The Underground Bank

In Italy, there is a secret bank with branches in Rome, Florence, Padua, Prato, Naples and Reggio Calabria. It's a credit institution that moves billions of euros to China by way of offering special services to special customers. Italian investigators call it 'China's underground bank', especially Guardia di Finanza's [Finance Police] investigators: they were the first to understand that something strange is going on in our country. The name has been adopted for use by Europol systems, which has already alerted all police forces in the European Union. Because we are not just dealing with 'individual suspicious transactions', nor small transactions by Chinese citizens sending money back to their homeland, which are often the result of laundering and tax evasion within the Chinese illegal economy in Italy. Instead, an organized and complex system is taking form in the subsoil of our country. It starts at the 'teller desk' here and goes all the way to the other side of the world. Probably thanks to a single management that might be taking advantage of state coverage: however, investigations in this regard are ongoing. Certainly, the made in China secret bank is able to launder billions of euros without leaving a trace.

This is why this submerged credit institution is not used just by Chinese citizens with cash coming from tax evasion through the by now well-known and tested 'open and close' mechanism - ghost companies that pay neither VAT nor contributions and close before Guardia di Finanza can get to their accounts. Drug traffickers linked to the criminal organizations Camorra and 'Ndrangheta also turn to this underground bank to pay the most ferocious Colombian drug cartels - entrepreneurs in much of the Northeast who have capital in the bank coming from tax evasion and want to launder it quickly before the police poke their nose into their business. And then there are the Chinese 'teller desks', which are used by Russian oligarchs who cannot make tracked purchases in Italy under sanctions for the war in Ukraine. Lastly, there are super-rich Chinese nationals who want to shop in the great fashion streets in Milan, Florence and Rome, breaking the limit of 50,000 euros in foreign currency set by Chinese banks. Even building contractors, protagonists of millionaire scams around the superbonus, have had dealings with 'officials' of the Chinese secret bank.

In return for their favours, the executives of this large hidden credit institution collect percentages of the sums to be moved, money which, almost as a requirement from Beijing, goes back to the home country.

The ultimate rule has always been that the money of Chinese nationals living in Italy must go back to Beijing. This is how the secret bank explains yet another curious phenomenon recorded by the Bank of Italy in the last 10 years: the collapse of official transfers from Chinese nationals living in Italy to China. From 5 billion euros in 2017, it went down to just 9 million euros in 2021. A figure that runs counter to all social and economic logic: because Beijing's orders have not changed, and the earnings of Chinese companies and small shops in our country must not be reinvested here, so as to leave nothing to the West; but above all because Chinese VAT numbers in Italy have grown, almost tripled, in the past 10 years. How is it possible, then, that transfers have almost disappeared, and while the Chinese economy is growing, Italy has not seen any increase in its GDP?

General Bruno Buratti, now head of Central Italy of Guardia di Finanza and former Commander of the same for the Triveneto region, in recent years coordinated important money handling operations in China. In the last report he signed for Veneto, he stated that 'between 2008 and 2020 in the Northeast alone, 15,000 VAT numbers were opened by Chinese people and 55 percent declared zero euros, 20 percent between 6,000 and 0 euros in turnover'. And in Veneto, 'inspections carried out on Chinese sole proprietorships allowed investigators to discover a tax debt of 2 billion euros against a recovery of just 50 million euros'. Where did all the money go?

The big underground bank explains what's going on: this 'institute' alone is allegedly moving between 1 billion and 2 billion euros a year, sending rivers of money into the current accounts of big Chinese state banks such as Agricultural Bank of China, Bank of China, China CITIC Bank and China Construction Bank Corporation. It is estimated that, erring on the side of caution, via triangulations involving ghost companies in Slovenia, Bulgaria and especially Hungary, the latter having become a fifth pillar of the Chinese economy in Europe, over 15 billion euros coming from Italy have reached state bank branches of Xi Jinping's China. The numbers are impressive, so much so that an ad hoc unit has been set up at the central command of the Guardia di Finanza.

But how does this bank work? Who turns to these hidden 'branches' to launder money, to pay drug trafficking cartels or simply to have some cash to spend in peace?  And who are the Chinese involved in these operations? Are they all front men, or are there local community leaders, too?

