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 003151 
 
SIPDIS 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: PGOV KCRM PREL BR
SUBJECT: BRAZIL'S BANESTADO INVESTIGATION ENDS IN A FIASCO 
 
REF: A. 03 BRASILIA 1846 
 
     ¶B. 03 BRASILIA 2365 
     ¶C. 03 BRASILIA 3292 
 
¶1. (SBU) SUMMARY.  A year and a half after its promising 
start, the Brazilian Congress's "Banestado" inquiry --an 
investigation into a vast money-laundering scheme involving 
hundreds of Brazilian politicians, criminals, and 
businesspersons-- has come to an inglorious end.  The 
investigative committee never looked at all of the voluminous 
documents in its possession, and in recent months, 
politicized leaks from the committee's files tarred public 
figures and damaged the reputations of the committee and its 
leaders.  On December 14 the committee finally issued its 
final report: a carefully-worded document that drew charges 
that it was protecting high-level politicians.  It then 
issued a counter-report, equally politicized, a week later. 
Whether or not either report is ever formally approved by 
Congress, the long life and pathetic death of the Banestado 
inquiry represent not only a missed opportunity to conduct a 
serious investigation into a huge corruption scheme, but they 
also undermine the credibility of all other congressional 
inquiries present and future.  The Brazilian Federal Police 
and Public Prosecutor will continue with their own 
investigations.  END SUMMARY. 
 
BANESTADO - BILLIONS LAUNDERED 
------------------------------ 
¶2. (SBU) "Banestado" was the name of the State Bank of Parana 
in southern Brazil which, during the 1990s, was at the center 
of a massive scheme by which drug lords, business owners, and 
political parties laundered illicit cash through phony bank 
accounts set up by money-changers in the Foz de Iguacu area. 
Much of the money was transferred to the Banestado branch and 
other financial houses in New York --including the notorious 
Beacon Hill-- and then transferred again to tax haven 
countries.  Investigators believe as much as US$30 billion 
may have been laundered by the complicated scheme.  In 2000, 
Banestado was privatized and sold to Itau Bank, and the 
pre-sale examination of its records tipped investigators to 
the money laundering. 
 
HIGH-LEVEL SUSPECTS 
------------------- 
¶3. (SBU) Well-known figures whose names have come up during 
the Banestado inquiry include: former Sao Paulo Governor and 
current Federal Deputy Luiz Antonio Fleury; former PSDB party 
Treasurer Ricardo Sergio, who may have funded the party's 
campaigns with illegal cash; leading PFL Senator Jorge 
Bornhausen whose family was linked to one of the suspect 
banks; former Sao Paulo Mayor Paulo Maluf, whose massive 
embezzlement schemes on city contracts while he was in office 
are still being investigated; former Parana Governor Jaime 
Lerner; former Sao Paulo Mayor Celso Pitta; current Central 
Bank President Henrique Meirelles; and former Bank of Brazil 
President Cassio Casseb.  Some of these individuals may not 
have been involved in wrongdoing, but only had their names 
leaked for partisan purposes. 
 
CONGRESS RELUCTANTLY OPENS AN INQUIRY 
------------------------------------- 
¶4. (SBU) With the political stakes so high, and with little 
confidence in the Federal Police investigation, Congress 
reluctantly set up a joint "Parliamentary Inquiry Committee" 
(CPI) in June 2003, chaired by Senator Antero Paes Barros (of 
the opposition PSDB) with Deputy Jose Mentor (from President 
Lula's PT) as rapporteur.  A CPI can call witnesses and issue 
subpoenas, but cannot issue indictments.  A CPI's final 
product is a written report that the Federal Police and 
Prosecutor can use in their investigations.  Several of the 
CPI's members, including Sen. Barros and Dep. Mentor, visited 
New York and Washington to meet with US law enforcement 
authorities in 2003 accompanied by embassy Legatt and 
returned with documents related to the case. 
 
