IN PANAMA, DRUG MONEY'S CLOUT OUTLIVES NORIEGA

PANAMA CITY--On May 29, Gabriel Castro, chief of Panama's intelligence
services, called the CIA station chief here with an urgent request: Could
he please send a U.S. airplane to collect and carry off a suspected
Colombian drug lord, then residing in one of Panama's maximum-security
prison cells? That turned out to be a key moment in an extraordinary
sequence of events that brought the reputed drug lord, Jose Castrillon
Henao, from Panama to a jail cell in Tampa, where he now faces trial on
charges of smuggling 34 tons of cocaine to the United States on behalf of
Colombia's Cali cartel.

The operation constituted a rare victory in the multinational war on drugs,
culminating a year-long investigative effort in six countries that was
orchestrated in part by the CIA, whose agents went so far as to rent the
apartment above Castrillon's and drilled a small hole in the ceiling to
film his movements and contacts.

Even more illuminating than the story of how Castrillon came to face
justice in the United States is the story of how he almost managed to avoid
it -- and how, according to U.S. officials and investigators, drugs
continue to fuel high-level corruption in Panama nine years after U.S.
troops invaded to rid the country of its drug-dealing dictator, Manuel
Antonio Noriega.

On that day in May, Castro knew he had to move fast. Castrillon had engaged
a business partner to try to buy his freedom with more than $1 million in
bribes. And he was known to have friends in high places, having allegedly
channeled hundreds of thousands of dollars to the 1994 election campaign of
President Ernesto Perez Balladares and -according to witnesses' accounts --
forged a friendship and possible business alliance with the president's
son-in-law.

So confident was Castrillon of his imminent release that when police
escorted him to a waiting helicopter less than 24 hours later, he thought
he was on his way home to Cali, according to his lawyer and U.S. and
Panamanian law enforcement officials. Much to Castrillon's dismay, however,
the helicopter landed at Howard Air Base, one of the few remaining U.S.
military properties in the Panama Canal area, where Castrillon was
transferred to a waiting jet sent by the U.S. Justice Department.

Accompanied by agents of the FBI and Drug Enforcement Administration, the
Colombian prisoner was flown to Tampa, where he has denied the cocaine
smuggling charges.

This account was pieced together from dozens of interviews with U.S. and
Panamanian investigators, government officials and Castrillon associates
over a two-month period here and in the United States.

Besides detailing the extent of Castrillon's contacts with Panama's
governing elite, it shows how an important U.S. foreign policy goal
- -maintaining a military presence in Panama after the canal reverts from
U.S. to Panamanian control in 1999 -- collided head on with efforts by U.S.
law enforcement agencies to put a suspected drug lord behind bars.

Wary of upsetting delicate and ultimately unsuccessful negotiations on
prolonging the American military presence here, senior policymakers in
Washington largely ignored evidence of Castrillon's contacts with close
associates of the Panamanian president, according to State Department,
Justice Department and U.S. intelligence officials who, like most people
interviewed for this article, spoke on condition of anonymity.

Among the evidence were credible reports received by CIA and DEA agents and
U.S. diplomats in Panama that the 1994 election campaign of Perez
Balladares had received hundreds of thousands of dollars from Castrillon
through the candidate's vice presidential running mate, Felipe Virzi.

Castrillon, 46, aroused the attention of international law enforcement
agencies in July 1995, when the Nataly I, a tuna boat owned by one of his
companies, was taken into custody by the U.S. Coast Guard and found to be
carrying 12 tons of cocaine. In October, the Coast Guard seized another
Castrillon boat, the Michelangelo, which was carrying 2 1/2 tons of cocaine
and, like the Nataly I, had been expertly altered to conceal large
quantities of drugs without upsetting the balance of the vessel.

The seizures triggered an investigation involving law enforcement agencies
in Colombia, Panama, Mexico, Ecuador, France, Italy and the United States,
which assigned the lead role in tracking Castrillon's movements to the CIA.

Castrillon, nondescript at 5 feet 9 inches and 180 pounds, had moved to
Panama in 1987 and was a well-known figure in the country. He was arrested
on charges of drug trafficking in 1989 but was freed by Noriega shortly
before the U.S. invasion in December 1989. U.S. troops captured Noriega and
brought him to the United States, where he is serving a life sentence in
Miami for drug trafficking.

In late 1993, Castrillon apparently sought to return the favor by helping
Noriega's party, the Revolutionary Democratic Party, now led by Perez
Balladares, to win the country's first democratic elections since Noriega's
ouster.

