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

041331Z Nov 05

UNCLAS SECTION 01 OF 03 BRASILIA 002951 
 
SIPDIS 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: PGOV PREL ECON BR
SUBJECT:  BRAZIL CORRUPTION SCANDAL UPDATE, WEEK OF 30 
OCTOBER-04 NOVEMBER 2005 
 
REF.: BRASILIA 2902 AND PREVIOUS 
 
¶1. (U) INTRODUCTION.  A number of significant developments 
have emerged this week in investigations on the corruption 
scandals battering the Lula's administration and contention 
with the opposition has increased markedly.  The highlights 
are listed below.  END INTRODUCTION. 
 
CORRUPTION SCHEME WAS FINANCED BY PUBLIC BANK 
--------------------------------------------- 
 
¶2.  (U) After six months of investigation, the Post Office 
CPI (the congressional committee investigating origins of 
money used to finance illicit PT funding operations) made 
substantial new revelations this week, indicating that at 
least some of PT moneyman Marcos Valerio's slush-fund came 
from the coffers of state companies -- rather than being 
the questionable loans from private banks, which had been 
his and the PT's line to date.  According to the CPI's 
rapporteur, Deputy Osmar Serraglio, Brazil's largest public 
bank, Banco do Brasil, was the source of at least 10 of the 
R$ 55 million already clearly identified as having been 
distributed to members of the PT and allied parties.  The 
complex scheme to transfer public money to Valerio's 
accounts involved other Brazilian companies, private banks, 
and Valerio's advertising agencies.  Allegedly, Banco do 
Brasil paid money to Valerio's agencies for advertising 
campaigns that were not really carried out; then, Valerio 
deposited part of the money in private banks and used it as 
collateral for loans. Subsequently, he "loaned" the money 
to the PT for political purposes. Clear evidence that 
public funds were used would be particularly hurtful to the 
government, and would undermine the PT's argument that the 
only crime committed by the party was the use of 
unaccounted campaign funds.  The next steps for the CPI 
would be gathering of more evidence to absolutely confirm 
the existence of this scheme and look into Valerio's 
various advertising contracts with other public companies 
in order to find the sources of the remaining R$ 45 
million. 
 
¶3.  (U) A reliable source indicated to POL officer this 
week that the Postal CPI will reveal up to 100 new names 
next week of recipients of payoffs from Valerio's slush 
fund.  To add even more fuel to the fire, nine prominent 
members of investigatory committees and spokesman for the 
opposition stepped forward this week to charge that their 
telephones are being tapped and/or that they have reason to 
believe they and their families are being subjected to 
surreptitious investigations aimed at discrediting them. 
Indeed, two of these deputies went to the Chamber floor 
with their accusations -- in highly emotional speeches that 
concluded with threats to "punch Lula out" (physically),if 
this intrusive behavior were not stopped. Needless to say, 
there will now be investigations of this matter and if any 
government involvement were to be found, it would be 
political dynamite. 
 
ETHICS COMMITTEE RECOMMENDS ACQUITAL OF ONE DEPUTY 
--------------------------------------------- -------- 
 
¶4.  (U) Of the three cases that have been before the 
Chamber's Ethics Committee for some time now, the weakest 
was against Dep. Sandro Mabel (PL-GO). He had been accused 
by Roberto Jefferson of having received money from the PT's 
private sector moneyman Marcos Valerio's pay-off machine 
and by Dep. Raquel Teixeira (PSDB-GO) of offering her R$1 
million to switch party affiliation to the PL.  But no 
concrete evidence was ever turned up on the former charge 
and it was only her word against his on the latter.  Dep. 
Benedito Lira's (PP-AL) report to the Committee recommended 
his acquittal and that body voted unanimous approval of it 
on November 1.  All that remains now to fully absolve Mabel 
is a floor vote - probably on November 9 - which is 
virtually certain to confirm this verdict. 
 
