BRAZIL: CORRUPTION SCANDAL UPDATE, WEEK OF 1-5

C O N F I D E N T I A L SECTION 01 OF 04 BRASILIA 002082

SIPDIS

TREASURY FOR PARODI, STATE PASS TO USTR

E.O. 12958: DECL: 08/05/2015
TAGS: PGOV PREL ECON BR
SUBJECT: BRAZIL: CORRUPTION SCANDAL UPDATE, WEEK OF 1-5
AUGUST 2005: FORMER CHIEF OF STAFF DIRCEU TESTIFIES BEFORE
ETHICS COMMITTEE

REF: A. BRASILIA 1979

B. BRASILIA 1874

C. BRASILIA 1973

D. BRASILIA 1631

E. BRASILIA 2025

F. BRASILIA 1602

Classified By: POLITICAL COUNSELOR DENNIS HEARNE. REASONS:
1.4(B)(D).


1. (SBU) SUMMARY. Hearings on the corruption scandals (refs)
in the Brazilian government continued this week, as
Congressman Jose Dirceu, President Lula da Silva's former
Chief of Staff and closest advisor, testified on 2 August
before the Chamber's Ethics Committee. Dirceu categorically
denied any awareness of the vote-buying and illicit
campaign-funding schemes mounted by PT party leaders with
private sector money man Marcos Valerio (refs). He also
refuted PTB Congressman Roberto Jefferson's new allegations
that he sought funds from telecommunications company Portugal
Telecom for the Workers' Party (PT) and the Brazilian Labor
Party (PTB) when he was Chief of Staff. In other
developments, Congressman Valdemar Costa Neto, president of
the Liberal Party (PL),resigned from his congressional seat,
after admitting to illegal funds from the PT -- the first of
several possible resignations by implicated congressmen on
the horizon. Simone Vasconcelos, Valerio's financial
director, testified to both judicial authorities and the
Postal Service Congressional Inquiry Committee (CPI) that she
had authorized the transfers in Brazilian reals valuing more
than USD $27 million to congressmen and staffers, per her
employer's instructions. Valerio, who is reportedly seeking
a deal with prosecutors, also testified to authorities,
further implicating Dirceu in the corruption scandal. On 3
August Roberto Jefferson told congressional questioners in
the separate, newly-formed CPI on the monthly bribery
allegations that he believed President Lula da Silva was not
aware of the bribery activity. END SUMMARY.

DIRCEU'S TESTIMONY: "I WILL FIGHT UNTIL THE END"
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2. (U) On August 2, Brazilian congressman and former Chief of
Staff Jose Dirceu (PT) delivered his long-awaited testimony
before the Chamber's Ethics Committee, as a witness in the
process filed against Congressman Roberto Jefferson (PTB) for
lying and violating congressional decorum (ref F). (Note: Per
refs, Jefferson's sensational allegations about high-level
GOB and PT involvement in illicit money transactions and
bribes for votes among congressmen triggered the current
scandals. End note.) The eight-hour testimony was covered
live by major TV stations, and there were rumors that Dirceu
might resign before the session or direct fire against the
president. Instead, Dirceu emphatically and categorically
denied Jefferson's allegations that he was the master mind
behind the alleged PT party's bribes-for-votes scheme: "I
didn't organize (it),I am not the boss of a scheme and I
would never allow the buying of parliamentary votes." Dirceu
also stated that he was unaware of loans made by advertising
executive Marcos Valerio to the PT and underscored that he
would not resign: "I wouldn't be able to walk on the streets
if, to safeguard my political and electoral rights, I had to
resign. I will fight until the end."