Through an intermediary, Felix Estripeaut, the Colombian made contact with
vice presidential candidate Virzi, according to Estripeaut. On two
occasions in spring 1994, Castrillon delivered checks totaling $51,000 to
Virzi, using Estripeaut as an intermediary, according to Estripeaut and
other campaign officials.

In addition, according to campaign insiders and U.S. intelligence
officials, Castrillon provided the campaign with hundreds of thousands of
dollars in cash. A source close to Castrillon and one person who worked in
campaign finances estimated independently that Castrillon had donated about
$800,000 to the election effort through Virzi and the vice presidential
candidate's close associates.

After threatening to sue several Panamanian news organizations that
reported on the link between Castrillon and his campaign, Perez Balladares
acknowledged that the Colombian had contributed $51,000 -after newspapers
had obtained copies of the two checks. He has steadfastly maintained that
his campaign received no other money from Castrillon.

"The checks were given as markers by Castrillon, so he could prove he gave
money to the campaign," said one person who handled campaign finances for
Perez Balladares. "But much more money came in in cash, passed from hand to
hand, with no records or receipts, through Virzi's people."

Virzi has consistently refused to talk to reporters as allegations of his
relationship with Castrillon have surfaced in Panama, but a senior U.S.
official said there was "no question" that Castrillon's contact in the
campaign was Virzi, something the official called "very worrisome."

Perez Balladares and Virzi did not respond to requests for interviews
relayed by telephone and hand-delivered letters. Senior Panamanian
officials have said that if Castrillon did give money to the campaign the
donation was not illegal at the time because there were no laws restricting
how much an individual could give, nor was it unlawful to take money from a
criminal enterprise.

After the election of Perez Balladares, Castrillon moved to capitalize on
other relationships built during the campaign. U.S. investigators were
especially intrigued by reports of Castrillon's ties to the president's
son-in-law and confidant, Enrique Pretelt Jr., whose insurance company had
obtained a contract to insure all state employees and who frequently
accompanied the president on state trips abroad. Although Perez Balladares
has denied reports of Pretelt's contacts with Castrillon, senior Panamanian
intelligence officials acknowledged in recent interviews that the two men
had a longstanding friendship. Pretelt did not respond to numerous requests
for an interview.

Pretelt and Castrillon met several times in early 1996 to discuss leasing a
large tuna-freezing facility near the Pacific entrance to the Panama Canal,
and they visited the building together on at least one occasion, according
to two Panamanians who attended the meetings. Castrillon, who had extensive
business dealings in Mexico, said he was representing a group of Mexican
investors, the sources said.

"Pretelt was approached by Castrillon about going into business on a cold
storage facility in Vacamonte," said a source close to the president. "But
it was before we really knew who Castrillon was, and the deal never went
through."

On April 13, 1996, Castrillon was seen leaving his apartment with a
suitcase. Fearing he was leaving the country, Panamanian police, under
direct supervision of CIA and DEA officials, arrested him. U.S. law
enforcement agents said they acted when they did in part because Perez
Balladares and Pretelt had traveled to Paris together and therefore would
not be in a position to interfere with the arrest.

A search revealed four false passports under several names and
nationalities and a wealth of documents relating to his many business
interests, but no clear evidence that he intended to flee. He was taken to
a special prison, and his capture was hailed as a victory in the United
States and Panama. But much of the information about Castrillon's contacts
with Perez Balladares' inner circle never made it to Washington, or at
least not through normal channels. Mindful of White House reluctance to
offend the Panamanian president, U.S. Ambassador William Hughes refused to
sign several cables written by U.S. anti-drug and intelligence operatives
in Panama and intended for Washington that described the contacts,
according to senior State Department and Pentagon officials who believe
that, as a result, U.S. policymakers were denied a complete picture of the
Perez Balladares administration.

Some of the information made its way through back channels to senior
officials in Washington, including Robert S. Gelbard, then the deputy
assistant secretary of state for international illegal drug matters, who
was sufficiently alarmed to warn publicly that Panama was running the risk
of being taken over by drug traffickers.

Senior policymakers at the White House, however, largely looked the other
way. The reason, according to senior State Department and Pentagon
officials, was White House reluctance to antagonize Perez Balladares as the
United States negotiated to keep 2,000 U.S. troops in Panama after the
Panama Canal and all its bases revert to Panamanian control in 1999.
Hughes, a former New Jersey congressman, declined to be interviewed for
this story. A person sympathetic to Hughes said the ambassador refused to
sign the cables because he was reluctant to report what he regarded as
unsubstantiated "rumors" about a friendly leader.

