(FORTUNE Magazine) – THE ILLICIT DRUG TRADE is probably the fastest-growing industry in the world and is unquestionably the most profitable. A handful of Latin American countries grow coca leaves that yield cocaine, while Asian opium poppy fields produce bumper harvests that become heroin. Marijuana sprouts everywhere. The global drug trade may run up to $500 billion a year, more than twice the value of all U.S. currency in circulation. The American market, the world's biggest ! for these drugs, produces annual revenues of at least $100 billion at retail -- twice what U.S. consumers spend for oil. The size and pervasiveness of the illegal drug industry, and the criminality associated with it, seem to have overwhelmed U.S. policy. (For some remedies, see the following story.) The drug trade has created a breed of shadowy billionaires who seem as canny in business as they are vicious. They stay abreast of market conditions, constantly change operating methods to avoid arrest, and invest their earnings in legitimate businesses. Crack is a classic example of market expansion. Though nobody knows how conscious the decision was, the low-priced smokable version of cocaine came along just as the expensive powder seemed to be peaking as a plaything of the rich and infamous. At $5 to $15 a dose, crack has transformed cocaine from a $100-a-gram indulgence into the Big Mac of street drugs. A form of heroin that is smoked, long used in Asia and now reaching the U.S., might be the next big -- and deadly -- line extension. At home the cocaine barons have created new demand among Latin American youth by packaging crude cocaine with marijuana or tobacco in a highly addictive cigarette called bazuco. They are also moving rapidly into Europe, a new market. The huge profit potential is attracting a flock of competitors. Thailand has developed a thriving export crop of marijuana, financed by Americans who ship tons of it to the U.S. Even war-shattered Lebanon is exporting heroin. Mexico has become the biggest supplier of drugs to the U.S. -- pushing home-grown marijuana and heroin, plus cocaine transshipped from Colombia. The U.S. has grabbed headlines with arrests in recent months and has seized record amounts of drugs, yet the supply seems undented. The drug business is simply responding to market forces. Some 20 million Americans smoke marijuana, nearly six million regularly use cocaine, and half a million are addicted to heroin. Says Francis A. Keating II, assistant secretary for enforcement in the Treasury Department: ''Any industry with 25 million American consumers can support an enormous empire.'' The burgeoning supply has driven down wholesale prices lately, but not retail. Because of powerfully strong demand, markups remain huge. ''Selling cocaine is like popping an Italian suit onto Rodeo Drive in Beverly Hills,'' says Charles Gillespie, U.S. ambassador to Colombia. ''The suit costs $180 to make, and you easily get $1,500 for it.'' DRUG TRADERS are far from ordinary gangsters. They have destabilized whole countries in Latin America through bribery -- a routine business expense -- and intimidation. The alleged drug dealings of Manuel Antonio Noriega, Panama's strongman, have precipitated a government crisis and a diplomatic collision with the U.S. Secretly on the take are high officials in the Bahamas, Mexico, and Jamaica. In May a federal grand jury indicted a former Honduran diplomat, with strong ties to the military leadership, for trying to smuggle 25 pounds of cocaine into Miami. Says Senator William V. Roth Jr., a Delaware Republican who has investigated the drug business: ''The cartels are so wealthy. We can't provide the same resources as those who can buy into governments.'' Where payoffs fall short, the gangs use violence. The Colombian government has been cowed by scores of drug-related assassinations over the past few years -- including 57 judges and two cabinet officers. The pattern of lawlessness and bribery exists in Asia too. Much of the heroin that reaches the U.S. comes from opium poppies grown in a section of northern Burma that is dominated by self-styled rebels who finance private armies with drug profits. Payoffs are so rewarding along Thailand's heroin- smuggling routes that crooked cops bribe their superiors to be assigned there. No country is more besieged than Colombia, the oldest democracy in Latin America. Drug barons offer policemen and judges plomo o plata (lead or silver) -- a bullet in the head or a bribe. Though the country has a vigorous legitimate economy, cocaine is its biggest single export -- an estimated $4 billion a year at wholesale prices. Says Senator Rodrigo Lloreada, a former foreign minister: ''The size of this business overwhelms our economy. Just imagine if the U.S. had a Mafia richer than the federal budget.'' The U.S. State Department advises Americans to stay away from Medellin, the provincial capital of Antioquia and headquarters of the most infamous cocaine enterprise, the Medellin cartel. That's equivalent to putting Chicago or Detroit off limits. Medellin is Colombia's industrial center, a balmy city of 1.5 million people in the Andes mountains. The region has a reputation for producing Colombia's sharpest businessmen, both legitimate and otherwise. Civic boosterism abounds. Billboards on major streets proclaim, in colloquial Spanish: ''Medellin