RE-ENGINEERING THE DRUG BUSINESS (continued from Part 1)

Delivering heroin directly into Thailand is a bit trickier, and the added
risk is reflected in the slight price hike to $5,500. The drug caravans
move over the dense mountain frontier, under cover of night, when Thai
border patrols are in their barracks. To see how porous the frontier can
be, Carter drives me to the Ban Phai border post atop Mount Doi Tung. We
barely make it up the steep road, since Carter's Toyota is loaded down with
M-4 assault rifles discreetly tucked into golf bags in the trunk. The
firepower is a precaution.

Tensions at the Ban Phai outpost -- a collection of bamboo huts reinforced
with black sandbags, trenches and M-60 heavy-caliber machine guns -- are
running high. Just a few days before, two advance scouts from a Wa caravan
were caught by a nearby border-patrol unit. The Wa took exception to the
arrest and unleashed a mortar barrage. The Thais responded with
105-millimeter Howitzers. Miraculously, only one person was injured.

Once the shipment has arrived in Thailand or Tachileik, a whole new set of
players enters the fray. These are Thais from Bangkok, who converge on the
border area to pick up heroin. They, too, have their specific niche: moving
the product to buyers in Bangkok. One such transportation subcontractor,
who had 37 kilos of China White in his black Land Rover, was recently
wounded by Burmese border guards in Tachileik. The bust clearly showed just
how decentralization keeps the narcotics trade in business. The load was a
mix of the Double Lion brand favored by Wa refineries and the 999 brand
popular with labs in the Shan region. Under interrogation, the driver could
not name his sources and could only provide police with a disconnected
contact number to a broker in Tachileik. The chain to the producers was
already broken. The transport subcontractors themselves add another layer
of protection for both the brokers in the border area and outside buyers,
because no one here will do business with a farang, as foreigners are
known. They are ''too conspicuous,'' says Colonel Arajavuth. ''We'd pick
them up right away.''

In fact, most of the foreign buyers are West Africans -- Nigerians, to be
precise -- who tend to stick out in the Thai provinces even more than Agent
Carter does. They prefer the more cosmopolitan anonymity of Bangkok and are
prepared to pay for the added security. In the Thai capital, the local
middlemen charge between $7,500 and $9,500 to deliver each kilo of heroin,
depending on the quantity ordered. West Africans are not the only foreign
customers; there are smugglers from Taiwan and Europe. But the Nigerians
are by far the most organized and entrenched group. Their job in heroin's
ever-lengthening supply chain is also among the riskiest: to get the heroin
into the United States.

Few C.E.O.'s of major American corporations lie awake nights agonizing over
logistics. That's what companies like DHL or U.P.S. are for. The drug
trade, too, has its courier services, outfits such as ''Nigeria Express''
or Mexico's notorious A.F.O.

The drug runners breach every United States frontier, but one of their main
targets is San Ysidro, Calif., America's busiest border crossing, the
fragile demarcation line that separates San Diego from the smuggler's
paradise of Tijuana. Between a quarter and a third of the heroin, cocaine
and marijuana entering the country passes through here and four smaller
checkpoints in Southern California, and on a good day the Customs Service
can hope to make at least a dozen decent-size seizures.

Up to now, it has been relatively easy going for China White traffickers.
Nigerians, having taken delivery of the heroin in Bangkok, have either
shipped it via couriers to transit countries like Mexico or Canada or, more
commonly, have sent it home to Lagos. Given Nigeria's perennial position
near the top of the global-corruption rankings, forwarding through Lagos
international airport does not pose much of a barrier. In Nigeria, the
drugs are repacked into smaller parcels, often into condoms that couriers
swallow and transit through nonsource countries like Britain or France to
throw Customs officials off the trail. If the heroin is sent directly from
Thailand to the United States, Caucasian couriers are usually employed to
foil racial profiling. They are often female, in their 20's and 30's.

It is also at this stage that another complication arises for Southeast
Asian heroin. As it approaches its target market, it brushes up against the
competition, including Mexican-produced Black Tar, known derisively as
Mexican Mud because of its poor quality; the more superior Mexican Brown in
powder form; and especially high-grade Colombian White, its biggest rival.
(Afghan heroin is conspicuously absent at San Ysidro and only occasionally
shows up in the United States, in places like Detroit. Its principal market
is Europe, where it arrives from Turkey, Russia and the Balkans.)

