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

S E C R E T SECTION 01 OF 03 BRASILIA 002150 
 
SIPDIS 
 
TREASURY FOR PARODI, STATE PASS TO USTR AND TO USAID/LAC/AA 
 
E.O. 12958: DECL: 08/12/2015 
TAGS: PGOV PREL ECON BR
SUBJECT: BRAZIL CORRUPTION SCANDAL UPDATE, WEEK OF 8-12 
AUGUST 2005 
 
REF: A. BRASILIA 2082 
     ¶B. BRASILIA 1979 
     ¶C. BRASILIA 1874 
     ¶D. BRASILIA 1973 
     ¶E. BRASILIA 1631 
     ¶F. BRASILIA 2025 
     ¶G. (S/NF) TD 314/47956-05 9 AUG 05 
 
Classified By: POLITICAL COUNSELOR DENNIS HEARNE. REASONS: 1.4 
(B)(D). 
 
¶1.  (SBU) SUMMARY.  In one of the most dramatic moments thus 
far in the continuing corruption scandals (refs a-f) plaguing 
the Brazilian government, President Lula da Silva's 2002 
campaign publicity coordinator Duda Mendonca stated on 12 
August before the Postal Service CPI that the Workers' Party 
(PT) paid for his services through deposits to an offshore 
account in transactions managed by advertising executive and 
money man Marcos Valerio. Such transactions would constitute 
violations of Brazilian tax laws, and would expose Lula 
himself more directly to guilt by association with Valerio's 
improprieties.  This development, coming atop the already 
broadening dimension of the crisis, led some opposition 
figures to openly discuss impeachment.  On 12 August Lula 
read a brief statement on television in which he denied any 
wrongdoing, pledged continued investigation by federal 
authorities and punishment of all guilty parties, and 
apologized to the nation for the current state of affairs. 
 
¶2. (SBU) Summary continued. Earlier in the week, Valerio 
testified before the Congressional Inquiry Committee (CPI) on 
vote buying that former Presidential Chief-of-Staff Jose 
Dirceu had authorized loans to the PT, and that former 
Communications Minister Luiz Gushiken was also aware of the 
loans to the Party.  Valerio presented a list with the names 
of 79 persons, the majority from the opposition party PSDB, 
who had withdrawn money from his accounts.  Also this week, 
eight impeachment requests against congressmen allegedly 
involved in the PT bribes-for-votes scheme were sent to the 
Ethics Committee.  And bank records sent by the PT to the 
Brazilian Electoral Court revealed that four deposits had 
allegedly been made by President Lula into PT accounts in 
2003-4.  The President denied having used loaned party funds 
for personal expenses and others affirmed that the President 
was unaware of the payments.  END SUMMARY. 
 
LULA'S PUBLICIST DEEPENS THE CRISIS... 
-------------------------------------- 
 
¶3. (U) On 11 August, Duda Mendonca, Brazil's most famous 
political consultant and the media architect of Lula's 
successful 2002 presidential campaign, delivered a voluntary 
testimony before the Postal Service CPI, and deepened the 
current political crisis by stating that he received illegal, 
undeclared funding from accused PT money broker Marcos 
Valerio via deposits into an offshore account.  According to 
Mendonca, the money was used to pay the Workers' Party (PT) 
costs for the 2002 campaign in which Lula won the presidency. 
 Such transactions would constitute violations of Brazilian 
financial and tax laws. The statement shocked PT congressmen 
in the hearing, who wept in indignation during Mendonca's 
testimony and joined the opposition in demanding that Lula 
address the nation to explain his involvement in a widening 
scandal, which now is moving beyond irregular campaign 
funding already acknowledged by the PT and the vote-buying 
scheme that is widely alleged (refs) and into the sphere of 
tax evasion and possible financial crimes.  Senior opposition 
figures, in the wake of the 11 August testimony, openly 
discussed whether the time is near for initiating impeachment 
proceedings against the President. 
 
...AND LULA SPEAKS OUT 
---------------------- 
 
¶4. (U) In response to the dramatic Mendonca testimony, and 
after weeks of calls for a presidential address to the 
nation, Lula made a brief televised statement on 12 August. 
Speaking calmly and forcefully, against the backdrop of a 
meeting of his cabinet in the Planalto Palace, Lula denied 
any personal wrongdoing, pledged commitment to thorough 
ongoing investigations by authorities of all allegations, 
promised continuation of fiscal policies and economic growth, 
called for political reforms, and apologized to the Brazilian 
people for the "indignaties"  of the current situation. 
 
VALERIO'S SECOND TESTIMONY BEFORE CONGRESS 
------------------------------------------ 
 
¶5. (U) Earlier in the week, on 9 August,  Marcos Valerio 
testified before the vote-buying scheme CPI that former 
Chief-of-Staff Jose Dirceu had authorized more than $24 
million in loans to the Workers' Party (PT).  Valerio stated 
that Dirceu "was a powerful and arrogant minister.  He is no 
one's friend . . . Today, I consider him my enemy."  Valerio 
also maintained that Luiz Gushiken, former Communications 
Minister and current chief of the Presidency's Center for 
Strategic Studies, was aware of the loans to the PT as well 
as the money the PT gave to other parties.  In his 14-hour 
testimony, Valerio also stated that more than $6 million was 
given to advertising executive Duda Mendonca.  Valerio made 
it a point though to emphasize Lula's innocence, stating that 
he could not say that Lula had knowledge of the illicit 
transactions. Valerio presented a list with the names of 79 
persons, the majority from the opposition party PSDB, who had 
withdrawn more than $783,000 from his accounts for the 1998 
Minas Gerais state campaign. Late in the testimony, a row in 
the committee broke out when a PT congressman attempted to 
add into the record a second list of 128 names of mainly PSDB 
allegedly involved in the 1998 Minas actions, which was 
procured in dubious circumstances.  The list was widely 
discredited as false, with some in the PSDB accusing Dirceu 
and others of planting the document to divert attention from 
the PT acts as the center of the scandals.  The PT 
congressman, Paulo Pimenta, resigned his position from the 
CPI on 11 August. 
 
