BRAZIL'S BANESTADO INVESTIGATION ENDS IN A FIASCO

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