To answer these questions, investigators are making a journey back in time, as well as running ongoing and important investigations into the amounts involved. But, as always, past history  explains the present. Thus, following old procedures focused more on tax evasion or drug trafficking and little on the movement of money, the hidden threads of this secret bank are being reconnected. The investigations, and the stories these enquiries tell, are making it possible to reconstruct, clearly and distinctly, the great puzzle of the Chinese underground bank in Italy. Without this bank, the money could not return to the homeland and is therefore the final link in a chain of behaviour and actions that appears to be the result of a great instruction book. Because there is a corollary to this state of affairs. Investigators now believe there is a sort of manual of an illegal Chinese economy to create a black economy through open and closed companies and trade in counterfeit products, with the objective of returning the proceeds to the homeland. A thesis that if proven will open a political front. It's the other side of the coin, along with the money, of the underground China bank in Italy.

 

Italian evaders

This story is slowly emerging from a number of investigations centred on Italian entrepreneurs' tax evasion. In February 2014, for instance, Ticino police and Guardia di Finanza uncovered a mechanism that truly resembled a game of Snakes & Ladders. On the one hand, a group of Italian tax evading entrepreneurs running companies across the border and who, through illicit channels, bogus companies, inflated sports sponsorships and false invoicing, send millions of euros in transfers to bank accounts in Ticino. On the other, two Chinese men responsible for moving this money from Ticino bank accounts to China. During this operation, Fiamme Gialle of the Italian financial police, follow a Chinese man and get to a flat in Milan. They go in and find a storage area with hundreds of thousands of euros in cash. The house belongs to a Chinese man previously convicted of organised crime. Naturally, this was possible thanks to the complicity of an employee of Ticino bank and a financial consultant who acted as the Italians' accountant. An isolated case, one would think.

Years go by and in March 2017, a few kilometres from Milan, in Verona, a network of Italians laundering money coming from tax evasion is uncovered.  Verona Carabinieri discovered the fraud, thanks to some entrepreneurs from Legnano who had evaded VAT and other taxes with false invoices to fake companies, and thanks to this mechanism had won public contracts in various sectors, from construction to services. It turns out Italian entrepreneurs, through bogus companies, had paid 37 million euros into the current accounts of foreign banks in exchange for cash withdrawn from a post office counter in tranches of 5,000 euros each, made by 'couriers' paid 50 euros per withdrawal. Within the folds of this investigation, a Chinese woman who managed 'a large flow of money to China' with this mechanism, is discovered. How strange, money going to China. How about Italians? How do they get their money back? It is not clear.

In January 2018, Operation Jolly was completed by Carabinieri in Rome, uncovering 18 million euros worth of money laundering. One of the people arrested is a Roman entrepreneur working in the car trade sector, previously arrested for money laundering operations in favour of Enrico Nicoletti, historical treasurer and money launderer of the Italian criminal organization Banda della Magliana. The mechanism is always the same: a first group sets up fake companies that transfer money to the current accounts of a company based in London; a second association, also headed by an Italian entrepreneur from Guidonia, sends the money coming from drug trafficking in the capital. However, according to the investigators, the bulk of the money laundering was the end result of black money made by Chinese entrepreneurs, and even in the ghost company in London, Chinese people were involved. In June of the same year, Bologna Guardia di Finanza stops some Chinese nationals at the airport trying to board trolleys full of gold bars worth 2.5 million euros. It is later discovered those ingots were created by a goldsmith in Arezzo in exchange for cash resulting from tax evasion by textile companies in Prato. In short, there are always some Italians evading taxes and some Chinese offering to transfer money abroad. But the final link is missing, the money returned in cash to our evaders.

