2004-07-06 19:54:00
Embassy Brasilia
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E.O. 12958: N/A

Refs: A) Brasilia 1384 B) Rio de Janeiro 765 C) 2003 Sao Paulo





E.O. 12958: N/A

Refs: A) Brasilia 1384 B) Rio de Janeiro 765 C) 2003 Sao Paulo


1. SUMMARY: The Chamber of Deputies' Parliamentary
Investigative Commission (CPI) on Piracy and Tax Evasion
released a draft version of its final report on June 8, making
recommendations of unprecedented scope for Brazil, including
draft legislation, revisions to the penal procedures code and
the adoption of a coordinated national plan to address the
problem of piracy in Brazil. The report contains chapters on
specific industries (paras 10 - 19) as well as on criminal acts
that have come to the CPI's attention during the last year
(para 20 and septel). The CPI presented a final version of the
report to Justice Minister Bastos on June 23 along with a
request for his support of the recommendations, particularly
the national plan. The CPI is now officially deactivated, but
executive members plan to request the formation of a formal
congressional working group with legal standing to follow
through with the cases initiated by the CPI. Plans are also
underway for a formal ceremony in mid-August to launch a book
version of the report and present it to the President of the
Chamber and to President Lula. While the fanfare surrounding
the CPI and the recommendations from its report have greatly
raised the profile of the fight against piracy, it is uncertain
that there is the government will and, perhaps more
importantly, the resources to put the good ideas into action.
End summary.

Broad Recommendations

2. The CPI's over-arching recommendation is the formulation of
a "National Plan to Combat Piracy" and creation of a
corresponding government body responsible for intelligence
gathering, policy formation and public outreach efforts. This
agency would be responsible for coordination with federal and
state police, various state and federal ministries, as well as
representatives of affected businesses and civil society.
Among the plan's primary objectives are:

-- execution of educational campaigns and institutional
support of privately sponsored campaigns to inform the average
citizen of intellectual property rights, the economic damage
piracy causes, and piracy's link with organized crime;
-- creation and maintenance of a national database allowing
for the cross-referencing of intelligence in the
investigation of organized crime;
-- support the creation in every state of a specific
division within the Secretariat for Public Security that
coordinates operations and centralizes information through
the creation of specialized police units that interlink with
municipal authorities;
-- incentives for special operations with the Attorney
General's office and the Federal Police to break up piracy
-- combating the entry of illegal products and legal
products destined for criminal purposes;
-- coordination of inspection/surveillance at ports,
airports and land borders to include training of the key
-- training and capacity-building for police and inspection
agencies on the federal, state and municipal level.

3. The CPI notes that the goals of its plan correspond in
large part to the 2001 Presidential Decree that created the
Inter-Ministerial Committee to Combat Piracy (CICP). Citing
the lack of desired results and the growing rate of piracy
since then, the CPI concludes that its national plan and
corresponding agency should replace the CICP. The draft report
also suggests that the Executive branch undertake the revision
of a treaty with Paraguay regarding the use of bonded
warehouses at the ports of Santos (Sao Paulo) and Paranagua
(Parana),as well as provide more personnel and more
technologically-advanced equipment to customs and police
inspectors at ports of entry.

4. Formal proposals directed at various levels of the
government put forward the CPI's recommendations and conclude
the draft report. The national plan and the treaty revision
are directed to the Executive branch; improved inspection for
counterfeit auto parts during auto-licensing procedures is
directed to state governors; the request to expedite cases and
sentencing of those involved in organized crime is directed to
the judicial branch, etc. Three specific requests involve Law
Kin Chong, the notorious alleged smuggler arrested earlier this
month attempting to bribe the CPI President (ref A): one to
the Minister of Justice requesting the reactivation of a 7-year-
old Sao Paulo federal police investigation of his business
activities; one to the Sao Paulo state prosecutor making the
same request; and one to the Minister of Justice requesting the
formation of a special task-force (comprised of Federal Police,
Attorney General, the Revenue Service, and the Sao Paulo
Secretary for Public Security) to investigate Chong's criminal


5. Two draft bills suggested by the CPI would alter the penal
procedures legislation in reference to crimes against
intellectual property. The CPI's objective is to treat these
crimes with greater severity as a means of deterrence, as well
as to ease the work of law enforcement authorities in
apprehending and prosecuting perpetrators. Its recommendations
go beyond the legislation the GoB passed in July 2003 with
regard to certain copyright offenses (Ref C). The new language
adds computer programs to the list of intellectual works, and
increases minimum penalties from less than one year to two
years and two months, plus fines to avoid suspended sentences.
One of the proposed changes modifies law 9.609/98 on IPR
protections for software to include the 2 year and two months
minimum sentence and adds publishing, publicizing and
disseminating information on the sale, purchase, rental, import
or export of pirated software by conventional or electronic
methods as a crime.

