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C O N F I D E N T I A L SECTION 01 OF 04 BRASILIA 002082 
 
SIPDIS 
 
TREASURY FOR PARODI, STATE PASS TO USTR 
 
E.O. 12958: DECL: 08/05/2015 
TAGS: PGOV PREL ECON BR
SUBJECT: BRAZIL: CORRUPTION SCANDAL UPDATE, WEEK OF 1-5 
AUGUST 2005: FORMER CHIEF OF STAFF DIRCEU TESTIFIES BEFORE 
ETHICS COMMITTEE 
 
REF: A. BRASILIA 1979 
     ¶B. BRASILIA 1874 
     ¶C. BRASILIA 1973 
     ¶D. BRASILIA 1631 
     ¶E. BRASILIA 2025 
     ¶F. BRASILIA 1602 
 
Classified By: POLITICAL COUNSELOR DENNIS HEARNE. REASONS: 
1.4(B)(D). 
 
¶1. (SBU) SUMMARY.  Hearings on the corruption scandals (refs) 
in the Brazilian government continued this week, as 
Congressman Jose Dirceu, President Lula da Silva's former 
Chief of Staff and closest advisor, testified on 2 August 
before the Chamber's Ethics Committee.  Dirceu categorically 
denied any awareness of the vote-buying and illicit 
campaign-funding schemes mounted by PT party leaders with 
private sector money man Marcos Valerio (refs).  He also 
refuted PTB Congressman Roberto Jefferson's new allegations 
that he sought funds from telecommunications company Portugal 
Telecom for the Workers' Party (PT) and the Brazilian Labor 
Party (PTB) when he was Chief of Staff.  In other 
developments, Congressman Valdemar Costa Neto, president of 
the Liberal Party (PL), resigned from his congressional seat, 
after admitting to illegal funds from the PT -- the first of 
several possible resignations by implicated congressmen on 
the horizon.  Simone Vasconcelos, Valerio's financial 
director, testified to both judicial authorities and the 
Postal Service Congressional Inquiry Committee (CPI) that she 
had authorized the transfers in Brazilian reals valuing more 
than USD $27 million to congressmen and staffers, per her 
employer's instructions.  Valerio, who is reportedly seeking 
a deal with prosecutors, also testified to authorities, 
further implicating Dirceu in the corruption scandal.  On 3 
August Roberto Jefferson told congressional questioners in 
the separate, newly-formed CPI on the monthly bribery 
allegations that he believed President Lula da Silva was not 
aware of the bribery activity.  END SUMMARY. 
 
DIRCEU'S TESTIMONY: "I WILL FIGHT UNTIL THE END" 
--------------------------------------------- --- 
 
¶2. (U) On August 2, Brazilian congressman and former Chief of 
Staff Jose Dirceu (PT) delivered his long-awaited testimony 
before the Chamber's Ethics Committee, as a witness in the 
process filed against Congressman Roberto Jefferson (PTB) for 
lying and violating congressional decorum (ref F). (Note: Per 
refs, Jefferson's sensational allegations about high-level 
GOB and PT involvement in illicit money transactions and 
bribes for votes among congressmen triggered the current 
scandals. End note.)  The eight-hour testimony was covered 
live by major TV stations, and there were rumors that Dirceu 
might resign before the session or direct fire against the 
president.  Instead,  Dirceu emphatically and categorically 
denied Jefferson's allegations that he was the master mind 
behind the alleged PT party's bribes-for-votes scheme:  "I 
didn't organize (it), I am not the boss of a scheme and I 
would never allow the buying of parliamentary votes."  Dirceu 
also stated that he was unaware of loans made by advertising 
executive Marcos Valerio to the PT and underscored that he 
would not resign: "I wouldn't be able to walk on the streets 
if, to safeguard my political and electoral rights, I had to 
resign.  I will fight until the end." 
 
