MEXICO PROTESTS HANDLING OF MONEY-LAUNDERING STING BY U.S. AGENTS

On a Saturday night in May, some accused Mexican drug traffickers and their
banker friends strolled out of a casino in Mesquite, Nev., piled into
limousines, and set off for what was to be a wild night of women at a
desert brothel called "The Chicken Ranch."

When they were quickly arrested in an elaborately choreographed sting that
reached from San Diego to Aruba, it concluded one of the most ambitious
undercover campaigns that U.S. law-enforcement agents have ever waged
against Latin American drug cartels.

Less than a month later, however, the three-year investigation appears
likely to make history less for the 167 arrests and the scope of the
drug-money laundering system that it smashed than for the extraordinary
diplomatic uproar it has inspired.

According to senior officials from both countries, the battle has brought
to a head what has been a lengthy, bitter and behind-the-scenes struggle
over how U.S. law-enforcement agents will be allowed to work in Mexico.

Nearly five years after Mexico and the United States forged a partnership
under the North American Free Trade Agreement, the furor has underscored
both the resilience of Mexico's nationalist sensitivities on
law-enforcement matters and the U.S. government's stubborn mistrust of
Mexico's criminal-justice apparatus.

"There are a lot of things that we have not accepted and that we are not
going to accept," said Mexican Foreign Minister Rosario Green. "We Mexicans
are very jealous of our national sovereignty."

Angered at what they view as the trampling of criminal laws and diplomatic
rule by undercover agents working in Mexico, Mexican officials say they may
prosecute the Americans for enticing the jailed bankers to commit crimes.
U.S. officials say Mexico has also proposed that law-enforcement
cooperation between the two countries could be suspended if such operations
take place again without their consent.

So frustrated have Clinton administration officials grown during more than
a year of secret negotiations over what protection will be accorded U.S.
law-enforcement agents assigned to Mexico that Attorney General Janet Reno
recently told Ms. Green that the United States may pull most of its
drug-enforcement agents out of the country.

Already, the Americans have abandoned hopes of gaining formal authorization
for the agents to carry guns, as they have done informally for years.
Instead, the United States is pushing for broader diplomatic immunity,
something Mexican officials have steadfastly opposed.

U.S. officials describe the possibility of a mass withdrawal of drug agents
as remote, given the likelihood that Mexico would only allow them to return
under more restrictive terms.

But they also acknowledge that the Drug Enforcement Administration has
already pulled back two teams of agents who recently came under threat from
drug traffickers in the two main cocaine-transit cities along the border,
Tijuana and Ciudad Juarez.

When the arrests were announced in May, with the indictment of officials
from 12 Mexican banks unsealed in Los Angeles, Treasury Secretary Robert
Rubin and Reno hailed the the action as "the largest, most comprehensive
drug-money laundering case in the history of U.S. law-enforcement."

According to interviews with almost two dozen U.S. and Mexican officials,
the case began after Customs Service agents in Los Angeles noticed a new
currency in the shadowy financial world through which Latin America's
biggest drug organizations move and hide their money.

Big Mexican bank drafts, drawn on the dollar accounts that Mexico's newly
privatized banks keep in the United States, were becoming instruments of
choice.

By 1994, Customs agents determined that drug profits in the United States
were being wired through U.S. banks or shipped in bulk back to Mexico,
where Mexican bankers, charging a one or two percent commission, would
issue drafts in dollars.

An Old Operation Helps Trace New Drafts

In a stroke, the dealers and the bankers created a highly-liquid currency
that was hard to trace. Drug traffickers could choose between cashing the
drafts, redepositing them or swapping them for, say, Colombian pesos with a
legitimate businessmen who might then use the dollars to buy goods in the
United States.

Customs agents began to infiltrate the system by using undetected pieces of
a successful operation they had set up against Colombian drug dealers years
earlier -- a phony business near Los Angeles, old drug connections and
experienced covert operatives.

The basic idea, one agents said, was to "play it again." Recalling Ingrid
Bergman's famous line from the 1942 film, they named the operation
"Casablanca."

At the heart of the scheme, agents said, was an extraordinary "cooperating
informant,"a man whom the drug traffickers and their bankers know as an
urbane, enterprising Colombian money launderer named "Javier Ramirez."

Working with an undercover team of Customs agents and police detectives,
Ramirez, a protected federal witness whose identity remains secret,
entertained traffickers at the warehouse offices of the front company
outside Los Angeles; flew them to Las Vegas on a private jet; even visited
them in Mexico.

The inquiry concentrated initially on money launderers associated with
Colombia's Cali cartel. But the agents' focus shifted in November of 1995,
when they were dispatched by Cali operatives to a routine money pick up
outside of Chicago.

Barely six weeks later, two senior agents were dispatched to Mexico City to
meet with Mexican officials.

