Identifier
Created
Classification
Origin
05BRASILIA2150
2005-08-12 17:53:00
SECRET
Embassy Brasilia
Cable title:  

BRAZIL CORRUPTION SCANDAL UPDATE, WEEK OF 8-12

Tags:  PGOV PREL ECON BR 
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This record is a partial extract of the original cable. The full text of the original cable is not available.
S E C R E T SECTION 01 OF 03 BRASILIA 002150 

SIPDIS

TREASURY FOR PARODI, STATE PASS TO USTR AND TO USAID/LAC/AA

E.O. 12958: DECL: 08/12/2015
TAGS: PGOV PREL ECON BR
SUBJECT: BRAZIL CORRUPTION SCANDAL UPDATE, WEEK OF 8-12
AUGUST 2005

REF: A. BRASILIA 2082

B. BRASILIA 1979

C. BRASILIA 1874

D. BRASILIA 1973

E. BRASILIA 1631

F. BRASILIA 2025

G. (S/NF) TD 314/47956-05 9 AUG 05

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

S E C R E T SECTION 01 OF 03 BRASILIA 002150

SIPDIS

TREASURY FOR PARODI, STATE PASS TO USTR AND TO USAID/LAC/AA

E.O. 12958: DECL: 08/12/2015
TAGS: PGOV PREL ECON BR
SUBJECT: BRAZIL CORRUPTION SCANDAL UPDATE, WEEK OF 8-12
AUGUST 2005

REF: A. BRASILIA 2082

B. BRASILIA 1979

C. BRASILIA 1874

D. BRASILIA 1973

E. BRASILIA 1631

F. BRASILIA 2025

G. (S/NF) TD 314/47956-05 9 AUG 05

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


1. (SBU) SUMMARY. In one of the most dramatic moments thus
far in the continuing corruption scandals (refs a-f) plaguing
the Brazilian government, President Lula da Silva's 2002
campaign publicity coordinator Duda Mendonca stated on 12
August before the Postal Service CPI that the Workers' Party
(PT) paid for his services through deposits to an offshore
account in transactions managed by advertising executive and
money man Marcos Valerio. Such transactions would constitute
violations of Brazilian tax laws, and would expose Lula
himself more directly to guilt by association with Valerio's
improprieties. This development, coming atop the already
broadening dimension of the crisis, led some opposition
figures to openly discuss impeachment. On 12 August Lula
read a brief statement on television in which he denied any
wrongdoing, pledged continued investigation by federal
authorities and punishment of all guilty parties, and
apologized to the nation for the current state of affairs.


2. (SBU) Summary continued. Earlier in the week, Valerio
testified before the Congressional Inquiry Committee (CPI) on
vote buying that former Presidential Chief-of-Staff Jose
Dirceu had authorized loans to the PT, and that former
Communications Minister Luiz Gushiken was also aware of the
loans to the Party. Valerio presented a list with the names
of 79 persons, the majority from the opposition party PSDB,
who had withdrawn money from his accounts. Also this week,
eight impeachment requests against congressmen allegedly
involved in the PT bribes-for-votes scheme were sent to the
Ethics Committee. And bank records sent by the PT to the
Brazilian Electoral Court revealed that four deposits had
allegedly been made by President Lula into PT accounts in
2003-4. The President denied having used loaned party funds

for personal expenses and others affirmed that the President
was unaware of the payments. END SUMMARY.

LULA'S PUBLICIST DEEPENS THE CRISIS...
--------------


3. (U) On 11 August, Duda Mendonca, Brazil's most famous
political consultant and the media architect of Lula's
successful 2002 presidential campaign, delivered a voluntary
testimony before the Postal Service CPI, and deepened the
current political crisis by stating that he received illegal,
undeclared funding from accused PT money broker Marcos
Valerio via deposits into an offshore account. According to
Mendonca, the money was used to pay the Workers' Party (PT)
costs for the 2002 campaign in which Lula won the presidency.
Such transactions would constitute violations of Brazilian
financial and tax laws. The statement shocked PT congressmen
in the hearing, who wept in indignation during Mendonca's
testimony and joined the opposition in demanding that Lula
address the nation to explain his involvement in a widening
scandal, which now is moving beyond irregular campaign
funding already acknowledged by the PT and the vote-buying
scheme that is widely alleged (refs) and into the sphere of
tax evasion and possible financial crimes. Senior opposition
figures, in the wake of the 11 August testimony, openly
discussed whether the time is near for initiating impeachment
proceedings against the President.

...AND LULA SPEAKS OUT
--------------


4. (U) In response to the dramatic Mendonca testimony, and
after weeks of calls for a presidential address to the
nation, Lula made a brief televised statement on 12 August.
Speaking calmly and forcefully, against the backdrop of a
meeting of his cabinet in the Planalto Palace, Lula denied
any personal wrongdoing, pledged commitment to thorough
ongoing investigations by authorities of all allegations,
promised continuation of fiscal policies and economic growth,
called for political reforms, and apologized to the Brazilian
people for the "indignaties" of the current situation.