¶5. (SBU) The term of the Banestado CPI was repeatedly 
extended --it was due to conclude its investigation in 
December 2003, but only issued its final report in December 
¶2004.  In the meantime, it called many mid-level banking and 
technical witnesses to testify but never called any of the 
high-profile politicians.  The CPI subpoenaed some 1,400 
confidential bank and telephone records of individuals and 
 
SIPDIS 
businesses, but then was not able to sort through all the 
cartons of sensitive documents it collected (the material 
reportedly included details on 1.6 million financial 
transactions). 
THE CPI RUNS OFF THE RAILS 
-------------------------- 
¶6. (SBU) By mid-2004, the CPI had become polarized along 
party lines.  The situation was worsened by party squabbling 
in the runup to the October 2004 municipal elections.  The 
CPI's two leading officials (Sen. Barros and Dep. Mentor) are 
from the PT and PSDB --the same two parties that went 
head-to-head in many of the key races in October.  Leaks of 
sensitive information from the CPI's files, implicating 
well-known politicians, began showing up in the newspapers in 
June and July.  For example, one leak raised suspicions that 
Central Bank President Henrique Meirelles used the Banestado 
network to hide undeclared assets, leading the administration 
to push through a law giving him the legal protections of a 
cabinet official:  criminal charges against him will be heard 
only by the Supreme Court and not a common court.  The leaks 
then led to counter-charges that some committee staffers may 
have been charging extortion fees to destroy incriminating 
files.  Next, the fact that the CPI's rapporteur, Dep. 
Mentor, subpoenaed many more bank and phone records than he 
could ever review raised suspicions that he was on a fishing 
expedition against PSDB-associated officials.  Finally, the 
committee simply lacked good sense and failed to show due 
diligence in the course of its investigations, for example 
not calling important witnesses while focusing on procedural 
details. 
 
DEPRESSING FINAL REPORT 
----------------------- 
¶7. (CPI) On December 14, the rapporteur, Dep. Mentor, issued 
his 1,500 page report, which requests prosecutors to indict 
91 individuals and proposes amnesty for anyone else if they 
repatriate their money to Brazil.  Only two of the 91 names 
are well-known:  former-Sao Paulo Mayor Celso Pitta and 
former-Central Bank President (under President Cardoso) 
Gustavo Franco.  Opposition parties quickly complained that 
the report was one-sided.  For example, it cites Franco for 
entirely official acts when he implemented mechanisms to 
regulate currency flows in the 1990s.  Meanwhile, the report 
fails to name Paulo Maluf --widely believed to have embezzled 
hundreds of millions of dollars during his term as Sao Paulo 
mayor in the 1990s.  Opposition leaders suggested that 
Mentor, a close ally of Sao Paulo Mayor Marta Suplicy, kept 
Maluf's name out of the report in return for Maluf supporting 
Suplicy's reelection bid in October 2004.  Suplicy lost 
anyway. 
 
¶8. (SBU) In response, Dep. Mentor hinted that the CPI's 
Chairman, Sen. Barros, failed to question a Brazilian crime 
boss now jailed in Uruguay, who allegedly bankrolled Barros's 
last campaign.  Mentor also pointed out that all of the CPI's 
files are being turned over to the Federal Police and Public 
Prosecutor's Office, whom he urges to conduct thorough 
investigations.  The craziness did not stop there.  A week 
after Mentor issued his report, Sen. Barros issued his own 
counter-report in which he calls for the indictment of both 
Maluf and current Central Bank President Meirelles.  The 
committee is supposed to vote approval of the final report to 
make it official.  With competing reports, a bitterly divided 
committee, and Congress about to go into recess until 
February, it seems unlikely that either report will be 
approved this year, if ever. 
 
COMMENT - ENOUGH BLAME TO GO AROUND 
----------------------------------- 
¶9. (SBU)  Congress typically establishes CPI inquiries in 
high-profile cases, where there is a concern that law 
enforcement authorities, if they were acting without the 
political cover of a CPI, could be subject to political 
pressures.  Not surprisingly, many CPIs turn into 
grandstanding opportunities for congress, but sometimes they 
succeed in focusing public attention on important issues. 
The Banestado CPI reached a new nadir because it made no 
significant findings in its investigations and it undermined 
rather than supported the ongoing Federal Police and 
Prosecutor's investigations.  When it turned into a partisan 
food fight (with Sen. Barros calling Dep. Mentor a "Joseph 
Goebbels follower, who thinks that if you tell a lie one 
hundred times that it becomes the truth"), it sullied the 
image of all CPIs, likely leaving the public far less willing 
than ever to have confidence in Congress's ability to carry 
out a thorough and transparent inquiry.  There is enough 
blame to go around in the Banestado case.  DANILOVICH