TOP MEXICAN OFF-LIMITS TO U.S. DRUG AGENTS

WASHINGTON - Early last year, as undercover U.S. Customs agents
neared the end of the biggest investigation ever conducted into the
illegal movement of drug money, bankers working with Mexico's most
powerful cocaine cartel approached them with a stunning offer.

The agents, posing as money launderers from Colombia, had insinuated
themselves deeply into the Mexican underworld, helping the traffickers
hide more than $60 million. Now, money men working with the cartel
said they had clients who needed to launder $1.15 billion more. The
most important of those clients, they said, was Mexico's powerful
defense minister.

The customs agents didn't know whether the money really existed or if
any of it belonged to the minister, Gen. Enrique Cervantes, officials
said. But having heard about American intelligence reports pointing to
corruption at high levels of the Mexican military, the agents were
mystified by what happened next.

Rather than continue the undercover operation to pursue the deal,
Clinton administration officials ordered to shut it down on schedule
several weeks later. No further effort was ever made to investigate
the offer, and officials said prosecutors have not even raised the
matter with the suspects in the case, who have pleaded guilty and are
cooperating with the authorities.

"Why are we sitting on this kind of information?" asked the former
senior customs agent who led the undercover probe, William F. Gately.
"It's either because we're lazy, we're stupid, or the political will
doesn't exist to engage in the kind of investigation where our
law-enforcement efforts might damage our foreign policy."

Senior administration officials denied that foreign policy influenced
their decision to end the operation, saying they were moved primarily
by concerns for its security. They also emphasized that the agents
were unable to verify the Mexican traffickers' claims.

Other officials of the administration, which has based much of its
Mexican drug strategy on collaboration with Cervantes, said they are
confident that he is above reproach. A spokesman for the Mexican
Defense Ministry, Lt. Col. Francisco Aguilar Hernandez, dismissed the
traffickers' proposal as self-serving lies.

But a detailed account of the case -- based on confidential government
documents, court records and dozens of interviews -- suggests that
U.S. officials walked away from an extraordinary opportunity to
examine allegations of the official corruption that is considered the
main obstacle to anti-drug efforts in Mexico.

For nearly a decade, American officials have been haunted by the
spectacle of Mexican officials being linked to illicit activities soon
after they are embraced in Washington. And just weeks before the
customs investigation, known as Operation Casablanca, ended last year,
administration officials received intelligence reports indicating that
the Mexican military's ties to the drug trade were more serious than
had been previously thought.

But when faced with the possibility that one of Washington's critical
Mexican allies might be linked to the traffickers, the officials gave
the matter little consideration. They said they opted for a sure
thing, arresting mid-level traffickers and their financial associates
and at least disrupting the money laundering system that drug gangs
had set up. To reach for a general, they said, would have added to
their risks with no certainty of success.

"Obviously it was a significant allegation," Customs Commissioner
Raymond W. Kelly said in an interview. But he added: "There was
skepticism about it. Was it puffing? It just was not seen as being --
I won't use the word credible -- but it wasn't verified."

Taking Stock: Arrests, Indictments and Drug Money

When senior administration officials announced the sting last May 18,
they took a triumphant inventory: the indictments of three big Mexican
banks and bankers from a dozen foreign banks; the arrests of 142
suspects; the confiscation of $35 million in drug profits and the
freezing of accounts holding $66 million more.

The officials claimed the success as the result of a longstanding
administration fight against money laundering. But Gately, who retired
from the Customs Service on Dec. 31, said his investigation ran a
gantlet of resistance from the start.

The Justice Department, uncomfortable with cases in which undercover
agents laundered more money for drug traffickers than they ultimately
seized, were imposing new limits on the time that such operations
could run and the money they could launder, officials said. And though
the restrictions did not apply to Customs, a branch of the Treasury,
Justice Department officials continued to play strong, skeptical roles
in supervising cases throughout the government.

One federal official, who spoke on the condition of anonymity,
admitted that he initially dismissed Gately's plan as a nonstarter.
"You're out of your mind," the official remembered saying.

Several colleagues said it was the sort of response that Gately, 49,
tended to see as a challenge. A decorated former Marine who enlisted
for service in Vietnam at the age of 17, he had already been at the
center of several cases that mixed internal struggle and public
success. Friends and critics described him in similar terms: driven,
sometimes abrasive and unusually creative.

After leading an investigation that revealed ties between the Italian
mafia and Colombian cocaine cartels, Gately co-wrote a 1994 book about
the case, "Dead Ringer," that cast him as a lonely crusader surrounded
by small-minded bureaucrats. "It is the story of one man who refused
to succumb to corruption," the prologue reads, "who believed in his
oath and mission, and the consequences he paid for believing in what
he was doing."

