For years, international discussion of China’s economic rise has focused on how it has built a manufacturing and export powerhouse and used industrial policy to support such efforts at a continental scale. But there is another, darker side of China’s dominance: its outsize role in the illicit global economy. China purchases roughly 90 percent of Iran’s sanctioned oil exports, which often arrive relabeled as originating from Malaysia and are paid for with money routed through small banks and shell companies acting as intermediaries. Cryptocurrency brokers in China and Hong Kong help North Korean hackers, such as the notorious Lazarus Group, convert stolen coins into usable cash. And China-based networks support money launderers working with Mexican cartels selling fentanyl, online scam centers in Southeast Asia, and the global wildlife trafficking trade.
Data from organizations and governments tracking illegal activity suggests that the Chinese illicit economy generates nearly $1 trillion in revenue annually, about the size of Switzerland’s GDP. Roughly two-thirds of counterfeit goods seized by customs authorities worldwide originate in China or move through Hong Kong, and the notorious scam compounds that have proliferated in Southeast Asia—many of which are operated by or linked to Chinese criminal networks—have trafficked more than 300,000 people from at least 66 countries into forced labor while generating roughly $40 billion in profits each year.
Beijing has tried to crack down on some of these activities. In the Philippines, China’s Ministry of Public Security canceled the passports of hundreds of Chinese nationals involved in offshore gambling operations there, turning them into fugitives who can be arrested and deported. Since 2023, joint operations between China and Myanmar have led to the arrest of more than 57,000 Chinese nationals suspected of telecom fraud, the closure of dozens of scam compounds along the China-Myanmar border, and the execution of several bosses running these compounds. The United States, too, wants to stop these activities: the Trump administration launched the Scam Center Strike Force to investigate fraud centers in Southeast Asia, and the president signed an executive order directing the government to prioritize cybercrime, including predatory schemes.
Yet none of these actions have significantly curtailed the illicit economy. If anything, it is growing larger. This is in part because these illegal activities are driven by many of the same forces that underpin China’s legal economy. Criminal groups have exploited the core financial and commercial infrastructure that developed in response to China’s strict capital controls and its industrial overcapacity. Beijing’s enforcement, although real, is selective and partial because elements of the illicit economy serve the country’s larger strategic goals, such as sustaining trade with Russia while maintaining distance from the war in Ukraine. What may appear to be a collection of unrelated crimes is intertwined with China’s imbalanced growth model and its foreign policy. As Washington struggles to compete with China, Beijing’s role in the global illicit economy is working against U.S. priorities around the world.
FOLLOW THE MONEY
The central forces driving China’s illicit economy are the structural imbalances created by the country’s economic model. One of the most important is financial: strict capital controls have created enormous demand to move money out of China. China’s economic boom has produced fabulous wealth, including more than 800 billionaires. But Beijing restricts how this wealth can leave the country. China has a quota limiting individuals to purchasing $50,000 in foreign currency each year, and they cannot freely convert domestic currency to move wealth abroad. With deposits in China generating low returns and no access to more lucrative foreign assets to invest in, wealthy individuals and business owners have sought to find ways to funnel their money out of the country.
Starting in the 1990s, underground bankers set up shell companies and bank accounts in Hong Kong to circumvent mainland China’s capital controls. These companies and accounts, often disguised as trading firms, settled transactions involving renminbi collected inside China against dollars held offshore. In addition, brokers and financial intermediaries routed payments to offshore counterparties to allow Chinese citizens to use domestic currency to purchase property abroad or to trade overseas investment for foreign visas and passports. Meanwhile, junket operators, who brought wealthy clients to casinos in Macau, extended credit to them in Hong Kong dollars and then collected the debts in mainland China in renminbi. This allowed them to settle debts at home while picking up currency abroad, facilitating capital flight on a large scale.
China’s industrial overcapacity has lowered the costs of building and operating illicit enterprises.
The same underground banking networks built to move private Chinese wealth became useful to criminal groups that also needed to transfer money across borders and conceal its origins. Drug cartels, for instance, have used them to launder their proceeds. Financial intermediaries match drug traffickers seeking to get rid of extra dollars with Chinese clients seeking to obtain dollars abroad. Similar networks also have provided the financial channels that help Chinese suppliers evade Western sanctions while selling ingredients such as nitrocellulose, used to make munitions, to Russia, or sodium perchlorate, a precursor for missile propulsion, to Iran.
