BRAZIL SCANDAL - CONGRESSMAN TESTIFIES BEFORE

UNCLAS SECTION 01 OF 02 BRASILIA 001602

SIPDIS

SENSITIVE

E.O. 12958: N/A
TAGS: PGOV SOCI KCRM PREL BR
SUBJECT: BRAZIL SCANDAL - CONGRESSMAN TESTIFIES BEFORE
CONGRESSIONAL ETHICS COMMITTEE

REF: A. BRASILIA 1494


B. BRASILIA 1544


1. (SBU) SUMMARY. Brazilian congressman Roberto Jefferson,
who is also president of the PTB party (an ally in President
Lula's governing coalition),began his testimony before the
Chamber of Deputies' Ethics Committee on June 14. He will
continue testifying on June 15. Jefferson was summoned by
the committee to clarify allegations that he has made in the
press over the past two weeks that officials of Lula's
Workers' Party (PT) have, for two years, paid out millions of
dollars to allied parties to buy their votes in Congress. In
his first day of testimony, Jefferson repeated these
allegations but offered no bombshells and admitted that he
has no evidence to support his claims. He said that the
vote-buying scheme began at least in August 2003, with the
knowledge of several administration officials, including the
Lula's powerful Chief of Staff, Jose Dirceu. Brazil's entire
political and financial classes are glued to their
televisions today watching Jefferson testify. Depending on
how much proof he can offer and how much these events damage
the government, Lula may have to shake up his cabinet and
fire Dirceu, may see his 2006 reelection chances take a hit,
and may see his fragile coalition fall apart.


2. (SBU) In addition, Congress has decided to delay setting
up a congressional inquiry (CPI) into separate but related
corruption charges at the Postal Service and Brazilian
Reinsurance Institute (IRB). Allegedly some of Jefferson's
personal appointees at these agencies were taking bribes and
skimming funds to funnel into PTB party slush funds. While
Jefferson will continue to testify through Wednesday, at this
early stage it does not appear he has the ammunition to make
this already-grave crisis any worse. END SUMMARY.

JEFFERSON'S TESTIMONY: NOTHING NEW
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3. (SBU) Brazilian Congressman Roberto Jefferson (PTB-Rio de
Janeiro) came to public attention last month when one of his
political appointees at the Postal Service was videotaped
taking a bribe (ref A). President Lula initially seemed
inclined to defend his coalition ally, but as the scandal
deepened, Jefferson began disclosing details about the
alleged vote-buying by Lula's PT party. According to
Jefferson, the two right-most parties in Lula's coalition
(Vice President Alencar's Liberal Party (PL) and the
Progressive Party (PP) of Chamber Speaker Cavalcanti) took
thousands of dollars each month for as long as two years to
vote for the administration's agenda in Congress. In
response to Jefferson's charges, the PL filed a complaint
against him for lying and violating congressional decorum.
The Ethics Committee then called him to answer the PL's
complaint, which is why he is testifying this week. After
the first few hours of his testimony, Jefferson had not
offered any new information. The testimony is being covered
live by every major TV station in the country.

CONGRESS INVESTIGATES THE POSTAL SERVICE
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4. (SBU) As a result of the attention riveted on the Ethics
Committee today, Congress decided to postpone at least
briefly the politically-charged establishment of a separate
inquiry committee (CPI) to investigate corruption in the
Brazilian Postal Service and the Brazilian Reinsurance
Institute. The governing coalition is maneuvering to control
the key seats on this CPI in order to protect Lula, the PT,
and the administration from collateral damage.

COMMENT - TOO SOON TO TELL, BUT NO BOMBSHELLS
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5. (SBU) The serial scandals that have beset Brazil for the
past four weeks are bad, but it is not clear that Jefferson's
testimony will make them worse. Worst case for the GoB:
Jefferson produces hard evidence implicating senior PT and
administration officials in the vote-buying scheme. This
could force Lula to fire Chief of Staff Dirceu --as well as
Central Bank President Mereilles and Social Security Minister
Juca, who each have unrelated corruption charges pending
before the Supreme Court. The fallout could fracture the
coalition and the PT party, and leave Lula politically
wounded for the next eighteen months. Best case: Jefferson
names names but is unable to produce hard evidence. In this
case Lula will still be under pressure to clean house and
reorganize his coalition, but can do so under considerably
less public and opposition scrutiny. Lula may allow himself
a small sigh of relief tonight that Jefferson seems to be out
of ammunition. In any event, the next few days will go far
toward defining the final eighteen months of Lula's first
term. Post will continue to report as developments unfold.
DANILOVICH