In 1975 New York, after having served five years of a 30-year prison sentence, career criminal Carlito Brigante is freed on a legal technicality exploited by his close friend and lawyer, Dave Kleinfeld. Carlito vows to end his unlawful activities but is persuaded to accompany his young cousin Guajiro to a drug deal held at a bar. Guajiro’s suppliers betray and kill him, forcing Carlito to shoot his way out. Later, Carlito takes Guajiro’s $30,000 from the botched deal and uses it to buy into a nightclub owned by a gambling addict named Saso, intending to save $75,000 to retire to the Caribbean.
As nightclub co-owner, Carlito declines several offers for a business partnership with a hot-headed young gangster from the Bronx named Benny Blanco. Carlito also rekindles his romance with his former girlfriend Gail, a ballet dancer moonlighting as a stripper. Kleinfeld develops a love interest with Benny’s girlfriend, Steffie, a waitress at the club. Benny’s frustration with Carlito’s constant rejections boils over and he confronts Carlito one night at his table. Carlito publicly humiliates Benny, who reacts by manhandling Steffie. Fueled by his now-extensive use of alcohol and cocaine, Kleinfeld brazenly pulls out a gun and threatens to kill Benny, but Carlito intervenes. Despite being personally threatened by Benny himself, Carlito lets him go unharmed; a decision which alienates Carlito’s bodyguard Pachanga.
Kleinfeld, who stole $1 million in payoff money from his client, Mafia boss Anthony Taglialucci, is coerced into providing his yacht to help Taglialucci break out of the Rikers Island prison barge. Kleinfeld begs for Carlito’s assistance in the prison break, and Carlito reluctantly agrees. That night, Carlito, Kleinfeld, and Taglialucci’s son, Frankie, sail to a floating buoy outside of the barge where Taglialucci is waiting. As they pull Taglialucci aboard, Kleinfeld kills him and Frankie and dumps their bodies in the East River.