CPI's Testament

6. In a public session June 8, preceding release and
subsequent approval of the draft report by the entire CPI,
rapporteur Deputy Josias Quintal (PMDB-RJ) characterized the
CPI's work over the last year as a first step on an arduous
road of concrete action to rid Brazil of piracy. He called
piracy a serious obstacle to national development, noting that
in today's world of technological advances and the Internet,
intellectual capital is even more valuable than financial
capital. He strongly criticized the authorities that
implicitly support piracy by allowing it to propagate in their
midst. While piracy is an international scourge, Quintal noted
that it has become a part of the Brazilian culture, as laws do
not impede it and the population remains largely oblivious to
the harm it causes. He emphasized that, while the media has
played up the CPI's involvement in high-profile arrests or
criminal allegations, the CPI's main responsibility is to
document the Brazilian symptoms of the disease of piracy and
tax evasion and suggest remedies, not to single-handedly cure
the country by arresting all those responsible.

7. Quintal said that government negligence and omission are in
large part responsible for the rampant nature of piracy in
Brazil, citing the "Paraguay fair," an open market known as the
central point of sale for pirated goods in Brasilia, as
evidence of the government's complicity. Passive and active
corruption combined with insufficient inspections at ports of
entry, lax application of laws and non-deterrent level
sentences indicate a government mechanism in need of repair, he
said. He denied that the CPI sought to target the informal
sector writ large -- the poor seller and buyer attempting to
make ends meet -- but said the focus had been the organized
crime elements that finance and profit from the trade.
However, he highlighted the need for public awareness campaigns
to demonstrate the danger and damage caused by piracy and
thereby effect change in the average citizen's attitude and
purchasing action.
The Written Word

8. The report's introduction notes that the CPI undertook its
work with the goal of providing a base to be further deepened
via dissemination to society at large and to the three layers
of government (federal, state and municipal) that would ideally
result in a structural reengineering of the agencies
responsible for combating the various crimes of piracy.
Characterizing the report as simply the beginning of a
Herculean task that will require the support of many across
Brazilian society and beyond, the deputies make clear that they
seek a paradigm that prevents and represses piracy in all its
forms throughout the country. To help achieve these ends, the
CPI offers its report and recommendations, and urges that
further study of the problem be undertaken in order to
establish a legal framework capable of handling the evolving
dimension and complexity of the issue.

9. The initial chapters of the report detail the organization,
membership (para 23) and activities of the CPI, including a
list of the individuals from whom the CPI requested testimony.
Visits to Paraguay and Washington D.C. are described. (Note:
Post has not yet obtained the final version of the CPI's
report, only the initial, hastily assembled 244-page draft.)
The CPI also offers its working definition of piracy in the
Brazilian context, which includes falsification, duplication,
and tax evasion in the forms of contraband and embezzlement.
Noting the sense of victory that swindling the authorities and
legitimate businesses by buying pirated goods provokes in some
consumers, the CPI offers anecdotal as well as statistical
evidence of the broad public acceptance of piracy. The
deputies argue that it is not social problems that cause piracy
but vice versa. Piracy feeds unemployment, crimes against
public health and the consumer, murder, extortion, and
corruption, according to the report, hardly a victimless crime.

Drinks, Cigarettes and Drugs

10. The body of the report details the major sectors
investigated, including beverages (principally alcoholic),
cigarettes, photocopiers, books, recording industry (CDs),
DVDs, software, pharmaceutical products, eyewear, pay TV,
automotive parts, and laptop computers/notebooks. Many of the
industries suffer unethical or illegal competition in the form
of under-invoicing, use of sub-standard quality inputs, tax
evasion through use of fraudulent stamps and forms and
trademark infringement. Dangers to public health are mentioned
throughout the report, especially in reference to beverages,
cigarettes, auto parts and pharmaceutical products. Many of
the recommendations specific to individual sectors address the
need to improve inspections by health and customs authorities,
revise taxation methods, toughen criminal penalties and launch
educational campaigns so that piracy is perceived by the public
as serious crime.

