DRUG WAR ON TRIAL

A new counteroffensive has been launched in the drug war: Financiers have
begun to retaliate against allegations of money laundering and drug
trafficking by suing the messengers. If successful, the suits could hinder
future investigations into the G spot of the drug trade, where billions of
dollars in illicit profits meet the highest precincts of international
finance.

At the heart of the legal assault are a Mexican billionaire and majority
owner of a Texas bank, Carlos Hank Rhon, of the powerful Hank family
(frequently referred to as the "Mexican Rockefellers"), and Roberto
Hernandez, president of Banamex, Mexico's second-largest bank. The suits
are being fought out in US courts, pitting scions of the Mexican elite
against an American journalist, a scholar and a little-known agency of the
US government.

Carlos Hank Rhon is the eldest son of Carlos Hank Gonzalez, who parlayed
friendships with former Mexican President Carlos Salinas and his
predecessor into a multibillion-dollar financial empire. Hank Gonzalez died
in August at the age of 73; his two surviving sons, Carlos Hank Rhon and
Jorge Hank Rhon, now oversee a multinational conglomerate that includes
holdings in real estate, television, manufacturing, trucking and banking.
In the mid-1990s Incus, a Caribbean-based holding company controlled by
Carlos Hank, engineered the purchase of the Laredo National Bank of Texas,
in one of the most significant expansions of Mexican capital into the
United States in the NAFTA era.

Carlos Hank's takeover of Laredo, however, ignited the interest of the
Federal Reserve Board and the suspicions of the National Drug Intelligence
Center (NDIC), which supplies intelligence and analyses to law enforcement
agencies. In a draft summary of an 800-page report detailing the links
between drug traffickers and top Mexican politicians and financial figures,
the NDIC drew connections suggesting that Hank was involved in the drug
trade and included reports of his involvement in money laundering for
Mexican drug organizations. The report, compiled at the request of the FBI
and the Drug Enforcement Administration, was dubbed Operation White Tiger,
in reference to an attempt by Carlos Hank to smuggle an endangered white
tiger into Mexico in the back seat of his Mercedes in 1991.

In the spring of 1999 the contents of the leaked White Tiger draft
summary--including the assertion that Hank posed "a significant criminal
threat to the United States" and that his enterprises helped facilitate
cocaine and heroin shipments into the United States--broke in a series of
articles in the Washington Times's weekly magazine Insight, the Washington
Post, the Mexican newspaper El Financiero and a feisty quarterly journal of
Hispanic politics and culture, El Andar, based in Santa Cruz, California,
which has been dogging the Hanks with investigative reports over the past
two years. The Laredo bank immediately threatened legal action against El
Andar, which has a circulation of some 10,000 readers, demanding a
retraction, $10 million and the bank's approval of any future articles.
Julia Reynolds, author of the story and editor of El Andar, refused, and
continued to write about the bank's funding and connections to Texas
political figures--including George W. Bush. After publicity on the threat
against El Andar appeared in the Los Angeles Times, Laredo backed off its
threat to sue.

The news about the Hanks was explosive, breaking just as then-Attorney
General Janet Reno and then-White House drug czar Gen. Barry McCaffrey were
visiting Mexico for a series of meetings on US-Mexican cooperation in the
drug war.

The White Tiger findings would generate more attention to the NDIC than at
any time in its short, mostly obscure history. Based in Johnstown,
Pennsylvania, the center, with a staff of some 200 scholars and
researchers, was created by George Bush senior as an arm of the Justice
Department to signal his commitment to fighting drugs (and as a signal of
Democratic Congressman John Murtha's commitment to providing employment for
his constituents). Until recently, its investigators have been mostly
nameless, the millions of words issuing from its government-issue red-brick
offices mostly anonymous.

But that changed when the NDIC was hit with a multimillion-dollar lawsuit
by Laredo's American president, Gary Jacobs. In the suit, filed this past
May 23 in federal court in Laredo, Texas, Jacobs demands $129 million from
the NDIC on the grounds that the center's leak of the White Tiger summary
constituted a violation of the Privacy Act, which prohibits the leak of
classified government documents. Jacobs terms the NDIC's allegations
"life-shattering lies." His attorney, Patrick McLaughlin, contends that the
information in White Tiger was little more than "unproven and uncharged
allegations" contained in an "unvetted" report that was "illegally
disseminated to the news media." White Tiger, he says, "assassinated my
client's character." On August 20 the Justice Department filed suit in
federal district court in Laredo asking that the case be dismissed.