In September 2021, Brescia carabinieri investigated a drug broker offering money laundering services to businessmen in Milan, Bergamo, Mantua, Lodi, Alessandria, Novara, Varese, Parma and Piacenza. It turns out that in a whirlwind of payments to bogus companies, made with money earned mostly from the marketing of kilos of hashish via foreign current accounts in France, Hungary, Bulgaria, the money eventually reaches China. And here comes the first sign of the circle closing: a Chinese man in charge of paying the money back to the broker and his collaborators. And how? In cash. So, on the one hand we have payments made with fake invoices but real money transfers into real current accounts towards China. On the other hand, cash was guaranteed to Italians. This is key. And shortly afterwards the circle truly closes, bringing to light the first real international branch of the big underground bank.

 

The bank's discovery

November 2021, Operation Silk Road. After years of investigations, stalking and wiretapping, Pordenone Finance Police uncovered the VAT evasion mechanism employed by Italian entrepreneurs in the iron and ferrous waste disposal sector and payments made to Chinese banks amounting to 150 million euros, with cash returned inside bags in a shopping centre run by Chinese nationals in Padua. In the same weeks, the Portogruaro Finance Police were also investigating a well-known Veneto accountant who was facilitating tax evasion for several entrepreneurs and their investments resulting from the black economy, and ended up in the same place, a Padua shopping centre. The whole thing is organized by a woman, Wang Y., who, with the help of family members who run an anonymous little shop in Corso Stati Uniti, guarantees bags full of hundreds of millions of euros in cash. In the end, both operations led to two transfers of funds to China for the amount of 210 million euros.

But let's take it one step at a time. The Fiamme Gialle [another name for Guardia di Finanza] were investigating Stefano Cossarini, an entrepreneur from Pordenone suspected of having set up a network to illegally dispose of metal scraps generated by small factories in Lombardy and Triveneto, evading millions of euros in VAT and other taxes. In their investigative report, which triggered an investigation by the Anti-Mafia District Directorate of Trieste, the financiers write: 'Stefano Cossarini often goes to Corso Stati Uniti in Padua, goes into the shop Pier Monì, and comes out with bags that clearly indicate he took something while inside the premises'. Earlier, Guardia di Finanza had placed cameras that showed inside those bags there is cash.

The circle is closed. But the scheme is complex: hundreds of companies in Lombardy, Veneto, and Emilia Romagna, used to dispose of waste metal without paying taxes and without guaranteeing the origin of the materials, sold off-the-books 150,000 tonnes of copper, brass, aluminium and other metals to companies (Metal Nordest, Femet, and Ecomet) set up by three entrepreneurs. These entrepreneurs then pretended to buy the same amount of material from three companies based in the Czech Republic and Slovenia, either registered in their names or controlled by them - Kovi Trade, Steel Distribution and BioTekna. This is how bogus papers were used to certify the origin of the material coming from abroad. The operation, however, did not end there. Formally, the three companies in Slovenia and the Czech Republic received the transfers and thus collected real money, about 150 million euros. At this point, the three foreign companies also pretended to be buying ferrous material in China, thus making further real payments to various Chinese bank accounts. Once they had ascertained the transfer had arrived in China, Chinese nationals returned the money in cash to Italians, retaining a percentage for their trouble. The suspicion that the Chinese state knows about this money laundering stems from the names of the banks receiving the transfers. Most of them are state-controlled institutions, starting with the Bank of China, with accounts in Xiamen, Quanzhou, Hangzhou and Jinhua, and continuing with Agricultural Bank of China, China City Bank, China Construction Bank Corporation, China Everbright Bank and Industrial and Commercial Bank of China.

A few months earlier, Venice Finance Police investigating a money laundering ring discovered by pure chance the same mechanism. The Fiamme Gialle were investigating Fabio Gaiatto, a fake broker who was sentenced to 10 years in a second instance for having swindled a number of clients through his financial company promising earnings of up to 10 percent of the sum invested. Investigating an investor connected to Gaiatto, a 64-year-old man from Portogruaro, they uncover even more. During the search, the investor tried to dispose of a hard disk, throwing it out of the window. 'Our technicians managed to recover all the files and found not only payments to bogus companies in Bulgaria and Slovenia, again for the fake disposal of iron waste and fake purchases from China of the same material with transfers that this time went to a bank in Shanghai, but also photos of the transfers made to Chinese entrepreneurs', explained the Finance Department. Following these leads, the investigators keep ending up in Corso Stati Uniti in Padua. And they find themselves facing the person who supposedly functions as mediator on behalf of the Chinese. This is the same person appearing in the Pordenone Finance operation: a woman referred to in the interceptions as 'big sister'.

