PWC CASE: "PLEADING THE FIFTY_FIRST"

UNCLAS MOSCOW 005244

SIPDIS

SENSITIVE
SIPDIS

STATE FOR EUR/RUS, EEB/IFD
TREASURY FOR TORGERSON

E.O. 12958: N/A
TAGS: EFIN ECON RS
SUBJECT: PWC CASE: "PLEADING THE FIFTY_FIRST"

REF: MOSCOW 5083


1. (U) This message is sensitive but unclassified and not for
internet distribution.

--------------
Summary
--------------


2. (SBU) On October 26, PricewaterhouseCoopers Russia (PWC) refused
to submit documents on the auditing firm's worldwide staff that an
appellate arbitration court had demanded earlier in the month
(reftel). PWC invoked Article 51 of the Russian Constitution, which
provides protection against self-incrimination, as its basis for not
complying with the court's demands. Our contacts observe that this
may be the first time a corporation in Russia has attempted to use
in its defense a right that has historically been applied only to
individuals. They also agree that the tactic is not likely to be
effective in this case. End Summary.

--------------
PWC Refuses to Comply...
--------------


3. (SBU) On October 26, the Russian office of PWC told the 9th
Appellate Arbitration Court in Moscow that it would not comply with
the court's request for access to the auditing firm's worldwide
personnel files. On October 12, the court had demanded that the
Federal Tax Service (FTS) be granted access to these files as part
of the latter's investigation into the extent of tax evasion by
former oil giant YUKOS. In that session, the court upheld the FTS
claim that PWC had colluded with YUKOS to defraud the GOR out of
billions in tax revenue (reftel). The FTS had argued: PWC was the
YUKOS auditor of record for almost 10 years; and PWC acknowledged in
June 2007 that YUKOS had not fully disclosed information relevant to
the auditing process. In light of these facts, FTS maintained, it
had a right and a duty to investigate where and how else YUKOS might
have schemed to evade taxes.

--------------
And PWC Pleads the "51st"
--------------


4. (SBU) PWC said during the October 26 session that its basis for
not complying with the court's demands was Article 51 of the Russian
Constitution. The article provides protection against
self-incrimination, stating that no one shall be compelled to give
testimony against him/herself, the person's spouse or close
relatives. Our contacts could not recall and had found no precedent
of an instance in which a corporation had invoked this provision of
the Russian Constitution.

--------------
Here Be Dragons
--------------


5. (SBU) Alexander Gomonov, a corporate counselor at Baker and
Botts in Moscow, said that PWC's decision will force Russia's legal
system into uncharted waters. Article 51 has so far only been
invoked by individuals and predominately in criminal cases. Gomonov
expressed doubt that the appellate arbitration court would set a
precedent by permitting this particular approach. He explained
that, regarding criminal law, the legal standing of corporations has
only recently begun to develop. Since 2002, the criminal code has
allowed corporations to be classified as potential victims of
crimes, but not yet as defendants.


6. (SBU) Albert Eganyan, an attorney at the Vegas-Lex law firm,
agreed with Gomonov's skepticism but was more emphatic. He said the
9th Appellate Arbitration Court would be an unlikely venue for a
multi-precedent setting decision. If the court upheld PWC's
argument, it would grant a corporation unprecedented standing, in a
civil case, on the basis of a right which the Russian legal system
has only assessed in criminal proceedings. Eganyan said PWC's
attorneys deserve credit for their creativity, "but it won't work."


7. (U) Yuliy Tay of the Bartolius Law Firm said that whether or not
the court allows PWC to use Article 51, "this will not release PWC
from the court's injunction to provide personnel files." Tay noted
that even in the U.S., where a corporation's rights and
responsibilities under criminal and civil statues are more
developed, corporations may not employ a blanket refusal "to
produce" documents, which "are not testimony."

--------------
Comment
--------------

8. (SBU) PWC's unprecedented use of Article 51 as a basis for not
furnishing documents seems unlikely to be successful. We'll know
November 28, when the next session of the appeal will be held.
BURNS