3. (U) The highlight of the session was Dirceu's
confrontation with Jefferson, who restated his claims against
the former Chief of Staff, but did not produce any hard
evidence. Talking at times directly into TV cameras,
experienced criminal lawyer Jefferson challenged, in ironic
and skeptical tones, the very notion that Dirceu, the closest
advisor to Lula and the most influential figure in the PT,
could possibly have been unaware of the illicit multi-million
dollar pay off system run by the PT's former treasurer in
conjunction with money man Marcos Valerio. He also launched
news charges, accusing Dirceu of running another illegal
financing scheme. According to Jefferson, Dirceu arranged a
meeting between high-level executives of telecommunications
company Portugal Telecom and President Lula, followed by a
"delegation" trip to Portugal to negotiate illegal funds to
pay back PT and PTB debts. Reportedly, the delegation was
composed of Marcos Valerio, allegedly representing the PT,
and the former PTB treasurer Emerson Palmieri. Portugal
Telecom confirmed the meeting with Valerio, but denied that
the subject discussed was party financing. Dirceu continued
to deny all accusations and the Presidency released a
statement refuting Jefferson's statements.


4. (U) In a parallel motion in the Chamber's Ethics
Committee, Jefferson's PTB party filed a complaint against
Dirceu and Liberal Party (PL) representatives Sandro Mabel
and Valdemar Costa Neto for violating congressional decorum,
due to their alleged involvement with the vote-buying scheme.
Investigations initiated against the cited congressmen
could lead to impeachment. (Note: The complaint against
Costa Neto was nullified when he renounced his congressional
seat paragraph 5 below. End note.) The complaint against
Dirceu also may be rejected, given that he was a member of
the Executive branch, not a congressman, when the alleged
abuses occurred.

THE FIRST CONGRESSIONAL RESIGNATION, MORE LIKELY TO COME
-------------- --------------


5. (U) On 2 August, Congressman Valdemar Costa Neto,
president of the right-wing Liberal Party (PL),became the
first congressman to resign from his seat amid corruption
allegations. The Postal Service CPI received documents
proving that PL treasurer, Jacinto Lamas, withdrew more than
$4 million from Valerio's accounts. In his resignation
speech, Neto acknowledged that he had been "misled" into
accepting illegal payoffs from the PT, but that the money was
used to pay political campaign debts, not to buy votes from
his PL colleagues in Congress. By resigning, Costa Neto
avoided being investigated by the Ethics Committee and losing
his political rights to stand for re-election (Note: This is
a venerable tactic among Brazilian politicians charged with
improprieties. End note.)


6. (U) Five other congressmen from the Workers' Party (PT)
who allegedly received money from Valerio's accounts may
announce their resignation within the next days: former
Speaker of the House Joao Paulo Cunha, Professor Luizinho,
Paulo Rocha, Josias Gomes, and Joao Magno. PT president Tarso
Genro stated this week that if PT members resign in order to
keep political rights and run in the 2006 national election,
they will be expelled from the party. In another
development, the PT-connected president of Brazil's National
Mint stepped down on August 4, after his name appeared in
Valerio's list of cash withdrawers. He allegedly received
illegal money while managing Jorge Bittar's (PT) 2004
campaign for Rio de Janeiro's city hall.
VALERIO'S CASH HANDLER TESTIFIES
--------------


7. (U) Simone Vasconcelos, financial director at the SMPB,
one of Marcos Valerio's companies, testified before the
Federal Police and Postal Service CPI during the week.
Vasconcelos admitted to transferring large sums of money from
Valerio's accounts, per his instructions, to congressmen and
their staffers. Vasconcelos presented lists of a total of 43
names of persons who withdrew money -- in Brazilian reals
worth more than USD $27 million -- from Valerio's accounts.
Vasconcellos also indicated Valerio paid a law firm that
defended the PT during investigations of the 2002 murder of
Celso Daniel, the PT mayor of Santo Andre, Sao Paulo. (Note:
During his testimony before the Ethics Committee, Congressman
Jefferson linked the January 2002 murder of Daniel with a
corruption scheme in Santo Andre to funnel money to PT
campaign coffers. Jefferson alleged Daniel was collecting
evidence to denounce the scheme. Prosecutors in Sao Paulo
continue to investigate the possibility that Daniel was
murdered by hired gunmen after being tortured and forced to
hand over a dossier implicating those involved, possibly
including PT officials. End note.)