Financial intermediaries and criminal fraud enterprises are coming into closer proximity, which is making their activities harder to disentangle and disrupt. Political changes such as China’s anticorruption campaign pushed casino junket operators and underground financiers from their established bases in Hong Kong, Macau, and mainland China to Cambodia, the Philippines, and other locations in Southeast Asia. In these places, they converged with criminal networks that had established business and political relationships. Scam networks generate the proceeds, while underground financiers launder and move the money through many of the same channels Chinese clients use to move private wealth offshore. A 2023 anti-money-laundering operation in Singapore showed how financial channels and fraud networks have become deeply interwoven. Authorities seized condos, gold, cryptocurrency, and bank accounts eventually valued at more than $2.2 billion, and arrested ten people, all of whom were originally from China and most of whom held Cambodian, Cypriot, Turkish, or Vanuatuan passports. Singaporean police traced members of the network to overseas scams and illegal online gambling operations.
China’s industrial overcapacity has also lowered the costs of building and operating illicit enterprises. Starting in 2021, China’s real estate slowdown weakened domestic demand for steel, cement, and other construction materials. Excess construction materials exported from China, together with Chinese construction services, helped casinos, special economic zones, and scam compounds develop rapidly in Southeast Asia while supporting Chinese export revenues. The glut of products in China’s vast electronics industry, including cheap phones, computers, and communications equipment, made it economical for criminal networks to operate fraud at industrial scale. When Myanmar’s military raided Shwe Kokko, one of the country’s largest scam compounds, in November 2025, it seized nearly 10,000 mobile phones—most of which were likely made in China—from a single site. Overcapacity in China’s oil-refining sector, too, has made discounted Iranian crude particularly attractive to independent refiners.
COST-FREE DIPLOMACY
Despite sporadic enforcement efforts, the benefits that leaders at different levels of the Chinese government accrue from the illicit economy make it difficult to stop. Local officials want to protect economically valuable firms and financial flows that keep their economies afloat, even if they are engaged in illegal activity, and Beijing selectively tolerates questionable flows of money and goods when they serve its strategic interests. Institutions connected to the Chinese Communist Party also play a role: some figures in organizations connected to the United Front, the party’s apparatus for building influence at home and abroad, as well as some members of overseas Chinese associations, overlap with criminal networks doing business overseas. This gives them networks of access to political elites in host countries while drawing them into pro-Beijing influence activities abroad.
Provincial governments, whose leaders face strong incentives to deliver growth, benefit from economic activity whether it is generated by legitimate business expansion or the illicit economy. In Fujian, for instance, officials in the city of Ningde backed the battery manufacturer CATL and built an industrial cluster around it to support industrial growth. In Anxi County, by contrast, local operators with fewer economic opportunities but access to informal financial channels set up a sprawling telecom-fraud network that eventually expanded into Southeast Asia. Ningde and Anxi were both embedded in Fujian’s broader networks of commerce, migration, and finance, but they had radically different outcomes: a globally competitive industrial cluster in one and an illicit transnational economy in the other. In both cases, leaders could point to high levels of economic growth.
Local support for illicit economic activity can also support Beijing’s foreign policy goals. In 2024, trade between Russia and the northeastern Chinese province of Heilongjiang reached $32.2 billion, part of a broader commercial relationship in which Chinese firms have supplied Russia with machine tools, microelectronics, and other dual-use goods that could be used for Russia’s war in Ukraine. Some of these sales go to entities facing U.S. sanctions. Although Beijing describes such trade as ordinary commerce, conducting it through provincial and private firms helps ensure that any potential sanctions fall on intermediaries rather than the party-state itself. And it is private brokers, shell companies, and financial intermediaries in Hong Kong and mainland China, not official state institutions, that clear Iranian oil purchases and North Korean cryptocurrency cash-outs, also giving Beijing distance from transactions that violate U.S. sanctions.
In a small number of cases, there may even be direct connections between crime bosses and Chinese intelligence agencies. Through their private business dealings, bosses can penetrate ruling parties in other countries and gain proximity to political leaders and access to information that China’s official embassies cannot easily obtain. In one prominent example, She Zhijiang, a crime boss responsible for developing the Shwe Kokko scam center in Myanmar, claimed while fighting extradition in Bangkok that he heeded instructions from China’s Ministry of State Security. He also alleged that a mayor of a small municipality in the Philippines, who local authorities determined was a Chinese national, was a Chinese state asset. The Philippines sentenced her to life imprisonment for human trafficking connected to her role in running an online gambling operation.
