U.S. DISAVOWS REPORT CLAIMING MEXICO'S HANK FAMILY IS A THREAT

WASHINGTON -- In the murky world where U.S. attempts to control the drug war
collide with international commerce, Mexico's powerful Hank family has won
an important victory.

For years, the family, headed by patriarch Carlos Hank Gonzalez, a towering
figure in the ruling Institutional Revolutionary Party whose business
dynasty invites comparisons to the Rockefellers, has been the subject of
speculation within the U.S. government that it provided political cover and
laundered money for top Mexican narcotics traffickers. Last June, those
rumors flared into the news media in the U.S. and Mexico with the
publication of leaked excerpts from a report produced by a little-known
government think tank, the National Drug Intelligence Center, that alleged
the family posed "a significant criminal threat to the United States."

But in an unusual step, Attorney General Janet Reno last month disavowed the
report in a letter to former New Hampshire Sen. Warren B. Rudman, now an
attorney with the law firm Paul, Weiss, Rifkind, Wharton & Garrison, who is
representing Mr. Hank Gonzalez's oldest son, Carlos Hank Rhon.

"The analysis and any conclusions and inferences contained in the report ...
remain in draft, and therefore, have not been adopted as official views and
positions of the NDIC, the Department of Justice, or the various federal,
state, and local law enforcement and regulatory authorities that may have
provided information to the drafters of the report," she wrote in a letter
dated March 21. "In conducting a preliminary review of the draft report it
was determined that the subject matter of the report was beyond the
substantive expertise and area of responsibility of the NDIC, and the
project was terminated."

The admission raises renewed questions about the quality of U.S.
intelligence on Mexican traffickers at a time when the Clinton
administration has been given unprecedented authority to identify and freeze
the U.S. assets of suspected foreign drug lords. By June 1, under the
Foreign Narcotics Kingpin Designation Act of 1999, the president will name
major foreign traffickers who are held to represent a threat to the U.S.
economy and national security, triggering moves to block their U.S. bank
accounts and prevent them from buying or selling any assets in the U.S.

The plan, modeled after a successful campaign against Colombian traffickers,
has drawn protests from Mexican business leaders and government officials.
They worry that Mexico is particularly vulnerable to the new law, because
Mexican trafficking organizations have grown substantially in recent years
to represent more than half the cocaine smuggled into the U.S. at the same
time that the North American Free Trade Agreement has fostered deep business
ties between the two countries.

Some Mexican businessmen and their U.S. partners believe the mix will leave
them unfairly targeted, particularly because the law prohibits affected
foreigners from contesting the designations in U.S. courts.

Gary Jacobs, chief executive of Laredo National Bancshares Inc., a Texas
bank-holding company that is Mr. Hank Rhon's principal U.S. business
investment, called the NDIC report "garbage" and said its appearance
appeared timed to help win approval of the Kingpin Designation Act. "This
now-discredited report, which last summer was leaked to the press, has been
widely referenced in the media and used in the U.S. to create highly
controversial legislation," he said in a statement. "It shows the terrible
dangers that a malicious misinformation campaign can produce, especially
where employees of several U.S. government agencies or quasi-government
agencies have been involved."

A spokesman for the NDIC, located in Johnstown, Pa., referred questions to
the Justice Department. A Justice spokesman didn't have any immediate
comment.

But several current and former government officials familiar with the report
conceded that it contained factual and interpretive errors and wouldn't have
survived an internal review without significant modifications. "It's a
terrible document," said one administration official involved in formulating
drug policy with Mexico. "It's really sad that it leaked."

Excerpts from the report first appeared in the Mexican newspaper El
Financiero on the eve of a visit to Mexico last year by Ms. Reno and U.S.
drug czar Barry McCaffrey. An internal investigation by the Justice
Department disclosed that a mid-level NDIC official involved in drafting the
report, Daniel Huffman, passed a copy to a research professor at the U.S.
Army War College, Donald E. Schulz.

Mr. Huffman, who was dismissed from the NDIC over the leak, says he
mistakenly thought Dr. Schulz, a recognized expert on the Latin military,
was with the Defense Intelligence Agency and therefore cleared to receive
it. Mr. Huffman said he believes Dr. Schulz gave his copy to an El
Financiero reporter. Dr. Schulz, who has since left the War College to
become chairman of the Political Science Department of Cleveland State
University in Cleveland, denies he gave it to the reporter.

Mr. Huffman himself acknowledges that the draft report was far from
conclusive. "The problem is, there's no smoking gun," he said, adding that
he understood his work was meant to help lay the groundwork for a
designation of the Hanks as drug-money launderers under the new law, if the
report passed muster. "We talked about it extensively" within the NDIC, he
said.

Mr. Hank Rhon, who didn't return a telephone call seeking comment, isn't out
of the woods with U.S. authorities yet. The Federal Reserve Board in
December 1998 began administrative proceedings aimed at forcing him to
divest most of his stake in Laredo National Bancshares. Arguing that Mr.
Hank Rhon made false filings to banking regulators, secretly sold some of
his shares to his father and other Mexican businessmen, and that one of his
affiliates improperly borrowed money from Laredo National, the Fed is
seeking to force him to lower his ownership to 24.9% from 74%. Another Hank
Rhon attorney, Fulbright & Jaworski partner Richard Beckler, denies the
allegations and says the Fed action, if successful, could cost Mr. Hank Rhon
more than $200 million, including fines and other penalties.

The family patriarch, Mr. Hank Gonzalez, who amassed his initial fortune
while operating Mexican businesses at the same time he held senior posts in
Mexican government -- and who coined the phrase, "a politician who's poor is
a poor politician" -- didn't return a telephone call seeking comment.

Write to Michael Allen at mike.allen@wsj.com