As the senior customs drug investigator in Los Angeles, Gately said,
he first heard from an informant in 1993 about an important shift in
the way that Mexican and Colombian drug traffickers were converting
their cash into funds that could be freely spent.

The informant said traffickers were depositing their money with
corrupt Mexican bankers, who sent it back to them in almost
untraceable cashier's checks drawn on the American accounts that the
Mexican banks used to do business in the United States.

Gately hoped his informant could infiltrate that system -- collecting
illicit cash from drug wholesalers in the United States and then
wiring it to corrupt bankers in Mexico. The bankers would issue drafts
for the money, and customs would develop evidence against suspects on
both ends of the transaction.

Many customs officials, however, were skeptical that the ruse would
work. Drug-enforcement agents wanted to use the informant in another
case. One federal prosecutor opposed using him at all because he had a
criminal past and threatened to indict him in a 10-year-old case.

Even when Gately was eventually able to recruit another informant, a
Colombian known by the pseudonym "Javier Ramirez," a senior Justice
Department official, Mary Lee Warren, pressed him to limit the
operation's scope, Gately and others said.

"What she wanted to know was, when was this going to be over?" he
recalled. "What was our endgame?"

Getting Involved: U.S. Operatives Meet a Kingpin

In November 1995, Colombian drug contacts introduced the undercover
agents to Victor Alcala Navarro, a representative of Mexico's biggest
drug mafia, the so-called Juarez cartel.

The customs agents, posing as money launderers from a dummy company
called Emerald Empire Corp., began picking up the Mexican's profits
and laundering them as planned.

In February 1997, at meetings in Mexico, Ramirez was introduced to
Alcala's boss. A few months later, the customs informant found himself
chatting by phone with the head of the cartel, Amado Carrillo Fuentes.

Over scores of meetings and million-dollar deals, the traffickers grew
more open about the official protection they enjoyed in Mexico,
law-enforcement officials and government documents indicate.

At one meeting in Mexico City on May 16, 1997, the traffickers brought
along 16 federal police agents as bodyguards. At another meeting, a
man who identified himself as an official of the Mexican attorney
general's office picked up $1.7 million in cash, including $415,000
that the undercover agents had brought for the cartel boss himself.

During a later meeting in New York, Alcala told the agents that like
Mexico's drug-enforcement chief, who had been arrested for
collaborating with the Juarez cartel, the defense minister, Cervantes,
was in league with the competing Tijuana cartel.

Customs officials said they remained skeptical of what the agents
heard, including the traffickers' claim that Carrillo Fuentes had
actually faked his own death in 1997. But in December 1997, Ramirez
invited Alcala to Colombia for an elaborately staged meeting that
seemed to raise their partnership to a new level.

At a heavily guarded hacienda overlooking Bogota, an informant acting
as Ramirez's Colombian boss, Carlos, said he and his partners had $500
million of their own to launder. They wanted to know whether the
Mexican bankers used by Alcala's boss, Juan Jose Castellanos
Alvarez-Tostado, could help.

"Alvarez called us right back," Gately recalled. "He said, 'Let me
send you my very best people, and we will get it done.' "

On March 6, 1998, Alcala arrived with several businessmen at the
tastefully furnished offices of Emerald Empire in an industrial suburb
of Los Angeles. This time the businessmen brought a big deal of their
own.

One of the men, David Loera, said he knew "a general" who had $150
million in Mexico City to invest. Would Ramirez -- who had told the
traffickers he owned part of a Nevada casino used to launder money --
care to help?

Over the next six weeks, according to government documents and the
accounts of Gately and several officials, the deal was discussed in
three more meetings and three telephone conversations between Ramirez,
the undercover agents and the traffickers. All of the contacts were
secretly tape-recorded and transcribed, officials said.

In one call, two senior investment managers at Mexico's second-largest
bank told the customs operatives that the money belonged not just to
"a general" but to the minister of defense. Later, the two Mexicans
advised Ramirez that the minister was sending "his daughter" (a woman
later said to be a friend) to meet with them, along with an army
colonel and a third person.

However, the investment managers said, the amount to be laundered was
much more than they had discussed: the minister had $500 million in
cash in New York and another $500 million in the Netherlands, in
addition to the $150 million in Mexico City.

Customs officials said they queried the CIA, which works closely with
the Mexican military on drug-control and other programs. The CIA
responded tersely that they had no such information about Cervantes,
an assessment that other officials have since reiterated.

