Identifier
Created
Classification
Origin
04BRASILIA458
2004-03-01 19:35:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Brasilia
Cable title:  

SCANDAL CONTINUES TO RATTLE BRAZILIAN GOVERNMENT

Tags:  PGOV PREL KCRM ECON BR 
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UNCLAS SECTION 01 OF 03 BRASILIA 000458 

SIPDIS

SENSITIVE

DEPT FOR WHA/BSC

E.O. 12958: N/A
TAGS: PGOV PREL KCRM ECON BR
SUBJECT: SCANDAL CONTINUES TO RATTLE BRAZILIAN GOVERNMENT

REF: BRASILIA 0402

UNCLAS SECTION 01 OF 03 BRASILIA 000458

SIPDIS

SENSITIVE

DEPT FOR WHA/BSC

E.O. 12958: N/A
TAGS: PGOV PREL KCRM ECON BR
SUBJECT: SCANDAL CONTINUES TO RATTLE BRAZILIAN GOVERNMENT

REF: BRASILIA 0402


1. (SBU) SUMMARY. The Waldomiro Diniz scandal that broke in
Brazil on February 13 (reftel) continues to reverberate, and
the end is not in sight. Diniz, a deputy to Lula's Chief of
Staff, Jose Dirceu, was fired when it was revealed that, as
head of the Rio de Janeiro lottery authority in 2002, he
solicited bribes from a numbers operator and reportedly
funneled that money into several Workers' Party (PT)
election
campaigns. With Brazil returning to work on March 1 from
the
Carnaval holidays, the story remains front-page news and has
spun off in different directions. VEJA magazine ran a cover
story alleging further PT campaign improprieties while
other
media reported that Diniz continued his influence peddling
even after joining the Lula administration. In that
instance, the press implies that in early 2003, Diniz
intervened to benefit GTech, a US firm that provides
computerized lottery services. In a February 20 statement,
GTech stated that two of its officials met with Diniz and
others in the new administration in early 2003, and that all
such talks were transparent and professional.


2. (SBU) On the political front, President Lula issued a
decree banning bingo games and slot machines throughout
Brazil. Congress must now vote on this measure, which is
controversial because it put hundreds of thousands of gaming
employees out of work. This week, Congress will also decide
whether to establish a congressional inquiry (CPI) into the
Diniz scandal, or more likely, into the gaming sector in
general. While Congress's normal legislative agenda may be
slowed by the fallout from the Diniz scandal, a political
reform bill that would, inter alia, reform campaign finance
rules, is on a fast track. There is no hard proof that Jose
Dirceu or other PT leaders filled party slush funds with
money squeezed from legal and illegal gambling operators,
but
there are certainly a lot of unanswered questions. While
Lula's personal approval numbers remain high, his
government,
his party, and his Chief of Staff are taking a beating. END
SUMMARY.

MORE CHARGES OF ILLEGAL PT CAMPAIGN FINANCING
--------------

3. (SBU) The fallout from the Waldomiro Diniz scandal that

broke on February 13 is far from over. In its 2/25 issue,
VEJA magazine ran an article claiming that the alleged
illegal campaign financing by the Workers' Party (PT) in
2002
was not isolated to Diniz and the money he claims to have
solicited for gubernatorial races in Rio and Brasilia. The
article reports that Jose Vicente Brizola, who in 2002 was
Director of the Rio Grande do Sul state lottery authority,
was pressured by that state's PT Senator Emilia Fernandes to
solicit up to R$900,000 (about $300,000) from bingo
operators
for her failed reelection bid. (Fernandes was Secretary for
Women's Affairs in Lula's government until losing her job in
the January 2004 cabinet reshuffle.) If true, the story
would be another black eye for the PT. On the other hand,
Brizola, who provided the basis for VEJA's report, is the
son
of former Rio governor Leonel Brizola, whose PDT party is a
shrill opponent of Lula's government, and PT leaders respond
that he is merely seeking revenge for not being offered a
job
in the administration.


4. (SBU) Also last week, Luiz Eduardo Soares, who in 2003
was
fired as head of the Federal Police for hiring his wife and
ex-wife as consultants, announced that while working in the
Rio state government in 2002, he learned of Waldomiro
Diniz's
illegal fundraising for the PT, but when he brought it to
the
attention of party leaders, nothing was done and Diniz was
left in place as head of the Rio lottery authority.

DINIZ'S ONGOING CORRUPTION -- US FIRM NAMED
--------------

5. (SBU) Another set of allegations has sprung up suggesting
that Diniz's corrupt activities did not end when he joined
President Lula's staff. The press is reporting that in
2003,
while serving as a senior advisor to Lula's Chief of Staff,
Diniz met with officials of US firm GTech, which holds the
contract to operate Brazil's 9,000 computerized lottery
parlors. Press reports indicate that Diniz met with numbers
racketeer Carlinhos Cachoeira ("Charlie Waterfall") not only
in the infamous 2002 videotapes (ref A),but also in early
2003, when they met with GTech officials to discuss a
25-month extension of the firm's contract. If Diniz's
actions were improper, it would belie Lula's statements that
Diniz's improprieties occurred before he joined the
administration --it would put his corruption inside Lula's
Planalto Palace. In a February 20 statement, GTech stated
that its officials met with Diniz and other officials of the
new administration in early 2003, and that all such talks
were transparent and professional.