Though Jacobs's name is on the lawsuit, it is Carlos Hank Rhon who is the
unseen player behind the legal machinations. Carlos Hank's company, Incus,
has controlled 70 percent of the shares in Laredo, and it is Hank's name
that surfaces most prominently in the White Tiger and related stories.
Jacobs's suit was filed a week before the settlement of a longstanding
Federal Reserve Board civil complaint against Hank and Incus accusing him
of using the names of relatives and associates to cover up his financial
interest in Laredo. The settlement does not require Hank to admit guilt,
but he is required to turn over his controlling shares in the bank to an
independent trust. And he agreed to pay $40 million in penalties--the
second-biggest fine in the Federal Reserve's history.

That was not Hank's first run-in with the Fed. In the mid-1990s, as reports
similar to those later contained in White Tiger began surfacing in Mexico
and the United States, the Fed launched an investigation into Laredo's bid
to purchase the Mercantile Bank of Brownsville, Texas. After a lengthy
investigation Laredo withdrew its bid.

Jacobs's suit against the NDIC followed, by less than a year, a legal
blitzkrieg that transformed the life of a mild-mannered political scientist
named Donald Schulz. Currently chairman of the political science department
at Cleveland State University, Schulz worked for eight years as a
specialist on Latin America and national security for the Strategic Studies
Institute at the US Army War College. While researching an academic book
exploring the links between the drug trade and Mexican politicians, Schulz
interviewed several officials at the National Drug Intelligence Center, one
of whom sent him a copy of the draft executive summary of White Tiger
containing material on the Hanks. Jacobs filed suit against Schulz in
August 2000, accusing him of violations of the RICO act, alleging that he
was involved in an "enterprise...designed to...unlawfully acquire, use and
disseminate top secret, predecisional, law enforcement sensitive
information...to the direct detriment of plaintiffs," that the assertions
in White Tiger constituted defamation and that release of the draft report
was a violation of Justice Department regulations prohibiting unauthorized
release of documents considered "law enforcement sensitive." In essence,
Jacobs accuses Schulz of "infiltrating" the NDIC and providing researchers
there with "disinformation" that was later leaked to the press in White Tiger.

Laredo's lawyer, Ricardo Cedillo, denies the White Tiger allegations and
asserts that they have resulted in deep damage to Jacobs's professional
standing. "Gary Jacobs is a border banker with an impeccable reputation,"
Cedillo said in a telephone interview from his office in San Antonio.
"Suddenly, he's not being invited to the seminars and programs on both
sides of the border, he's not enjoying the fruits of his labor. He has been
on a first-name basis with ambassadors from the United States and Mexico,
and now he is [treated like] a pariah after being associated [in White
Tiger] with money launderers."

Schulz denies providing any such information or leaking the report.
Schulz's trial, when it commences in August 2002, will revolve not
necessarily around the truth of such assertions but whether he leaked the
report and whether he conspired to interject allegedly defamatory
information into the contents of the NDIC report. Schulz says he didn't
receive a copy of the summary until late March of 1999 (the court record
indicates it was sent to him on March 25), and the Insight magazine
story--the first to publish the White Tiger allegations, and running at
almost 4,000 words--appeared on March 29. The author of the story, Jamie
Dettmer, has declined to name his source, but he insists that it wasn't
Schulz. An internal investigation by the Justice Department determined that
the source of the leak--and the person who sent the draft summary to
Schulz--was the supervisor of the White Tiger project, an NDIC agent named
Daniel Huffman; Huffman, a former FBI agent, resigned under pressure last
year.

Whoever was the source, the leaks were not popular in Washington, which was
on the verge of certifying Mexico as a "partner" in the drug war. In a
letter to former Senator Warren Rudman, who as a Hank lobbyist on Capitol
Hill had disputed the White Tiger allegations, Attorney General Janet Reno
disassociated herself from the findings in the report. Shortly afterward,
Schulz's work on Mexico at the War College was terminated, and he was
diverted to research on Colombia as the wheels of Plan Colombia were
grinding their way through Congress. White Tiger itself was shelved by the
NDIC when a new director took over in June 1999.

For Schulz, the lawsuit has had a devastating impact. He has spent, thus
far, some $25,000 on legal costs and has received no assistance from either
the NDIC or the US Army War College; his appeal to the government for legal
help has now been sitting with the Justice Department for more than eight
months. If the case goes to trial, Schulz, 59, says it will eat up all his
retirement savings. Ironically, Schulz and the NDIC, which tried to
distance itself from him after he was sued last year, have now been thrown
together as parallel defendants in the legal offensive launched by Jacobs.
"It doesn't matter whether I win or lose; I lose," Schulz says. "My time,
my costs to lawyers--I will have lost even if I'm vindicated in the end."
In June Schulz filed a countersuit for "harassment" against Laredo, asking
$1 million in damages and demanding that Carlos Hank Rhon's name be added
to Jacobs's complaint as a plaintiff. As the majority owner and chairman of
Laredo, and as a primary target of Operation White Tiger, Hank, Schulz
argues, dodged behind Jacobs. Keeping Hank's name off the suit, asserts
Schulz, protects him from being deposed and keeps information about his
business activities in the United States and Mexico from being entered into
the legal record.