In the face of sharp criticism from opposition politicians who are now
weighing a huge bailout of the troubled banking system, Mexican officials
have acknowledged only one meeting -- one at which the Customs agents
briefed a former deputy attorney general who is a member of the political
opposition.

In fact, U.S. officials said the agents laid out most of what they knew to
the former deputy attorney general, Rafael Estrada Samano, and asked for
his help. They said they then gave a separate , less detailed presentation
to a deputy minister of finance, Ismael Gomez Gordillo.

Americans Are Called Vague About Needs

"We asked him to conduct a joint investigation with us," said one official
with direct knowledge of the meeting with Estrada. "That would have
included them covering meetings with the traffickers, conducting
surveillance. Estrada said he had to check with his boss and would get back
to us. But they just wouldn't respond to us. And after a couple of months,
we gave up."

In an interview Tuesday, Mexican Attorney General Jorge Madrazo said he
believed the Americans had been vague about both the investigation and
their needs. He acknowledged that Gomez Gordillo also met with the agents,
but said they had asked him only for information on some Mexican bank
accounts, which he provided.

While U.S. officials have defended the secrecy of the operation as
necessary to protect the lives of undercover agents, it has gone largely
unnoticed that senior Mexican law-enforcement officials knew for more than
two years that Customs agents were investigating money laundering by
Mexican banks, and that the operation was apparently never jeopardized as a
consequence. But from the Mexico City briefings, Customs officials grew
suspicious about the lack of response they got.

"It was obvious that something was screwed up, whether it was corruption or
something else," one law-enforcement official said. "And that did factor
into our decision not to go back to them later on."

"The Doctor, " who agents identified as Victor Manuel Alcala Navarro,
introduced Javier Ramirez and his purported launderers to an ever-widening
group of Mexican bankers.

But he also introduced the agents to his boss, a man they identified as
Jose Alvarez Tostado and came to believe was the principal money launderer
for the Juarez cartel.

In little more than a year, the agents managed to launder more than $62
million in drug profits funneled from sales in the United States and
Canada. But they might have done far more. At one Illinois safehouse of the
gang, they found a ledger documenting the collection of $200 million by
part of the organization over a period of about 18 months.

"We were so conservative about what we did and how much we moved that we
were constantly in danger of losing our credibility with the bankers," said
one Customs official. The bankers, he said, far from being enticed to break
laws, were uniformly introduced to the agents by drug traffickers. "We
could have done not millions of dollars, but hundreds of millions."

Fears in Washington and Reactions Overseas

But senior Mexican investigators who have pursued the Juarez gang sharply
criticized the U.S. operation.

"The Customs guys didn't even get the name of their main target right," one
Mexican officials said dismissively. "It's Juan Jose Castellanos
Alvarez-Tostado. And he's not such a big deal."

The Mexicans noted that they have worked closely with agents from both the
Drug Enforcement Administration and the FBI, dealt with a much wider part
of the same drug organization, and could easily have helped Customs agents
had they been asked.

The agents, however, received clear instructions from above.

In briefings last November and December for Reno, Rubin and a few of their
subordinates, officials said there was considerable discussion of possible
"collateral effects" once the investigation went public: diplomatic
troubles; an impact on the Mexican financial markets; even the possibility
that the weak Mexican banking industry, could have trouble getting
interbank loans.

But several officials said it was Rubin -- whose Treasury Department has
often been depicted by other officials in Washington as skeptical about
Mexican corruption and skittish about tough U.S. measures to fight it --
who insisted that the operation proceedin secret.

Those left out, they said, included not only the Mexican government but
senior officials at the White House, the State Department and even the
Treasury itself.

While senior Mexican officials initially praised the operation after its
disclosure, they said they did so after being told that none of the
undercover work was done on Mexican soil. When they read the indictments
and saw that wasn't so they were incensed.

"It is very clear that there is an ignorance of Mexican law on the part of
the United States," said Madrazo, the attorney general, "or if not the
United States, at least among the agents who participated in this."

Officials Wonder What to Do With Data

U.S. officials acknowledged that the repercussions are more than a matter
of diplomacy.

Hopes of wrangling a form of diplomatic protection for U.S. agents in
Mexico, "administrative and technical immunity," have been discarded.
Thoughts of following up the investigation are fading. Although Customs
officials have the name of a Mexican army general and the rough identities
of federal police agents who were said by one of the suspects to have
laundered illicit profits, the U.S. agents are debating whether even to
pass them on.

A handful of the suspects who couldn't be lured to the United States have
been arrested in Mexico. But the one whom U.S. officials believe knew the
most, an investment banker named Enrique Mendez Urena who was said to have
worked for the trafficker Carrillo Fuentes, did not fare well.

After Mendez's name and Mexico City address were sent to Mexican officials,
he was arrested in Puerto Vallarta, and then suddenly died of massive head
injuries. The state police, who apparently arrested him, said he was acting
strangely and hurt himself in jail.

Copyright 1998 The New York Times Company

Checked-by: (Joel W. Johnson)