11. The main concerns of the beverage sector are unethical
competition by way of trademark violations and adulteration of
the products as well as a high tax rate (35 percent for beer)
that encourages evasion and fraud. Recommendations include
more effective inspection of businesses and decreasing the tax
rate, as well as draft legislation that would implement an
outflow measurement system to aid authorities in conducting

12. The CPI dedicated much time and effort to investigating
the piracy and tax evasion involved in the cigarette industry.
One of the CPI's most publicized busts occurred in September
2003 when notorious cigarette smuggler Roberto Eleuterio da
Silva (aka Lobao) was arrested. Cigarettes face an extremely
high tax burden (65% of the cost to the consumer) in Brazil,
but benefit from a favorable production environment in
neighboring Paraguay. These factors, combined with porous
borders, lax inspection and corruption, attract the criminal
elements that have constructed a complex international network
of individuals and "companies" involved in the smuggling of
cigarettes. The CPI report details several of the smuggling
networks, naming names and citing wiretapped phone
conversations that implicate government officials and others
(septel). The report recommends harsher penalties for
smuggling contraband, more resources for Federal Police, health
and tax inspection authorities, and swift completion of cases
against Lobao and his cohorts. The CPI also suggests that the
Ministry of Health create special, more rigorous, authorization
procedures for operation of cigarette factories.

13. The CPI investigated three cases of falsified or
adulterated pharmaceutical products suspected of causing deaths
and serious injury over the last year. While these cases were
not linked to tax evasion or organized crime, the CPI cites
weaknesses in the inspection systems of ANVISA (Sanitary
Surveillance Agency) as well as the negligence of individual
producers for the errors that resulted in public health crises.
The CPI also raises health concerns with regard to the eyewear
sector, which suffers Chinese competition fueled by trademark
infringement, tax evasion and sub-standard inputs, as well as a
plethora of unlicensed business and distributors that purport
to offer prescription lenses. The report urges the Ministry of
Health to improve ANVISA's inspections capabilities, to conduct
systematic product raids at retail outlets and do laboratory
analyses of the products, and to use the ANVISA registration
system and data bank to provide correct and rapid information
to the public regarding risks of dangerous products.


14. Illegal photocopying of books, especially university
students copying textbooks, comes in for heavy criticism in the
report. Book copyright infringement is committed on an
industrial scale, providing an underground economy within many
Brazilian universities, according to the report. The CPI
suggests increasing the penalty for this crime so that the
majority of cases that are prosecuted do not result in
suspended sentences (which is the case from crimes with a
minimum penalty of one year or less) and urges the Ministry of
Education to educate students as to the criminal nature of the
activity, making the study of author's rights mandatory for all
law graduates.

15. The CPI's investigation of CD and DVD piracy draws heavily
on industry reports and statistics, focusing on the entry of
virgin CD (CDRs) through ports and organized crime aspects,
including a detailed look into some of Law Kin Chong's
operations in the state of Amazonas. One chapter describes a
particular sting operation carried out by the Federal Police
and Military Police of Amazonas against video rental
establishments and based on an investigation by ADEPI (the
Association for the Defense of Intellectual Property, linked
with MPAA.) Amazonas is said to be the center of audiovisual
piracy in Brazil. Chinese and Lebanese mafias operating
through Paraguay are described as the major smugglers of
Taiwanese origin CDRs - the report even notes that Philips has
the patent on CD production in Brazil until 2009. The CPI also
highlights the damage piracy has on the Brazilian music
industry, noting a reduction of 50% of the legitimate music
market in the last five years, and describes some of the
industry's efforts to fight CD piracy in Brazil.
Recommendations in this sphere include revisions of the treaty
with Paraguay concerning use of bonded warehouses, increased
financial and human resources support for the Federal Police
and the tax authorities, as well as the installation of non-
intrusive inspection equipment (such as container x-ray
machines) at ports.

16. The importance of Brazil's software industry as an engine
of production for the economy as a whole sets the stage for the
CPI's examination of software piracy. The GoB's selection of
software as one of the priority sectors for its industrial
policy efforts, cited in the report, further emphasizes the
stakes. As with music and audiovisual piracy, the CPI draws
heavily from industry reports and statistics provided by ABES
(Brazilian Association of Software Companies) and BSA (Business
Software Alliance) to demonstrate the damages caused by the
proliferation of CD burners and the power of the internet used
for nefarious purposes. The methods of software piracy
described in the report include industrial-level falsification
which originates in large foreign production centers that
package the products as the original to mislead the consumer,
the small-scale local copying operations (consumer knows the
product is counterfeit),hardware integrators who copy software
on to computer hard drives for sale, corporate piracy where
unauthorized copies of licensed software is distributed
throughout the organization, and on-line piracy.

17. The CPI's proposals for combating software piracy center
on the modifications legislation on penal procedures, the
"Codigo de Processo Penal." The changes would eliminate the
need for the police to analyze each seized product, allow
associations of right holders to legally store or warehouse
seized goods, and allow associations of rights holder to allege
violations and thereby precipitate legal investigations.

