Wachovia bank has agreed to pay $160m to settle charges brought by the US justice department and bank regulators that lax controls allowed Mexican drug cartels to launder millions of dollars through the bank using exchange houses that line the US-Mexican border.

The US Attorney’s Office for the Southern District of Florida said on Wednesday Wachovia had agreed to pay $110m to the government, representing proceeds of illegal narcotics sales that were laundered through the bank. Wachovia will also pay a $50m fine to the US Treasury. The government has agreed to defer criminal prosecution for 12 months and, if Wachovia continues to comply with its obligations under the deal, will dismiss the charges.

The settlement comes amid growing alarm over drugs-related bloodshed. Last weekend three people, including two Americans with ties to the US consulate, were gunned down in Ciudad Juárez, a city just south of El Paso, Texas.

Concerned about the potential for money laundering, other large US banks took steps over the past decade to curtail their business with these Mexican exchanges, called casas de cambio. But Wachovia ramped up transactions instead, US authorities said.

According to court documents, Wachovia provided a variety of services to these exchanges, which primarily exist so that US immigrants can funnel money back to relatives in Latin America, including wire transfers, bulk cash, pouch and remote capture deposits.

Because Wachovia did not have a rigorous system in place to detect suspicious transactions, some $373bn in wire transfers were made and more than $4bn in bulk cash was transported from the exchanges in Mexico to Wachovia accounts from 2004 through 2007.

Some of that money was used by drug kingpins to purchase aircraft for their trafficking operations. The US attorney’s office said more than 20,000 kilogrammes of cocaine was ultimately seized from those aircraft.

Wachovia also maintained relationships with third-party telemarketing processors that deposited more than $418m using remotely-created cheques. More than 40 per cent of those cheques were returned as unauthorised, yet Wachovia failed to report the suspicious transactions.

“Wachovia’s blatant disregard for our banking laws gave international cocaine cartels a virtual carte blanche to finance their operations,” Jeffrey Sloman, US attorney, said in a statement.

Wachovia was bought by San Francisco-based Wells Fargo in 2008 after a disastrous expansion into mortgage lending. Wells Fargo said it was aware of the money-laundering investigation prior to the acquisition and had adequately reserved for the settlement. By early 2008, Wachovia had stopped doing business with these exchanges, Wells Fargo said on Wednesday.