BRAZIL CORRUPTION SCANDAL UPDATE: WEEK OF 3-7

UNCLAS SECTION 01 OF 02 BRASILIA 002687

SIPDIS

TREASURY FOR PARODI; STATE PASS USTR AND USAID/LAC

E.O. 12958: N/A
TAGS: PGOV PREL BR
SUBJECT: BRAZIL CORRUPTION SCANDAL UPDATE: WEEK OF 3-7
OCTOBER 2005

REF: (A) BRASILIA 2614
(B) BRASILIA 2601 AND PREVIOUS

1.(U) Introduction: Brazil experienced a relatively
quiet week on the political scandal front, as congressional
investigators sought to regain their bearings following the
leadership change in the lower house. The three
congressional inquiry committees focused on the
interlocking scandals (ref b) returned to work, even as
President Lula da Silva charged there were too many
unconfirmed accusations and allegations. Lula's comments
drew a sharp rejoinder from the opposition's Senate leader.
End summary.

"DENUNCISMO"
--------------


2. (U) The week got off to a bad start for Lula's Workers'
Party (PT) when its former Secretary-General, Silvio
Pereira, gave an interview published in Sunday's Folha de
Sao Paulo in which he alleged that the entire PT Executive
Committee knew all about the "Caixa 2" illegal campaign
fundraising schemes. Numerous members of the executive
committee and other party leaders rushed into print with
categorical denials of any such knowledge.


3. (U) In a speech Monday to the Sao Paulo State
Federation of Industries (FIESP),Lula complained of a
climate of "denuncismo" characterized by allegations and
accusations which in the end are not corroborated or
confirmed. "And there are no apologies, no reparations, no
retractions," Lula complained. Coming off his victory in
getting political ally Aldo Rebelo elected President of the
lower house, Lula appears to be trying to move off the
defensive and intensifying efforts to put the scandal
behind him. But his remarks drew a sharp rejoinder from
Arthur Virgilio, leader of the opposition PSDB in the
Senate. In a twenty-minute speech, Virgilio listed the
names of all the individuals and private and state-owned
companies who have been implicated in the scandal and have
suffered consequences. These include 15 Members of
Congress facing possible expulsion, one already expelled,
three who resigned (Virgilio gratuitously included ousted
lower house President Severino Cavalcanti, whose downfall
was caused by an entirely unrelated incident),and numerous
executives of state-owned companies who were forced to step
down. In all, he said, 47 private companies and 26 state
entities have been enmeshed. "If it were all merely
'denuncismo,' nobody would have had to be fired, nobody
would have had to pay some price," Virgilio said. Leading
media pundits such as columnist Dora Kramer also quickly
criticized Lula's apparent effort to dismiss in such a
facile manner five months of devastating revelations and
investigations.

IN THE CPIs
--------------


4. (U) On Tuesday, after several unsuccessful attempts,
the congressional inquiry committee (CPI) charged with
pursuing corruption in the postal service was finally able
to assemble a quorum and voted to break the banking, tax,
and telephone secrecy privilege of eleven brokerage firms
involved in pension fund investments. The CPI continues to
track allegations of irregularities in state-owned
companies and dubious fund-raising activities by the PT.
PT and allied members on the committee have been accused of
trying to sabotage the CPI's work by failing to attend
meetings, thereby depriving the committee of a quorum.
Their sudden appearance may signal a shift in tactics as
the government now wants to ensure that the CPIs complete
their work and disband in the allotted six-month time
frame, so as not to extend their activities into the
election year. The Postal Service CPI is due to finish its
work December 9, but most provisions are for an extension
of its mandate into early 2006.


4. (U) Also on October 4, the CPI investigating bingo
corruption voted to summon Lula's personal secretary,
Gilberto Carvalho, to a confrontation October 26 with the
brothers of Celso Daniel, the murdered PT mayor of Santo
Andre (ref B). Daniel was murdered in January 2002 in what
many now suspect was a crime related to politics and
municipal corruption. Carvalho, who is alleged to have
directed efforts to cover up the crime to keep it from
tainting the PT, testified before the committee on
September 15. Celso Daniel's brothers, Joao Francisco and
Bruno, have testified that Carvalho described to them the
outlines of a corruption scheme managed by Lula's former
Chief of Staff, Jose Dirceu --allegations both Carvalho and
Dirceu stridently deny. An irritated President Lula said,
"I'm still waiting for the Bingo CPI to call a bingo
operator." This CPI has focused much of its attention on
municipal corruption allegations involving the PT, as well
as corruption related to bingo operations.

EXPULSIONS
--------------
4.On Wednesday, the enforcement arm ("Corregedoria") of
the lower house issued a report formally recommending the
expulsion of thirteen members implicated in the scandal.
Most are accused of withdrawing funds from companies or
accounts controlled by Marcos Valerio. The house
leadership is expected next week to approve the opening of
expulsion processes against the thirteen. The first step
in the process is be an investigation by the Ethics
Committee, some of whose members are believed to favor
exonerating some of the accused.

DANILOVICH