ZAPOPAN, Mexico (Reuters) - At a modern factory in a city whose main claim to fame is an image of the Virgin Mary revered for granting miracles, Mexican pharmaceuticals firm Grupo Collins churns out antibiotics and other medicines.

A soldier stands inside a raided pawn shop while under investigation for money laundering in Tijuana November 25, 2009. REUTERS/Jorge Duenes

But the United States contends that the company in Zapopan is not what it seems. The U.S. Treasury put Grupo Collins on a black list in 2008, saying the firm supplies a small drug cartel in western Mexico with chemicals needed to make methamphetamines.

Grupo Collins, which has denied any connection to organized crime, is one of dozens under suspicion of laundering money for the nation’s booming drug business, whose growing economic impact now pervades just about every level of Mexican life.

Mexican cartels, which control most of the cocaine and methamphetamine smuggled into the United States, bring an estimated $25 billion to $40 billion into Mexico from their global operations every year.

To put that in perspective: Mexico probably made more money in 2009 moving drugs than it did exporting oil, its single biggest legitimate foreign currency earner.

From the white Caribbean beaches of Cancun to violent towns on the U.S. border and the beauty parlors of Mexico City’s wealthy suburbs, drug cash is everywhere in Mexico. It has even propped up the country’s banking system, helping it ride out the financial crisis and aiding the country’s economy.

Smuggled into Mexico mostly from the United States in $100 bills, narco money finds its way onto the books of restaurants, construction firms and bars as drug lords try to legitimize their cash and prevent police from tracing it.

“Mexico is saturated with this money,” said George Friedman, who heads geopolitical analysis firm Stratfor.

In western Mexico, drug money started pouring into Zapopan and nearby Guadalajara in the 1980s as the Sinaloa cartel bought hospitals and real estate, said Martin Barron, a researcher at the institute that trains Mexico’s organized crime prosecutors.

Now residents in the region known in Mexico for its piety say drug smugglers barely make an effort to disguise themselves.

A strip of fancy boutiques in Zapopan was financed with drug money, says Jaime Ramirez, a local newspaper columnist who has been reporting on the drug world for two decades. As well as the Grupo Collins factory in Zapopan, a nearby car wash is also on the U.S. Treasury’s black list.

A local cemetery draws relatives of traffickers who were among the 17,000 people killed in the drug war in Mexico since 2006. “A lot of narcos are buried there. You should see it on Fathers’ Day,” Ramirez said, as a black pick-up truck with tinted windows pulled in.

Zapopan residents just shrug their shoulders when a wealthy neighbor displays traits seen as typical of a drug trafficker -- wearing cowboy gear, playing loud “norteno” music from the country’s north or holding lavish parties attended by guests who arrive in pick-up trucks or SUVs.

“Living alongside them is normal,” Ramirez said. “Everybody knows when a neighbor is on the shady side.”

One of those neighbors was Sandra Avila, a glamorous trafficker known as the “Queen of the Pacific,” who lived in Zapopan before being arrested in Mexico City in 2007.

On a typical day in Zapopan recently, men unloaded boxes from vans in the Grupo Collins compound, near the company’s private chapel and soccer field. From behind the factory’s high walls, there was little to suggest it could have ties to a cartel.

“It has always been really calm,” said Genaro Rangel, who sells tacos every morning to factory workers from a stall across the street.

The plant was advertising a job opening on the company web site for a machine room technician.

Washington’s accusation, filed under a U.S. sanctions program, makes it illegal for Americans to do business with Grupo Collins and freezes any assets it might have in U.S. accounts. In a 2006 report, Mexican authorities named Grupo Collins’ owner Telesforo Tirado as an operator of the Colima cartel.

The U.S. Treasury and Mexico’s Attorney General’s office both declined to provide further details on the case and Grupo Collins executives also refused to comment. But Tirado has previously denied the charges in the Mexican media.

CASHING IN ON THE DRUG TRADE

What’s going on in Zapopan is happening all over Mexico.

A well-known Mexico City restaurant specializing in the spicy cuisine of the Yucatan peninsula was added to the U.S. list of front companies in December. Months earlier, one of Mexico’s top food critics had recommended it.

Drug money has also fueled part of a real estate boom around tourist resorts such as Cancun, said a senior U.S. law enforcement official in Mexico City.

“We’ve had cases where traffickers purchased large tracts of land in areas where any investor would buy,” he said, asking not to be named because of concerns about his safety.

An architect in the city of Tijuana did well out of designing buildings that cartels would build and rent out to legitimate local businesses.

“The pay was enough for me to build a house for myself, as well as to buy a lot a tools,” he said. He was once hired to design a tunnel that led to the street from a secret door in a drug gang member’s closet.

