UPDATE ON PWC'S RUSSIAN TAX ISSUES

1. (C) On January 30, the Department of Economic Security
(DES) within the Ministry of Interior (MVD) called on
PricewaterhouseCoopers' (PWC) senior managing partners to
provide a detailed explanation of the firm's expense
accounting for its expatriate employees. DES officials
interrogated the partners aggressively for seven hours to
determine whether PWC's practices merited criminal charges.
The basis for the questioning was the November 2006 Federal
Arbitration Court decision in favor of the Federal Tax
Service which had charged that PWC underpaid USD 14 million
in taxes as a result of improperly expensing expatriate
salaries. Although PWC has paid the back taxes, the amount
exceeds the threshold to pursue criminal charges. PWC's
criminal defense counsel concluded that the case was rapidly
escalating, and moving toward the possible initiation of
criminal charges. PWC Global CEO Sam DiPiazza will come to
Moscow the week of February 5 for government meetings that
the Embassy is helping to organize.



2. (C) PWC senior managers and legal counsel say that the
damage from criminal proceedings would not be limited to PWC.
They explained that to conduct a legal audit of a company,
the auditing firm must be independent from the shareholder's
influence. Since a criminal case would bring a major
shareholder in a significant number of firms PWC audits into
conflict with the auditor, PWC's independence would be
"impaired," and the firm would not be in a position to
release audited financial statements for its clients with
significant state-owned shares (like Sberbank, RAO UES, and
Gazprom). This could, for instance, complicate the efforts
of some PWC clients, like Sberbank, to comply with disclosure
requirements related to issuing financial securities.
Sberbank is planning to conduct a USD 7.5 billion stock
offering by the end of the first quarter of 2007.

Comment


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3. (C) To date, no criminal charges have been filed.
Speculation is brewing, however, that PWC could be caught in
the money-laundering allegations which may be in the works
against former Yukos chief Mikhail Khodorkovsky. End Comment.
BURNS