This operation becomes a sort of Holy Grail, the complete scheme of the Chinese underground bank, which is likely to have a huge liquidity of money coming from illicit proceeds made in Italy to send to China. The scheme is sent to all the provincial commands of Guardia di Finanza, starting collaborations also with carabinieri and police.  Thus, last September in Brescia, Guardia di Finanza investigated two entrepreneurs for fake purchases of ferrous material in Slovenia and Eastern countries with transfers that reached China for 4.5 million euros.  Buried in the garden of the couple, they found drums containing 8 million euros in cash. 3 million euros more were found in the cellar. The whole business of fake invoices, however, was worth 500 million euros. Shortly before, Prato Finance Police had concluded Operation Pluto and arrested a Chinese man who, via bogus companies, since 2013 had transferred 170 million euros to China, money originating from tax evasion and black economy of other companies in the Prato district.

Both numbers and the amount of money are mind boggling and share a common link, contacts with groups of Chinese nationals dealing in cash and transferring money to their homeland.

 

Foreign payments on behalf of mafia

The underground bank doesn't just launder Italian money and in a way also an illegal Chinese economy. It also offers payment services abroad, 100 percent guaranteeing the transfer of money. Not least because, at the other end of the world, there are no nice guys willing to put up with scams and deception. We are talking about the biggest drug cartels in South America, starting with the Gulf Clan in Colombia. Camorra and 'Ndrangheta are in contact with this network of Chinese branches, and the evidence is emerging from recent investigations and from a journey back in time to investigations carried out a few years ago that hadn't paid too much attention to the presence of Chinese nationals guaranteeing payments and receiving cash.

In February 2020, 'Ndrangheta drug trafficker Domenico Romeo was arrested. To pay the Colombian cartel known as the Gulf Clan a 400-kilo shipment of cocaine, he had turned to the Chinese. Romeo himself told investigators and described the delivery in Milan of several tranches of 100 thousand euros each to Chinese nationals who had contacts in Colombia. Such contacts retained a percentage of the sums in exchange for their services. Romeo had been a fugitive since the spring of 2019, when he escaped 'Operation Wind'. The operation, realized with the collaboration of the US Drug Enforcement Administration, led to the arrest of three people, including Antonio Alvaro, 'accountant' of the clan of the same name, apprehended in Colombia. He was responsible for a huge drug shipment of almost 400 kilos, in transit towards Europe and worth over 100 million euros. A river of cocaine that Guardia di Finanza, in cooperation with Spanish and French authorities, followed to the port of Genoa, seizing 386 kilos of drugs. Payment had been guaranteed by the Chinese.

In May 2021, mafia boss Giuseppe Romeo of San Luca 'Ndrina' ['Ndrangheta basic unit constituted by blood relatives] was arrested in Spain. Once again, the Interpol investigation reveals a Chinese woman in Antwerp guaranteeing payments abroad for drug trafficking. Investigators believe that in Antwerp, Romeo relied on a second Chinese woman to manage his finances. According to the investigative papers, the flat used as a base by the Belgian gang connected to Romeo belonged to the woman, who had another address in the red-light district. According to the investigators, the woman guaranteed the Romeos access to 'an informal system of money transfer using a method similar to Hawala': transactions did not take place through current accounts but via 'trust' schemes between people. That is, a Chinese man in Colombia receives a phone call from a compatriot in Italy and pays the drug traffickers on trust, knowing that he will be reimbursed.

