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Cablegate: Brazil Scandal: The "Official Story" Crumbles As

This record is a partial extract of the original cable. The full text of the original cable is not available.

C O N F I D E N T I A L SECTION 01 OF 03 BRASILIA 001973

SIPDIS

STATE PLEASE PASS USTR; NSC FOR CRONIN

E.O. 12958: DECL: 07/22/2015
TAGS: PGOV PREL BR
SUBJECT: BRAZIL SCANDAL: THE "OFFICIAL STORY" CRUMBLES AS
INVESTIGATIONS INTENSIFY

REF: A. BRASILIA 1494
B. BRASILIA 1544
C. BRASILIA 1622
D. BRASILIA 1631
E. BRASILIA 1819
F. BRASILIA 1867
G. BRASILIA 1849

Classified By: Political Counselor Dennis Hearne. Reasons 1.4
(b)(d)

1. (C) Summary: The scandals (reftels) affecting the
government of President Lula da Silva and his PT party
reached a serious new level in recent days. Former PT
officers implicated in the alleged financial improprieties
have now attempted to present suspect financial transfers
managed by a private sector facilitator on the PT's behalf as
being used solely for off-the-books contributions to cover PT
campaign debts, and not as illegal payoffs to mercenary
politicians to secure votes. As such, the transfers would be
confessed violations of electoral regulations, but not
criminal offenses. In a TV interview on 17 July President
Lula da Silva essentially blessed this version of events.
But congressional investigating committees (CPIs), judicial
and media inquiries are uncovering information daily that
give the lie to that "official story," and point to the
probable existence of schemes whereby huge quantities of
public moneys were diverted by PT officials and their private
sector moneymen into potentially criminal transactions,
including bribes to secure votes. As bank records are
unsealed by investigators, revealing the breadth of the
schemes, the immense amount of money involved, and names of
prominent politicians from various parties, questions are
intensifying about Lula's personal vulnerability and the
potential for a full-blown institutional crisis that could
largely paralyze the executive and legislative branches for
months to come. End summary.

The "Official Story"...

2. (SBU) Over the past several days, senior figures in the
PT and GOB have tried to establish a consolidated line of
defense against the mushrooming scandals dominating Brazil's
political class and media (reftels). Last weekend, following
careful rehearsal with PT attorneys, ex-PT treasurer Delubio
Soares and Marcos Valerio, an advertising businessman
implicated as a money man working for the PT in suspect
financial activities, presented the following account to
Brazilian judicial authorities: Funds "loaned" by Valerio's
firms to the PT were destined for the party's "caixa 2"
(Brazilian political slang for off-the-books operating funds)
to pay party debts from 2002 and 2004 election campaigns.
They claimed that moneys were not used for monthly payoffs to
coalition congressmen to secure votes, as former PTB party
leader Roberto Jefferson and others have alleged (refs); such
payoffs would constitute bribery, a criminal act. Rather,the
transactions were violations of legal reporting requirements
for political parties in Brazil, but not violations of
criminal statutes. The moneys were transferred in direct
loans to the PT or drawn down by "authorized persons" from
bank accounts established by Valerio's firms using loans
which Valerio apparently secured by presenting as collateral
lucrative contracts his advertising firms had won with state
entities. Jose Dirceu and ex-PT Secretary General Silvio
Pereira were aware of the transactions, according to Soares
and Valerio, but Lula was not (former PT President Jose
Genoino's role is not clear).

3. (SBU) In a television interview with a Brazilian
journalist on 17 July in Paris, Lula endorsed this account,
saying the affair is limited to some elements of the PT
falling into unsavory practices that are "systematic" among
Brazilian parties, specifically use of the "caixa 2." He
expressed regret but tried to place the problem in the
broader context of structural defects in Brazilian politics
and distanced himself and his government from mistakes made
by party members of a PT that had "grown too rapidly" and
whose "best elements" had migrated to the government.

