US embassy cable - 05BRASILIA2305

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