This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 03 BRASILIA 000458 
 
SIPDIS 
 
SENSITIVE 
 
DEPT FOR WHA/BSC 
 
E.O. 12958: N/A 
TAGS: PGOV PREL KCRM ECON BR
SUBJECT: SCANDAL CONTINUES TO RATTLE BRAZILIAN GOVERNMENT 
 
REF: BRASILIA 0402 
 
¶1. (SBU) SUMMARY.  The Waldomiro Diniz scandal that broke in 
Brazil on February 13 (reftel) continues to reverberate, and 
the end is not in sight.  Diniz, a deputy to Lula's Chief of 
Staff, Jose Dirceu, was fired when it was revealed that, as 
head of the Rio de Janeiro lottery authority in 2002, he 
solicited bribes from a numbers operator and reportedly 
funneled that money into several Workers' Party (PT) 
election 
campaigns.  With Brazil returning to work on March 1 from 
the 
Carnaval holidays, the story remains front-page news and has 
spun off in different directions.  VEJA magazine ran a cover 
story alleging further PT campaign improprieties while 
other 
media reported that Diniz continued his influence peddling 
even after joining the Lula administration.  In that 
instance, the press implies that in early 2003, Diniz 
intervened to benefit GTech, a US firm that provides 
computerized lottery services.  In a February 20 statement, 
GTech stated that two of its officials met with Diniz and 
others in the new administration in early 2003, and that all 
such talks were transparent and professional. 
 
¶2. (SBU)  On the political front, President Lula issued a 
decree banning bingo games and slot machines throughout 
Brazil.  Congress must now vote on this measure, which is 
controversial because it put hundreds of thousands of gaming 
employees out of work.  This week, Congress will also decide 
whether to establish a congressional inquiry (CPI) into the 
Diniz scandal, or more likely, into the gaming sector in 
general.  While Congress's normal legislative agenda may be 
slowed by the fallout from the Diniz scandal, a political 
reform bill that would, inter alia, reform campaign finance 
rules, is on a fast track.  There is no hard proof that Jose 
Dirceu or other PT leaders filled party slush funds with 
money squeezed from legal and illegal gambling operators, 
but 
there are certainly a lot of unanswered questions.  While 
Lula's personal approval numbers remain high, his 
government, 
his party, and his Chief of Staff are taking a beating.  END 
SUMMARY. 
 
MORE CHARGES OF ILLEGAL PT CAMPAIGN FINANCING 
--------------------------------------------- 
¶3. (SBU)  The fallout from the Waldomiro Diniz scandal that 
broke on February 13 is far from over.  In its 2/25 issue, 
VEJA magazine ran an article claiming that the alleged 
illegal campaign financing by the Workers' Party (PT) in 
2002 
was not isolated to Diniz and the money he claims to have 
solicited for gubernatorial races in Rio and Brasilia.  The 
article reports that Jose Vicente Brizola, who in 2002 was 
Director of the Rio Grande do Sul state lottery authority, 
was pressured by that state's PT Senator Emilia Fernandes to 
solicit up to R$900,000 (about $300,000) from bingo 
operators 
for her failed reelection bid.  (Fernandes was Secretary for 
Women's Affairs in Lula's government until losing her job in 
the January 2004 cabinet reshuffle.)  If true, the story 
would be another black eye for the PT.  On the other hand, 
Brizola, who provided the basis for VEJA's report, is the 
son 
of former Rio governor Leonel Brizola, whose PDT party is a 
shrill opponent of Lula's government, and PT leaders respond 
that he is merely seeking revenge for not being offered a 
job 
in the administration. 
 
¶4. (SBU) Also last week, Luiz Eduardo Soares, who in 2003 
was 
fired as head of the Federal Police for hiring his wife and 
ex-wife as consultants, announced that while working in the 
Rio state government in 2002, he learned of Waldomiro 
Diniz's 
illegal fundraising for the PT, but when he brought it to 
the 
attention of party leaders, nothing was done and Diniz was 
left in place as head of the Rio lottery authority. 
 
DINIZ'S ONGOING CORRUPTION -- US FIRM NAMED 
------------------------------------------- 
¶5. (SBU) Another set of allegations has sprung up suggesting 
that Diniz's corrupt activities did not end when he joined 
President Lula's staff.  The press is reporting that in 
2003, 
while serving as a senior advisor to Lula's Chief of Staff, 
Diniz met with officials of US firm GTech, which holds the 
contract to operate Brazil's 9,000 computerized lottery 
parlors.  Press reports indicate that Diniz met with numbers 
racketeer Carlinhos Cachoeira ("Charlie Waterfall") not only 
in the infamous 2002 videotapes (ref A), but also in early 
2003, when they  met with GTech officials to discuss a 
25-month extension of the firm's contract.  If Diniz's 
actions were improper, it would belie Lula's statements that 
Diniz's improprieties occurred before he joined the 
administration --it would put his corruption inside Lula's 
Planalto Palace.  In a February 20 statement, GTech stated 
that its officials met with Diniz and other officials of the 
new administration in early 2003, and that all such talks 
were transparent and professional. 
 
GTECH - WORLDWIDE LOTTERY OPERATOR 
---------------------------------- 
¶6. (SBU) In 1997, Brazilian firm Racimec, owned by Carlinhos 
Cachoeira --the lottery operator who made the videotapes of 
himself negotiating bribes with Waldomiro Diniz-- won a 
five-year contract to operate the federal lottery.  Racimec 
was then bought by GTech, a Rhode Island company with 2003 
revenues of $979 million that operates lotteries around the 
world.  This contract was extended through April 2003, and 
then re-extended for 25 more months.  The GoB is GTech's 
single largest customer, accounting for 10% of the firm's 
revenues.  In 2002, GTech filed a still-unresolved lawsuit 
against the GoB to prevent it from segmenting the lottery 
contract into four separate operations and thus reducing its 
need for GTech's services.  The stakes are high, lottery 
proceeds are about R$5 billion (about $1.7 billion) annually 
and, of this, about one-third is earmarked for GoB social 
programs. 
 
