At the meeting of the bosses after Sonny's murder Puzo writes that "Barzini was in narcotics". He wasn't old-fashioned. It was his goal to supplant Corleone as top dog.

So presumably everyone knew that Barzini supported drug dealing. And Vito should have known before then that Tattaglia and Sollozzo were backed by Barzini. But Vito was indeed slipping. He was wrong (assuming he even believed it) about the difficulty of corrupting politicians, judges, and law enforcement to take money to protect narcotics dealers and importers. And even given his personal distaste for narcotics he was not in a field where he could let personal feelings interfere with business decisions.