is good folks'' and ''Say it with pride: I Love Medellin.'' Senator Alvaro Uribe proudly shows American visitors around his hometown. ''The narcos are a small group here,'' he says. Then he adds, ''But very dangerous.'' In this business, rivals are literally killing each other for market share. The drug boom has inspired a competing cartel from Cali, a slightly smaller city to the south, but the Medellin cartel remains the biggest. Between them the two groups produce and ship 60% to 70% of Colombia's cocaine, while the rest is handled by more than 60 independent operators. THE GOOD CITIZENS of Medellin have managed to keep the drug billionaires out of the city's most exclusive country club, but they cannot shut out the violence that explodes from gang rivalries. Recently a powerful car bomb devastated part of a posh residential area that locals now call Beirut. Every morning police pick up bodies of gunshot victims, sometimes as many as a dozen. Drug money is highly visible in Medellin. Luxury apartments are shooting up in the California-like hills above the city, and the skyline is dotted with satellite dishes to pull in distant TV stations. Without cocaine profits in the local economy, Senator Uribe figures unemployment would nearly double to 25%. Says he: ''We need foreign investment so that people would not have to rely on narcotics money.'' A loose alliance of criminal families, the Medellin cartel has turned cocaine trafficking into a well-managed multinational industry. Says a U.S. government analyst of the cartel: ''It has all the attributes of a sophisticated commodity business. The guys who run it are businessmen.'' An American pilot who once flew for the organization says it was run ''like a FORTUNE 500 company.'' A criminal enterprise publishes no annual report, of course, but glimpses of cartel operations can be found in U.S. indictments, in testimony of employees who were arrested and became government informants, and from interviews with law enforcement officials in the U.S. and Colombia. An organization chart confiscated by police looked in some ways like that of any big business. But the differences were startling. The financial division was not only responsible for collecting revenues and making investments, but also for laundering money. An ''enforcement'' division took charge of bribes, guards, and hit men. But a U.S. authority on the cartel stresses its decentralized management structure. It does not mastermind every move of its ^ members. Says he: ''Decisions to kill a judge are made by individual families.'' The Colombian drug barons have built a vertically integrated industry. They finance cultivation of coca plants in the Andes by Peruvian and Bolivian peasants, who have long chewed the leaves for a mild high. Under cartel supervision, the peasants process dried leaves into a gooey mass known as cocaine base. Cartel pilots fly the cocaine base to clandestine airstrips in Colombia's vast central forests. In what the cartel calls laboratories, often thatch huts near the landing fields, cocaine base is mixed with ether and acetone to become pure cocaine. The cocaine, now a white powder, is packed into one-kilogram plastic bags and eventually smuggled to the U.S. The price soars along the way. Each shipment contains cocaine from various cartel members so that no one of them is wiped out if a load is seized by police. The cartel delivers to its own wholesale distributors in the U.S. They in turn sell to a variety of independent local gangs and individual retailers, who process crack and handle street sales. To ferry cocaine to the U.S., the cartel recruits U.S. pilots, who are paid about $5,000 per kilo. The average load in a light twin-engine plane is 300 kilos. The planes are equipped with the best electronic equipment money can buy, including encoding and scrambling devices for secure communications and high-powered receivers that allow pilots to eavesdrop on their pursuers. The cartel's top men live more or less openly in and around Medellin. They lie low during periodic government campaigns against them, then reappear when passions cool. Heavy U.S. pressure occasionally produces results. Carlos Lehder, 38, was extradited to the U.S. in 1987, after being captured by the Colombian army. He was convicted of 11 counts of drug trafficking in a Florida court in May, and faces life plus 150 years in prison. His compatriots in the cartel's top echelon, Gonzalo Rodriguez Gacha, 41, Pablo Escobar, 38, and Jorge Luis Ochoa, 39, face U.S. indictments. COLOMBIAN LAWMEN generally credit Escobar with helping to pull the cartel together a decade ago. A banker who once dealt with him describes Escobar as a ''self-taught, intuitive administrator.'' A reputed car thief, he evidently decided that drug-running would be a more lucrative business. In the mid- Seventies he persuaded Fabio Ochoa, known around Medellin as a smuggler of Scotch whisky and television sets, to pioneer the cocaine trade. Fabio now plays the role of a wealthy rancher. No drug charges have been been filed against him, and he apparently has retired. His son Jorge Luis now runs the family business along with his two brothers, Fabio Jr. and Juan David. A turning point for drug cooperation came in 1981 when leftist guerrillas kidnapped Fabio Ochoa's 28-year-old daughter, Marta, seeking ransom to finance their