BRAZIL CORRUPTION SCANDAL UPDATE, WEEK OF 22-26

UNCLAS SECTION 01 OF 03 BRASILIA 002305

SIPDIS

SENSITIVE

C O R R E C T E D COPY (TEXT MISSING)

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

E.O. 12958: N/A
TAGS: PGOV PREL ECON BR
SUBJECT: BRAZIL CORRUPTION SCANDAL UPDATE, WEEK OF 22-26
AUGUST 2005

REF: A. BRASILIA 2219

B. BRASILIA 2150

C. BRASILIA 2082

D. BRASILIA 2025

E. BRASILIA 1979

F. BRASILIA 1874

G. BRASILIA 1973

H. BRASILIA 1631

I. BRASILIA 2242

J. BRASILIA 2237


1. (U) SUMMARY. During the week of 22-26 August, the
ongoing, scandal-driven political crisis shaking the Lula
da Silva government and PT party (refs) was augmented by
the new corruption allegations against Finance Minister
Antonio Palocci (refs I and J). Political reactions to
Palocci's 21 August press conference, in which he refuted
accusations leveled by his former aide Rogerio Buratti(ref
I),were mostly positive. Buratti repeated the charges
before a congressional inquiry committee (CPI) on 25
August, but offered no documentary evidence. Former PL
deputy Valdemar Costa Neto and former PT communications
Secretary Marcelo Sereno also testified before CPIs. An

SIPDIS
IBOPE poll released on 23 August indicates that the
continuing crisis has finally affected President Lula da
Silva?s standing, with the results showing that in a
presidential election Lula would lose in a second-round
vote to Sao Paulo PSDB mayor Jose Serra. The PT party's
internal disputes -- particularly the struggle between
current president Tarso Genro and former minister Jose
Dirceu -- continue to undermine the party's unity and
electoral prospects. In a dramatic speech on 25 August,
Lula stated he has not decided yet whether he would seek
re-election, and pledged ?patience? in confronting the
crisis, vowing he would not emulate former Brazilian
presidents who have opted for resignation or even suicide
in the face of crises. END SUMMARY.

POLITICAL REACTIONS TO PALOCCI'S PRESS CONFERENCE
-------------- --------------


2. (U) In a testimony before the Sao Paulo state
prosecutor's office on 18 August, Rogerio Buratti, a former
advisor to Finance Minister Antonio Palocci, alleged that
Palocci received kickbacks from a trash collection company
and funneled the funds to PT coffers while he was the mayor
of Ribeirao Preto (refs I-J). Buratti could not present
evidence in support of his claims and on 21 August, Palocci
held a two-hour press conference in which he offered a
forceful, point-by-point denial of the accusations.
Although Palocci is likely to be summoned by one of the
congressional inquiry committees (CPIs) to formally respond
to Buratti?s charges, responses to Palocci?s press
conference have been mostly positive, including among
opposition leaders. PFL president and senator Jorge
Bornhausen called Palocci?s statements straight forward and
courageous in comparison with President Lula?s reactions to
date; PSDB floor leader in the Senate Arthur Virgilio
agreed that "Palocci's form and tone were excellent, and
Lula should follow his example". On 25 August, Buratti
testified before the CPI on bingo operations and repeated
his accusations against Palocci, but did not provide any
documentary evidence against the Finance Minister.

IN THE CPI?S
--------------


3. (U) The three congressional inquiry committees (CPIs)
currently investigating the interlocking corruption
scandals in Brazil had a full week. On 23 August, former
PL president and congressman Valdemar Costa Neto testified
before the CPI on vote buying, and confirmed that the PL
received approximately USD $4.2 million from the PT in
exchange for the party's support for Lula in the 2002
presidential campaign. Costa Neto denied the existence of a
PT vote-buying scheme among PL congressmen (Note: Lula's
vice-president, Jose Alencar, is a PL member. End Note).
On the same day, former PT communications Secretary Marcelo
Sereno testified before the CPI on corruption related to
bingo operations and acknowledged that he had discussed PT
finance and campaign issues in meetings in the Presidential
Palace with Marcos Valerio, the now-notorious private
sector money man at the center of current crisis (refs).


4. (U) The CPIs also approved a number of requests to
summon more witnesses that could assist in the
investigation of other corruption allegations. On 18
August, members of the CPI on Bingos approved a request to
invite Jose Francisco Daniel, the brother of Celso Daniel -
- the PT mayor of Santo Andre, Sao Paulo who was kidnapped
and murdered in still-murky circumstances in 2002 -- to
explain his claims that Daniel's assassination was linked
to a corruption scheme to funnel payoffs on municipal
contracts to PT campaign coffers. Last week, the Sao civil
police reopened its criminal investigation of the case,
which has remained the subject of an active inquiry by the
state Public Ministry (a judicial authority under Brazilian
law that can conduct separate investigations from police,
especially in instances of suspected corruption or
malfeasance),where officials have consistently supported
the theory that the killing was linked to corruption and
politics. On 22 August, the CPI on Vote Buying decided
summoned for testimony 62 persons who allegedly withdrew
money from Valerio's accounts, including congressmen and
congressional staffers. The dates for the depositions have
not been established.

