The Justice Department said Wachovia, which was purchased by Wells Fargo & Co., had "admitted failure to identify, detect, and report suspicious transactions in third-party payment processor accounts."
About $420 billion in transfers went through the bank without adequate money-laundering detection systems in place, The Wall Street Journal reported.
In a statement, Wachovia said it had spent $42 million in upgrades to its security system to "strengthen its ability to guard against unlawful use of its system by wrongdoers."
Prosecutors said some of the billions of dollars transferred from Mexican money exchange houses was used to buy planes for drug traffickers.
Federal attorney Jeffrey Sloman said, "Wachovia's blatant disregard for our banking laws gave international cocaine cartels a virtual carte blanche to finance their operations by laundering at least $110 million in drug proceeds. Corporate citizens, no matter how big or powerful, must be held accountable for their actions."
Wachovia agreed to pay $110 million to the U.S. Justice Department and $50 million to the U.S. Treasury, the Journal said.