DATE FOR FINAL VOTE ON DIRCEU'S CASE STILL PENDING 
--------------------------------------------- ----- 
 
¶5.  (U) Ethics Committee Chairman, Ricardo Izar (PTB-SP), 
has been struggling mightily to move the far more important 
case of Jose Dirceu (PT-SP) - against a continuing blizzard 
of legal maneuvering on the part of Lula's former super- 
minister and his able lawyer.  The Committee had already 
approved rapporteur Julio Delgado's (PSB-MG) recommendation 
that Dirceu be expelled from the Chamber by a 13-1 margin 
on October 27.  But that vote was invalidated on a 
technicality by the Supreme Court (STJ) and Izar has been 
attempting to repeat the process in a way that conforms 
with that ruling.  His hope has been to complete it soon 
enough to permit a definitive floor vote by November 9. 
But a combination of obstructionist tactics on the part of 
the defendant, holidays and scheduling problems have 
impelled the Speaker of the Chamber, Aldo Rebelo (PCdoB-SP) 
to delay the day of reckoning until November 23.  This has 
also slowed action on the third of these long-pending cases 
- that of Romeu Queiroz (PTB-MG) -- but the Committee could 
vote receive a report on him (almost certain to go against 
him) and vote on it as early as next week. It is also 
noteworthy here that the full Chamber moved with unexpected 
promptness this week to extend the statutory deadline for 
final resolution of these three old cases, so that the 
accused can no longer hope to secure acquittal simply by 
running out the clock. Thereafter, however, the Committee 
will have to turn its attention to the 13 more cases that 
have been more recently referred to it by still ongoing CPI 
investigations - the processing of which will certainly run 
on past the end of this legislative year in mid-December. 
 
THE CUBAN CONNECTION 
-------------------- 
 
¶6.  (U) Charges that the PT had surreptitiously received as 
much as R$ 3 million during the 2002 campaign from the 
Cuban government - published by the newsmagazine, Veja, 
last weekend - have both added a new dimension to ongoing 
scandal investigations and heightened contention between 
the Lula administration and its opposition.  While the 
leadership of the PSDB and PFL have been cautious about 
pronouncing on the truth of these accusations, they have 
promptly announced their intention to investigate them. 
Indeed, the main accuser, Vladimir Poleto, is already 
scheduled to testify before the opposition-led Bingo and 
Municipal Corruption CPI on November 8.  These accusations 
are particularly incendiary because they identify then-PT 
campaign chairman (now Finance Minister) Antonio Palocci as 
a participant in this transfer on the Brazilian side - and 
one of the red-lines so far observed by the opposition has 
been to refrain from calling him before Congress, in spite 
of other corruption allegations against him.  In addition, 
Brazilian electoral law and nationalism make this such a 
potentially powerful charge that it has encouraged the 
opposition to publicly consider the possibility of legal 
action aimed at canceling the "registration" of the PT. 
This would have the effect of making Lula and all other 
candidates of that party ineligible to participate in next 
October's elections. 
 
COMMENT 
------------------------ 
 
¶7.  (SBU) For at least the last couple of months, the Lula 
administration had been seeking a modus vivendi with the 
opposition, in order to wind down these damaging 
investigations, restore some semblance of normal governance 
(especially in Congress) and give itself time to recover 
strength in time for the rapidly approaching 2006 campaign 
season.  But the President's initial reaction to these 
threatening new developments seems to have been a strong 
one.  Of course, he promptly denied the PT's receipt of any 
Cuban money, as well as government involvement with 
espionage activities against Congress.  But the tenor of 
private remarks to his closest collaborators - promptly 
leaked to the press - were reported to have been even 
harsher.  According to a number of reports, he essentially 
averred that, if the "right" was going to try to force him 
out of office prematurely, perhaps via motions to cancel 
the registration of the PT, it would be in for "war".  This 
might include such retaliatory initiatives as exposing 
illegal campaign funding on the part of the opposition, 
opening criminal investigations against those involved in 
corruption under the previous Cardoso administration, 
withdrawing government advertising from hostile 
publications (which might not be legally possible) and even 
"following the line of Chavez".  The most charitable 
interpretation of this latter threat might be calling his 
supporters into the streets - which, if intended to 
intimidate Congress and the courts, would be bad enough. 
It should be noted, however, that Lula has not actually 
done anything yet.  Moreover, many politicians have been 
out of Brasilia most of this week (which had a holiday in 
the middle of it) and, of course, President Bush will be 
arriving on Saturday.  Below the turbulent surface, one 
gets the impression that the government and opposition may 
have scared one another.  And there are now indications 
that elements on both sides are seeking to contain any 
further escalation of the confrontation.  But it remains to 
be seen what happens when business gets back to normal next 
Monday and Tuesday.  END COMMENT. 
 
DANILOVICH