WACHOVIA IS UNDER SCRUTINY IN LATIN DRUG-MONEY PROBE

WASHINGTON -- Federal prosecutors are investigating Wachovia Corp. as
part of a broad probe of alleged laundering of drug proceeds by
Mexican and Colombian money-transfer companies, according to people
familiar with the matter. Wachovia is one of several large U.S. banks
that have come under scrutiny for their relationships with such companies.

It is in discussions with the Justice Department about reforms in its
compliance system and faces a possible deferred-prosecution agreement
that would require extensive federal oversight. An official of
Wachovia said it is cooperating in the probe.

Wachovia, based in Charlotte, N.C., and some other U.S. banks severed
relationships with Mexican foreign-exchange firms in December and
January after authorities began their inquiries.

Some have struck agreements with the government to improve their
efforts to fight money laundering, avoiding prosecution. The
remittance industry transmits more than $50 billion from the U.S. to
Latin America annually, mostly legitimate wages from immigrants
caring for their relatives.

The banking industry has long sought a foothold in the lucrative
industry, which charges high fees to move money.

But it is also a natural target for narcotics traffickers seeking a
way to move the proceeds of their U.S. drug sales to Latin America
without detection. A spokeswoman for Wachovia, Christy
Phillips-Brown, said, "Wachovia is committed to maintaining a strong
anti-money-laundering program." The investigation is the latest
headache for the North Carolina bank, which has also been pressured
by the credit turmoil and fallout from its 2006 acquisition of a
California home lender.

Wachovia recently cut its dividend and raised $8 billion in capital
to shore up its financial state.

And on Friday, it agreed to pay up to $144 million to settle a probe
of its ties to telemarketers and payment processors accused of
obtaining bank-account data from the elderly and withdrawing money
from their accounts. The government's latest assault on drug-money
laundering focuses on casas de cambio, or money-exchange houses,
which dot the U.S.-Mexico border to facilitate workers' remittances
and other cross-border transfers. Wachovia built up its ties to casas
de cambio as a way to tap the Hispanic market, which doesn't always
bank through traditional Main Street outlets. Wachovia served as a
larger partner, holding the foreign-exchange houses' deposits and
providing back-office services.

In 2005, it introduced the Dinero Directo card to facilitate
cross-border remittances. The bank pushed into the business despite
well-publicized concerns from U.S. law enforcement that such firms
were sometimes used to launder drug money. Wachovia declined to
discuss why it pursued this business despite the warnings. Internal
emails and documents filed in federal courts in Miami, Chicago and
New York describe former ties between Wachovia and money-changing firms.

In a case in U.S. court in Miami, federal agents seized more than $11
million in 23 Wachovia accounts belonging to Casa de Cambio Puebla, a
Mexican chain. U.S. and Mexican prosecutors said they believed the
money was being laundered, according to legal papers filed by Puebla.
Mexican police raided Puebla offices last fall, alleging
relationships with a major drug cartel. Frank Rubino, a Miami lawyer
for the owners of Puebla, said the money seized belongs to legitimate clients.

In a case in federal court in New York and Chicago, Wachovia is suing
to retrieve $38 million from a firm called Majapara Casa de Cambio.
Wachovia contends, among other things, that Majapara was "engaged in
illegal loans."

Lawyers for Majapara said in court papers that it is on the verge of
bankruptcy, in part because Wachovia cut off the banking
relationship, even though there was nothing illicit about its business.

Internal emails filed in court show Wachovia executives alerting
Majapara officials that "Bulk Cash deposits will not be accepted or
collected after Dec. 20, 2007." In response to Majapara's assertion
that the bank summarily terminated the relationship, Wachovia's Ms.
Phillips-Brown said, "Their claims are without merit." In a recent
affidavit, a U.S. representative for Majapara said that Wachovia had
provided the Mexican firm with lines of credit, overdraft privileges
and remittance-processing services.

Wachovia, the court papers filed by Majapara said, provided "largely
unsecured credit well in excess of $100 million on any given day."
Majapara said that it previously gave its business to several banks,
but that in February 2007, after Wachovia extended its large credit
facility, it transferred virtually all of its business to Wachovia.
U.S. and Mexican authorities have cracked down in recent years on the
operations of the foreign-exchange firms.

The Mexican Attorney General's office says some of them are part of a
sophisticated system that funnels drug money through U.S. banks, on
to European banks and then back to the U.S. and Latin America. As
early as the mid-1990s, U.S. regulators and drug investigators were
warning U.S. banks that Mexican casas de cambio presented a
significant money-laundering risk.

The status of Wachovia's talks with federal prosecutors about a
possible deferred-prosecution agreement couldn't be learned.

In a such an agreement signed with Union Bank of California in
September, the Justice Department faulted the bank for "failing to
maintain an effective anti-money-laundering program" and failing to
report suspicious money-transfer activities.

The case detailed how two since-jailed drug suspects used accounts of
Ribadeo Casa de Cambio to transfer millions of dollars in alleged
drug proceeds. Federal prosecutors identified $295 million in
transfers from various Union Bank accounts to their account, with
only $29 million being repaid. In another instance, one person
deposited 34 sequentially numbered $1,000 traveler's checks on the same day.

Prosecutors faulted Union Bank for failing to corroborate the
legitimacy of the transfers.

In addition, according to prosecutors, the bank failed to catch the
large volumes of traveler's checks, bulk cash deposits and wire
transfers structured to fall below limits requiring reporting. Union
Bank forfeited $21.6 million to settle the allegations. "We are
confident we will meet the government's requirements and we have put
a lot of effort and energy into that process," said Union Bank
spokesman Steve Johnson on Friday.

Several other banks have unwittingly helped to funnel drug money,
according to law-enforcement officials.

Last August, American Express Bank International, a unit of American
Express Co., entered into a federal deferred-prosecution agreement on
charges of failing to maintain an effective anti-money-laundering program.

The bank forfeited $55 million.

Its Miami branch was being used to launder drug profits, according to
federal prosecutors. An American Express spokesman had no immediate comment.