CONGRESS TO DECIDE ON DECREE ON BINGO'S STATUS 
--------------------------------------------- - 
¶7. (SBU) Aside from the direct legal consequences of the 
scandal, there are political ramifications on at least three 
tracks:  the legal status of national bingo games, the 
possibility of a congressional inquiry (CPI), and efforts to 
reform campaign finance laws.  The first of these, the bingo 
games, was the subject of the President's first direct 
response to the scandal.  On February 20, seeking to exert 
control over the loosely-regulated bingo games, Lula issued 
a 
presidential decree (MP 168) banning all bingo and slot 
machines (but not lotteries) throughout Brazil.  Lula's 
office announced that the decree would remain in force until 
"a definitive solution is found".  In fact, to remain in 
force, the decree must be voted into law by Congress within 
60 days.  In its first week, MP 168 survived six legal 
challenges filed by bingo operators, and the wave of 
lawsuits 
is not likely to abate as the police continue seizure 
operations that have already netted 1,200 machines. 
 
¶8. (SBU) MP 168 is tricky business for Congress.  While the 
Diniz scandal has heightened public suspicions of the gaming 
sector, it is estimated that between 120,000 and 320,000 
gaming employees have been put out of work by the decree, 
and 
they have begun marching in the streets (one placard in 
Brasilia read, "Jose Dirceu, Your Job Cost Me Mine!").  This 
is tough medicine for an administration committed to 
reducing 
a rising tide of unemployment.  The GoB concern is that 
bingo 
parlors are used to launder money, but a PT Deputy (Gilmar 
Machado) already had administration support for a bill that 
would legalize and regulate the bingo games.  Further, there 
is a lingering suspicion that the Diniz scandal was 
orchestrated in part by numbers racketeers hoping to create 
pressure for greater legalization of gambling.  With so many 
competing inerests, it seems likely that the administration 
will push to get MP 168 ratified by Congress in the coming 
weeks, at least in part to reinforce Lula's political 
authority and to demonstrate that the administration and PT 
are moving forcefully against gambling.  That might then 
open 
the door for debate on a follow-on bill, such as Machado's, 
to re-legalize some sort of federal bingo. 
 
CONGRESSIONAL INQUIRY STILL IN THE AIR 
-------------------------------------- 
¶9. (SBU) In the days after the scandal broke, party leaders 
in Congress argued over whether to open a congressional 
inquiry (CPI).  The PT leadership and administration oppose 
a 
CPI in part to avoid more public shaming at the hands of 
opposition politicians, but also because the GoB wants to 
refocus attention on its legislative agenda.  There were 
indications before Carnaval that intense lobbying by the PT 
and its coalition partners had rallied enough opposition 
votes to kill the CPI, but a threat by a PT Senator to 
investigate illegal campaign financing by other parties 
infuriated the opposition and left the issue to be settled 
this week.  One possible compromise is to open a CPI to look 
into the gaming sector in general, rather than any specific 
case.  The Diniz case is being investigated by the Federal 
Police and the Federal Prosecutor's office (both of whom 
will 
take Diniz's deposition this week), and the Rio state 
assembly. 
 
CAMPAIGN FINANCE REFORM GETS A BOOST 
------------------------------------ 
¶10. (SBU) While some of the GoB's legislative agenda is 
likely to be slowed by the Diniz scandal, a political reform 
bill has received a shot in the arm.  Political reform 
(meaning rules changes for parties, elections, and campaign 
financing) was on the back burner because in this, an 
election year, it seemed unlikely to pass.  Now, a bill that 
has been a year in the drafting by an ad hoc committee in 
the 
Chamber has moved forward to the Justice Committee and put 
in 
"urgent procedure", to speed its way to the floor.  However, 
the bill is controversial and will certainly undergo changes 
before passing into law. 
 
COMMENT - DIRCEU AND PT ARE DAMAGED 
----------------------------------- 
¶11. (SBU) There is no proof that Chief of Staff Jose Dirceu 
or other Workers' Party leaders filled party slush funds 
with 
money squeezed from legal and illegal gaming operators, but 
there are certainly a lot of unanswered questions.  Dirceu 
has reportedly offered his resignation to Lula more than 
once 
since the scandal broke, but was rebuffed each time. 
Polling 
numbers not yet released publicly reportedly show Lula's 
personal approval numbers remain high, but that his 
government, his party, and his Chief of Staff are all 
suffering significantly in the public eye. 
 
¶12. (SBU)  It is the nature of Brazilian political scandals 
that leaks and revelations continue to emerge, but that 
weeks 
or months later, the whole thing goes away and only 
lower-level officials ever suffer legal sanction.  That 
pattern may hold true in this case, but Dirceu, who only 
recently was called the "Prime Minister" and the "All 
Powerful" is clearly diminished, and the PT has lost much of 
its hard-earned reputation for probity.  The separate case 
of 
Celso Daniel, the PT mayor murdered in 2002, and the 
reluctance by the party leadership to push a thorough 
investigation, also weighs against the PT.  If hard evidence 
of large-scale campaign finance abuses is found and linked 
to 
the highest levels of the PT (Dirceu was party president 
during the 2002 elections), the scandal could drag on for 
months.  The opposition parties, with their eyes on the 
October 2004 municipal elections, will also keep stirring 
the 
pot.  Damage has been done, but it is too early to say how 
much worse it will get. 
VIRDEN