China's drug war against the United States: an aspect of liminal warfare - Analysis

The fentanyl crisis is one of the most horrific disasters America has ever faced. On average, this drug kills more than 200 Americans a day. China, under the leadership of the Chinese Communist Party, is the geographic source of the fentanyl crisis. Companies in China produce nearly all of fentanyl's illicit precursors, the key ingredients that drive the illicit global trade in this synthetic drug. The latest U.S. FinCEN report reveals threat patterns and trends that financial institutions need to monitor.

The Financial Crimes Enforcement Network (FinCEN) of the US Department of the Treasury (Treasury) published a Financial Trend Analysis (FTA Report) highlighting fentanyl-related illicit finance. The FTA Report follows two advisories released by FinCEN in 2019 and 2024 that discuss financial transaction types and red flags associated with fentanyl activity.

GettyImages

The FTA Report’s primary conclusion – that the US, Mexican, Chinese, and other foreign financial sectors serve as a potent and pervasive medium for the fentanyl supply chain – is not new. Nonetheless, the report underscores the urgency for banks and other businesses with ties to Latin America to review their exposure to this activity and update their compliance controls. This is especially relevant in light of recent developments, such as the announcement of Executive Order 14157 (discussed in our prior alert) ordering the “total elimination” of certain cartels and transnational criminal organizations, the subsequent designations of Latin American cartels and other persons facilitating fentanyl trade on their behalf as Foreign Terrorist Organizations (FTOs) and Specially Designated Global Terrorists (SDGTs), and the powerful investigative and enforcement tools available to US law enforcement arising from these designations.

What is Fentanyl?

Fentanyl is a synthetic opioid, roughly 100 times more potent than morphine, traditionally used for pain relief and anesthesia in medical care. However, illicit fentanyl—which is often produced to mimic legitimate prescription drugs—is primarily synthesized, trafficked, and smuggled into the United States by Mexican cartels.The Sinaloa Cartel and CJNG —which are Foreign Terrorist Organizations, Specially Designated Global Terrorists, and Drug Trafficking Organizations—largely control the fentanyl supply chain from Mexico and utilize precursor chemicals and manufacturing equipment primarily sourced from the PRC to synthesize illicit fentanyl in clandestine laboratories through a series of chemical reactions. The resulting fentanyl powderis either pressed into pill form in Mexico or smuggled into the United States to be pressed domestically for distribution. In 2024, the U.S. Drug Enforcement Administration (DEA) seized over 55 million fentanyl pills and nearly eight thousand pounds of fentanyl powder.

The fentanyl trade generates a significant amount of illicit profits for the cartels that are

exploiting the U.S. financial system in every step of the fentanyl supply chain. To help combat the fentanyl threat, FinCEN personnel embedded at the DEA Special Operations Division and the U.S. Department of Justice’s Joint Criminal Opioid Darknet Enforcement team are providing BSA-driven financial intelligence support to law enforcement investigations targeting precursor chemical sales, fentanyl trafficking, and related money laundering activity.

The FTA Report provides insight into the Trump Administration’s efforts and methods to combat the cartel-driven fentanyl trade. As Treasury Secretary Scott Bessent stated in recent remarks to the American Bankers Association, the intent behind these anti-money laundering (AML) and countering the financing of terrorism (CFT) policies is “to truly focus on national security priorities and higher-risk areas and explicitly permit financial institutions to de-prioritize lower risks.” The FTA Report is, therefore, a must-read for financial institutions in the US and Latin America seeking to navigate the heightened risk and enforcement environment.

The FTA Report

Based on more than 1,200 reports filed throughout 2024 by regulated financial institutions under the Bank Secrecy Act (BSA), the FTA Report analyzes trends and key elements across approximately $1.4 billion in suspicious transactions linked to fentanyl. The report finds, for example, that depository institutions and money services businesses (MSBs) in the US accounted for 57 and 32 percent of fentanyl-related BSA reports, respectively. Most domestic sales of fentanyl were cash or peer-to-peer (P2P) transfers. Methods to launder suspected fentanyl proceeds range from simple to complex, with some of the largest reported suspicious activity involving professional money laundering organizations and trade-based money laundering schemes.