In certain circumstances, Beijing is willing to crack down on illegal activity. When Chinese citizens are victims of kidnapping or fraud, as was the case in the scam centers along the Myanmar border, Chinese authorities move quickly and make arrests. Likewise, when crime bosses become international liabilities that could hamper Beijing’s relations with other countries, or when their political patrons fall and there are fewer political costs to targeting them, Beijing will act. In October 2025, for example, the United States indicted Chen Zhi, the Chinese-born mastermind behind Prince Group, one of Southeast Asia’s largest criminal conglomerates. After many countries froze or seized assets linked to him, China called for his arrest and requested his extradition from Cambodia. Trying criminal leaders such as Chen in China is an ideal outcome for Beijing: it demonstrates to foreign audiences that China is enforcing the law, while also reducing the risk that testimony about state links could emerge in foreign courtrooms.
TIGHTENING THE SCREWS
Where possible, Beijing and Washington should work together to fight back against illegal activity. China does not want underground banking networks allowing capital to flee the country. Beijing’s Sky Net repatriation operations, which since 2015 have pursued and returned thousands of corrupt officials and economic fugitives to China, are an explicit acknowledgment that infrastructure to move money abroad and conceal overseas assets hinders Chinese state control. As the United States and China continue high-level talks, constraining the underground financial architecture of the illicit economy is an opportunity for a mutual diplomatic win. They could start by exchanging information on shell companies identified by their respective financial intelligence units and by coordinating crackdowns on the largest underground banking networks. Such an arrangement would echo the two countries’ collaboration in setting up a counternarcotics working group, in January 2024, to fight fentanyl trafficking.
But in other areas in which Beijing is not ready or willing to address the problem, Washington should use its own tools. Washington can institutionalize cooperation among states with shared interests in fighting transnational crime linked to Southeast Asia—South Korea, Taiwan, Thailand, and Singapore—through a standing arrangement for sharing information about transactions tied to identified China-linked illicit finance networks. Working together to track these flows would reduce the chance that international criminals can extend their reach beyond any single jurisdiction. The Financial Action Task Force, an intergovernmental body, has established standards for combating cross-border money laundering; what is missing is a political commitment among U.S. allies and partners to systematically share operational data on China-linked illicit finance networks. Governments could draw on data collected by the Treasury Department’s Financial Crimes Enforcement Network and allied financial intelligence units to identify transactions tied to these networks. A standing arrangement would turn that commitment into routine practice.
The U.S. Treasury Department can also invoke Section 311 of the U.S.A. Patriot Act, which authorizes the Treasury secretary to designate a foreign financial institution as “of primary money laundering concern” and cut it off from accounts in the United States. Washington can apply this to Chinese and Hong Kong financial institutions that facilitate purchases of Iranian oil, launder cartel proceeds, or convert stolen cryptocurrency into usable funds. Treasury has shown it is willing to use this authority. In 2017, it employed Section 311 against a Chinese bank for serving as a financial conduit for North Korea, and in October 2025, it issued a final rule severing Cambodia’s Huione Group from the U.S. financial system because of its role in laundering money connected to North Korean cyber heists and Southeast Asian scam centers. Similar actions could impose costs on the financial institutions handling tens of billions of dollars in revenues from sanctioned Iranian oil each year.
For too long, the United States has let illicit activity slide even though much of it undercuts U.S. foreign policy priorities. Washington has failed to stop Chinese purchases of Iranian oil despite U.S. sanctions, hollowing out efforts to limit money reaching the Islamic Republic. Cryptocurrency stolen by North Korean hackers and laundered through Chinese financial intermediaries provides funds for Pyongyang’s weapons programs, undermining international nonproliferation policy. The scam compounds that Chinese networks have built across Southeast Asia now take tens of billions of dollars a year from victims worldwide, including from people in the United States. China’s structural imbalances are fueling this illegal economic activity. If the United States really wants to compete with China and push back against the consequences of its economic rise, it will have to deal with what’s on the books as well as what’s not.
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