US embassy cable - 04BRASILIA1906

UNCLAS SECTION 01 OF 02 BRASILIA 001906 
 
SIPDIS 
 
SENSITIVE 
 
TREASURY FOR OASIA - DAS LEE AND SSEGAL 
NSC FOR RENIGAR 
USDOC FOR 3134/USFCS/OIO/EOLSON/DDEVITO 
USDOC FOR 4332/ITA/MAAC/WH/OLAC/DMCDOUGALL/ADRISCOLL 
USDOC FOR 4332/ITA/MAC/WH/OLAC/JANDERSON/WBASTIAN 
STATE FOR EB/IFD/OMA 
 
E.O. 12958: N/A 
TAGS: EFIN, ECON, PGOV, BR, Macroeconomics & Financial 
SUBJECT: BRAZIL CENTRAL BANK DEPUTY GOVERNOR QUITS AMID 
SCANDAL 
 
 
This cable is Sensitive but Unclassified, please protect 
accordingly. 
 
1. (U) Deputy Central Bank Governor for Monetary Policy Luiz 
Candiota resigned July 28 after press allegations the 
previous weekend of improprieties in both Candiota's and 
Central Bank (CB) President Henrique Meirelles' pre-2003 
Brazilian income-tax returns.  In Meirelles' case, the chief 
accusation is simply that he should have filed a Brazilian 
tax return for 2001, i.e., that he was not entitled to claim 
physical residence in the U.S. from 1997 through 2001 as 
grounds for exemption from Brazilian income tax, since that 
year he registered himself with the Goias state electoral 
committee as locally domiciled -- a standard requirement for 
his planned 2002 race for a seat in Brazil's Congress. 
Meirelles defended himself in an immediate Central Bank press 
release, pointing out that he had paid all U.S. taxes due 
while living in the United States and asserting that he had 
merely maintained a domicile in Brazil for electoral 
purposes, which did not require him to pay Brazilian taxes 
during that period. 
 
2. (U) The charges against Candiota were of a different 
order, involving apparent multiple cases of unreported 
financial transfers, typically in the low-to-mid six figures 
(U.S. dollars), some of them to offshore tax havens, through 
a New York-based bank alleged to be a known money-laundering 
conduit.  Like Meirelles, Candiota also denied any illegality 
in his conduct.  However, he did not publicly offer specifics 
to rebut the allegations and apparent detail of documentation 
that he had hidden assets abroad.  In contrast to the 
immediate CB press release upholding Meirelles, the GoB made 
no public move on Candiota's behalf; in fact, comments on 
the case by Justice Minister Bastos were widely seen as 
having the opposite effect.  In his letter of resignation, 
Candiota stated that despite the allegations, untruth, he 
felt "personally violated" by them and was no longer willing 
to remain in the job under those circumstances.  He also 
argued it was best for him to leave quickly lest extended 
scandal harm the Central Bank or unsettle financial markets. 
 
3. (SBU) A senior advisor to the Central Bank Board gave no 
credence to the allegations against Candiota and Meirelles in 
a July 28 conversation with Emboff and argued that the media 
to-do over the two top CB figures was simply an example of 
election-year politics, driven by opposition efforts to 
discredit the Lula administration.  He predicted more of the 
same as October municipal elections draw near. 
 
4. (SBU) Simultaneous with the announcement of Candiota's 
resignation, Meirelles, after consultation with Finance 
Minister Palocci, nominated CSFB Managing Director Rodrigo 
Azevedo to replace him.  Azevedo is well and favorably known 
to the Embassy and to Consulate Sao Paulo as a keen, and 
orthodox economic analyst with impeccable academic 
credentials.  His nomination has drawn universal plaudits 
from the financial community, and markets responded calmly 
both to Candiota's resignation and replacement.  The 
nomination will require Senate confirmation, tentatively 
scheduled for the second or third week of August.  At this 
point the only obvious obstacle to a quick confirmation is 
the greater difficulty of obtaining a quorum during this 
electoral season. 
 
5. (SBU) Comment: Candiota's exit is plainly a GoB effort 
quickly to put this scandal in the past, and defuse any 
danger to Meirelles himself, which at this stage seems to be 
the likely outcome.  Had these charges surfaced 
two-and-a-half months ago, amidst the sustained bad economic 
news and criticism of the Central Bank's tough monetary line 
that prevailed at the time, it might have caused serious 
political and market damage.  But the improved economic data 
and trends since then give the GoB and Meirelles much more 
political leeway.  Indeed, the very fact that the GoB gave 
Meirelles full authority to pick Candiota,s replacement 
usefully reinforces the perception of de facto Central-Bank 
autonomy, even in the absence of formal CB "independence," 
which Finance Minister Palocci recently re-announced as a key 
prospective GoB legislative goal for 2005. 
 
DANILOVICH