They Changed Their Name To Wells Fargo...Has Wachovia's Game Changed?

Just before sunset on April 10, 2006, a DC-9 jet landed at the international airport in the port city of Ciudad del

Mark Lennihan, Associated Press - A

Wells Fargo agreed to pump up anti-money-laundering activities at the bank it acquired last year. And it's not an isolated case in the industry.

By MICHAEL SMITH, Bloomberg Markets

Carmen, 500 miles east of Mexico City. As soldiers on the ground approached the plane, the crew tried to shoo them away, saying there was a dangerous oil leak. So the troops grew suspicious and searched the jet.

They found 128 black suitcases, packed with 5.7 tons of cocaine, valued at $100 million. The stash was supposed to have been delivered from Caracas to drug traffickers in Toluca, near Mexico City, Mexican prosecutors later found. Law enforcement officials also discovered something else.

The smugglers had bought the DC-9 with laundered funds they transferred through two of the biggest banks in the United States: Wachovia Corp. and Bank of America Corp., Bloomberg Markets magazine reports in its August 2010 issue.

This was no isolated incident. Wachovia, it turns out, had made a habit of helping move money for Mexican drug smugglers. Wells Fargo & Co., which bought Wachovia in 2008, has admitted in court that its unit failed to monitor and report suspected money laundering by narcotics traffickers -- including the cash used to buy four planes that shipped a total of 22 tons of cocaine.

The admission came in an agreement that Wachovia struck with federal prosecutors in March, and it sheds light on the largely undocumented role of U.S. banks in contributing to the violent drug trade that has convulsed Mexico for the past four years.

'Blatant disregard'

Wachovia, based in Charlotte, N.C., admitted it didn't do enough to spot illicit funds in handling $378.4 billion for Mexican-currency-exchange houses from 2004 to 2007. That's the largest violation of the Bank Secrecy Act, an anti-money-laundering law, in U.S. history -- a sum equal to one-third of Mexico's current gross domestic product.

"Wachovia's blatant disregard for our banking laws gave international cocaine cartels a virtual carte blanche to finance their operations," says Jeffrey Sloman, the federal prosecutor who handled the case.

Since 2006, more than 22,000 people have been killed in drug-related battles that have raged mostly along the 2,000-mile border that Mexico shares with the United States. In the Mexican city of Ciudad Juarez, just across the border from El Paso, Texas, 700 people had been murdered this year as of mid-June. Six Juarez police officers were slaughtered by automatic weapons fire in a midday ambush in April.

Rondolfo Torre, the leading candidate for governor in the Mexican border state of Tamaulipas, was gunned down last week, less than a week before elections in which violence related to drug trafficking was a central issue.

Mexican President Felipe Calderon vowed to crush the drug cartels when he took office in December 2006, and he has since deployed 45,000 troops to fight the cartels. They've had little success. Among the dead are police, soldiers, journalists and ordinary citizens. The United States has pledged Mexico $1.1 billion in the past two years to aid in the fight against narcotics cartels.

In May, President Obama said he would send 1,200 National Guard troops, adding to the 17,400 agents on the U.S. side of the border to help stem drug traffic and illegal immigration.

Behind the carnage in Mexico is an industry that supplies hundreds of tons of cocaine, heroin, marijuana and methamphetamines to Americans, bringing in an estimated $39 billion in sales annually, according to the Justice Department.

Martin Woods, director of Wachovia's anti-money-laundering unit in London from 2006 to 2009, says he quit the bank in disgust after executives ignored his documentation that drug dealers were funneling money through Wachovia's branch network.

"If you don't see the correlation between the money laundering by banks and the 22,000 people killed in Mexico, you're missing the point," Woods says.

Launderers have options

Wachovia is just one of the U.S. and European banks that have been used for drug-money laundering. For the past two decades, Latin American drug traffickers have gone to U.S. banks to cleanse their dirty cash, says Paul Campo, head of the U.S. Drug Enforcement Administration's financial crimes unit.

Miami-based American Express Bank International paid fines in both 1994 and 2007 after admitting it had failed to spot and report drug dealers laundering money through its accounts.

Drug traffickers used accounts at Bank of America in Oklahoma City to buy three planes that carried 10 tons of cocaine, according to Mexican court filings.

Federal agents caught people who work for Mexican cartels depositing illicit funds in Bank of America accounts in Atlanta, Chicago and Brownsville, Texas, from 2002 to 2009. Mexican drug dealers used shell companies to open accounts at London-based HSBC Holdings PLC, Europe's biggest bank by assets, an investigation by the Mexican Finance Ministry found. Those two banks weren't accused of wrongdoing.

Bank of America spokeswoman Shirley Norton and HSBC spokesman Roy Caple say laws bar them from discussing specific clients. They say their banks strictly follow the government rules.

A Mexican judge on Jan. 22 accused the owners of six centros cambiarios, or money changers, in Culiacan and Tijuana of laundering drug funds through their accounts at the Mexican units of Banco Santander SA, Citigroup Inc. and HSBC, according to court documents filed in the case.

Citigroup, HSBC and Santander, which is the largest Spanish bank by assets, weren't accused of any wrongdoing. The three banks say Mexican law bars them from commenting on the case, adding that they each carefully enforce anti-money-laundering programs.

HSBC has stopped accepting dollar deposits in Mexico, and Citigroup no longer allows non-customers to change dollars there. Citigroup detected suspicious activity in the Tijuana accounts, reported it to regulators and closed the accounts, Citigroup spokesman Paulo Carreno says.

No bank has been more closely connected with Mexican money laundering than Wachovia. Founded in 1879, Wachovia became the largest bank by assets in the southeastern United States by 1900. By 2008, Wachovia was the sixth-largest U.S. lender, and it faced $26 billion in losses from subprime mortgage loans.

San Francisco-based Wells Fargo, which dates from 1852, bought Wachovia last year for $12.7 billion, creating the largest network of bank branches in the United States.

As Wachovia's balance sheet was bleeding, its legal woes were mounting. In the three years leading up to Wachovia's agreement with the Justice Department, grand juries served the bank with 6,700 subpoenas requesting information. The bank didn't react quickly enough to the prosecutors' requests and failed to hire enough investigators, the U.S. Treasury Department said in March.

After a 22-month investigation, the Justice Department on March 12 charged Wachovia with violating the Bank Secrecy Act by failing to run an effective anti-money-laundering program. Five days later, Wells Fargo promised in a Miami federal courtroom to revamp its detection systems.

Wachovia's new owner paid $160 million in fines and penalties -- less than 2 percent of its $12.3 billion profit in 2009 -- and agreed not to contest the facts in its admission. If Wells Fargo keeps its pledge, the U.S. government has agreed to drop all charges against the bank in March 2011.

Wells Fargo spokeswoman Mary Eshet says the bank has invested $42 million in the past three years to improve its anti-money-laundering program and has been working with regulators.

"We have substantially increased the caliber and number of staff in our international investigations group, and we also significantly upgraded the monitoring software," Eshet says.