Cedillo discounts this charge: "Jacobs is no surrogate for Carlos Hank
Rhon." Rather, he says, the reason the Mexican mogul has kept his name off
the suit is that he "has a thick skin, and didn't want to aggravate Mexican
press attention at a time when his father was ill." Indeed, the Mexican
press has had a voracious appetite for stories on the Hank family--ranging
from serious corruption investigations to salacious tabloid reports, in
which they are cast as a symbol of the PRI oligarchy that dominated Mexico
for seven decades.

Jacobs's legal offensive appears to be the culmination of a campaign
foreshadowed on national television when, in an interview with PBS's
Frontline for its fall 2000 special on the drug war, he announced, "With
the lawsuits I [am] getting ready to file, these cockroaches in the
government are going to run for cover." Jacobs's choice of "cockroaches"
appears to be based on the potential for sending a warning signal to any
future investigators--from the government or the press. The Washington
Times never heard from Jacobs's legal team. After being contacted by Carlos
Hank's lawyers, the Washington Post printed a "clarification" of its
earlier story by saying it had mistakenly identified a trucking company as
a Hank property. (The Post stands by the rest of its reporting on the White
Tiger findings concerning Hank family links to the drug trade.)

Schulz says the suit against him "is part of a larger campaign of
intimidation against journalists, scholars and US government researchers
who have researched or written about the Hanks. It's an attempt to
intimidate and silence everything from El Andar to the US government, or
those who speak with the US government. If it succeeds, simply threatening
a lawsuit could be used by others to deter government or journalistic
investigations."

Another case wending its way through the courts involves a Mexican banker's
legal attack against a US journalist, Al Giordano, the editor and publisher
of Narco News (www.narconews.com), an Internet magazine that for the past
year has been covering the intersection between corruption and the drug war
in Latin America. Giordano is facing a libel suit filed by Banamex,
Mexico's second-largest bank, for a series he wrote last year asserting
that the bank's president, Roberto Hernandez, was involved with drug
trafficking and money laundering.

Giordano's reports were based on stories in the Mexican newspaper Por
Esto!, based in Yucatan. The author of the Por Esto! series was the
newspaper's founder and editor, Mario Menendez, a veteran Mexican
journalist who was briefly imprisoned in 1968 after publishing details
about the massacre of students demonstrating in Mexico City's Tlatelolco
Plaza before the 1968 Olympics.

Por Esto!'s most explosive charges--which Giordano went on to repeat,
describing them as "what lawyers call beyond a reasonable doubt"--concerned
the appearance of several bales of cocaine on land owned by Hernandez along
the Yucatan coast. Hernandez himself is a leading figure of the Mexican old
guard allied to the PRI, having purchased the government's shares in
Banamex in 1991, turning that investment into a financial empire. There was
no proof of Hernandez's knowledge of the shipment, but the Por Esto!
series, which ran from 1996 through 1999, included photographs of the
cocaine seized on Hernandez-owned property and of containers frequently
associated with drug-running along the Yucatan coast that were found on
Hernandez-owned beachfront. The stories proved particularly embarrassing
when President Clinton traveled to Yucatan in 1999 for an antidrug
conference attended by then-Mexican President Ernesto Zedillo and hosted by
Hernandez at a local resort.

Banamex responded by suing Mario Menendez for libel and slander. Two years
later, a Mexican judge ruled against the bank; that decision was upheld in
May 2000 on appeal (a subsequent effort to pursue Menendez on criminal
libel charges was thrown out of court in Mexico City last October). Having
failed to discredit the charges in Mexico, in August 2000 Banamex shifted
venue, filing suit on the same grounds against Giordano, Narco News and
Menendez in a state court in New York. The defendants, allege Banamex,
defamed the bank and issued "false statements" that interfered with the
bank's "prospective economic advantage," based on the fact that the
journalists repeated their charges during an interview on New York public
radio station WBAI and during a Columbia University conference on Latin
America in March of 2000. According to the bank's filing, "Neither Banamex
nor its Chairman and General Director are or ever have been engaged in
illegal drug trafficking...nor is it funded with such money."