Colombia is a relative upstart in the international heroin trade, with
cocaine traffickers there deciding to get into the business only around
1990. It was a decision based purely on demographics. The cocaine craze of
the 80's was waning as the drug fell out of fashion with urban
professionals. Moreover, dealers were discovering that unlike heroin
addicts, many habitual coke users tended to burn out after five years.
Faced with a dwindling customer base in America, cocaine traffickers tried
to expand into Europe. But they had only limited success, in places like
Spain, England and, most recently, the Netherlands. The hard drug of choice
in the European Union was heroin, and Pakistani and Turkish groups had the
market sewn up there. So Colombian cocaine traffickers decided to diversify
and launched a poppy-cultivation drive, importing seeds, equipment and
expertise from Southwest Asia.

''It took them three or four years to get it right,'' recalls Felix J.
Jimenez, the D.E.A.'s New York bureau chief, ''to procure the proper
refining know-how and precursor chemicals like acetic anhydride.''

But by the mid-90's, he says, the Colombians were producing heroin with
purity levels exceeding 90 percent. Suddenly Colombian smugglers had a
product that was equal to, if not better than, China White. All they had to
do was get the new product to the market, past points of entry like San Ysidro.

One sure sign of the high regard in which traffickers hold San Ysidro's
defenses is the risk premium attached to making it across. If getting
heroin into China or Thailand bears a markup of $1,000 per kilo, here it's
a different story altogether. After it makes the 100-yard journey across
the border, a kilo of Black Tar will soar in value to $54,000 once safely
on the San Diego side. Colombian heroin will rise by as much as 20 times
once it gets to Los Angeles. And China White will command well into the six
figures once it reaches American soil.

With the stakes so high, smuggling syndicates go to great lengths to keep
tabs on what is going on at San Ysidro; when, for instance, shifts are
ending, how many rovers are deployed on a given day, which canine units are
on patrol. But mostly they just play the numbers game, the law of averages.
More than 40 million people enter the United States through San Ysidro
annually, and Customs can't check them all.

''We get up to 60,000 cars a day, and you have to keep in mind that 99
percent of the passengers are honest travelers,'' says Robert Hood, a
supervisory Customs inspector. ''So the bad guys come straight at us. And
if we intercept a few loads, that's just a tax they factor into the cost of
doing business.''

Most of the China White passing through San Ysidro is spirited through the
pedestrian crossing, a long concrete corridor lined with metal detectors,
airport-style X-ray scanners and D.E.A. posters offering $2 million for
information leading to the arrest of Benjamin Arellano Felix and his
brother, Ramon.

The Arellano Felix Organization, A.F.O. for short, is a testament to just
how important transportation subcontractors have become in the drug
industry. The Tijuana-based outfit started out humbly, smuggling duty-free
cigarettes and alcohol in the late 70's. Over time, they moved up to
marijuana and were well placed to reap a bonanza from the cocaine craze of
the 80's. By the 90's, they were moving tens of billions of dollars in
contraband, controlled an estimated three-quarters of everything that
passed through San Ysidro and even built complex tunnels into Texas.

''They took over,'' says Jayson Ahern, director of field operations for
United States Customs in Southern California. ''They effectively supplanted
their old bosses in Colombia and became a cartel of their own.'' The
A.F.O.'s competitive edge was location: right on the Mexican-American
border. However, the critical error that would lead to their downfall, as
with the Colombian cartels before them, was getting too big and flouting
the laws of decentralization.

Colombia's Medellin and Cali cartels were the first drug-trafficking
organizations to vertically integrate. Like the big oil companies with
gasoline, the cartels tried to hang on to their product through its entire
chain of manufacturing, distribution and sale to consumers. For a while it
worked, but the downside of any vertically integrated structure is that one
broken link can bring down the whole organization. By using freelance
subcontractors who don't know one another or even the identity of their
employers, traffickers of China White assiduously avoid this peril.

The Nigerian buyers in Bangkok, for instance, don't even move the heroin
themselves. Instead they hire American, European or Canadian couriers that
they send on circuitous journeys to finally enter the United States in
places where they hope Customs will have its guard down.

Inspector Hood is familiar with this type of ruse. ''I had this one lady
pull up to the pedestrian crossing in a cab,'' he recalls. ''I took a look
at her passport and it had an exit stamp from Thailand dated three days
before. She said her vacation had been cut short because her goddaughter
got sick and she had to get back to Baltimore quickly. I didn't buy it.
There are definitely more direct routes to Maryland than driving through
Mexico.''