VALERIO'S SECOND TESTIMONY BEFORE CONGRESS
--------------


5. (U) Earlier in the week, on 9 August, Marcos Valerio
testified before the vote-buying scheme CPI that former
Chief-of-Staff Jose Dirceu had authorized more than $24
million in loans to the Workers' Party (PT). Valerio stated
that Dirceu "was a powerful and arrogant minister. He is no
one's friend . . . Today, I consider him my enemy." Valerio
also maintained that Luiz Gushiken, former Communications
Minister and current chief of the Presidency's Center for
Strategic Studies, was aware of the loans to the PT as well
as the money the PT gave to other parties. In his 14-hour
testimony, Valerio also stated that more than $6 million was
given to advertising executive Duda Mendonca. Valerio made
it a point though to emphasize Lula's innocence, stating that
he could not say that Lula had knowledge of the illicit
transactions. Valerio presented a list with the names of 79
persons, the majority from the opposition party PSDB, who had
withdrawn more than $783,000 from his accounts for the 1998
Minas Gerais state campaign. Late in the testimony, a row in
the committee broke out when a PT congressman attempted to
add into the record a second list of 128 names of mainly PSDB
allegedly involved in the 1998 Minas actions, which was
procured in dubious circumstances. The list was widely
discredited as false, with some in the PSDB accusing Dirceu
and others of planting the document to divert attention from
the PT acts as the center of the scandals. The PT
congressman, Paulo Pimenta, resigned his position from the
CPI on 11 August.

CHAMBER MAY IMPEACH OVER TWENTY CONGRESSMEN
--------------


6. (U) On 10 August, Speaker of the House Severino Cavalcanti
yielded to pressure from opposition leaders and forwarded to
the Ethics Committee eight impeachment requests against
congressmen allegedly involved in the PT bribes-for-votes
scheme, including the complaint against Jose Dirceu (PT),
Lula's former chief of staff. Besides Dirceu, five members
of Roberto Jefferson's PTB party, one member of the Brazil's
vice-president's PL party, and one of the PRB party will be
investigated for violating congressional decorum and, if
found guilty, may be impeached and lose political rights for
8 years. In addition, the Ethics Committee may open
investigations on another 13 congressmen, mostly from the PT
and PP parties, also for violating congressional decorum.
These congressmen can resign before investigations begin in
order to retain political rights, as did the former PL
president Valdemar Costa Neto who renounced his chamber seat
on August 1. PT president Tarso Genro had previously stated
that any member who resigned would be expelled from the
party. However, Dirceu publicly confronted Genro,
disagreeing with his decision and further dividing the party,
just weeks before its internal elections.

Congressmen under investigation -- cannot resign:
- Roberto Jefferson (PTB)
- Jose Dirceu (PT)
- Romeu Queiroz (PTB)
- Sandro Matos (PTB)
- Joaquim Francisco (PTB)
- Neuton Lima (PTB)
- Francisco Goncalves PTB)
- Sandro Mabel (PL)
- Alex Canziani (PRB)

Congressmen under suspicion ) have the option of resigning
to retain political rights:
- Joo Paulo Cunha (PT): former President of the Chamber
of Deputies
- Paulo Rocha (PT)
- Professor Luizinho (PT)
- Joao Magno (PT)
- Josias Gomes (PT)
- Jose Mentor (PT)
- Jose Janene (PT)
- Pedro Correa (PP)
- Pedro Henry (PP)
- Vadao Gomes (PP)
- Carlos "Bispo" Rodrigues (PL)
- Wanderval dos Santos (PL)
- Jose Borba (PMDB)
LULA'S LOANS FROM PT?
--------------


7. (U) An examination of bank records sent by the PT to the
Brazilian Electoral Court revealed that four deposits had
allegedly been made by President Lula into PT accounts,
totaling $12 million in 2003-4. According to the party, the
deposits were intended to settle Lula's debts with the PT.
The President denied having used loaned party money, and
Minister of Political Articulation Jacques Wagner and PT
floor leader Senator Aloisio Mercadante said that this loan
never existed, that the PT treasury had committed an error by
noting this "loan" in the President's name. On 9 August,
Paulo Okamotto, the PT's treasurer in Lula's 1989
presidential campaign currently heading the Small Business
Administration (Sebrae),stated that he had made the deposits
in the President's name, but did not show any receipts, and
affirmed that the President was unaware of the payment. It
would be illegal to use PT formal funds -- which are in part
public moneys provided under Brazilian electoral programs to
all registered political parties -- for personal expenses.

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


8. (S/NF) Duda Mendonca's testimony appears to directly link
Lula's campaign with illegal off-shore financial activity run
by Marcos Valerio, the money man at the center of the ongoing
scandal. In itself, this is a grave development for Lula in
terms of his personal vulnerability. But it comes at a time
when weeks of revelations and testimony (refs a-f) have
already established a body of compelling circumstantial
evidence of impropriety on such an enormous scale that it is
becoming impossible for the congress, media and public to
avoid intense questions about Lula's broad responsibility --
whatever his proven level of awareness -- for the crisis
engulfing Brazilian political life. In this context, open if
reluctant discussion of the possibility of impeachment -- a
path most Brazilians still view with weary dread -- is
increasing. There is a growing sense that matters must now
move through investigation toward an end point of meaningful
consequences, or risk dissolution into a farce that could
damage the credibility of the country's institutions, which
have generally functioned well in the crisis thus far. At
this point, additional substantial revelations of serious
impropriety -- especially if linked directly to Lula -- would
be devastating. We believe such revelations may emerge (ref
g). In septels to follow, we will assess political aspects
of scenarios of either an impeachment or a discredited Lula
limping through the balance of his term. A septel being
transmitted concurrently with this message analyzes economic
dimensions of those scenarios.

LINEHAN