The FTA Report notes that the fentanyl trade involves multiple foreign touchpoints, with Mexico and China playing significant roles in production and distribution. Regions controlled by the Sinaloa Cartel and the Cartel Jalisco Nueva Generacion (CJNG) were the top two Mexican regions identified in the BSA reports. FinCEN also determines that the same cartels use equipment and chemicals sourced from China to synthesize fentanyl. As discussed in our prior alert, in February 2025 (and consistent with Executive Order 14157), the Trump Administration designated the Sinaloa Cartel and CJNG, along with six other organizations, as FTOs under Section 219 of the Immigration and Nationality Act and as SDGTs under Executive Order 13224.

FTA Report findings

FinCEN’s analysis reveals numerous trends and red flag indicators of illicit fentanyl trade and related money laundering. The analysis also describes the types of information that US law enforcement will likely request from financial institutions and businesses to aid in tracking fentanyl-related transactions. Findings of the FTA Report especially relevant to financial institutions include the following:

• Fentanyl-related financial activity in the US falls heavily within certain geographic areas. Populous states having large urban areas, such as California, Florida, and New York, and border states like Arizona, are collection points for proceeds from the fentanyl trade. The prevalence of fentanyl activity along the US–Mexico border underscores the role of the international drug distribution network.

• Mexico and China are the top two foreign countries listed in subject address fields of fentanyl-related BSA reports. Illicit businesses in these two countries have developed intricate procurement methods for the fentanyl trade. Financial institutions are encouraged to be careful of financial schemes, such as shell companies, irregular transactions involving chemical companies, and sporadic periods of account inactivity, which may indicate that these businesses are being used to trade in fentanyl.

• E-commerce played a crucial role in the transfer of funds in fentanyl-related transactions. Many Chinese-based companies rely on e-commerce to facilitate procurement of fentanyl inputs, including specific types of piperidone and benzene. Specifically, chemical companies use Chemical Abstracts Service (CAS) numbers, which are unique numerical identifiers assigned to chemical substances, in payment instructions and invoices. Financial institutions must be aware of such potential identifiers in order to unmask the true nature of fentanyl transactions.

• In the US, most fentanyl transactions are conducted in cash and P2P transfers. Many P2P transfers are accompanied by references to “blues” and “ills” – euphemisms for fentanyl purchases. BSA reports also identified bitcoin payments in suspected darknet marketplace drug transactions.

• An array of money laundering schemes, ranging from simple to complex, are connected to the fentanyl trade. Simple schemes often include the direct return of illicit proceeds to Mexico through MSB funds transfers. These may have become more difficult to complete following FinCEN’s March 11, 2025 geographic targeting order, which lowered the threshold for certain MSBs along the US–Mexico border to submit currency transaction reports, as covered in this alert. Complex schemes include suspected professional money laundering organizations (PMLOs) – such as Chinese money laundering organizations – helping to move illicit fentanyl proceeds on behalf of the cartels. BSA filers also reported potential trade-based money laundering (TBML) activity involving electronics, such as cellular phones, and vaping devices.

The drug war

The fentanyl crisis is one of the most horrific disasters America has ever faced. On average, fentanyl kills more than 200 Americans a day.

Fentanyl is the leading cause of death for Americans ages 18 to 45 and a major cause of the historic decline in American life expectancy. It has led to millions of people suffering from addiction and the destruction of countless families and communities. Beyond the United States, fentanyl and other synthetic narcotics mass-produced by the People's Republic of China (PRC) are devastating nations around the world, including Europe. It is truly a global crisis.

What is Liminal Warfare?

Liminal Warfare is an incremental war waged silently by China against Western economies where the spectrum of competition and confrontation with the West is so wide that the battlefield is everywhere and the war is total. In this logic, control of technological assets, strategic infrastructure and major global supply chains integrate “trans-military” and “non-military” warfare operations, as described in the 1999 book Unrestricted Warfare written by two PLA colonels.

To make states more dependent on Beijing and more willing to “a new authoritarian world order with distinctive Chinese characteristics,” Liminal Warfare encompasses economic, diplomatic, legal, military, intelligence, cyber, and illicit operations seamlessly put in place

The PRC, under the leadership of the Chinese Communist Party, is the ultimate geographic source of the fentanyl crisis. Companies in China produce nearly all of the illicit fentanyl precursors, the key ingredients that drive the illicit global fentanyl trade.