Auto parts, Pay TV and Notebooks

18. Piracy in the auto parts sector has its roots in foreign
(Asian) production of counterfeit products smuggled into
Brazil. Job losses, increasing numbers of auto accidents and
tax evasion are the result of piracy that has taken over 10% of
the market, according to the CPI report. The packaging and
national distribution of falsified parts is centered in Sao
Paulo state, and the CPI again recommends tighter customs
inspections and state-conducted vehicle inspections to combat
the crime. Pay TV and telecommunications systems piracy
involve organized crime as well as the individual users
stealing signals, extending cables or using decoders. The
report describes piracy of distribution networks, TV as well as
telephone, in low-income areas or favelas as a powerful tool of
organized crime to subjugate entire communities, citing the
case of a known criminal organization in Sao Paulo that has
mounted and operates a clandestine telephone network. The CPI
recommends further study of the problem by law enforcement.

19. The CPI's investigation of illegally imported Toshiba
notebooks or laptop computers started with allegations received
by the Special Action Group to Repress Organized Crime (GAECO).
The complaints alleged that several Brazilian companies import
laptops from the U.S. without meeting Brazilian legal
requirements or paying required tax, and sell the products via
classified ads and the Internet. The report goes into detail
about seized documents and equipment, and alleges that the
software on the notebooks was also pirated. Again,
recommendations center on more thorough customs inspections.

Miscellaneous Chapters

20. The report includes a chapter entitled "a multifaceted
view of piracy," which attempts to delve beyond the surface of
piracy (the poor vendor, the poor consumer, and the indifferent
low-level authority) to assist the citizen in understanding the
harm/dangers involved, the rubric of the informal economy
versus legitimate small business, and the international
implications. The deputies take the position that each country
needs to judge the effectiveness of its intellectual property
rights regime, stating that "rights that aid development should
be preserved and rights that entail more costs than benefits
should be avoided." Law Kin Chong (ref A) merits a separate
chapter, while another chapter details the names and criminal
activities of several private individuals and officials linked
to cases investigated by the CPI, including Federal Deputy
Pedro Correa (PP-PE),Federal Judge Joao Carlos Da Rocha
Mattos, civil and federal police officials in Sao Paulo, and
notorious cigarette smuggler Roberto Eleuterio da Silva (aka
Lobao). The CPI identifies over one hundred individuals and
businesses involved in allegedly criminal activity related to
piracy or tax evasion in its report. In order to facilitate
potential USG investigations, including efforts to cancel U.S
visas, post will inform Department and law enforcement agencies
of specific information contained in the report via septel.


21. The depth and breadth of the CPI's investigations are
impressive, and the unprecedented scrutiny directed at the
responsible authorities and Brazilian society at large deserves
praise. The close working relationship with the Brazilian
private sector contributed greatly to the investigations and
recommendations, and the frequently cited link between
unrealized national economic development and piracy ring true
for many in the GoB. The report demonstrates the deputies'
desire to produce a document that will serve as an educational
tool, a means to reach out to Brazilians and affect positive
change. Attempts to create a legally-sanctioned working group
to pursue the criminal cases developed with the CPI's
assistance underscore the deputies' commitment, as well as a
desire to disprove the naysayers that discounted the high-
profile arrests as political grandstanding at the expense of
law enforcement authorities.

22. The CPI correctly admits that its recommendation of a
national plan to combat piracy draws greatly from the goals
professed in the establishment of the Interministerial
Committee (CICP). The report does not offer reasons for the
CICP's failure to make significant progress against piracy, but
simply notes that the time has come to seek another option. As
the current President of the CICP has often told us, the fight
against piracy in Brazil remains a question of resources. The
CICP has not received sufficient funds, let alone high-level
support, to fulfill its mandate, and a new national plan will
face the same obstacle. Despite the dedication of a few in the
executive and legislative branches, it is still not clear where
anti-piracy efforts will fall on the long list of competing GoB
priorities. If the attention the CPI report receives propels
the issue further up the list, this alone would be a major

CPI Members

23. The Piracy CPI members and executive body include the
following Congressional representatives:

President: Antonio Luis Medeiros, PL/SP
First Vice President: Julio Lopes, PP/RJ
Second Vice President: Vanessa Grazziotin, PcdoB/AM
Third Vice President: Julio Semeghini, PSDB/SP
Rapporteur: Josias Quintal, PMDB/RJ

Devanir Ribeiro, PT/SP
Rubinelli, PT/SP
Wasney De Roure, PT/DF
Laura Carneiro, PFL/RJ
Marcos Abramo, PFL/SP
Robson Tuma, PFL/SP
Olavo Calheiros, PMDB/AL
Carlos Alberto Lereia, PSDB/GO
Julio Redecker, PSDB/RS
Sandes Junior, PP/GO
Alex Canziani, PTB/PR
Ronaldo Vasconsellos, PTB/MG
Mauricio Rabelo, PL/TO
Dr. Ribamar Alves, PSB/MA
Lupercio Ramos, PPS/AM
Dr. Rodolfo Pereira, PDT/RR
Sarney Filho, PV/MA