Craving acceptance, the drug gangs even throw their money at acquaintances to get them on the social scene.

A drug trafficker pays his friend Roberto, who declined to give his last name, to keep him connected in Tijuana and introduce him to women. “I take him to parties,” Roberto said.

In the wealthy shopping areas of Interlomas, near Mexico City, the Perfect Silhouette spa offers breast implants.

Staffed by young women in loose-fitting white suits, the spa also sells weight-loss creams and offers massages. The U.S. Treasury recently said it was part of the financial network of the Beltran Leyva cartel, whose leader was gunned down by elite Mexican marines in December.

The salon’s manager, Teresa Delgado, appeared baffled by the U.S. accusations. “We haven’t seen anything strange here,” she said. A woman Delgado identified as the owner did not return a phone call requesting an interview.

Businesses enlisted to launder drug money typically get a cut worth 3 percent to 8 percent of the funds passing through their books, the U.S. law enforcement official said.

“SMURFING” AROUND THE LAWS

Much of the cartels’ profits eventually ends up in Mexico’s banking system, the U.S. official said. During the global financial crisis last year, those assets provided valuable liquidity, says economist Guillermo Ibarra of the Autonomous University of Sinaloa.

“They had a cushion from drug trafficking money that to a certain extent helped the banks,” Ibarra said.

Indeed, drug money in banks is a global phenomenon, not just in Mexico. A United Nations report on the global drug trade in 2009 said that “at a time of major bank failures, money doesn’t smell, bankers seem to believe.”

Drug gangs in Mexico have their associates make thousands of tiny deposits in their bank accounts to avoid raising suspicion from banking authorities, a practice known as “smurfing,” said the U.S. official.

Mexico’s banking association and the finance ministry’s anti-money laundering unit declined to comment for this story.

While Mexico is confiscating more drugs and assets than ever under President Felipe Calderon, forfeitures of money are still minuscule compared to even low-ball estimates of the amount of drug money that flows into Mexico.

Under Calderon, authorities have confiscated about $400 million, almost none of which was seized from banks, said Ricardo Najera, a spokesman for the Attorney General’s Office.

Mexican bank secrecy laws make it particularly difficult to go after drug money in financial institutions, Najera said.

“We can’t just go in there and say ‘OK, let’s have a look,’” he said. “We have to trace the illicit origin of that money before we can get at those bank accounts.”

The U.S. Treasury has blocked only about $16 million in suspected Mexican drug assets since June 2000, a Treasury official in Washington said.

The official, who asked not to be named, said the sanctions program aims to hit drug lords by breaking “their commercial and financial backbones.” But freezing assets is not “the principal objective nor the key measure of success.”

MAFIA CAPITALISM

Data on Mexican banking provides a novel way for calculating the size of the drug economy. Ibarra crunched numbers on monetary aggregates across different Mexican states and concluded that more money sits in Sinaloan banks than its legitimate economy should be generating.

“It’s as if two people had the same job and the same level of seniority, but one of them has twice as much savings,” he said, talking about comparisons between Sinaloa and other states.

Ibarra estimates cartels have laundered more than $680 million in the banks of Sinaloa -- which is a financial services backwater -- and that drug money is driving nearly 20 percent of the state’s economy.

Edgardo Buscaglia, an academic at Columbia University, recently scoured judicial case files and financial intelligence reports, some of which were provided by Mexican authorities.

His research found organized crime’s involvement in Mexican businesses had expanded sharply in the five years through 2008, with gangs now involved in most sectors of the economy.

Buscaglia thinks Mexico’s lackluster effort to confiscate dirty money is allowing drug gangs and other mafias to flourish.

“You will wind up with mafia capitalism here before things improve,” he said.

Even though cartels are clearly creating jobs and giving a lot of people extra spending money, some of these economic benefits are neutralized by a raging drug war that has scared investors.

About a dozen foreign companies in Ciudad Juarez, across the border from Texas, are postponing investments in factories there because of regular gun battles in the city, said Soledad Maynez, who heads a local factory association.

She met with the companies’ representatives in November. “They need the security issue improved,” she said.

Business leaders say thousands of shops have closed in Ciudad Juarez because of the violence.

Another problem the economy could face is that drug funding could one day fall if authorities cracked down on money laundering or somehow wrenched power away from the cartels.

“(Drug money) could have a short-term positive effect. But in the long run, because you’re propping up this artificial economy, the moment it stops it all crashes,” the U.S. law enforcement official said. (Additional reporting by Lizbeth Diaz in Tijuana, editing by Claudia Parsons and Jim Impoco)