Apr.05, 2010, 01:29:20 AM PDT

In 1993, federal authorities found a secret passage running under the border from Tijuana, Mexico, into southern San Diego County.

The infamous Otay Mesa Tunnel was a conduit for smuggling heroin and cocaine into the United States and ferrying laundered proceeds back into Mexico. The subsequent investigation led to seizure of 8.4 tons of cocaine and the convictions of nine people. Among them was Jose Reynoso, a narcotics trafficker linked to a Guadalajara drug cartel in whose California warehouse one end of the tunnel was located.

The FBI's investigation and a parade of confidential witnesses also led to the doorstep of one of the most influential Latino businessmen on the Central Coast, Javier Vasquez-Robles, owner of La Esperanza Markets in Salinas, Watsonville, Santa Cruz and the greater Bay Area.

Witnesses told the FBI that Vasquez-Robles stored and distributed large quantities of cocaine and methamphetamine from warehouses at his markets and a ranch on Hughes Road at the foot of Mount Madonna. The Watsonville resident, they said, also laundered millions of dollars in drug profits through his stores so the cash could be smuggled inconspicuously back into Mexico.

After nine years of surveillance and wiretapping, the FBI collected what it thought was sufficient evidence to convict Vasquez-Robles on 12 counts of drug trafficking, money laundering and conspiracy.

In June 2002, an indictment was handed down, also naming his wife and daughter and seeking forfeiture of the family's 17 markets. The women faced multiple 20-year sentences. Vasquez-Robles, then 50, faced life in prison.

On Thursday, 17 years after the investigation began and eight years after the indictment, Vasquez-Robles was sentenced to three years in prison, the result of a settlement in which he pleaded guilty to one count of international money laundering and two counts of lying on his U.S. citizenship application.

His wife, Emelia Vasquez, 56, pleaded guilty to one count of laundering drug money and was sentenced to probation and a year of home confinement. Money-laundering charges against his daughter, Corina Vasquez, 32, were completely dismissed, as were drug charges against two other men named in the indictment.

The settlement raises questions about what happened to allegations that Vasquez-Robles was operating a major drug operation on the Central Coast. Those questions will remain unanswered by the government. The U.S. Attorney's Office declined comment on the settlement.

Vasquez-Robles' attorney, Paul Meltzer of Santa Cruz, said federal prosecutors "correctly concluded they could not prove the case beyond a reasonable doubt."

"At the end of the day, despite all of the allegations, Mr. Vasquez was never found in possession of any drugs whatsoever," he said. "So, after eight years of litigation, we're pleased to resolve the case on these terms."

Meltzer stressed that neither his client nor any of the other defendants cooperated with authorities. On the contrary, he said, the government's settlement was based on a lack of evidence and problems with its confidential informants, all of whom were convicted of serious crimes after Vasquez-Robles was indicted.

Vasquez-Robles did not respond to a request for comment.

Paid informants

While settlement discussions occurred behind closed doors in U.S. District Court in San Jose, court records reveal a clear and fascinating picture of the evidence revealed in the federal investigation.

As defense motions pointed out, the case was built almost entirely on confidential witnesses, some of them paid FBI informants. In 1993, one of those witnesses told agents that Vasquez-Robles transported drugs to his warehouses in Watsonville, where he and his associates hid them before distributing them to other cities.

The witness said Vasquez-Robles also stored large sums of cash before transporting it into Guadalajara through San Francisco International Airport, and that the "Guzman-Loera drug-trafficking organization," with which Jose Reynoso was linked, was using La Esperanza Markets to launder its drug proceeds.

The information prompted federal authorities to scrutinize 1,903 "Currency Transaction Reports" filed by banks in connection with La Esperanza Markets in Salinas, Watsonville and Santa Cruz, as well as Reynoso Meat Market in Castroville. Agents also sought IRS and Brinks Armored Car records in connection with the businesses.

The records revealed that between February 1988 and July 1993 approximately $89 million moved through four core bank accounts linked to La Esperanza Markets, according to court documents.

In 1995 and 1996, Vasquez-Robles and his wife reported adjusted gross incomes of $73,433 and $104,691 respectively. A civil IRS audit determined the combined income was understated by more than $5.2 million.

