Casino Royale Fire Stirs Scandal

Casino Arrests Stir Scandal in Mexico
Accused Plotter of Deadly Blaze Nabbed, As Alleged Corruption Hits Ruling Party.
By DAVID LUHNOW And JOSé DE CóRDOBA

MONTERREY, Mexico—A mounting corruption scandal related to illegal casinos is damaging President Felipe Calderón's conservative party, whose fight against organized crime has long been a central aim.

The scandal stems from an attack on a Monterrey casino in late August by alleged members of the Zetas drug cartel, who set a gasoline-fueled fire that killed 52 casino visitors, including a pregnant woman.

On Thursday, Mexico's army said it had captured the alleged mastermind of the attack, Carlos Alberto Oliva, nicknamed "The Frog." Mr. Oliva is seen as the No. 3 leader of the Zetas, who have terrorized much of Mexico through murder, extortions and kidnappings.

"This is a very important blow against the Zetas," Nuevo Leon Lt. Gov. Javier Treviño said in an interview. In the last two years, Nuevo Leon and its capital Monterrey have become a battleground between the Zetas and their former employers, the Gulf Cartel.

During Mr. Calderón's term, some 43,000 people have died in violence between drug cartels. But even as Mr. Calderón has sent in the army to fight the gangs, his administration—of the National Action Party (PAN)—let illegal casinos flourish, where the cartels can launder illicit money, according to both industry players and U.S. officials.

Mexico's army and police say they have now arrested virtually all the main suspects in connection with the deadly fire. But what smolders on is the scandal sparked by the fire.

Mexican officials believe the Zetas set fire to the casino to pressure the owners into paying extortion money. The Casino Royale, officials say, was a target because the casino lacked the proper city and federal permits to operate. In exchange for money, the Zetas would presumably offer the casino "protection" from city and federal inspections.

Days after the Casino Royale fire, Monterrey's leading newspaper published a video showing the brother of the PAN mayor of Monterrey, Fernando Larrazabal, receiving wads of money at one Monterrey casino. The paper suggested that many of the city's casinos, which lack legal permits, were paying off city officials—and drug gangs—to stay open.

The mayor has denied wrongdoing. His brother, Jonas Larrazabal, says the money was payment for selling cheese to the casinos. The comment was seen as laughable across Mexico, where selling "cheese" to make a fortune has become a national joke. Newspapers call the scandal "Queso-gate," or "Cheese-gate."

Since the Casino Royale fire, Mexican officials have admitted that many of the country's casinos lack the proper licenses or disregard gambling regulations, paying off local and federal officials to look the other way.

The owner of Casino Royale, Raúl Rocha, has told Mexican authorities he paid out some $140,000 each month in extortion money, although he declined to say to whom, citing fears for his safety, according to Mexican prosecutors. Mr. Rocha is now in Miami, people familiar with the situation said, and didn't respond to requests for comment.

The Interior Ministry last month filed criminal charges of abuse of authority against the former top official in charge of regulating casinos at the ministry, Roberto Correa, as well as Manuel Fierro, another top-ranking former official, according to ministry officials.

Both men, whose current whereabouts are unknown, are charged with allegedly giving out illegal licenses to casinos, ministry officials say. The charges carry a maximum jail sentence of 12 years.

"We found a real mess here," said deputy interior minister Juan Marcos Gutierrez in an interview. "But we are cleaning it up." Mr. Gutierrez said the ministry is carrying out a review of all casino licenses and will close down those that don't comply with regulations.

For Mr. Calderón's PAN, the scandal threatens the party's reputation for probity. While the party is largely seen as ineffective, it is also seen as more upright than its rivals, particularly the former ruling Institutional Revolutionary Party, the favorite to win back power next year.

"How can we criticize the PRI when we have our own rot," said Fernando Canales Stelzer, a prominent Monterrey PAN party member.

The issue has concerned U.S. officials for several years.

"The traffickers, the casino operators and corrupt politicians form a self-protective triangle which makes it difficult for honest law enforcement officers to get at organized crime," said a 2009 U.S. diplomatic cable released by document-leaking website WikiLeaks, signed by Bruce Williamson, then the U.S. consul in Monterrey. "One way for the Mexican government to strike back at cartels would be to take a fresh look at its policy on casino licenses."

The Interior Ministry said it was taking steps to root out casino-related corruption even before the fire. In June, the ministry fired the head of the gambling commission who replaced Mr. Correa, a former PAN legislator named Guadalupe López Mares, and her four top subordinates. Ms. López Mares hasn't been accused of any wrongdoing.

Since 2008, however, the industry's biggest legal players, like media giant Grupo Televisa SAB, have warned regulators that scores of illegal casinos were opening up, eating into the profits of the legally established players who stuck to the rules, paid taxes, and complied with anti-smoking and local fire laws.

"The casino industry is out of control thanks to corruption within the government and the judicial system," said Alfonso Perez Lizaur, the head of the country's main gambling industry association. "It's sad that 52 people had to die for the government to take this issue seriously."

Starting in 2008, the casino industry association, led by Mr. Perez, filed dozens of complaints with the Interior Ministry, according to copies of the complaints reviewed by The Wall Street Journal.

One case involved a former Monterrey city official, Sergio Gil, to whom Mr. Perez said the government illegally granted a casino permit in 2008. Mr. Gil couldn't be reached for comment.

Mr. Perez said he made repeated inquiries over the case to the Interior Ministry, but said he got no answer. He then sought help at the government's anti-corruption watchdog, and said he again received no help. Finally, he filed criminal charges at the Attorney General's office against several top watchdog agency officials for failing to investigate alleged negligence of top Interior Ministry officials, including Deputy Minister Abraham González.

Mr. Gonzalez is seen as close to Mr. Calderón. It was on Mr. Gonzalez's ranch in Jalisco that Mr. Calderón first announced he was running for president in 2005. Mr. Gonzalez denied any wrongdoing.

Some of Mr. González's closest aides, however, have come under scrutiny. Ivan Peña, Mr. González's former chief of staff at the ministry, worked for two casino groups after leaving his post in 2007, by his own account.

Mr. González to do with the casino industry since leaving the ministry in 2009.

Underscoring the revolving door nature of the casino industry and the interior ministry, another former top official, Miguel Angel Ochoa, currently works for a casino industry association that represents some casinos that obtained their permit through judicial fiat and which are not allowed to join the main industry association. His office didn't respond to a request for comment.