A group of state attorneys general have been working on a settlement with the nation’s biggest banks, under which the banks would devote a certain amount of money to foreclosure relief, in exchange for avoiding litigation over their myriad abuses that arose during the foreclosure fraud scandal (including the use of “robo-signers.”)

However, the settlement is on shaky ground after federal regulators broke with the AG’s and cut their own (weak) deal with the banks, and several Republican AG’s publicly questioned whether the banks should have to engage in any foreclosure prevention efforts at all, despite their mortgage servicing abuses.

Previously, the Republican attorneys general of Virginia, Texas, Florida, South Carolina, Oklahoma, Nebraska, and Alabama sided with the banks, with radical Republican Attorney General Ken Cuccinelli (VA) deriding foreclosure prevention as “welfare.” Now, an eighth Republican AG, Georgia’s Sam Olens, has also taken the banks’ position:

Georgia Attorney General Sam Olens said he has “significant concerns” about a proposal to reduce loan balances for some homeowners as part of a settlement of a nationwide foreclosure probe, joining at least seven other states that have criticized such a plan…“You’re declaring in advance who the winners and losers are,” Olens said. “I’m a little concerned that this process disengages the normal market forces.”

In reality, the proposed settlement lets the banks off too easy, as the loan reduction amount that has been floated (about $20 billion) wouldn’t be enough to seriously alleviate pain in the housing market. And any settlement that doesn’t involve banks reducing loans amounts to letting the banks off the hook for their prior abuses and counting on vague promises that they’ll avoid such abuse in the future.

A recent report from the International Monetary Fund showed that the effect of more aggressive loan reductions on bank balance sheets “is likely to be limited,” and several of the banks involved in the settlement discussions are back to making sky-high profits. But instead of pushing for help for homeowners, Republican AG’s are siding with the banks, advocating that they receive a slap on the wrist for their flagrant violations of the mortgage servicing process.

One year ago, Bloomberg News reported that Wachovia Corp. — one of the biggest banks in the U.S. — “had made a habit of helping move money for Mexican drug smugglers.” Wells Fargo & Co., which acquired Wachovia a couple of years ago, admitted in 2010 that it “failed to monitor and report suspected money laundering by narcotics traffickers — including the cash used to buy four planes that shipped a total of 22 tons of cocaine.” The case was later settled for about $110 million and Wachovia paid another $50 million in fines for failing to properly monitor the transfer of $378.4 billion from currency exchange houses in Mexico. The charges were dismissed.

It turns out, Wachovia had been receiving warnings for years from a senior anti-money laundering officer in its own London office, Martin Woods. Yet, Woods’ words of caution weren’t only met with indifference. Wachovia reportedly retaliated against Woods and essentially drove him out of his job. The Observer recently reported:

Rather than launch an internal investigation into Woods’s alerts over Mexico, Woods claims Wachovia hung its own money-laundering expert out to dry. [...] On 16 June Woods was told by Wachovia’s head of compliance that his latest SAR [suspicious activity report] need not have been filed, that he had no legal requirement to investigate an overseas case and no right of access to documents held overseas from Britain, even if they were held by Wachovia. [...]

“Wachovia had my résumé, they knew who I was,” says Woods. “But they did not want to know – their attitude was, ‘Why are you doing this?’ They should have been on my side, because they were compliance people, not commercial people. But really they were commercial people all along. We’re talking about hundreds of millions of dollars. This is the biggest money-laundering scandal of our time.

At some point, Woods received a letter from the bank’s compliance managing director which accused him of failing “to perform at an acceptable standard.” In 2008, Woods sued Wachovia for bullying and detrimental treatment of a whistleblower. Wachovia settled that case too and agreed to pay an undisclosed amount under the condition that Woods leave the bank.

To this day, not a single bank has been indicted for violating the anti-money-laundering Bank Secrecy Act. Meanwhile, foreign government agencies in the United Kingdom, Mexico, and Colombia, along with the United Nations Office on Drugs and Crime have all reportedly documented money laundering by the banking industry. According to Al Día, financial institutions such as Bank of America, American Express, Western Union, the Mexican offices of Citigroup, the European HSBC and Banco Santander have all “helped move money for Mexican cartels.”

Meanwhile, the drug war has claimed the lives of at least 35,000 people since 2006 in Mexico alone. Senior U.S. commanders told the Senate Armed Services Committee last week that Mexico and Central America make up one of the most dangerous regions in the world, rivaling the conflicts in Iraq and Afghanistan. And as the U.S. continues to pour millions of dollars into fighting the drug war in Mexico, U.S. drug users contribute approximately $40 billion a year to Latin American cartels — money which apparently often ends up passing through U.S. banks.