The case represents an unprecedented turn of events for Internet
journalism. Narco News, produced and written in English from a town in
Mexico, has broken some important stories related to the drug
war--including an expose of the CIA's hiring of mercenaries in Peru, months
before an airplane with an American missionary family aboard was shot down
by one of those private CIA-contractor teams in the Peruvian jungle.
"You've got a Mexican Internet magazine, published in English, being sued
in an American court," comments veteran civil liberties lawyer Thomas
Lesser, who is defending Narco News. "If they can get away with this,
nobody on the Internet will be safe from legal harassment." The suit has
been a nerve-rattling experience for Giordano, a former political
correspondent for the Boston Phoenix. With no legal insurance and operating
on a bare-bones budget, he is conducting a joint defense with Lesser,
representing Narco News, and David Atlas, representing Menendez.

"What was said here in New York about Banamex is mild when compared with
what was said about Hernandez in Mexico," comments Atlas, who is with the
New York law firm of Frankfurt, Garbus, Kurnit, Klein & Selz, noted for its
defense of First Amendment cases. "And Mexican courts decided three times
that what Menendez published was not defamatory to Banamex. This is purely
an attempt to intimidate journalists, this time in an entirely new venue."
In a hearing at the New York Supreme Court in Manhattan on July 20, Atlas,
Lesser and Giordano argued that Banamex's suit should be thrown out of
court on jurisdictional grounds and because New York law requires malice,
which they deny. The judge is considering their request.

he accuracy of all these stories will in the end be determined by a court
of law. In the meantime, there is one revealing element common to all the
legal actions. It is a financial institution that is far closer to home
than any of the Mexican enterprises operating south of the Rio Grande:
Citibank. It was Citibank that brought Carlos Hank Rhon to the attention of
the Fed during the Mercantile Bank investigation because of his ties to
Raul Salinas, brother of then-Mexican President Carlos Salinas. Hank Rhon
introduced Raul Salinas to the top banking agent in Mexico for Citibank,
which Treasury Department investigators claim helped facilitate the
laundering of some $200 million that Raul Salinas skimmed off Mexican
government food programs, corrupt procurements and drug payoffs during his
brother's tenure as president. (Raul Salinas is currently serving a
twenty-year sentence in a Mexican prison for murder and illicit enrichment;
Carlos Salinas is living in self-imposed exile in Ireland.)

Most pungently, on May 18 Citibank, now Citigroup, announced that it was
purchasing Banamex for $12.5 billion in cash and stock--making Hernandez,
overnight, one of the richest men in the Americas.

"How can they [Banamex] claim that I've ruined their reputation when
they've just done a massive deal with Citibank." exclaimed Giordano,
interviewed by telephone from his office in Mexico shortly after the sale
was announced.

The Citibank-Banamex deal now joins the largest US financial
institution--which was criticized by the Federal Reserve Board during
Senate subcommittee hearings in 1999 as having lacked the proper procedures
to detect Salinas's and other corrupt Mexican politicians' money-laundering
activities--with a bank that has been excoriated in the Mexican and US
press for its corrupt ties to the PRI. (Responding to widespread criticisms
of its monitoring of suspect accounts, this past spring Citigroup hired one
of the Fed's top experts on money laundering, Rick Small, to oversee its
compliance office.) A further irony: When Citigroup chairman Robert Rubin
was Treasury Secretary during the Clinton Administration, he authorized a
comprehensive assault on money laundering that was dubbed Operation
Casablanca. Among the tens of millions of dollars identified as having
illicit origins over the course of Casablanca's multipronged investigation
(which was partly immortalized in the film Traffic) was $3.3 million seized
during a sting against none other than Banamex, which the DEA, in
coordination with Mexican law enforcement, alleged was drug money from a
northern Mexican smuggling operation.

In many ways, all these cases are also united by the phenomenon of NAFTA's
having opened the door to Mexican capital flowing north, just as US capital
and jobs have been flowing south. Follow the money far enough across the
ever-more-open US-Mexican frontier, these challenges suggest, and
journalists and scholars alike, not to mention the federal government
itself, could face a new NAFTA-inspired boomerang of unintended
consequences. Giordano now claims that if his case goes to trial, it will
not be just him but "the entire drug war" that will be going on trial.

The guiding principle of Operation Casablanca was to "follow the money"
that helps fuel the drug trade. Whatever the courts decide, the three
pending cases offer an ominous warning sign to anyone who tries to do just
that. Congressional investigators estimate that as much as $500 billion is
laundered through the US financial system each year. But attempting to draw
the links between the legitimate and illegitimate economies, the great
untold secret of the drug war, remains a dangerous business.