revolution. The kidnapping inspired a summit meeting of 223 cocaine traders in Medellin. They formed an organization called Death to Kidnappers that began systematically knocking off members of the leftist group, whether or not the victims had anything to do with the kidnapping. Marta was swiftly released, and the cartel emerged. A pilot, Lehder set up a transshipment base at Norman's Cay in the Bahamas and emerged as the cartel's self-styled ''king of cocaine transport.'' The Ochoas started a distribution network out of Miami, and Rodriguez Gacha handled routes to the Los Angeles area. Rodriguez is known as ''the Mexican'' both for his fondness for Mexican peasant culture and for the crude, sometimes violent behavior that Colombians tend to associate with their neighbors to the north. Born near Bogota, Rodriguez flourished in the trade as a henchman of Escobar. After rising to a leadership position in his own right, he opened a flashy disco in his hometown of Pacho, a city of 50,000. The U.S. charges that Rodriguez helped establish cocaine manufacturing and distribution in Nicaragua in 1984. He got help, according to the indictment, from Federico Vaughan, a senior official in the Marxist Sandanista regime, who arranged for the cartel to fuel its planes at a Nicaraguan military air base. Rodriguez is no leftist: He has been charged with the murder of a left-wing Colombian political leader. Police theorize that Rodriguez was angry because leftist guerrillas were interfering with his coca farmers. WHEN he's not underground, Escobar lives in luxury on a 50,000-acre ranch called Hacienda Napoles near Medellin. Atop the gate is a vintage Piper Cub, said to be his first drug plane. A bullet-scarred 1920s Packard -- Escobar has bragged it once belonged to Al Capone -- stands on a pedestal next to the swimming pool. Nearby, hippos, giraffes, a dwarf elephant, and other animals roam in the natural setting of his zoo. A hefty 200-pounder, Escobar is said never to use cocaine: He races motorcycles for kicks. He has cultivated a Robin Hood image, building 500 small houses for slum squatters. In 1982 he was elected to the Colombian Congress as an alternate member. As a politician he has mainly lobbied against laws allowing extradition of suspected criminals to the U.S. When he appears around town, fellow citizens of Medellin respectfully -- and fearfully -- call him ''Don Pablo.'' Angered by the drug-gang assassination of Colombia's attorney general in January, the army has been raiding the homes and labs of cartel leaders. Escobar's bed was still warm when troops entered his ranch house. He escaped through a secret tunnel. General Jaime Ruiz, commander of the army's Fourth Brigade in Medellin, told FORTUNE of discovering in Escobar's hideaway sophisticated weapons, army and police uniforms, ''an entire apparatus of intimidation and terrorism.'' The army made an even more revealing find at the ranch: a collection of telephone conversations between Escobar and Colombian drug dealers in the U.S. that Escobar had taped. He is heard telling his customers that once the plane takes off, the cocaine is the buyer's responsibility. Unless Escobar wanted the tapes to refresh his memory when he writes his memoirs, they seem to be part of the evidence he is building to fight extradition to the U.S. Extradition is the cartel leaders' greatest fear. When Jorge Luis Ochoa was arrested in Spain in 1984, the U.S. quickly moved to extradite him on drug charges. Ochoa's cohorts back home sent a threatening message to news media in Colombia. If Ochoa were to be extradited to the U.S., they said, ''we will declare total and absolute war against Colombia's political leaders.'' Party chiefs would be executed ''out of hand.'' Ultimately Spain sent Ochoa home, rather than to America, to face charges of smuggling fighting bulls into Colombia. Late last year he was arrested for jumping bail, but quickly went free -- after what the U.S. State Department says was Colombian government indecision abetted by the corruption of at least one judge and a prison warden. The cartel deftly, and sometimes murderously, adapts to setbacks. In March 1984, Colombian police raided a jungle complex of 19 cocaine-processing labs that the traffickers called ''Tranquilandia,'' or quiet village. It sprawled over a 35-mile radius and had three airstrips. American agents had set up the spectacular bust by planting electronic beepers in drums of ether the cartel had purchased in the U.S. When the ether was shipped to Tranquilandia, Colombian police followed the beeps. They destroyed the facility and poured nearly 14 tons of cocaine into a nearby river. The cartel struck back. Within two months, Colombia's justice minister, Rodrigo Lara Bonilla -- who seemed eager to extradite drug kingpins to the U.S. -- was assassinated by a hit man on a motorcycle using a machine pistol, the sign of a contract job. The group also moved quickly to replace the lost plant by making arrangements to refine cocaine in Nicaragua and Panama. A U.S. informant filmed Escobar and a Sandinista official supervising the loading of cocaine in Nicaragua for shipment to the U.S. When the U.S. Coast Guard cracked down on air shipments from the Bahamas in 1979, the Colombians changed tactics. They dropped cocaine from the planes into international waters, where speedboats waited to pick it