Zhang Lei: A story of synthetic drugs, international drug trafficking, and OFAC SDN designations.

Zhang Lei and Drug Trafficking

Back on July 29, 2014, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) designated Zhang Lei (a.k.a. Eric Chang), his company, CEC Limited, and his associates, Zhang Jiceng, Wang Guoying, and Hu Yongan. Their names have all been added to the Specially Designated Nationals and Blocked Persons (SDN) List and their property and interests in property subject to U.S. jurisdiction has been blocked (i.e. frozen).

OFAC’s action was taken pursuant to the Foreign Narcotics Kingpin Designation Act. This law is an independent legal authority under which the president can block property and restrict transactions involving alleged international narcotics traffickers. In essence, the law recognizes a constant state of emergency caused by international narcotics traffickers, and allows the president (and the Secretary of the Treasury by delegation) to designate persons the government has reasonable cause to believe are involved in international narcotics trafficking.

Zhang’s backstory with federal and foreign law enforcement is very interesting and reveals some insight into how a person ends up as a specially designated foreign narcotics kingpin. If the allegations against Zhang are true, these designations were a long time coming.

As alleged, for over a decade, Zhang shipped thousands of kilograms of synthetic drugs and controlled substances, including mephedrone, into the United States and other countries – including Australia, Austria, France, Germany, the Netherlands, and Italy.  According to its website, Zhang’s company, CEC Limited, is a manufacturer of various chemical compounds.  The company has been the source of supply for synthetic drugs sent throughout the United States and Europe. Purchasers simply had to visit CEC Limited’s website, find the product they want, wire money to Zhang, and await shipment.

Shipments to the United States earned Zhang roughly $30 million.  As the United States and other countries banned new psychoactive substances, Zhang and his associates developed replacement chemicals or used fraudulent shipping labels to continue to traffic illicit narcotics. Zhang’s business through CEC Limited was apparently so successful that he warned on his website that “Western Union office feel suspicious about me now . . . every day I . . . collect more than $200,000 from WU office.” Any transaction involving Zhang or CEC Limited would now have to be blocked by Western Union following their respective designations.

Zhang was also apparently cognizant of the perceived risks associated with his conduct. He was concerned that the Chinese government “will think I am doing Money Laundering for terrorists. So please support me by paying through bank transfer.” Unfortunately for Zhang, terrorist financing is not the only thing that can land someone on a black list. Mr. Zhang also appears to have underestimated what the United States was extraterritorially capable of doing to his business empire if the Chinese government failed to act.

By adding Zhang to the SDN List, the United States has effectively excluded him from the U.S. financial system. Moreover, his designation means that any U.S. dollar transaction processed through a U.S. bank will be blocked, even if the underlying transaction does not involve any U.S. persons or jurisdiction. Contrary to Zhang’s belief, bank transfers from the United States or in U.S. dollars (as is recommended on the company’s website) would not likely be any better than using Western Union.

For at least the past three years Zhang has been a fugitive (opens pdf) of the United States and has apparently operated his China-based business with relative impunity until recently. Back in 2011 a federal grand jury in the Northern District of New York indicted Zhang in a criminal conspiracy involving the distribution of mephedrone (bath salts) and MDMA (molly). Interestingly, one of the co-defendants in that case, Bill Harper, was a former Syracuse Common Council candidate who also distributed drugs manufactured by Zhang.

According to an article on Syracuse.com, Harper wrote a series of panicky emails to Zhang regarding their business arrangement after a woman consumed some of the drugs and became “crazy and unstable.” According to an article on NPR, that woman, who was reportedly under the influence of drugs and “firing a shotgun at what she believed to be ghosts,” gave law enforcement a lucky break that eventually would link the events to Zhang. Drugs found in that woman’s home were marked with labels bearing CEC Limited. Ironically, Harper warned, “Please do not do business with these people. I am very worried (her) arrest will bring attention to our business relationship.” This particular “business relationship” allegedly made a profit of approximately $4.5 million dollars in about one year.

More recently, Chinese authorities arrested Zhang on November 7, 2013 under charges of teaching criminal methods to others and producing ecstasy, which is unlawful in Shanghai. But with no extradition treaty between China and the United States, it seems unlikely that Zhang will ever face his U.S. charges. The imposition of OFAC administered sanctions appears to be the U.S. government’s best and only recourse.

So how did Zhang, his company, and associates get designated as foreign narcotics kingpins? The Treasury, through OFAC, works in conjunction with the Justice department and U.S. intelligence community to make the designations. Factors that may have supported the decision to designate Zhang include: (1) the existence of an indictment against him; (2) his status as a fugitive; (3) the existence of a foreign indictment or other similar charging instrument against him; (4) his heavy utilization of the U.S. financial system; and (5) his strong nexus to the United States and U.S. persons. In essence, there is reasonable cause to believe Zhang was involved in these activities, he is a foreign person outside of the jurisdiction of the United States, and the sanctions would likely have an appreciable impact on Zhang’s ability to do business.

Depending on the outcome of Zhang’s case in China, Zhang and his associates may have legitimate grounds to have their designations reconsidered. One of the purposes of the sanctions was presumably to dismantle Zhang’s narcotics trafficking network. However, if CEC Limited ceases operations and Zhang is required to serve a long prison sentence in China, the circumstances originally justifying the designations may no longer be applicable to the situation. This may form the basis of a designation reconsideration made pursuant to 31 C.F.R. 501.807.

Disclaimer: Blog posts should not be relied upon as legal advice and are only provided for informational purposes.  Information contained in blog posts may also become outdated with the passage of time as laws change and U.S. foreign policy and national security objectives evolve.