It turns out that the woman had nearly three kilos of heroin in her luggage
and was a courier for Nigerian traffickers. They had hoped that a white
waitress would not fit the profile of the Latin American smugglers usually
seen at San Ysidro. ''They probe for weaknesses,'' adds Hood, ''figuring we
are not looking for Southeast Asian heroin here, the way they do on flights
arriving from Bangkok to J.F.K.''

Many couriers -- mules, or body-packers, as they are known in the trade --
are swallowers who ingest honey-coated condoms filled with heroin. This
makes them perilously hard to detect. Usually, it's only when something
goes badly wrong that they get caught. One of Hood's colleagues, for
instance, recently stumbled on a jittery gentleman claiming to be a
pharmacist from Colombia.

''The guy was too jumpy,'' recalls the colleague, Chief Inspector Mark
Wilkerson. ''And he didn't look like a professional type.'' In other words,
he fit the mule profile. Wilkerson asked him to remove his tie and put it
back on. ''He couldn't do it, couldn't tie a knot,'' Wilkerson laughs. The
faux pharmacist was a mule who had been promised several thousand dollars
to make the delivery.

To the uninitiated, all this may seem like a great deal of trouble to go
through to move a mere kilo. China White is unusual that way. Of all the
branches of the narcotics trafficking trade, it is by far the least
efficient on a cost-per-kilo basis. According to a study by an economist,
Peter Reuter, Latin American-produced cocaine is as much as 10 times
cheaper to transport because it is usually shipped in bigger batches, 250
kilos and up. This allows traffickers economies of scale to spread out the,
say, $500,000 fee pilots of small aircraft or go-fast boats often charge.

The discrepancy has its roots in the heritage of Colombian cocaine
traffickers, many of whom came to the trade from the marijuana rackets,
where bigger payloads were always the norm. But it also reflects the nature
of heroin and demonstrates why it is increasingly the drug of choice for
the savviest smugglers. With its high market value, heroin is ideally
suited to traveling tens of thousands of miles, crossing countless borders.
It requires far smaller networks to smuggle than the big organizations
needed for cocaine or marijuana. And spreading loads over dozens of
individual couriers minimizes risk.

''If I had to make any analogies,'' says Mike Chapman, a senior special
agent with the D.E.A. in Washington, ''it would be to Al Qaeda.''

Heroin traffickers tend to operate more like highly compartmentalized
terrorist cells than multinational corporations or the sprawling Colombian
cartels of the Pablo Escobar era. But that's also the case, increasingly,
across the entire narcotics industry. ''This type of activity does not
allow concentration of power like legitimate commerce,'' says Ethan
Nadelmann, an economist and drug-policy expert. ''If smugglers get too big,
they develop security and personnel problems and get targeted by law
enforcement.''

Indeed, Pablo Escobar -- El Patron, as he was known in his heyday -- would
be living proof of this, had he not been killed in 1993 after one of the
most intense international manhunts in history. It's the same story with
the high-flying Tan Xiaolin from Muse, who is currently on death row in
China along with 18 of his associates. Even those D.E.A. posters of the
Arellano Felix Organization, the closest thing to a cartel since the
leaders of the Cali and Medellin gangs were locked up almost a decade ago,
are already dated. Ramon is dead, shot in February by Mexican authorities,
and his brother Benjamin was arrested in March.

Drug traffickers are also vulnerable to shifting international winds.
Smugglers have had a rough time since Sept. 11 changed the way most nations
view border security. In late 2001, heroin seizures rose sixteenfold along
the California-Mexico border, largely at San Ysidro, which, like every port
of entry in America, has been on Level 1 alert since the attacks on the
twin towers.

''For the first few weeks,'' recalls Hood, ''we didn't see any drugs
whatsoever. It was eerily quiet, as if the traffickers were hanging back,
waiting to see what we would do.''

But smugglers, like anyone else, have bills to pay and can't afford to sit
on inventory for too long. ''Eventually they have to move,'' says Vincent
E. Bond, a public affairs officer with United States Customs in San Diego.
''And this isn't a very good time to be trying to fly in a Cessna under
radar,'' he adds. ''You're liable to have an F-16 up your tail.''

So syndicates are shifting away from air routes and big ports of entry,
trying to hide their tracks better, bury their loads deeper and use more
marine cargo and speedboat deliveries. (The Coast Guard reports making
seizures at a pace more than twice last year's.) And for once, the law of
averages is now tilting toward interdiction efforts. ''Regular passenger
traffic has been way down since 9/11,'' says Bond. ''That gives us more
time to scrutinize each entrant.''