up. The cartel made its U.S. wholesalers responsible for drying out and reprocessing the cocaine if water leaked into the sealed packets. As the U.S. tightened patrols along the Florida coast, the cartel began flying via Mexico. About one-third of Colombian cocaine now comes through Mexico. HANDLING DRUG MONEY is proving the cartel's most vulnerable point. Since the trade is conducted entirely in cash, narcotics leaves a trail of $20 bills. Steven Kalish, an American convicted of smuggling marijuana from Colombia, recalls filling entire rooms of a house in Tampa, Florida, with $35 million in currency. ''We could not count all the money,'' he says. Kalish flew the stash to Panama on a private jet and deposited it in secret bank accounts. He says he got help from General Noriega, for a cut. Panama was the perfect laundromat for a while. Paying off Noriega apparently worked wonders. Small planes loaded with dollars could land at Torrijos International Airport and taxi over to the Panamanian air force base, where military guards supervised loading of the cash into armored trucks for the trip to a bank. Although Washington has been singularly unsuccessful in forcing Noriega from power, U.S. economic sanctions did put a crimp in the drug business. Says an investigator for the U.S. Senate: ''Shutting down the Panama banks created a real crisis in drugland.'' Adaptable as ever, though, the cartel is busily finding new cash havens. Paraguay, according to the U.S. State Department, ''appears to have become a significant money-laundering location for narcotics traffickers, due to lax government controls.'' A world apart, in more than geography, is the heroin trade. From Southeast Asia's Golden Triangle, the remote mountainous area where the borders of Burma, Thailand, and Laos converge, comes the potent heroin that hits New York streets as ''China white.'' Burma alone exported an estimated 65 metric tons of heroin last year, ten times what U.S. addicts supposedly consumed by injection. Part of it went to Europe and other parts of Asia. But the disparity could also mean the U.S. has more heroin users than the government estimates. The heroin business is dominated by warlord adventurers in northern Burma, where ten or so insurgent groups have been battling the government in Rangoon for nearly 40 years. The most powerful warlord is Khun Sa, 56, head of the Shan United Army, which is demanding independence from Burma. He insists to Western visitors: ''I'm a revolutionary leader, not a drug trafficker.'' But he devotes most of his attention to refining opium, wholesaling heroin, and taxing rival traffickers who pass through his territory. Says an American official in Thailand: ''There's nothing legitimate about Khun Sa.'' He was originally named Chang Chi-fu, after his ethnic Chinese father, and his formal education ended with elementary school. He formed his private army out of the remnants of a local militia set up by the Burmese government to fight Communist insurgents. He has some 5,000 fighting men plus a 10,000-man support troop. To them he is General Khun Sa. At his headquarters deep in the jungle, beyond the reach of the Burmese government, a sign over the door reads: ''Blood and Guts.'' BECAUSE OF his anti-Communist credentials, his troops have received training from Taiwan for years. Nonetheless, Khun Sa deals with the Burmese Communist Party, a nominally Maoist insurgent group that grows most of the opium in Northern Shan state. A wily negotiator, Khun Sa has repeatedly offered to phase out drugs in exchange for American economic aid. He wants $300 million annually over eight years, a deal Washington has been rejecting since 1977. U.S. officials doubt he would give up his lucrative business even if he got the money. Southeast Asian warlords have transformed a cottage industry of hill tribes, who have smoked black opium for over a century, into a global heroin business. The wholesale product, sealed in plastic bags, sometimes carries brand names such as Double Globe and Red Lion. Under any name, the economics are alluring: | A batch of opium that costs $170 in northern Burma yields $2 million or more in American and European cities after relatively cheap processing and dilution. That giant markup gets spread around. Horse and donkey caravans haul the opium from Burma to a dozen or so refineries in Laos and along the Thai-Burma border. An estimated 80% to 85% of the resulting heroin moves over jungle trails and mountains into Thailand, crossing the border at remote spots far from government inspectors. The rest is smuggled to the U.S. through China and Hong Kong, or via India. Heroin comes to America concealed in various Asian exports, such as furniture or textiles. Some even arrives sewn into the bodies of live goldfish. Couriers, known as mules in the trade, also carry heroin out of Thailand on commercial aircraft, often taking circuitous routes through Japan or Taiwan, since U.S. customs agents are less suspicious of passengers arriving from those relatively drug-free countries. Officially, the Thai government frowns on the trade and has eradicated most of its own opium crop. Unofficially, because of corruption and political ambivalence, the government allows it. A Thai police general with a reputation for honesty says, ''Khun Sa comes in and out of Thailand at will. Someone must be protecting