Brazil Scandal: `7 Dwarfs,' Huge Cash Payoffs -- Officials Accused Of Milking Millions From Federal Budget

RIO DE JANEIRO, Brazil - It is a tale of cash-stuffed suitcases, secret payoffs, an accused killer turned stool pigeon and a shady group of lawmakers known as "The Seven Dwarfs."

The charges of high-level malfeasance come barely a year after the impeachment of President Fernando Collor de Mello for corruption. Collor later resigned and a top aide fled the country, one step ahead of the police.

Now the clean-government crusade has revived and become a wrenching test for Brazil's civilian government, still taking root after a 1964 to 1985 military dictatorship.

"We are not judging only the fate of people, (but) the fate of democracy in Brazil," said Sen. Jarbas Passarinho, the head of a joint congressional committee investigating the scandal.

The scandal broke this month when police in Brasilia, the capital, raided the house of economist Jose Carlos Alves dos Santos. They were searching for evidence that Santos, former director of the federal budget department, had kidnapped and murdered his wife.

Instead, they found $800,000 - including $30,000 in counterfeit bills. They also found $300,000 more in a bank vault and traces of cocaine in his private plane.

In a tell-all interview in the current edition of Veja magazine, Santos said the money came from a network of corrupt officials that milked millions of dollars from the federal budget.

Santos named 24 senators and representatives, three governors and seven current or former Cabinet ministers he said manipulated the budget and took bribes or kickbacks.

He said the practice became common after 1988, when a new constitution allowed Congress to present amendments to the budget even after a final draft had been approved.

Santos explained that lawmakers earmarked a public works project for a certain company and took a kickback. Another way was to request funding from the Education or Social Welfare ministries to favor certain institutions - often created by the legislators themselves for pork-barrel projects.

Santos said there was little solid proof because the payoffs were always in cash. However, newspapers dug up a list of budget amendments with the name of the "approved" construction company penciled in beside.

All the amendments were approved by a budget committee controlled by seven legislators, known because of their small stature as "the seven dwarfs."

For his work as an adviser to the committee, Santos said, he received suitcases of cash from the "head dwarf," powerful committee chairman Rep. Joao Alves, a 30-year veteran of Congress.

Alves called Santos a liar, and said he did nothing wrong.

The government suspended two Cabinet ministers accused of wrongdoing: Regional Integration Minister Alexandre Costa and the presidential chief of staff, Henrique Hargreaves, a personal friend of President Itamar Franco.

Although Franco was not personally implicated, he said he would not oppose holding early elections if Congress agreed that was best.