Petrobras Probe a Potential Political Free for All

UNCLAS SECTION 01 OF 02 RIO DE JANEIRO 000190 SENSITIVE SIPDIS STATE FOR WHA/BSC, WHA/EPSC, EB/ESC E.O. 12958: N/A TAGS: ENRG EINV PGOV BR SUBJECT: Petrobras Probe a Potential Political Free for All Sensitive But Unclassified, Please Protect Accordingly. ¶1. (SBU) Summary. On August 6, the Brazilian Senate will begin an investigation (Comissao Parlamentar de Inquerito, CPI) into allegations of corruption in state-controlled oil company Petrobras. Members of the PSDB, the lead government opposition party, allege that Petrobras engaged in tax and procurement fraud as well as embezzlement. Petrobras denies any wrongdoing and claims the proceeding is a "political witch hunt" designed to delay key energy sector reform legislation. The GOB remains supportive of Petrobras and President Lula has publicly voiced his opinion that the allegations are motivated by political maneuvering by the opposition in advance of the 2010 presidential elections. Run by allies of the government, and with senators absorbed by almost daily revelations of institutional malfeasance, the Petrobras CPI may drag on and stall GOB plans to revamp the oil sector, but is unlikely to result in significant harm to Petrobras or the GOB. End Summary. Allegations -------------- ¶2. (U) In early May, members of the Social Democratic Party (PSDB) issued a call for a congressional investigation (CPI) into charges that Petrobras engaged in tax and procurement fraud resulting in the 4.3 billion reais (about USD 2.15 billion) in unpaid taxes. The Federal Police, under a special operation known as "Operation Deep Waters," released a report indicating potential fraud in the bidding for the renovation of petroleum refining platforms. The Federal Court of Accounts (TCU) also released findings noting irregularities in the company's platform construction contracts. Other charges include procurement fraud in the construction of the Abreu and Lima refinery in Pernambuco, the use of illegal accounting tactics to avoid 4.3 billion reais in tributary compensations, preferential and unreported sponsorship in the amount of 609 million reais for labor unions and cultural and social institutions historically tied to the governing Workers' Party (PT),and the embezzlement of royalties. In the last week, media revealed that, among the institutions that allegedly benefiting from Petrobras sponsorship was the foundation of Senate president Jose Sarney, who is currently under pressure to resign over corruption charges that include the illegal use of public funds and nepotism. �A; Accusers -------------- ¶3. (U) Members of the lead opposition party, the PSDB, are the major backers of the investigation. Many analysts view this as a stalling and political maneuvering tactic designed to frustrate Lula's plans to pass key pieces of energy legislation and to damage the PT's 2010 presidential hopes. According to press reports, Petrobras officials are worried that Lula's plan to revamp oil laws regulating sub salt reserves, such as the plan to create a new state-owned oil revenue centralizing company, will be significantly slowed or even stalled given the potential for the CPI investigations to last up to a year. Under this scenario, the end of the investigation would coincide with the start of the presidential election season, making the passage of any new legislation under the incumbent government unlikely. ¶4. (U) The political jockeying worries some Petrobras officials, including CEO Jose Sergio Gabrielli, who is quoted as saying that this investigation could start a "political free-for-all." The congressional inquiry could potentially reach the higher levels of the GOB, up to the Presidential Chief of Staff and hand-picked Lula successor, Dilma Rousseff, who currently serves as chairman of Petrobras's Board of Directors. ¶5. (U) Political machinations have delayed the start of the investigation four times since it was initially called for in May ¶2009. On July 14, two months after the approval for the inquiry and in preparation for the mid-year recess, the Congress officially announced the eleven members of the CPI, headed by PT Senator Joao Pedro. It is widely believed that Sarney allowed the CPI to begin work as a way of removing the limelight from his own troubles and reducing opposition pressure for him to resign. The CPI includes only three members of the major opposition parties, the PSDB and Democrats (DEM). Ruling party control of the investigation allows it to control who can be called to testify and to bar any attempts on the part of the opposition to summon Rousseff. The alliance between Sarney's PMDB and the PT make any investigation of wrongdoing on his part or that of senior GOB officials unlikely. Government and Petrobras Reactions RIO DE JAN 00000190 002 OF 002 -------------- ¶6. (U) On May 15, Lula publicly voiced his support for Petrobras, calling the congressional inquiry irresponsible and unpatriotic at a time when the country faces the challenge of a global economic crisis and is trying to raise financing to develop large new oil reserves. Lula also continues to publicly support Sarney, whose party--the largest in Brazil--is viewed as a key ally in the PT's 2010 presidential campaign. Sarney's possible connection to the Petrobras scandal will likely be the focus of the CPI initially, even though the allegations only surfaced recently. ¶7. (U) The Finance Ministry announced on July 15 the resignation of the head of the national tax authority, Lina Maria Vieira. The ministry has declined to respond to media reports that Finance Minister Guido Mantega asked Vieira to step down after the tax authority launched an investigation and fined Petrobras without Mantega's approval. The Ministry has not issued a reason for Vieira's exit and has named Otacilio Cartaxo, the current deputy secretary of the tax authority, as acting. ¶8. (U) For its part, Petrobras staunchly denies any wrongdoing and has pledged to comply fully with the investigative process. CEO Gabrielli expressed his worry that the investigation will have serious consequences for the company in a public statement. In the same statement, he attempted to assure investors of the solidity of the company, asserting his belief that the probe will uncover no evidence of fraud or corruption. Market indicators since the call for the investigation was first announced point to continued investor confidence in the company, but some analysts are worried about the potential for the probe to reveal wrongdoing. ¶9. (SBU) Comment: Run by allies of the government, and with senators absorbed by almost daily revelations of institutional malfeasance (Brasilia septel),the Petrobras CPI may drag on and stall GOB plans to revamp the oil sector. In our view, however, the CPI might make life uncomfortable for some senior Petrobras officials, and might even lead to resignations, but is unlikely to result in significant penalties or damage to Petrobras or the GOB. End comment. ¶10. (U) This message was cleared by Embassy Brasilia. HOLM-OLSEN