¶3. (U) The highlight of the session was Dirceu's 
confrontation with Jefferson, who restated his claims against 
the former Chief of Staff, but did not produce any hard 
evidence.  Talking at times directly into TV cameras, 
experienced criminal lawyer Jefferson challenged, in ironic 
and skeptical tones, the very notion that Dirceu, the closest 
advisor to Lula and the most influential figure in the PT, 
could possibly have been unaware of the illicit multi-million 
dollar pay off system run by the PT's former treasurer in 
conjunction with money man Marcos Valerio.  He also launched 
news charges, accusing Dirceu of running another illegal 
financing scheme.  According to Jefferson, Dirceu arranged a 
meeting between high-level executives of telecommunications 
company Portugal Telecom and President Lula, followed by a 
"delegation" trip to Portugal to negotiate illegal funds to 
pay back PT and PTB debts.  Reportedly, the delegation was 
composed of Marcos Valerio, allegedly representing the PT, 
and the former PTB treasurer Emerson Palmieri.  Portugal 
Telecom confirmed the meeting with Valerio, but denied that 
the subject discussed was party financing.  Dirceu continued 
to deny all accusations and   the Presidency released a 
statement refuting Jefferson's statements. 
 
¶4. (U) In a parallel motion in the Chamber's Ethics 
Committee, Jefferson's PTB party filed a complaint against 
Dirceu and Liberal Party (PL) representatives Sandro Mabel 
and Valdemar Costa Neto for violating congressional decorum, 
due to their alleged involvement with the vote-buying scheme. 
  Investigations initiated against the cited congressmen 
could lead to impeachment.  (Note: The complaint against 
Costa Neto was nullified when he renounced his congressional 
seat paragraph 5 below. End note.)  The complaint against 
Dirceu also may be rejected, given that he was a member of 
the Executive branch, not a congressman, when the alleged 
abuses occurred. 
 
THE FIRST CONGRESSIONAL RESIGNATION, MORE LIKELY TO COME 
--------------------------------------------- ------------- 
 
¶5. (U) On 2 August, Congressman Valdemar Costa Neto, 
president of the right-wing Liberal Party (PL), became the 
first congressman to resign from his seat amid corruption 
allegations.  The Postal Service CPI received documents 
proving that PL treasurer, Jacinto Lamas, withdrew more than 
$4 million from Valerio's accounts.  In his resignation 
speech, Neto acknowledged that he had been "misled" into 
accepting illegal payoffs from the PT, but that the money was 
used to pay political campaign debts, not to buy votes from 
his PL colleagues in Congress.  By resigning, Costa Neto 
avoided being investigated by the Ethics Committee and losing 
his political rights to stand for re-election (Note: This is 
a venerable tactic among Brazilian politicians charged with 
improprieties. End note.) 
 
¶6. (U) Five other congressmen from the Workers' Party (PT) 
who allegedly received money from Valerio's accounts may 
announce their resignation within the next days: former 
Speaker of the House Joao Paulo Cunha, Professor Luizinho, 
Paulo Rocha, Josias Gomes, and Joao Magno. PT president Tarso 
Genro stated this week that if PT members resign in order to 
keep political rights and run in the 2006 national election, 
they will be expelled from the party.  In another 
development, the PT-connected president of Brazil's National 
Mint stepped down on August 4, after his name appeared in 
Valerio's list of cash withdrawers.  He allegedly received 
illegal money while managing Jorge Bittar's (PT) 2004 
campaign for Rio de Janeiro's city hall. 
VALERIO'S CASH HANDLER TESTIFIES 
-------------------------------- 
 
¶7. (U) Simone Vasconcelos, financial director at the SMPB, 
one of Marcos Valerio's companies, testified before the 
Federal Police and Postal Service CPI during the week. 
Vasconcelos admitted to transferring large sums of money from 
Valerio's accounts, per his instructions, to congressmen and 
their staffers.  Vasconcelos presented lists of a total of 43 
names of persons who withdrew money -- in Brazilian reals 
worth more than USD $27 million -- from Valerio's accounts. 
Vasconcellos also indicated Valerio paid a law firm that 
defended the PT during investigations of the 2002 murder of 
Celso Daniel, the PT mayor of Santo Andre, Sao Paulo. (Note: 
During his testimony before the Ethics Committee, Congressman 
Jefferson linked the January 2002 murder of Daniel with a 
corruption scheme in Santo Andre to funnel money to PT 
campaign coffers.  Jefferson alleged Daniel was collecting 
evidence to denounce the scheme.  Prosecutors in Sao Paulo 
continue to investigate the possibility that Daniel was 
murdered by hired gunmen after being tortured and forced to 
hand over a dossier implicating those involved, possibly 
including PT officials. End note.) 
 