But while Cervantes has not been a focus of suspicion, Mexican and
American officials said several senior generals close to him have been
under scrutiny by investigators from both the Mexican attorney
general's office and a special military intelligence unit.

On Feb. 6, analysts at the Drug Enforcement Administration briefed
Attorney General Janet Reno on intelligence indicating that senior
Mexican generals might indeed be cooperating with Carrillo Fuentes'
organization, officials said. And in a separate customs case in
Houston, undercover agents had been approached about laundering
millions of dollars for an unnamed Mexican army general, officials
said.

On April 9, Alcala visited Emerald Empire with a cousin, who had just
returned from Mexico with a message. "He was very nervous about the
deal," Gately said. "He said it could be very dangerous if it got
screwed up, because the money belonged to 'all of them, including the
president,' " Ernesto Zedillo. (A spokesman for Zedillo, David Najera,
dismissed the claim as baseless.)

Later that month, Gately went to Washington to brief officials
including Kelly -- who was then about to take over the Customs Service
after overseeing it as the Treasury Undersecretary for
Enforcement.

"Kelly said, 'How do we know it's really him?' " Gately recalled,
referring to Cervantes.

"I told him, 'We don't know,' " Gately said. " 'We can't substantiate
it. But we have no reason to believe they're telling us anything other
than what they know.'

"They weren't trying to impress us, they were trying to make deals
with us," Gately added. "So whoever had this money, I thought it was
worth pursuing -- whether it was the defense minister of Mexico or
somebody we'd never heard of."

People familiar with the discussions said they did not go much
further. The general's supposed emissaries were to meet Ramirez in Las
Vegas on April 22. They did not arrive, and the traffickers reported
that they had gotten nervous.

Kelly acknowledged that he had been pressing for months to wrap up the
investigation; he said he had grown increasingly concerned that
information about it might leak out, endangering the undercover
agents. The final sting had already been postponed twice because
federal prosecutors were still preparing indictments.

James E. Johnson, who succeeded Kelly as undersecretary and has
closely supervised Treasury's relationship with Mexico on enforcement
issues, added a cautionary note that several officials said seemed to
underscore his concern for the political stakes. Unless the agents had
proof of Cervantes' role, several officials quoted him as warning,
they should not bandy his name about in connection with the case.

"We need to be very careful about how we talk about this sort of
thing," a senior law-enforcement official, who would not speak for
attribution, quoted him as saying. "If we don't have the goods, it
makes us look like we're overreaching."

Avoiding Pitfalls: U.S. Agents Begin Fretting Over Leaks

The operation had already navigated a series of sizable
obstacles.

Gately and some other agents were worried that their boss in Los
Angeles, John Hensley, had leaked information about the secret
operation to congressional aides and others; Hensley had also pressed
hard to bring the operation to an end, officials said.

For his part, officials said Hensley had accused his strong-willed
subordinate of transgressions ranging from traveling without
authorization to stealing millions of dollars. Kelly acknowledged that
the charges were investigated and found baseless; Hensley declined any
comment.

As discussions about the supposed $1.15 billion were going on, the
undercover operation also suffered a serious setback with the capture
of a key Juarez operative in Chicago. The arrest brought money
deliveries to a halt while the cartel hunted for a mole.

On Saturday, May 16, more than two dozen Mexican traffickers, bankers
and other operatives who had been invited to the United States by the
undercover team were rounded up in San Diego and at the Casablanca
Casino Resort in Mesquite, Nev. And officials said whatever thoughts
they had that the allegations about Cervantes might be pursued were
dropped in the diplomatic backlash that followed.

While the Mexican authorities were asked to arrest about 20 suspects
indicted in the case, they initially located only six. One was the
partner of Loera, the fugitive businessman who first proposed the deal
with "the general." The partner was found dead in a Mexican jail from
injuries that the police described as self-inflicted. Alvarez-Tostado
has never been found; his deputy, Alcala, awaits trial in Los Angeles.

Soon after the operation, American officials said, they showed the
Mexican government some of their information on apparent corruption in
the case. They said they kept silent about more explosive evidence to
avoid exacerbating the furor that had broken out over their decision
not to warn Mexico about the operation.

Still, the officials said that none of the information was ever
pursued, and the Mexican attorney general, Jorge Madrazo Cuellar,
obliquely dismissed the allegations in a little noticed statement
issued last July.

Madrazo said in an interview that the Americans told him only about
unnamed federal agents and a money laundering scheme involving "a
general who had a daughter." He said the name of Cervantes, who has no
daughter, was never mentioned.

"With the information that they gave me, what could I possibly have
done?" Madrazo asked. "Gone and looked for a general with a daughter?"