Once in the territorial United States, heroin typically makes its way to
three major collection centers. On the West Coast it travels up Interstate
5 to Los Angeles. There, the wholesale price of a kilo of high-quality
heroin jumps to between $86,000 and $100,000, from the $40,000-to-$54,000
range in San Diego.

Along the way, importers jack up the bottom line by cutting the product --
''stepping on'' it, in street parlance. This is usually the first of many
adulterations to follow, all intended to increase profits by decreasing
purity, and a variety of agents are used for this purpose: quinine, talcum,
even lactose.

In America, as in Europe, immigrants are the major importers and
distributors of heroin. This is simply because the smuggling networks
prefer to deal with their own and don't trust outsiders. Nigerians will
sell to fellow West Africans, Chinese to immigrants from back home and so on.

The American market for heroin, worth about $10 billion annually, is thus
roughly divided into ethnic spheres of influence. Los Angeles-based Mexican
groups control wholesale markets west of the Mississippi. Nigerians
operating out of Chicago have the northern parts of the Midwest. And New
York-based Dominican syndicates fronting for Colombians dominate the East
Coast. Smaller Chinese gangs operate on the fringes, moving mostly in areas
like San Francisco or New York that have large Asian communities.

The divisions, notes Jimenez, the D.E.A.'s top man in New York City and a
leading expert on heroin in America, are fluid. Mexican groups, for
instance, regularly impinge on the West Africans in Chicago, who in turn
intrude on Dominican turf in places like Baltimore. The competition can be
fierce and at times violent, but more often than not it tends to be fought
along straight marketing lines.

One such battle changed the face of the heroin trade on the Eastern
Seaboard. It occurred in New York in the mid-1990's. Up to then, Jimenez
explains, the wholesale heroin business on the East Coast belonged to
Chinese triads. (They themselves had supplanted Italian crime families the
decade before.) But with the entry of the Colombians, the established
Chinese rings found themselves with a serious fight on their hands.
Astonishingly, what broke out was almost entirely a price war.

China White, which was often smuggled a kilo at a time in people's
stomachs, sold for between $160,000 and $180,000 per 700-gram unit,
explains Jimenez. But the Colombians would include heroin in their large
cocaine shipments, benefiting from drastically lower transportation costs.
''They could charge $80,000 a kilo and undercut the Chinese by half.''

The Colombians, of course, enjoyed the geographic advantage of closer
proximity to the United States. But they had another, equally important,
competitive advantage: established distribution centers. ''They would force
their Dominican cells to take, say, two kilos of heroin for every hundred
kilos of coke they ordered and give out free samples to their customers.''

The move turned out to be a marketing coup, creating an entirely new
clientele for heroin, much the same way that the introduction of crack
cocaine in the previous decade had exposed a yuppie drug to the mass
market. Because the Colombians insisted that their distributors keep the
heroin at high purities, upscale coke users could now snort or smoke it,
ridding the product of the stigma of dirty needles and H.I.V. ''I put a
hidden camera on a street corner where I knew they sold heroin,'' Jimenez
says. ''You wouldn't believe the customers we got on film: lawyers,
doctors, teachers.''

The net result of the innovative strategies, says Jimenez, is that by the
new millennium, Colombian heroin dominated markets in New York and
throughout the Eastern Seaboard.

>From collection centers like New York City, heroin travels down the I-95
corridor to secondary markets like Philadelphia, Baltimore and Washington.
Dealers from those satellite towns will usually make the trip to New York
once every few weeks, picking up anywhere from one to five kilos at a time,
explains Detective Lieutenant Michael Tabor of the Baltimore police department.

While New York can boast of hundreds of ''cells,'' as Jimenez labels major
distribution rings, a city the size of Baltimore will have no more than two
dozen dealers capable of buying in kilo quantities. ''We know who they
are,'' Tabor says, rattling off names. ''We've got phone taps on all of
them,'' he adds. ''But they're damn slick.''

As you go progressively down the food chain, though, things get a little
easier from a law-enforcement perspective. I find myself setting out once
again to cruise the streets of Baltimore with narcotics officers.

Special Operations Unit One meets daily at 11 a.m. in a newly renovated
conference room that appears industriously messy, like the marketing
department in a successful midsize company. But no one in Sgt. Mark
Janicki's eight-man unit looks remotely corporate: beards, braids,
ponytails and skull-and-bones ear studs form part of the dress code, which
leans heavily toward leather and jeans.