JEFFERSON AND VALERIO EXONERATE LULA 
------------------------------------ 
 
¶8. (U) On 4 August Deputado Roberto Jefferson testified 
before the newly-established CPI for investigation into the 
allegations of monthly bribe payments ("mensalao") by the PT 
to allied congressmen for votes. (Note: Per refs, this CPI 
will continue the work already underway in Postal CPI, but 
with more focus on the bribery issues.  Some critics have 
opined that the GOB has pushed for a multiplicity of CPIs, to 
defuse the impact of the congress's investigations. End 
note.)  Jefferson was the first witness before the new CPI 
and reiterated charges he has made in the Postal CPI, ethics 
committee hearings and media, but with a striking difference: 
for the first time, Jefferson said that he did not believe 
President Lula da Silva had personal awareness of the 
irregular financial activities of PT leaders and Marcos 
Valerio.  In earlier accounts, Jefferson had mentioned he 
personally had noted the bribery activity to a surprised Lula 
earlier this year, but Jefferson now seems intent on 
exonerating the president.  Jefferson again placed blame for 
the intellectual authorship of the schemes on Dirceu.  At 
week's end Marcos Valerio told the press that he now plans to 
"tell all I know," assigned responsibility to Dirceu, and 
indicated his belief that Lula was not aware of the 
improprieties. 
 
IMPEACHMENT SUITS FILED BY TWO PRIVATE LAWYERS 
--------------------------------------------- - 
 
¶9. (U) On 4 August, two little-know private attorneys filed 
impeachment requests with the Chamber of Deputies against 
Lula, holding him culpable for the corruption scandals. 
Chamber President Cavalcanti, who has authority for 
considering and disposing of the requests, stated he would 
"do nothing hasty" in considering the motions.  Earlier in 
the week, Cavalcanti indicated he saw no grounds for 
impeachment.  Four other impeachment requests, unrelated to 
the current situation, have been filed against Lula in 
private motions since he assumed office.  All were shelved by 
the Chamber. 
 
COMMENT 
------- 
 
¶10. (C) Dirceu's testimony this week drew a categorical line 
around him, and by extension, around Lula, Dirceu's only true 
superior in the GOB and PT.  Dirceu professed complete 
innocence and unawareness of massive schemes he attributed to 
rogue officers of the PT -- a party that Dirceu helped to 
found and over which he has exerted unique dominance. 
Jefferson's witheringly ironic, on-camera challenges to this 
version in the ethics hearing resonated among a political 
class that has had no doubts about Dirceu's power.  We tend 
to share the skepticism, as our own contacts with Dirceu have 
led us to believe there is little in the government or PT 
that escapes his attention and influence.  Whatever the 
veracity of his account, Dirceu is a brilliant and ruthless 
survivor, who would be uniquely equipped among Brazilian 
politicians to carry off the big lie -- he endured 
interrogation during Brazil's dictatorship and later lived 
clandestinely in the country for eleven years, disguised by 
plastic surgery and a false name. But the affirmations of 
Dirceu's involvement by Jefferson and Valerio, and the 
persistent flow of new information that could demolish such 
an unequivocal story, leave Dirceu in an exposed position. 
 
¶11. (C) For now, Dirceu's audacious approach, coupled with 
the protestations of Lula's innocence by Jefferson and 
Valerio, are reinforcing the shield around Lula.  And for the 
moment, this seems to fit with the mood of most of the 
congress, opposition and public, who want a rigorous 
accounting of the scandal and will be happy to see the 
rolling heads of implicated politicians, but who remain wary 
of the trauma of a presidential impeachment.  Whether this 
remains the case depends on new revelations that, in the 
current environment, seem likely to appear; on whether Dirceu 
-- in the event he faces disaster -- has evidence of Lula's 
complicity that he could unleash in anger against the man he 
reportedly feels abandoned him; and on whether Lula can reign 
in his provocative rhetoric of recent days and humbly accept 
the defense of appalling ignorance that most of Brazilian 
society still seems willing to afford him. 
 
 
 
LINEHAN