We get to last October. During the Milan DDA [Antimafia District Division] investigation, financial police discovered an Italy-China business pact.  The operation led to 13 arrests, dismantling the clan led by Davide Flachi, son of the 'Comasina boss' Pepè Flachi, who passed away last January. Former boxer Franco Terlizzi, a former contestant on the reality show 'L'isola dei famosi', ends up in custody although he is later released after a re-examination, accused of being a front man for Flachi. At the centre of the investigation is a lot of 140 kilos of hashish in Spain, destined for the streets of Milan. The drugs were later seized at the French border and the deal fell through. But it emerges that Flachi had turned to members of the Chinese community in Agrate Brianza for payment. Last November, the Investigative Groups of Financial Guards of the Guardia di Finanza dismantled two Milanese gangs involved in laundering money obtained from drug deals. The two gangs shared the same couriers and trafficking routes, but most importantly a way of operating through storage sites and van deliveries. They were moving up to 6 tonnes of drugs. But the two gangs had more in common. They both resorted to 'money transfer and money laundering tools via the "services" provided by the Chinese secret bank'. This is when 'Luca, known as the Chinese', with a branch office in Via Canonica, makes his appearance. Rosario D'Onofrio, an ex-military man and former referee, is drawn into the investigation.

Ongoing investigations in Naples are bringing to light contacts between top Camorra bosses and Chinese nationals, with amounts of up to one million euros exchanged near airports - sums in cash that the Camorra pays to Chinese people, who then pay for drugs in South America. That same cash, meanwhile, is perhaps used to reimburse Italians who turn up shortly afterwards waiting for cash in exchange for the sums they deposited into current accounts in China. This is how the black bank branch works. Customers are numerous and money is moved extremely quickly. Everything, however, has a price - a percentage of between 2 and 5 points of the amount of money to be transferred or handed over in cash is retained by Chinese and sent back home.

 

Money mules and money transfers

And so. The bank transferring money to China does not do so solely through complex banking mechanisms. In the background, even if just barely as it has become more difficult and at the same time more dangerous, money is still being transferred by money mules. A method still in use and one that has largely replaced the mechanism uncovered by investigators and which until the early 2000s was the most widespread way of sending money, even if illicit, back to the homeland - money transfers. This mechanism disappeared in June 2015 when the Florence Public Prosecutor's Office discovered an illicit transfer of 2.2 billion euros to China precisely through 'money transfer' agencies. At that time, the Milan branch of the Bank of China, along with four of its executives, had caught the attention of the investigators. That channel has been closed, but money mules continue being used today. This method pivots around Italian airports. Last year, during Operation Rent, Milan carabinieri tailing some Calabrians involved in drug trafficking arrived at Chinese accountants handling payments and the transfer of money to Hong Kong using money mules. So, they discovered that at Fiumicino Airport alone, around 37 million euros had been sent to China with trolleys loaded with money.

 

The Silk Road in reverse

In short, the flow of illicit money Italy-China is vast, compared to official remittances of just a few euros. And the underground bank is a key element in bringing capital back to the homeland. Even Italian intelligence services are turning their attention to this reverse Silk Road. The annual report of the Security System of the Republic presented last Tuesday says: 'Regarding Chinese criminality, informative action continues to be oriented in the direction of the business-criminal dynamism of unscrupulous Chinese entrepreneurs who, recurring to complex schemes of tax evasion and recycling, often coupled with a systematic collection and transfer to the homeland of the proceeds of illegal activities, have succeeded in consolidating their position within some national economic sectors through a systematic collocation in precise territorial areas'.

The latest annual report of the Bank of Italy's Financial Intelligence Unit deals with the same topic. 'During 2021, we received several reports of suspicious transactions concerning transfers of significant amounts of money made by Italian companies to China, often with the interposition of Central and Eastern European companies operating in heterogeneous sectors inconsistent with the scope of activity of the dispensers. The phenomenon, which had already emerged in the past in relation to the possible under-invoicing of textile goods imported from China, manifested itself in partially unprecedented ways, extending to different business sectors including the construction and trade sectors and the recycling of metal structures. Generally speaking, the specific features of the Italian companies involved (often newly established and with a minimally operational and organised structure), as well as the peculiarities of the related financial movements, made it possible to trace reported schemes back to operational paradigms which, although manifesting an apparent commercial legitimacy, are only aimed at the transfer of sums between subjects, in this case Italian and Chinese, to settle various types of illicit business'.