Back in February 2017, the U.S.-China and the Security Review Commission published a report detailing how illicit flows of fentanyl and other new psychoactive substances (NPS) from China were fueling an opioid crisis in the United States.

The conclusions of the report they demonstrated that: 

• China remains the largest source of illicit fentanyl and fentanyl-like substances in the United States. Fentanyl, a synthetically produced opioid, is shipped from China directly to the United States or Mexico (and to a lesser extent Canada) before it is trafficked across the U.S. border. Domestically, China does not have a fentanyl abuse problem.  China is a global source of fentanyl-like substances and other NPS because the country's vast chemical and pharmaceutical industries are poorly regulated and poorly monitored, allowing manufacturers to manufacture and export dangerous substances (both controlled and uncontrolled) undetected. 

• The inefficient China's chemical and pharmaceutical regulatory environment is due in part to misaligned incentive structures for local governments, which are encouraged to prioritize economic growth and development goals above all else. This is also due to the fragmented nature of China's administrative system that oversees the production and export of chemicals and pharmaceuticals.

• The chemical structures of fentanyl analogues and other NPS can be modified in an infinite number of combinations to create chemically similar but distinct substances. 

• Because the Chinese government, like other governments around the world, schedules chemicals one by one, Chinese manufacturers stay one step ahead of regulators by creating new, uncontrolled substances that can be legally produced and exported. Chinese chemical exporters secretly ship drugs to the Western Hemisphere using a chain of relay systems, mislabeling narcotic shipments, and modifying chemicals so they are not subject to controls, among other methods. Chinese distributors also use online marketplaces to disguise their identities as they reach potential customers in the United States and around the world.

  
  

This investigation involved, among other steps, in-depth analysis of PRC public websites, analysis of PRC government documents, acquisition of more than 37,000 unique data points of PRC companies selling narcotics online via web scraping and data analysis, undercover communications with PRC drug trafficking companies, and consultations with public and private sector experts.

The Special Commission's investigation established that the GOC, under the control of the CCP:      

• Directly subsidizes the production and export of illicit fentanyl materials and other synthetic narcotics through tax refunds.  Many of these substances are illegal under PRC laws and have no known legal use worldwide. Like its export tax rebates for legitimate goods, the CCP's subsidies for illegal drugs incentivize international sales of synthetic drugs from the PRC. The CCP has never disclosed this program.

• It awarded grants and monetary rewards to companies that openly trafficked illicit materials of fentanyl and other synthetic narcotics.  There are even examples of some of these companies enjoying site visits from PRC provincial government officials who complimented them on their impact on the provincial economy.

• It holds ownership stakes in several PRC companies linked to drug trafficking.  These include a PRC government prison linked to human rights abuses that owns a chemical company dedicated to drug trafficking, and a publicly traded PRC company that hosts thousands of open drug trafficking cases on its sites.

• Fails to prosecute manufacturers of fentanyl and precursors.  Instead of investigating drug traffickers, the PRC security services did not cooperate with US law enforcement and even notified targets of US investigations when they received requests for assistance.

• Allows the widely monitored and controlled open sale of fentanyl precursors and other illicit materials on the PRC Internet. A review of just seven e-commerce sites found more than 31,000 cases of PRC companies selling illicit chemicals with clear links to drug trafficking. Undercover communications with PRC drug trafficking companies (whose identities were provided to U.S. law enforcement) revealed a desire to engage in clearly illicit drug sales without fear of reprisal.

• Censors content about domestic drug sales, but leaves drug-focused content intact on export.  The PRC has censorship triggers for domestic drug sales (e.g., “fentanyl + cash on delivery”), but no such triggers exist to monitor or prevent the export of illicit narcotics out of the PRC.

• Strategic and economic benefits from the fentanyl crisis.  The fentanyl crisis has helped CCP-linked Chinese organized crime groups become the world's leading money launderers, enriched the PRC's chemical industry, and had a devastating impact on Americans.

While the PRC government publicly acknowledged in November 2023 that trafficking in fentanyl precursors and other illicit narcotic materials in the manner described above is illegal under Chinese law, the Special Committee found that thousands of PRC companies were openly selling these illicit materials on the Chinese Internet, the most surveilled national network in the world. The CCP operates the most advanced techno-totalitarian state in human history that “leaves criminals nowhere to hide” and has the means to stop producers of illicit fentanyl materials, but has failed to prosecute flagrant violations of its own laws.