As it happens, the United States failed in its bid to keep a military
presence in Panama. On Sept. 24, both nations declared negotiations on the
subject at an end. The Castrillon case almost collapsed as well.

According to U.S. and Panamanian investigators, surveillance reports and
photographs of Castrillon during the two-week period before his arrest --
when he met several times with Pretelt -- were inexplicably omitted from
the evidence files assembled for his Panamanian trial.

From his jail cell, Castrillon began threatening to publicize details of
his connections to the president's office, hoping to cut a deal that would
allow him to return to Colombia, his attorneys said. One person he turned
to was Virzi, to whom he wrote several letters, receiving several replies.
Letters seen by reporters show that Castrillon demanded more support from
Virzi as well as increased medical attention for an ailing back. Virzi
apparently indicated that he would help. One letter, written on official
vice presidential stationary over what appears to be Virzi's signature,
assures Castrillon that the legal mechanisms "now exist for you to return
to your country as quickly as possible."

When it became clear in early 1997 to U.S. and Panamanian authorities --
some of whom were less forgiving toward the Colombian than his political
allies -- that Castrillon was intent on breaking out of prison, he was
moved to a special cell at police headquarters downtown and guarded day and
night by 40 policemen. The United States repeatedly warned that if
Castrillon escaped, "the whole government would pay like hell," according
to a senior Panamanian official.

Then, Castrillon began going public with his threats to name his friends in
the government. In his first and only public appearance in a Panamanian
court, Castrillon asked to speak on his own behalf and jabbed directly at
Virzi and Pretelt.

"The leadership of this country opened their doors to me, and we began to
discuss business, legitimate business, and all through the time I was under
surveillance we continued to discuss business," Castrillon said. "They
invited me to their country houses; they introduced me to their children,
to their wives, to their son-in-law. We saw each other publicly and on many
occasions."

During this time, the United States was slowly piecing together an
indictment against Castrillon, but Panamanian law prohibited his expulsion
to another country while he was facing criminal charges here. By early
1998, Castrillon hit on another plan to be sent back to Colombia.

In March, during the Easter holidays, Castrillon obtained an order from
Panamanian immigration authorities expelling him to Colombia, and two
officials were sent to escort him to his flight home, according to
Panamanian government sources and associates of Castrillon. The plan failed
only because a low-ranking prison guard would not free Castrillon without
permission from a superior, then on vacation. Stung by the near success of
Castrillon's efforts, the Justice Department redoubled its campaign to
obtain an indictment against the Colombian.

According to U.S. and Panamanian officials with direct knowledge of the
events, Castrillon orchestrated payoffs to legislators to push through
changes in Panamanian law that would allow his expulsion to Colombia. When
U.S. officials got wind of it, they raised the issue with Castro and other
senior Panamanian officials. Castrillon's lawyer, Ed Shohat, said he had
"no indication that Castrillon had anything to do with passing the bill."

Other sources said that Castro, the intelligence chief, counseled against
blocking the legislation. Instead, he said, the government should move the
bill through as soon as a U.S. indictment was ready. Then, instead of
expelling Castrillon to Colombia, Panama would simply ship him to the
United States.

Although skeptical, U.S. officials agreed to the plan. Meanwhile,
Castrillon, his bank accounts frozen, arranged for Cali cartel partner
Victor Patino Fomeque -- currently jailed in Colombia after his conviction
on drug-trafficking charges -- to lend him $1 million with which to bribe
his way to freedom, according to Castrillon associates and U.S.
investigators.

By mid-May, another envoy from Cali appeared in Panama with money in hand
and began making the rounds of judicial and immigration authorities,
according to U.S. and Panamanian intelligence reports. One Panamanian
official monitoring the case said Castrillon was offering several million
dollars to those who could secure his release.

With the U.S. indictment in order, the Panamanian government pushed for
passage of the legislation that would permit Castrillon's expulsion. On May
28, buried in a bill to protect victims of crime, the measure passed.

The next day Hughes requested Castrillon's expulsion to the United States,
and Castro placed his call to the CIA station chief. On May 31, at 6 p.m.,
Castrillon was taken from his cell in an ambulance, overjoyed to be leaving
on what he thought was the first leg of his journey home. At 6:14, he was
placed on the helicopter that took him to Howard Air Base. He arrived at
MacDill Air Force Base in Florida at 1 a.m. on June 1.