What comes out of the mechanism of money transfer to China are building superbonus scams and frauds carried out by several Italian entrepreneurs. 'With reference to the building sector - the Bank of Italy unit writes - the funds instrumental to the execution of foreign provisions come from assigning fictitious tax credits, accrued following the presumed realisation of building works or energy optimisation within the framework of economy support measures launched during the pandemic, to domestic banking intermediaries. With regard to the metal sector, on the other hand, the presence of bogus companies and other entities interposed in various ways within the national supply chain has led to a progressive lengthening of the chain of transfers, making the reconstruction of financial flows more difficult. The outcome of the analyses conducted and their relative implications, mostly of a fiscal nature, have been supported by the results of the investigations'.

 

The Chinese illegal banking system

Illegal Chinese banking, however, exists within China as well, as indicated by the Chinese International Crime Study by Global Financial Integrity, a Washington-based think tank specialising in the analysis of financial malfeasance. 'It is difficult to determine the extent of China's clandestine banking system, but there is no doubt that it has also been used to move huge sums beyond China's borders. For example, Chinese authorities have seized some $130 billion "from underground banks". In China, declared confiscated amounts are usually only the tip of the iceberg. According to some specialists, it is estimated that China's underground banks have over 10,000 customers and are believed to launder over $100 billion every year'. According to this study, however, the underground economy and underground banks are necessary to increase the intrusiveness of the Chinese economy abroad. There's one element in this story, namely the China underground bank in Italy, which must not be overlooked because it is thanks to this mechanism that China gets billions of euros. A treasure trove for the Beijing economy. And this is where the second aspect of this phenomenon comes into play. Is it possible the Chinese state does not know that billions of euros resulting from illicit activities of all kinds and from black money made by the districts in Italy are being poured into the current accounts of its banks?

 

State shopping

At any rate, the fact that the Chinese government organised a direct intervention in the Italian economy is testified by a number of factors that have long been available to the judicial police and intelligence of our country. La Repubblica can tell how, shortly before the lockdown, a certain lawyer was going around Rome trying to acquire majority stakes in strategic companies on behalf of companies directly linked to Beijing. He did so using fake companies to hide sales so that Italian authorities could not trace the real buyers. He miscalculated. As documented by the investigation into Alpi Aviation, the drone company that was about to end up in Chinese hands, our country took action. First the Prosecutor's Office, then the judicial police and, finally, politics. As a matter of fact, the government led by Draghi made full use of its 'golden powers', the tool allowing the government to intervene and block, or at least regulate, sales of companies operating in strategic sectors for national security to foreign companies. Of the 496 notifications issued by the Prime Minister's Office in 2021, 51 concern technology sales in Defence, 20 in 5G and 425 in Energy, Transport and Communications. A large portion are Chinese companies, especially in the 5G sector, where companies employing non-European technology were banned from bidding. The principle is always the same - data security, or rather the non-accessibility of information with respect to servers. Also, because quite often these companies are under the direct control of state-owned companies.

In recent months, la Repubblica conducted an investigation with Datenna, a Dutch company monitoring the movements of Chinese companies through open sources (Osint - Open source intelligence).

Datenna has identified a number of acquisitions of strategic companies by Chinese companies, which in turn are linked in various ways to the government. The story of Famà Helicopters, a company specialising in the production of ultralight helicopters, is emblematic. As emerges from the documents analysed by Datenna, in 2022 the Chinese Duofu International Holding Group acquired not only its production facilities, but also its research and development department, know-how and intellectual property rights. 'Taking a look at the corporate structure', Datenna explains, 'it is possible to see that Duofu International Holding has full ownership of Wenzhou Dover Aviation Industry Group Co. and three other aviation subsidiaries. Although the agreement was concluded in the field of civil aviation, China aims to increase the interaction between civil research and commercial sectors and their military application through a strategic plan called Military-Civil Fusion. Investments recently concluded in the aviation sector, including one with Airbus, underline China's desire to achieve independence in the production chain'.

The point is that Duofu has had direct collaborations with Chinese regime governmental entities in an area of development and aviation, central to Beijing's military strategy.

The black bank bringing capital back to the homeland, the illegal economy and attempts to buy key Italian assets. These questions have attracted attention at all levels also in our country.

Translated by Barbara Bacci