MEXICAN BANKS INDICTED IN DRUG MONEY PROBE

Operating out of a storefront in a gritty neighborhood of Santa Fe Springs,
undercover agents from the U.S. Customs Service carried out a three-year
sting that ended Monday with the indictment of three Mexican banks and 107
people on charges of laundering millions of dollars for Latin American
drug-smuggling cartels.

The indictments returned by a Los Angeles federal grand jury represent "the
culmination of the largest, most comprehensive drug money laundering case
in U.S. law enforcement history," said Treasury Secretary Robert Rubin.

"Today," he added, "we have hurt the drug cartels where it hurts most--in
their pocketbooks."

The announcement was a bombshell in Mexico, which has been buffeted in
recent years by charges that drug traffickers have spread their influence
into the top levels of government and business.

The news sent Mexican stock and bond markets lower and forced radio and
television broadcasters to cut into regular programming. Banking stocks
plunged as much as 8.5% on the Mexican stock exchange after the
announcement, which came as the country's banking sector is just beginning
to recover from a virtual collapse after the country's devastating 1995
recession.

In lightning raids that began over the weekend, federal and local law
enforcement agents across the United States arrested 35 suspects,
including 15 Mexican bank officials who were lured to meetings in Las
Vegas and San Diego, and 16 members of the drug cartels of Cali, Colombia,
and Juarez, Mexico.

Authorities also seized $35 million from the American assets of the Mexican
banks named in the indictments: Bancomer S.A., Banca Serfin S.A. and Confia
S.A.--among the largest and most prestigious banks in Mexico.

Forfeiture actions have been taken to seize an additional $81 million
believed to be stashed in other U.S. accounts.

In addition to the three banks charged, the indictments named managers at
12 of Mexico's 19 largest banking institutions as participants in the money
laundering scheme.

The Treasury Department said the case represents the first time Mexican
banks and bank officials have been directly linked to laundering profits
for the cartels.

Stunned by the sweeping indictment, Mexican bankers vigorously denied that
their companies were engaged in money laundering and pledged full
cooperation with the probe.

Carlos Gomez y Gomez, head of the Mexican Bankers Assn., told a news
conference: "We consider that these operations were carried out by workers
and employees acting individually and don't represent an institutional
practice of Mexican banks. The banking system of our country has 140,000
employees, of whom 26 have been named as [being] involved in the practice
of money laundering."

Despite his assurances, the announcement was at the very least a severe
embarrassment to Mexico's largest and most prestigious banks. Three of them
were indicted directly; nine others were named because their employees were
accused of laundering money for Mexican and Colombian drug cartels.

Even Gomez y Gomez's own institution, Santander, was named. But he said
the seizure of $35 million in allegedly dirty money in the U.S. operation
would not affect the solvency or operations of Mexican banks.

"The Mexican Bankers Assn. supports unconditionally all the measures taken
to punish the guilty. We presidents and directors [of banks] share the
concern to improve the controls in Mexican banks against money laundering,"
Gomez y Gomez told reporters.

But Rogelio Ramirez de la O, a prominent economic consultant based in
Mexico City, said, "I think [Treasury Secretary] Robert Rubin was one of
the last persons to [realize] the Mexican banks were involved in
laundering. This has been very much a suspicion in Mexico since 1995."

U.S. authorities said the Mexican bankers were implicated in meetings with
the undercover agents.

Dubbed "Operation Casablanca," the investigation was launched in November
1995, when Customs Service investigators learned that drug cartel members
were laundering proceeds from U.S. drug sales through branches of Mexican
banks along the border.

Passing themselves off as money launderers, the undercover agents
established a front company in Santa Fe Springs and managed to get
themselves hired as middlemen for the principal money brokers employed by
the drug cartels of Cali, Colombia, and Juarez, Mexico.

Through coded messages faxed by the money brokers from Colombia and Mexico,
the undercover agents were instructed where to go to pick up drug proceeds
and how to move the money out of the United States. Money was picked up in
places as far away as Chicago, Miami and Milan, Italy, and then dispatched
to the drug cartels through wire transfers or through surreptitious
shipments of currency.

To complete the laundering process, much of the drug money was then sent
back to the United States with the help of the Mexican bankers who arranged
for the issuance of untraceable bank drafts, according to prosecutors.

The undercover agents were introduced to some of those bankers by Victor
Manuel Alcala-Navarro, an alleged underling to a Juarez cartel money
broker in Chicago.

One meeting led to another and soon, prosecutors said, the agents had a
long list of Mexican bankers eager to help them launder the money although
the agents made it clear that the funds came from drug sales. In return
for their assistance, the bankers were given a 1% commission.

A federal prosecutor in Los Angeles said most of the bankers were not
surprised when made aware of the source of the money and told the agents
that laundering drug money was a common practice in Mexican banking.

The investigation found that nearly 100 U.S. bank accounts were used by the
drug traffickers, but authorities said they found no evidence that American
banks were aware of the money laundering. If convicted, the defendants
face penalties ranging up to life in prison.

Michael McDonald, a former top IRS money laundering investigator, said
Mexico had been a money laundering haven with few controls in past years.
However, he said, the Mexican government--working closely with U.S.
authorities--had implemented some of the toughest money laundering
controls in the world, covering securities deals as well as banking
transactions of more than $10,000.

All banks have been issued manuals explaining how to spot suspicious
transactions. An FBI-trained unit with 30 full-time members was created in
January to investigate money laundering.

Ramirez de la O, a prominent Mexican economic analyst, cautioned that
however comprehensive the new money laundering regulations may be, "the
Mexican bankers have demonstrated time and again that they find all these
ways to go around the law."

He also noted that there had long been a cozy relationship between the
authorities and bankers, who "enjoy an unknown degree of protection from
some government officials."

McDonald, who now consults from Miami on money laundering issues, said:
"This is going to materially disrupt the money laundering cycle of the
Colombian and Mexican cartels, at least temporarily." He added, however,
that "money laundering is like a water balloon. You step on one side, and
it pops up on another."

The Mexican attorney general's office and Finance Ministry joined the
Bankers' Assn. in pledging full cooperation with the U.S. investigation.
All of them appeared surprised by the announcement. In a separate
development Monday, the Federal Reserve said it had issued "cease and
desist" orders against five foreign banks, including two of those under
indictment, for failing to address serious deficiencies in their
anti-money laundering programs. Those banks are Banca Serfin, Bancomer,
Banamex and Bital of Mexico and Banco Santander of Spain. Each operates
offices in the United States.

The order requires the banks to implement new anti-money laundering
procedures. Rosenzweig reported from Los Angeles, Sheridan from Mexico
City.

Times staff writer Jim Smith in Mexico City contributed to this story.
Copyright Los Angeles Times

Checked-by: jwjohnson@netmagic.net (Joel W. Johnson)