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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.

Ferocious and unprecedented secrecy means taxpayers will never know the names of the banks that have been supported through the special liquidity scheme, which was unveiled by Bank Governor Mervyn King last week.

Requests under the Freedom of Information Act are to be denied. Details will be kept secret even after 30 years – the period after which all but the most sensitive state documents are released.

Any Bank of England employee leaking the names of institutions involved will face court action for breach of contract.

Even a figure for the overall amount advanced will not be published until October. Meanwhile the Bank is expected to issue at least £50bn of Treasury bills to banks in exchange for their mortgages – entirely in secret.

This hypersensitive official stance is thought to be a response to the events of last year when a huge stigma was attached to any lender suspected of going to the Bank for cash help.

The scheme is intended to steady the markets, but it is feared that reports of banks making widespread use of the facility could trigger further instability.

Barclays and HBoS have both confirmed they will use the Bank of England scheme. ‘We welcome the Bank facility and we will participate in it,’ confirmed Andy Hornby, chief executive of HBoS.

Other banks declined to comment, but it is expected that this week all of the leading banks, with the exception of Lloyds TSB, will tender some of their mortgages to the Bank of England.

HBoS confirmed last week it had packaged up £9bn of mortgages ready either for securitisation – in effect, selling them on in the wholesale financial markets – or to be offered to the Bank in return for Treasury bills.

The scheme, drawn up by King and approved by Chancellor Alistair Darling, aims to improve banks’ liquidity by temporarily swapping bundles of mortgages and credit card debt for Treasury bills, which are short-dated Government debt that matures within nine months.

The scheme will run for three years so these bills will be replaced by new ones when required.

Under the plan, bills will be exchanged only for securities rated triple-A – the highest possible grade of security – by at least two of the three big ratings agencies, Fitch, Moody’s and Standard & Poor’s.

It’s called “urban mining”, scavenging through the scrap metal in old electronic products in search of such gems as iridium and gold, and it is a growth industry around the world as metal prices skyrocket.

The materials recovered are reused in new electronics parts and the gold and other precious metals are melted down and sold as ingots to jewellers and investors as well as back to manufacturers who use gold in the circuit boards of mobile phones because gold conducts electricity even better than copper.

“It can be precious or minor metals, we want to recycle whatever we can,” said Tadahiko Sekigawa, president of Eco-System Recycling Co which is owned by Dowa Holdings Co Ltd.

A tonne of ore from a gold mine produces just 5 grams (0.18 ounce) of gold on average, whereas a tonne of discarded mobile phones can yield 150 grams (5.3 ounce) or more, according to a study by Yokohama Metal Co Ltd, another recycling firm.

The same volume of discarded mobile phones also contains around 100 kg (220 lb) of copper and 3 kg (6.6 lb) of silver, among other metals.

Recycling has gained in importance as metals prices hit record highs. Gold is trading at around $890 (449 pounds) an ounce, after hitting a historic high of $1,030.80 in March.

Copper and tin are also around record highs and silver prices are well above long term averages.

RECYCLING METALS

Recycling electronics makes sense for Japan which has few natural resources to feed its billion dollar electronics industry but does have tens of millions of old cell phones and other obsolete consumer electronic gadgets thrown away every year.

“To some it’s just a mountain of garbage, but for others it’s a gold mine,” said Nozomu Yamanaka, manager of the Eco-Systems recycling plant where mounds of discarded cell phones and other electronics gadgets are taken apart for their metal value.

At the factory in Honjo, 80 km (50 miles) southwest of Tokyo, 34-year-old Susumu Arai harvests some of that bounty.

A ribbon of molten gold flows into a mould where it sizzles and spits fire for a few minutes before solidifying into a dull yellow slab, on its way to becoming a 3 kg (6.6 lb) gold bar, worth around $90,000 at current prices.

Wearing plastic goggles to protect his eyes while he works, Arai said he was awestruck when he started his job two years ago.

“Now I find it fun being able to recover not just gold, but all sorts of metals,” he said.

The scrap electronics and other industrial waste is first sorted and dismantled by hand. It is then immersed in chemicals to dissolve unwanted materials and the remaining metal is refined.

Eco-System, established 20 years ago near Tokyo, typically produces about 200-300 kg (440-660 lb) of gold bars a month with a 99.99 percent purity, worth about $5.9 million to $8.8 million.

That’s about the same output as a small gold mine.

Eco-System also recovers metals from old memory chips, cables and even black ink which contain silver and palladium.

RECYCLING CELL PHONES

But despite growing interest in the environment and recycling, the industry struggles to get enough old mobile phones to feed its recycling plants.

Japan’s 128 million population uses their cell phones for an average of two years and eight months.

That’s a lot of cell phone phones discarded every year, yet only 10-20 percent are recycled as people often opt to store them in their cupboards due to concerns about the personal data on their phones, said Yoshinori Yajima, a director at Japan’s Ministry of Economy, Trade and Industry.

Just 558 tonnes of old phones were collected for recycling in the year to March 2007, down a third from three years earlier, industry figures show.

As metals prices rise, the Japanese industry faces growing competition for scrap, which is pushing up prices.

“We are seeing more competition from Chinese firms, and naturally the goods go where the money is,” Dowa’s Takashi Morise said.

In response, Japanese firms are importing used circuit boards from Singapore and Indonesia, as they also contain valuable minor metals that Japan is particularly eager to recover.

These minor metals such as indium, a vital component in the production of flat panel televisions and computer screens, antimony and bismuth are indispensable for producing many high-tech products.

However, they are often not easy to acquire as China has tightened export controls, making it harder for Japanese manufacturers to buy these metals.

That’s where the “urban miners” step in.

The escalating costs of heating oil, propane and kerosene, most commonly used in the Northeast, have posed the greatest burdens, officials say, but natural gas and electricity prices have also climbed at a time when low-end incomes are stagnant and prices have also jumped for food and gasoline.

In New Hampshire, applicants for fuel subsidies under the federal Low Income Home Energy Assistance Program received an average of $600 in a one-time grant and up to $975 for the extremely poor who rely on heating oil or propane, the costliest fuels. But those grants, which in recent years have covered 60 percent of heating costs, covered only about 35 percent of those costs this winter, said Celeste Lovett, director of the state’s energy aid program. The state will have given aid to about 34,500 people by the end of April, Ms. Lovett said, a 5 percent increase over last year and the highest number ever.

The most immediate challenge is to help the high number of consumers who are far behind in electric and gas payments, said Mark Wolfe, director of the National Energy Assistance Directors’ Association, which represents state aid officials in Washington.

Crude prices rose on initial reports that a U.S. ship had fired on two Iranian boats; the news raised concerns that a conflict between U.S. and Iranian forces could cut oil supplies from the region. A Navy spokeswoman said the origin of the boats was unclear.

The news was enough to send light, sweet crude for June delivery up to $119.55 before the contract retreated to settle up $2.46 at $118.52 a barrel on the New York Mercantile Exchange.