cryptogon.com

The report, in Saturday’s Wall Street Journal, cited people familiar with the matter.

It said Wachovia is talking to the Justice Department about reforming its compliance system and faces a possible deferred-prosecution deal that would give the government significant oversight of the bank. A Wachovia representative said the company is cooperating with the investigation, the report added.

The probe is related to the alleged laundering of drug revenue by Mexican and Colombian money-transfer companies, the report said. Wachovia is one of several large banks that officials have investigated because of relationships with such companies, according to the report. Wachovia and “some other” U.S. banks cut off their ties to Mexican foreign-exchange companies in December and January following inquiries in the government’s investigation, the report added.

In September, a U.S. registered Gulfstream II business jet carrying 3.3 tons of cocaine crashed in Mexico’s Yucatán Peninsula. A year earlier, a DC-9 aircraft loaded with 5.7 tons of cocaine from Venezuela was seized in Mexico by Mexican soldiers.

Both of the planes were purchased through a Mexican exchange house called Casa de Cambio Puebla, and that’s turning into a problem for Wachovia, the fourth biggest bank in the United States, and Harris Bank, the Chicago unit of Canada’s BMO Financial Group.

Last week, the Mexican government, working in cooperation with U.S. law enforcement, raided Casa de Cambio Puebla’s offices and moved to put the exchange house out of business. Mexican authorities detained a branch manager, Pedro Alatorre, and a compliance officer, Amador Vazquez, saying they were under investigation for drug-money laundering.

Federal investigators in Mexico released information this week connecting Alatorre to an account at Harris Bank holding $2.7 million and also described Alatorre as a financial operator for the Pacific Cartel, headed by notorious fugitive Joaquín “el Chapo” Guzmán Loera. The Mexican raid explains why the U.S. government froze $11 million of Casa de Cambio Puebla’s assets in 23 different accounts at Wachovia branches in Miami and London in May.

In filings made in federal court in Miami, Frank Rubino, Casa de Cambio Puebla’s Miami lawyer, said Assistant U.S. Attorney Andrea Hoffman told him the government had frozen the money because Casa de Cambio Puebla “was involved in money laundering.” In an interview, Rubino said he did not understand the money-laundering accusation. Another court document shows the funds were seized as part of a case being run by the Drug Enforcement Administration. The filings came to light because Casa de Cambio Puebla sued the U.S. government in federal court in Miami to release frozen funds.

Casa de Cambio Puebla was founded in 1985 by Mexican businessmen, say court filings, and licensed by Mexican banking regulators. It has 17 branch offices throughout Mexico, 240 employees, and maintained 46 U.S. dollar interbank accounts at Wachovia branches in Miami and New York. Wachovia and Harris Bank declined to comment.

“If these allegations are in fact true, Mr. Alatorre did these acts without the knowledge, permission or consent of the management/ownership of Casa de Cambio Puebla,” Rubino said in a written statement to Forbes.

The feds are targeting American banks connected to Mexican exchange houses used to launder drug proceeds. In September, Union Bank of California, a unit of San Francisco-based UnionBanCal, agreed to pay $31.6 million in fines and penalties to settle drug-money laundering issues stemming from its business with Mexico-based Ribadeo Casa de Cambio.

Union entered into a deferred prosecution agreement with the Justice Department on charges of failing to maintain an effective anti-money-laundering program. The feds identified at least $22 million in drug proceeds that flowed through Mexican exchange-house accounts at Union Bank of California. Mexican regulators shuttered Ribadeo Casa de Cambio, but not before its president, Francisco Anton Perez, was found shot to death in the back of a car.

The U.S. government has increasingly been concerned about money-laundering efforts exploiting the relationship between the U.S. financial sector and Mexican exchange houses, the regulated casas de cambio and the more loosely watched centros cambiarios. Last year the Treasury Department issued an advisory warning of the “potential misuse of relationships with U.S. financial institutions by certain Mexican financial institutions, including Mexican casas de cambio.”

The advisory was billed as part of the U.S. government’s effort to “ensure that U.S. financial institutions are not used as a conduit for the laundering of proceeds from narcotics trafficking.” The Treasury Department identified six casas and centros last year used by the Arellano Felix drug cartel to launder proceeds smuggled across the border. In 2005, the feds highlighted nine casas that helped the same cartel launder $120 million.

Mexican President Felipe Calderon has bolstered efforts to clamp down on drug cartels and their financial networks. But there is concern Calderon’s crackdown will stress a Mexican economy that relies on money transfers from Mexicans working in the U.S. back to their families.