GTECH - WORLDWIDE LOTTERY OPERATOR
--------------

6. (SBU) In 1997, Brazilian firm Racimec, owned by Carlinhos
Cachoeira --the lottery operator who made the videotapes of
himself negotiating bribes with Waldomiro Diniz-- won a
five-year contract to operate the federal lottery. Racimec
was then bought by GTech, a Rhode Island company with 2003
revenues of $979 million that operates lotteries around the
world. This contract was extended through April 2003, and
then re-extended for 25 more months. The GoB is GTech's
single largest customer, accounting for 10% of the firm's
revenues. In 2002, GTech filed a still-unresolved lawsuit
against the GoB to prevent it from segmenting the lottery
contract into four separate operations and thus reducing its
need for GTech's services. The stakes are high, lottery
proceeds are about R$5 billion (about $1.7 billion) annually
and, of this, about one-third is earmarked for GoB social
programs.

CONGRESS TO DECIDE ON DECREE ON BINGO'S STATUS
-------------- -

7. (SBU) Aside from the direct legal consequences of the
scandal, there are political ramifications on at least three
tracks: the legal status of national bingo games, the
possibility of a congressional inquiry (CPI),and efforts to
reform campaign finance laws. The first of these, the bingo
games, was the subject of the President's first direct
response to the scandal. On February 20, seeking to exert
control over the loosely-regulated bingo games, Lula issued
a
presidential decree (MP 168) banning all bingo and slot
machines (but not lotteries) throughout Brazil. Lula's
office announced that the decree would remain in force until
"a definitive solution is found". In fact, to remain in
force, the decree must be voted into law by Congress within
60 days. In its first week, MP 168 survived six legal
challenges filed by bingo operators, and the wave of
lawsuits
is not likely to abate as the police continue seizure
operations that have already netted 1,200 machines.


8. (SBU) MP 168 is tricky business for Congress. While the
Diniz scandal has heightened public suspicions of the gaming
sector, it is estimated that between 120,000 and 320,000
gaming employees have been put out of work by the decree,
and
they have begun marching in the streets (one placard in
Brasilia read, "Jose Dirceu, Your Job Cost Me Mine!"). This
is tough medicine for an administration committed to
reducing
a rising tide of unemployment. The GoB concern is that
bingo
parlors are used to launder money, but a PT Deputy (Gilmar
Machado) already had administration support for a bill that
would legalize and regulate the bingo games. Further, there
is a lingering suspicion that the Diniz scandal was
orchestrated in part by numbers racketeers hoping to create
pressure for greater legalization of gambling. With so many
competing inerests, it seems likely that the administration
will push to get MP 168 ratified by Congress in the coming
weeks, at least in part to reinforce Lula's political
authority and to demonstrate that the administration and PT
are moving forcefully against gambling. That might then
open
the door for debate on a follow-on bill, such as Machado's,
to re-legalize some sort of federal bingo.

CONGRESSIONAL INQUIRY STILL IN THE AIR
--------------

9. (SBU) In the days after the scandal broke, party leaders
in Congress argued over whether to open a congressional
inquiry (CPI). The PT leadership and administration oppose
a
CPI in part to avoid more public shaming at the hands of
opposition politicians, but also because the GoB wants to
refocus attention on its legislative agenda. There were
indications before Carnaval that intense lobbying by the PT
and its coalition partners had rallied enough opposition
votes to kill the CPI, but a threat by a PT Senator to
investigate illegal campaign financing by other parties
infuriated the opposition and left the issue to be settled
this week. One possible compromise is to open a CPI to look
into the gaming sector in general, rather than any specific
case. The Diniz case is being investigated by the Federal
Police and the Federal Prosecutor's office (both of whom
will
take Diniz's deposition this week),and the Rio state
assembly.

CAMPAIGN FINANCE REFORM GETS A BOOST
--------------

10. (SBU) While some of the GoB's legislative agenda is
likely to be slowed by the Diniz scandal, a political reform
bill has received a shot in the arm. Political reform
(meaning rules changes for parties, elections, and campaign
financing) was on the back burner because in this, an
election year, it seemed unlikely to pass. Now, a bill that
has been a year in the drafting by an ad hoc committee in
the
Chamber has moved forward to the Justice Committee and put
in
"urgent procedure", to speed its way to the floor. However,
the bill is controversial and will certainly undergo changes
before passing into law.

COMMENT - DIRCEU AND PT ARE DAMAGED
--------------

11. (SBU) There is no proof that Chief of Staff Jose Dirceu
or other Workers' Party leaders filled party slush funds
with
money squeezed from legal and illegal gaming operators, but
there are certainly a lot of unanswered questions. Dirceu
has reportedly offered his resignation to Lula more than
once
since the scandal broke, but was rebuffed each time.
Polling
numbers not yet released publicly reportedly show Lula's
personal approval numbers remain high, but that his
government, his party, and his Chief of Staff are all
suffering significantly in the public eye.


12. (SBU) It is the nature of Brazilian political scandals
that leaks and revelations continue to emerge, but that
weeks
or months later, the whole thing goes away and only
lower-level officials ever suffer legal sanction. That
pattern may hold true in this case, but Dirceu, who only
recently was called the "Prime Minister" and the "All
Powerful" is clearly diminished, and the PT has lost much of
its hard-earned reputation for probity. The separate case
of
Celso Daniel, the PT mayor murdered in 2002, and the
reluctance by the party leadership to push a thorough
investigation, also weighs against the PT. If hard evidence
of large-scale campaign finance abuses is found and linked
to
the highest levels of the PT (Dirceu was party president
during the 2002 elections),the scandal could drag on for
months. The opposition parties, with their eyes on the
October 2004 municipal elections, will also keep stirring
the
pot. Damage has been done, but it is too early to say how
much worse it will get.
VIRDEN