Sergeant Janicki goes over the game plan. I am to accompany one undercover
officer on a heroin buy, while the rest of the unit is divided into
surveillance and enforcement squads. The officer I'm accompanying, a
34-year-old Long Island native who uses the street name Mike, goes off to
change into his disguise. We're posing as construction workers --
strung-out construction workers by the look of it when Mike returns wearing
filthy, tar-splattered jeans, heroin-chic dark eyeliner and a backward
baseball cap that pins down his stringy, shoulder-length hair. I'm suddenly
glad that I didn't shave this morning.

Janicki gives us a lift to a nearby parking garage, where the department
keeps a white Dodge pickup with scaffolding sections scattered in its
flatbed for added effect. Kentucky Fried Chicken wrappers and crumpled
7-Eleven coffee cups litter the floor of the cab, more props.

As we head southeast to one of Baltimore's rougher neighborhoods, Mike
explains how the lower rungs of the distribution chain are organized.
Baltimore's dozen or so big dealers reparcel the newly purchased kilos into
more affordable ounce-size lots. Shops or midsize dealers then break down
ounces into grams that are resold to crews in ''packages'' of 100 vials or
gelcaps, each containing one milligram. Gelcaps, as opposed to the pink-,
blue- or green-tops, cater to the low end of the market, the addicts who
inject heroin.

''That's when they're really stepping on the product,'' says Mike. ''The
rule is generally six to one,'' Jimenez elaborates, meaning that from the
one kilo purchased from wholesalers, up to seven kilos will be produced by
adding sundry adulterants by the time it hits the street. ''This is where
the biggest markups occur,'' he adds. ''From wholesale to retail, because
that's where you face the biggest risks. You have to protect yourself not
only from the police but from rivals and people in your own organization
who know you are carrying large amounts of cash.''

As we drive deeper into the drug zone, the violence and poverty that
accompany the lowest echelons of the heroin trade become more visible. Mike
spots a street corner that is not too busy. He doesn't want to risk leaving
me alone with a crowd. He radios Sergeant Janicki to coordinate
surveillance. ''Corner of East Monument and Belnord,'' he says, stowing the
walkie-talkie. ''All right, put away your notebook,'' he says. ''And
whatever happens, don't get out of the truck.''

We slow down and pull up to the curb. ''Yo, man, dope's out?'' he calls.
Dope is street slang for heroin, which is also sometimes called boy. ''I
got shirleys,'' responds the dealer, a tough-looking youth in shiny white
sneakers with a stick of red licorice clenched between a solid row of gold
teeth. Shirley means crack cocaine, which is also called girl. ''He waitin'
on a fresh pack,'' says the youth, nodding across the street to a man with
no teeth. A pack is 100 heroin gelcaps, each filled with heavily
adulterated heroin -- scramble'' in the local dialect -- which means he is
expecting a delivery from his crew boss.

Mike doesn't like it. To make the buy, he has to get out of the truck and
leave me alone. He hesitates for a moment. ''Be cool,'' he finally tells
me, and much as I try, I find it hard to follow his instruction, what with
the licorice guy eyeballing me menacingly. Mike returns a few nerve-racking
minutes later and hands me a clear capsule that looks like cold medicine.
It is filled with a chunky white substance. ''Scramble,'' he says, putting
the pickup in gear.

Mike paid $10 for the milligram, the purity of which usually ranges from 4
to 7 percent, but recently has been testing as high as 12 percent -- a sure
sign that heroin is in plentiful supply in Baltimore. ''What's that come
out to per kilo?'' I ask.

''Math was never my strong suit,'' Mike says. ''But a lot.'' I crunch a few
numbers while we drive away, giving Sergeant Janicki and his enforcement
unit time to swoop in on the unsuspecting mark. Moments later Janicki
radios in to inform us that he has picked up the dealer, a 31-year-old
black male with 21 prior arrests for heroin and cocaine distribution.
''Guy's a junkie,'' Mike says sadly, shaking his head. ''Probably gets 50
bucks and a free fix to sit out there all day.''

There are thousands of others like him in Baltimore -- and throughout inner
cities across the United States -- working, much like the stranded peasants
of Myanmar, for next to nothing, for a lack perhaps of economic
alternatives. And as for the heroin that unites them in their poverty, a
lone kilo, which began its economic life cycle so humbly at the hands of a
Burmese mother of seven, will have generated sales just shy of a million
dollars by the time it ends its deadly journey and enters the American
bloodstream.