him.'' Thailand's border with world's largest opium-producing country is wide open. At Mai Sai, the northernmost town in Thailand, it's a short walk across a bridge into the Burmese village of Tha Keelek. During the day Thais and Burmese go freely back and forth with no inspections on either side. Thais on bicycles and motorcycles carry soft drinks and other consumer goods into Burma, which sends in handicrafts, jade, and, no doubt, drugs. Thai heroin addicts -- the country admits having 150,000 -- walk into Burma for a fix that costs 40 cents. Interdicting drugs from Mai Sai is a lost battle before it starts. Says police captain Samart Pansri, 44, head of a special antinarcotics force in town: ''We cannot make big busts because we don't have the money to set up buys or pay informants. We're supposed to work under cover, but we have just one old pickup truck that everyone recognizes.'' Even when better-equipped national police come to town, their hands are tied: Under Thai law, traffickers must be caught with drugs. Captain Samart insists that he knows the three main heroin wholesalers in town, but cannot arrest them ''even if we taped them making deals'' because the bosses never touch the drugs. The best police can do is arrest couriers. Making a big heroin purchase in Mai Sai is easy. Word of a potential customer spreads quickly around the dusty little town. A middleman sets up negotiations in an innocent-looking place, such as the bus station. The buyer pays in advance, depositing the money in a joint account with the seller at one of five local bank branches. Only then can the purchaser pick up the merchandise, often at a Burmese village a few hours away by foot. Washing money is an easier task for heroin traffickers than it is for the cocaine kings. Hong Kong, the region's freewheeling financial center, imposes no restrictions on movement of money, and transactions are usually hidden behind a web of bank secrecy laws. Gareth Mulloy, the British colony's commissioner for narcotics, concedes that drug sellers take advantage of Hong Kong's free-for-all economy, but he argues that American officials tend to exaggerate the problem. Under U.S. prodding, Hong Kong is drafting a law allowing seizure of narcotics assets, which Mulloy says will help ''shrug off the taint of drug money.'' Mostly, though, Asian drug money is laundered through a maze of financial transactions among ethnic Chinese, whose extended families run gold shops, trading firms, and foreign exchange dealerships throughout Southeast Asia. The money is almost impossible for law enforcement officials to track because cash itself rarely moves. A heroin dealer can deposit money in a Hong Kong gold shop, for instance, and get a voucher that enables him to pick up that sum in Bangkok. The Hong Kong shop might settle the account within the family by smuggling television sets into Thailand. Says police major general Chavalit Yodmanee, secretary general of Thailand's narcotics control agency: ''In the Chinese criminal world, people deal on trust.'' Johnny Kon, 46, apparently made the mistake of trusting a customer too much. Using half a dozen fake passports, police say, he roamed Asia and South America setting up legitimate businesses, including a watch factory in Paraguay, to cover his drug dealing. Early this year U.S. drug enforcement agents lured Kon to Manhattan, perhaps by posing as big buyers who insisted on meeting the boss. Kon was charged with smuggling 1,000 pounds of heroin into the U.S. over the past three years, a feat that would make him one of the biggest heroin wholesalers in the U.S. He has pleaded not guilty and is awaiting trial in jail in New York. Kon's U.S. dealings exemplify the rise of ethnic Chinese in a drug trade previously dominated by the Mafia. Heroin remains an affirmative action industry in the U.S., where the important dealers include rings of Nigerians, West Indians, Pakistanis, and Israelis. CLEARLY, the global flood of illicit drugs defies conventional law enforcement. Even if the U.S. could somehow wipe out the Golden Triangle, almost as much opium would remain beyond American reach in Iran and Afghanistan. Big narcotics organizations like the Colombian cartels can outspend and outgun small nations. America's war on drugs is long on rhetoric and short on effectiveness. Busting drug dealers, as a Washington analyst puts it, ''is like trying to put General Motors out of business by knocking off used-car dealers.'' Says Bogota Mayor Andres Pastrana: ''If you arrest one trafficker, there are 20 more waiting to go into the business, and 500 more behind them.'' On some international matters that involve individual safety -- terrorist attacks or hijackings, for example -- the U.S. has found success by cooperating with other nations. Michael Lane, deputy commissioner of U.S. Customs, recommends ''a multinational force to deal with narcotics.'' Drug- producing countries, which once blamed the problem mainly on American demand, are discovering their own citizens are also consumers. Colombia, for instance, has about 500,000 regular smokers of cocaine, probably more addicts per capita than the U.S. Burma has at least 300,000 users of heroin and opium. Most countries desperately want help in fighting narcotics. Ultimately, nations will have to band together against this threat to so many of their citizens.