ETHICS COMMITTEE REQUESTS JEFFERSON'S IMPEACHMENT
-------------- --------------


5. (U) On August 25, the Chamber's Ethics Committee
presented the final report on congressman Roberto
Jefferson's case, requesting his impeachment (refs). The
report will be voted on next week and, if approved by the
Chamber, Jefferson will lose his seat and political rights
for eight years. The impeachment requests against other
congressmen currently being investigated by the Ethics
Committee -- including the case against former Chief of
Staff Jose Dirceu--are likely to be voted on before the end
of the year.

POLL: LULA?S REELECTION PROSPECTS DROP
--------------


6. (U) An IBOPE poll released on 23 August shows a virtual
tie between Lula and Sao Paulo mayor Jose Serra (PSDB) in a
the first-round vote of a presidential election, with the
president receiving 29 percent and Serra 30 percent. Serra
would beat Lula 44 to 35 percent in a subsequent run-off
vote. In addition, President Lula's personal approval
rating dropped to 45 percent. (Note: When Lula took office,
his approval rating was 84 percent; in June 2005 it fell to
55 percent, and in July to 54 percent. End Note.) Lula's
PT party also remains divided internally. A bitter
struggle continues between current PT president Tarso
Genro, who advocates a major reformation of the party and
possibly re-orientation leftward in the wake of the
scandals, and former minister Jose Dirceu, who refuses to
stand down from aspirations for party leadership, despite
being widely viewed as culpable for the financial
irregularities and corruption allegations rocking the party
and GOB. The leadership will be decided in the PT?s
upcoming September elections. The dispute may ultimately
lead to rift in the party and threaten its survival in its
present form, with the moderate wing led by Dirceu
splitting from a more leftist group disillusioned with the
corruption scandals and critical of Lula?s orthodox
economic and fiscal policies.

PLEDGES OF PATIENCE
--------------
7.(U) In his most dramatic speech since the outset of the
three-month old crisis, Lula stated on 25 August to an
audience of businessmen that he has not decided yet whether
he would seek re-election, and pledged ?patience, patience,
patience? in confronting the pressures mounting on him and
his government. Evoking memories of former crisis-plagued
Brazilian presidents Getulio Vargas, who committed suicide,
and Janio Quadros, who resigned abruptly from office, Lula
said he would eschew such desperation and emulate instead
Juscelino Kubitschek, who endured public scorn to become,
over time, remembered as a great statesman.


8. (SBU)Comment. Three months and counting into the crisis,
a kind of melancholic routine is settling into Brazilian
politics. Judicial authorities continue investigations in
various directions, the three CPIs are becoming
institutionalized features of evening TV broadcasts, new
testimony is heard daily from witnesses who regularly seek
habeas corpus or plea deals before they open their mouths,
Sunday newspapers compete for sensational new angles each
weekend, and the electoral polls show the negative impact
of the scandals is finally seeping down into the Lula
redoubts of Brazil?s poorest and least educated classes.
Media commentators are starting to criticize the lack of
concrete results from the various inquiries, but the next
several weeks may be more decisive as investigations come
to a head, decisions are rendered by the congress on the
motions for removal of congressmen implicated in the
scandals, and the 62 individuals clearly suspected of
receipt of bribes are called to testify publicly.


9. (SBU) Comment continued. The three CPIs continue to
compete with each other in often unproductive ways, and the
organization of their internal workloads is apparently poor
and politicized, but there is emerging a rough but coherent
division of labor. The CPI on postal service corruption
will now focus on the origins of the millions of dollars in
funds that apparently served as collateral for the huge
sums loaned by money man Marcos Valerio to the PT and
allied parties. The CPI on vote buying will try to extract
confessions and stronger proof of bribery. And the bingos
CPI will focus not only on linkages between bingo houses
and PT finances, but PT schemes for kickbacks on contracts
in municipalities such as Riberao Preto and Santo Andre in
Sao Paulo that appear intended to funnel money into party
coffers. If parsing of investigations along these three
lines proves effective, Brazilians may start to perceive,
finally, the clear outlines of the monster of massive
illegality created by elements of the PT in the service of
conquering and keeping power -- a creature that now has
ravaged the party?s image, the GOB?s efficacy, and Lula?s
future and legacy.

DANILOVICH