JEFFERSON AND VALERIO EXONERATE LULA
--------------


8. (U) On 4 August Deputado Roberto Jefferson testified
before the newly-established CPI for investigation into the
allegations of monthly bribe payments ("mensalao") by the PT
to allied congressmen for votes. (Note: Per refs, this CPI
will continue the work already underway in Postal CPI, but
with more focus on the bribery issues. Some critics have
opined that the GOB has pushed for a multiplicity of CPIs, to
defuse the impact of the congress's investigations. End
note.) Jefferson was the first witness before the new CPI
and reiterated charges he has made in the Postal CPI, ethics
committee hearings and media, but with a striking difference:
for the first time, Jefferson said that he did not believe
President Lula da Silva had personal awareness of the
irregular financial activities of PT leaders and Marcos
Valerio. In earlier accounts, Jefferson had mentioned he
personally had noted the bribery activity to a surprised Lula
earlier this year, but Jefferson now seems intent on
exonerating the president. Jefferson again placed blame for
the intellectual authorship of the schemes on Dirceu. At
week's end Marcos Valerio told the press that he now plans to
"tell all I know," assigned responsibility to Dirceu, and
indicated his belief that Lula was not aware of the
improprieties.

IMPEACHMENT SUITS FILED BY TWO PRIVATE LAWYERS
-------------- -


9. (U) On 4 August, two little-know private attorneys filed
impeachment requests with the Chamber of Deputies against
Lula, holding him culpable for the corruption scandals.
Chamber President Cavalcanti, who has authority for
considering and disposing of the requests, stated he would
"do nothing hasty" in considering the motions. Earlier in
the week, Cavalcanti indicated he saw no grounds for
impeachment. Four other impeachment requests, unrelated to
the current situation, have been filed against Lula in
private motions since he assumed office. All were shelved by
the Chamber.

COMMENT
--------------


10. (C) Dirceu's testimony this week drew a categorical line
around him, and by extension, around Lula, Dirceu's only true
superior in the GOB and PT. Dirceu professed complete
innocence and unawareness of massive schemes he attributed to
rogue officers of the PT -- a party that Dirceu helped to
found and over which he has exerted unique dominance.
Jefferson's witheringly ironic, on-camera challenges to this
version in the ethics hearing resonated among a political
class that has had no doubts about Dirceu's power. We tend
to share the skepticism, as our own contacts with Dirceu have
led us to believe there is little in the government or PT
that escapes his attention and influence. Whatever the
veracity of his account, Dirceu is a brilliant and ruthless
survivor, who would be uniquely equipped among Brazilian
politicians to carry off the big lie -- he endured
interrogation during Brazil's dictatorship and later lived
clandestinely in the country for eleven years, disguised by
plastic surgery and a false name. But the affirmations of
Dirceu's involvement by Jefferson and Valerio, and the
persistent flow of new information that could demolish such
an unequivocal story, leave Dirceu in an exposed position.


11. (C) For now, Dirceu's audacious approach, coupled with
the protestations of Lula's innocence by Jefferson and
Valerio, are reinforcing the shield around Lula. And for the
moment, this seems to fit with the mood of most of the
congress, opposition and public, who want a rigorous
accounting of the scandal and will be happy to see the
rolling heads of implicated politicians, but who remain wary
of the trauma of a presidential impeachment. Whether this
remains the case depends on new revelations that, in the
current environment, seem likely to appear; on whether Dirceu
-- in the event he faces disaster -- has evidence of Lula's
complicity that he could unleash in anger against the man he
reportedly feels abandoned him; and on whether Lula can reign
in his provocative rhetoric of recent days and humbly accept
the defense of appalling ignorance that most of Brazilian
society still seems willing to afford him.



LINEHAN