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Prosecutors say LIESA, which manages the Carnival parade competition, made $27-million (U.S.) in ticket sales alone last year.

Pilar Olivares/Reuters

The dancers in Rio de Janeiro's legendary Carnival celebration are famous for their ability to cover the essentials with a minimal application of sequin and feathers. But city prosecutors say that wisp of glitter also gives cover to a web of scams, graft and other illegal activity that lurks behind the facade of the festival that draws millions of people into the streets each year.

Proceedings began earlier this month in one part of a many-stranded public inquiry into corruption and abuse of public funds for Carnival. The mayor of Rio, the chief of tourism and the heads of Rio's 12 famed "samba schools" are among those charged.

Prosecutors allege that the schools (which are really neighbourhood-based clubs) have failed to account for public funds they receive to mount the massive themed floats with thousands of dancers and musicians that, together, form the Carnival parades, and to stage a related celebration on New Year's Eve. They are also after Mayor Eduardo Paes for failing to keep an electoral promise to open up management of the parade to public competition and for continuing to give public funds to organizations widely perceived as having ties to organized crime.

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Mr. Paes, a popular mayor first elected in a landslide in 2008, had pledged to take management of the three-day-long parade competition out of the hands of the murkily administered Independent League of Samba Schools of Rio, known by its Portuguese acronym LIESA.

The league sells tickets to attend the parades, and CDs and broadcast rights – in 2012 they made $27-million (U.S.) from ticket sales alone, according to the prosecutors. The schools, meanwhile, get millions of dollars in grants from the state and city governments and companies such as Petrobras.

Rio's samba schools were historically affiliated with gangsters, known as bicheiros, who used the extravaganza as a way to launder profits from illegal lotteries. During the long years of Brazil's military dictatorship, the lottery kingpins acted as paid thugs for the junta, but burnished their public image by paying for Carnival. And the concern for the public prosecutors is that they are still involved. "Carnival is Brazilian, and with it comes all the features of Braziilan life, for better or for worse," said Aydano Motta, author of a definitive book on the celebration.

The mayor says he is trying to counter the influence of the Carnival mafia by giving the samba schools public funds instead – but prosecutors say taxpayers' money is being funnelled into unknown pockets. "We [the government] are making some people rich," said Glaucia Santana, the state prosecutor who is arguing the case in court. "I don't know who exactly, but we are. Money is being siphoned off." The inquiry began in 2006.

Mr. Paes's office said he would not comment as the case is before the courts. Previously, he has said that he did his best to take on the gangsters; he advertised for third-party bidders to manage the parade as a whole but had no takers. Last year he plaintively asked the newspaper O Globo, "What am I going to do, cancel Carnival?"

Ms. Santana agreed with the mayor's assertion that no company has expertise in staging Carnival as a whole, but argues the event could easily be broken down into smaller components with contracts that could be subject to public bidding, ending the LIESA lock.

Mr. Motta said the mayor makes another legitimate point – that there is "enormous resistance" to making any change in Carnival, and there are many vested interests, including the schools, the sponsors and the most powerful television network in the country.

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"A lot of people would lose" if there was third-party management, he said. "We need to understand that these relationships with bicheiros are deeply rooted and they don't involve only power and money – they are also relationships of affection. It's easier to understand a world where there is only good and bad. But it's more sophisticated than that."

And Carnival is already cleaner than it once was. "If you look at old pictures, the biggest bicheiros were at the front of the parade posing like they own it. Today they don't even show up anymore," he said. "It's a process. You can't change something built in 60 years in two years or 10."

Fernando Horta, head of the Unidos da Tijuca samba school (which has won the coveted Carnival champion title multiple times) said his organization uses all the funds it is given properly; it needs the cash, he said, because it's hugely expensive to put on the parade.

And city hall should pay for it because the event brings in the bulk of Rio's tourists every year, he added, suggesting that less-savoury private interests might then be avoided. "If the public authorities assist more, it helps us avoid the need for other 'patrons' and such things."

Ms. Santana, the prosecutor, said it would likely be at least four years before there is a verdict on any part of this case. And the public of Rio should have no illusions that even if she wins this case, Carnival would be clean.

"They will always find news ways to do it," she said. "I've been here 12 years, and I know now our job is just to contain the problems – forget solving. I have faith that public prosecutors prove their worth – but correcting the character of human beings, that's a job for God."

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