3. (SBU) That is now the "official story" and Lula and
those close to him seem rallied around it, even as rank and
file PT members fume at their party's fall into disrepute and
erstwhile Lula confidants like Genoino find themselves cast
off a listing boat. This version --if it sells-- could armor
the president against direct connection to the admitted
impropriety, which would be relegated to the arcane area of
Brazilian electoral regulations rather than criminal law.
The PT would be penalized by the electoral officials, Delubio
and others would go into the political wilderness, the fate
and direction of the party would remain unclear until
September's party convention, but the crisis might be
contained.
... That is Falling Apart

4. (SBU) But the story isn't selling, it is falling apart
rapidly. Reiterating the "official" version before
congressional investigating committees on 20 and 21 July,
Delubio Soares and Silvio Pereira were met by expressions of
exasperation and incredulity by their questioners, and the
men repeatedly refused direct answers on key points, invoking
the right to avoid self-incrimination. In the face of
continuing revelations in the media of the long and varied
list of persons "authorized" to make cash withdrawals from
Valerio's accounts, it is becoming impossible to plausibly
claim the moneys were going only to cover PT campaign debts.
Throughout the week Brazilian newspapers published names from
Valerio's unsealed bank records that include senior party
figures from not only small coalition parties but from the PT
itself, as well as congressional staff members and even
relatives of politicians (including the wife of former
president of the Chamber of Deputies, Sao Paulo PT deputy
Joao Paulo Cunha). The impression is being reinforced daily
that the suspect moneys were, in fact, being used for monthly
pay-offs for votes, and quite possibly for other illegal
purposes, and not just for PT debts. Reportedly huge amounts
of money - perhaps as much as Reals 60 million (about 30
million dollars) in total or more -- were withdrawn, with use
of armored cars to transport the cash required in some
instances.

Comment:

5. (C) Throughout the growing scandals, the government, much
of the opposition, and the Brazilian public have seemed to
want to avoid a full-blown institutional crisis. The
government obviously fears demolition; the leading PSDB and
PFL opposition want to appear responsible, playing the role
of a worthy government in waiting ready to take on a weakened
Lula at the 2006 polls; the public worries about political
paralysis. All fear damage to Brazil's image abroad that
could torpedo Brazil's hard-won economic stability. But it
seems likely that investigators and Brazil's aggressive media
will continue to tear the "official" story to shreds. There
are just too many opportunities to find inconsistencies and
uncover new facts, as implicated parties scramble to divert
blame or to cut deals. Hence the executive branch will
continue to find itself preoccupied with damage control and
the congressional scene will remain lurid and frenetically
focused, with competing CPIs serving up sensational
revelations and self-righteous pruning by those legislators
who are not themselves under scrutiny. In this environment,
and given the Lula government's already abysmal record in
dealing with the congress, it is difficult to imagine
progress in the next months on major agenda items, with the
possible exception of political reform. This unproductive
interregnum will also be followed in short order by
distractions of the 2006 campaign season, leading many
commentators to opine that the Lula government, in terms of
ability to address major domestic issues, is now virtually
over. Such a completely pessimistic prediction may be
premature, but the trends are not encouraging.

6. (C) Comment continues. Then there is the question of Lula
himself. He is a fighter and continues to enjoy deep
reserves of good will in Brazil and abroad; recent polls show
his personal popularity remains strong. Yet the sheer
dimension of a scandal that involves senior PT members
diverting huge sums of public money into what looks
increasingly like a carefully constructed artifice for
bribery on a grand scale is mind-boggling even for a
Brazilian public that is often cynical and stoic about
corruption. In this light, it seems folly on the part of the
president's advisors to have allowed him to associate himself
so clumsily with an account that is already perceived as a
cover story, one that will not survive even a few days of
scrutiny. There is intensifying concern that Lula will not
remain untouched by the crisis. The worst case scenario of
impeachment investigations still seems very remote to us --
more concrete proof would need to be produced than that
presented to date that Lula was complicit in wrongdoing or
omissive in taking action against it once he became aware.
Moreover, the public and congress are loath to confront such
a national trauma. But we could face a situation in which
Lula's governance capacity becomes deeply eroded and he
personally is increasingly seem as a distracted, disconnected
and even negligent leader. The next few weeks will be a
crucial time and we will provide regular updates and analysis
on major developments.

MANGANIELLO

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