CHAMBER MAY IMPEACH OVER TWENTY CONGRESSMEN 
------------------------------------------- 
 
¶6. (U) On 10 August, Speaker of the House Severino Cavalcanti 
yielded to pressure from opposition leaders and forwarded to 
the Ethics Committee eight impeachment requests against 
congressmen allegedly involved in the PT bribes-for-votes 
scheme, including the complaint against Jose Dirceu (PT), 
Lula's former chief of staff.  Besides Dirceu, five members 
of Roberto Jefferson's PTB party, one member of the Brazil's 
vice-president's PL party, and one of the PRB party will be 
investigated for violating congressional decorum and, if 
found guilty, may be impeached and lose political rights for 
8 years.  In addition, the Ethics Committee may open 
investigations on another 13 congressmen, mostly from the PT 
and PP parties, also for violating congressional decorum. 
These congressmen can resign before investigations begin in 
order to retain political rights, as did the former PL 
president Valdemar Costa Neto who renounced his chamber seat 
on August 1.  PT president Tarso Genro had previously stated 
that any member who resigned would be expelled from the 
party.  However, Dirceu publicly confronted Genro, 
disagreeing with his decision and further dividing the party, 
just weeks before its internal elections. 
 
Congressmen under investigation -- cannot resign: 
-     Roberto Jefferson (PTB) 
-     Jose Dirceu (PT) 
-     Romeu Queiroz (PTB) 
-     Sandro Matos (PTB) 
-     Joaquim Francisco (PTB) 
-     Neuton Lima (PTB) 
-     Francisco Goncalves PTB) 
-     Sandro Mabel (PL) 
-     Alex Canziani (PRB) 
 
Congressmen under suspicion ) have the option of resigning 
to retain political rights: 
-     Joo Paulo Cunha (PT): former President of the Chamber 
of Deputies 
-     Paulo Rocha (PT) 
-     Professor Luizinho (PT) 
-     Joao Magno (PT) 
-     Josias Gomes (PT) 
-     Jose Mentor (PT) 
-     Jose Janene (PT) 
-     Pedro Correa (PP) 
-     Pedro Henry (PP) 
-     Vadao Gomes (PP) 
-     Carlos "Bispo" Rodrigues (PL) 
-     Wanderval dos Santos (PL) 
-     Jose Borba (PMDB) 
LULA'S LOANS FROM PT? 
--------------------- 
 
¶7.  (U) An examination of bank records sent by the PT to the 
Brazilian Electoral Court revealed that four deposits had 
allegedly been made by President Lula into PT accounts, 
totaling $12 million in 2003-4.  According to the party, the 
deposits were intended to settle Lula's debts with the PT. 
The President denied having used loaned party money, and 
Minister of Political Articulation Jacques Wagner and PT 
floor leader Senator Aloisio Mercadante said that this loan 
never existed, that the PT treasury had committed an error by 
noting this "loan" in the President's name.  On 9 August, 
Paulo Okamotto, the PT's treasurer in Lula's 1989 
presidential campaign currently heading the Small Business 
Administration (Sebrae), stated that he had made the deposits 
in the President's name, but did not show any receipts, and 
affirmed that the President was unaware of the payment.  It 
would be illegal to use PT formal funds -- which are in part 
public moneys provided under Brazilian electoral programs to 
all registered political parties -- for personal expenses. 
 
COMMENT 
------- 
 
¶8. (S/NF) Duda Mendonca's testimony appears to directly link 
Lula's campaign with illegal off-shore financial activity run 
by Marcos Valerio, the money man at the center of the ongoing 
scandal.  In itself, this is a grave development for Lula in 
terms of his personal vulnerability.  But it comes at a time 
when weeks of revelations and testimony (refs a-f) have 
already established a body of compelling circumstantial 
evidence of impropriety on such an enormous scale that it is 
becoming impossible for the congress, media and public to 
avoid intense questions about Lula's broad responsibility -- 
whatever his proven level of awareness -- for the crisis 
engulfing Brazilian political life.  In this context, open if 
reluctant discussion of the possibility of impeachment -- a 
path most Brazilians still view with weary dread -- is 
increasing.  There is a growing sense that matters must now 
move through investigation toward an end point of meaningful 
consequences, or risk dissolution into a farce that could 
damage the credibility of the country's institutions, which 
have generally functioned well in the crisis thus far.  At 
this point, additional substantial revelations of serious 
impropriety -- especially if linked directly to Lula -- would 
be devastating.  We believe such revelations may emerge (ref 
g).  In septels to follow, we will assess political aspects 
of scenarios of either an impeachment or a discredited Lula 
limping through the balance of his term.  A septel being 
transmitted concurrently with this message analyzes economic 
dimensions of those scenarios. 
 
LINEHAN