CHART: HEROIN Though Iran, Pakistan, and Afghanistan are also in the business, most heroin reaching the U.S. starts as opium from the poppy fields of the Golden Triangle where Burma, Laos, and Thailand converge. Opium is reduced to an impure morphine base, called pitzu, in crude laboratories nearby. Donkey caravans carry it to more sophisticated labs. Pitzu is refined into morphine, then heroin, and sent to the U.S.

OPIUM $170 10 kg yield 1 kg of pitzu

PITZU $1,000 per kg

MORPHINE $2,400 per kg

HEROIN BASE $3,800 per kg

HEROIN $7,500 per kg (in Bangkok)

WHOLESALE IN THE U.S. $400,000 per kg up to 80% pure

STREET PRICE $2 million per kg 6% pure

CREDIT: NO CREDIT CAPTION: NO CAPTION DESCRIPTION: Price of heroin starting with 10 kg of raw opium, price increase as it is reduced to morphine, heroin base and pure heroin for wholesale in the United States and sale on the street.

CHART: COCAINE Grown mostly in Bolivia and Peru, coca leaves are refined into coca paste at primitive facilities nearby. Paste is flown to secret labs in Colombia, where it is processed first into what is called cocaine base, then into cocaine hydrochloride, the pure white powder that is smuggled into the U.S. Wholesalers dilute it with an inert substance before passing it on to street dealers, who cut it again, sometimes with laundry detergent.

COCA LEAVES $500 500 kg yield 2.5 kg of coca paste

COCA PASTE $750 2.5 kg yield 1 kg of cocaine base

COCAINE BASE $1,500 per kg

COCAINE HYDROCHLORIDE $4,000 per kg

WHOLESALE IN THE U.S.$18,000 per kg 85% to 95% pure

STREET PRICE IN THE U.S.

CRACK $135,000 per kg COCAINE POWDER $200,000 per kg 55% pure

CREDIT: NO CREDIT CAPTION: NO CAPTION DESCRIPTION: Price of cocaine starting with 500 kg of coca leaves, price increase as it is reduced to coca paste, cocaine base and cocaine hydrochloride for wholesale in the United States and street sale as crack and cocaine powder.