In 1993, Vasquez-Robles owned only two markets. By 2000, he owned or was affiliated with 17. According to FBI affidavits, he later told another informant that his uncle, Jose Reynoso, helped him establish all but five of the stores.

As his business grew, so did his cash activity, records showed. Between Jan. 1, 1998, and June 30, 1999, Wells Fargo Bank alone reported more than $98 million in cash withdrawals from La Esperanza bank accounts. According to FBI affidavits, the Salinas and Watsonville stores received Brinks deliveries often totaling close to $1 million per week in $100 bills, the preferred denomination of the cartels.

FBI wiretaps

Based on the statements of the original informant and the financial records, the FBI brought in another paid informant in an attempt to infiltrate the suspected drug and money-laundering operation and won court orders to wiretap Vasquez-Robles' cell phone.

In conversations and transactions over the next two years, Vasquez-Robles, his wife and daughter were captured laundering $841,000 in what they thought were drug proceeds for the confidential witness. "CW-1" brought Emilia Vasquez bags containing thousands of dollars in small bills that she and her daughter counted and later exchanged for $100 bills that were easier to transport.

On one occasion, the man brought $493,000 into the Watsonville market, where all the laundering occurred. On others, Vasquez-Robles helped the man wire money to Canada. His plea involved one of those $10,000 transactions.

According to affidavits, Vasquez-Robles also arranged for workers at his Hughes Road ranch to weld hidden compartments into two "load cars" that the witness indicated he would use to smuggle cash and drugs. One of the workers helped the witness stash kilos of "look-alike" cocaine in the compartments.

Vasquez-Robles told the man he had once loaded 50 kilos of narcotics into one load car and one of the welders told the witness that his boss and another Watsonville businessman liked to use El Caminos and Rancheros because they were designed with empty spaces on each side.

Markets refinanced

And on numerous occasions, FBI agents said, Vasquez-Robles was taped discussing drug sales with the informant. The conversations were filled with code words like "ice" and "agua." In one phone call, Vasquez-Robles referred to a "20-pound tomato."

He offered to hook the witness up with various drug connections, agreed to help him purchase and distribute a half-ton of cocaine and said he could get him 28 pounds of methamphetamine.

None of the deals ever materialized, and neither the witness nor FBI agents tailing Vasquez-Robles ever saw him with drugs.

"CW-1 has continued to be a great assistance in establishing that Javier and Emilia Vasquez-Robles use their markets to launder drug proceeds," agent Patrick Stokes wrote in an affidavit requesting continued wiretapping in April 2000.

"What CW-1 has not been able to do, however, (despite) substantial indications that Javier Vasquez-Robles is also directly involved in narcotics trafficking, is to engage him directly in a drug transaction," he said. "It appears that Vasquez-Robles is substantially more careful when it comes to narcotics transactions than he is with money laundering ..."

Despite 17 years of trying, agents never caught their suspect with drugs.

His attorney, Meltzer, said he had no idea how much money the government spent on the prosecution and declined to comment on the legal defense fees in the case. In 2005, the Assistant U.S. Attorney agreed to let Vasquez-Robles' family refinance La Esperanza Markets, whose assets had been frozen, to pay what then amounted to $323,000 in attorney fees.

Fined $300,000

Vasquez-Robles was not forced to forfeit any of the stores as a term of his plea agreement, though he must pay a $300,000 fine. Meltzer said his immigration status likely will be addressed after he serves his federal prison sentence, which begins June 30.

Vasquez-Robles and his wife are Mexican nationals who have been legal residents of the United States for many years. In 2001, the year before he was indicted, he applied for citizenship, falsely claiming he'd never been arrested.

At the time he had only a misdemeanor record, but after his indictment immigration officials caught the discrepancy and re-asked the question in an interview and sworn statement. Again he lied. He was indicted in 2003 on that charge, which was included in his plea deal.

Lori Haley, spokeswoman for the U.S. Immigration Customs Enforcement, said she was not familiar with the case and could not comment directly about the potential outcomes.

However, she said, her department is in constant contact with jails and state and federal prisons and regularly seeks deportation of convicted immigrants through the "Criminal Alien Program."

"If you commit an aggravated felony," she said, "you are deportable."