PWC'S TRAVAILS IN RUSSIA WORSEN

C O N F I D E N T I A L MOSCOW 005403

SIPDIS

SENSITIVE
SIPDIS

STATE FOR EUR/RUS
TREASURY FOR TORGERSON
DOC FOR 4231/IEP/EUR/JBROUGHER
NSC FOR MCKIBBEN

E.O. 12958: DECL: 11/15/2017
TAGS: EFIN ECON RS
SUBJECT: PWC'S TRAVAILS IN RUSSIA WORSEN

REF: A. MOSCOW 3441


B. MOSCOW 5244

C. MOSCOW 5083

D. AND OTHERS

Classified By: ECON M/C Eric Schultz, Reasons 1.4 (b/d).

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


1. (C) During a November 14 meeting with EconMinCouns,
Managing Director for PricewaterhouseCoopers Russia (PWC)
Peter Gerendasi offered a bleak assessment of his company's
current legal difficulties. Gerendasi was pessimistic about
the November 26 appeal of PWC's ongoing expatriate salary
case (Reftel A) and noted that the related criminal
investigation had been extended yet again, until mid-January.
He said the outlook for the next session of the YUKOS appeal
on November 28 was less clearly negative (Reftel B),but in a
related development the Finance Ministry had just opened a
full-scale review of the firm's accounting policies and
practices, to be completed by December 20, with the firm's
license at stake. Despite the company's mounting legal
travails, Gerendasi maintained that PWC was in Russia for the
long haul. End Summary.

--------------
Expatriate Salary Case
--------------


2. (C) Managing Director for PricewaterhouseCoopers Russia
(PWC) Peter Gerendasi flatly told EconMinCouns he was not
optimistic the firm's position would prevail in its November
26 appeal of its nearly two-year case regarding expatriate
salary expenses from 2002. The firm's lawyers expected the
decision to go against PWC. The company would continue to
appeal the decision, if necessary all the way back to the
Supreme Arbitration Court (Reftel A). Gerendasi reiterated
that the case had already cost PWC USD 15 million in back
taxes. If the case were ultimately to be decided against PWC
and the government went after the firm's expatriate salary
accounting for 2003-2005, it could cost the firm an
additional USD 45 million or more.


3. (C) Gerendasi said the related criminal case had also
taken a turn for the worse. The Interior Ministry (MVD)
extended the investigation yet again, until mid-January,

2008. The deadline for the MVD's investigation has now run
out eight separate times. The investigation, which started
in February, reached a high point in March when the MVD
raided PWC's Moscow office and confiscated paper files as
well as the firm's back-up tapes. The raid was ruled illegal
in May, but the Federal Security Service kept the back-up
tapes, which Gerendasi called "records for the last 15 years
of PWC's work in this country."


4. (C) Gerendasi said the company had hoped the criminal
case would be dropped because the investigation had become
"less intense" in recent weeks, and MVD officials had told
Gerendasi they were just "going through the motions."
Gerendasi said it appeared the criminal investigation had
devolved into a pressure tactic against the firm.

--------------
YUKOS Case
--------------


5. (C) According to Gerendasi, the outlook for the next
session of the YUKOS appeal, set for November 28, was less
clear. Gerendasi expressed the hope that the Prosecutor
General's written statement from July that PWC had not
knowingly facilitated the former oil giant's tax evasion
would be a deciding factor in PWC's favor. However, the
media coverage of the firm's position on its right against
self-incrimination (Reftel B),which PWC offered as a basis
for not giving the court access to the personnel files of
PWC's 150,000 employees worldwide, had not given much cause
for optimism. Although the potential financial penalties in
this case were only on the order of USD 500,000, Gerendasi
noted that the real threat remained to the firm's auditing
license.


6. (C) In that regard, Gerendasi said PWC had received still
more bad news the week before. Finance Ministry Director for
State Financial Control and Auditing Leonid Shneidman had
called Gerendasi in for a meeting and had subsequently issued
instructions to two professional accounting organizations,
the Association of Auditors and the Institute of Professional
Accountants, to conduct a full-scale review of PWC's auditing
policies and practices. The main issues under review would
be PWC's role as the YUKOS auditor of record and the firm's
internal controls related to the auditing business.


7. (C) Gerendasi said Shneidman had noted the genesis of
this review, due on his desk by December 20, was a request
from the Federal Tax Service in April to examine PWC's
business practices. (Note: At that time, PWC had just lost
its first instance court case in the YUKOS case. End Note.)
Gerendasi said that a positive review would not be much help
to PWC since neither the court nor the Federal Tax Service
would be inclined to use it to show leniency. A negative
review, however, could result in PWC's audit license being
revoked.

--------------
Russia Matters to PWC
--------------


8. (SBU) Despite the rather stark picture Gerendasi painted,
he said that PWC remained bullish on Russia and intended to
maintain its operations in-country. The firm now had 2,000
employees and an expanding client base. He expressed
confidence that PWC would earn a positive evaluation during
its full-scale review and that, in the long term, the firm's
position in the expatriate salary and YUKOS cases would
prevail. He added that in the interest of facilitating a
resolution to the firm's short-term difficulties, PWC's
international leadership would try to meet with senior GOR
officials in the near future.

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


9. (C) Despite Gerendasi's long-term optimism, the political
and legal concerns that are driving the heightened scrutiny
of PWC's accounting practices appear to have taken on a life
of their own, and it appears increasingly unlikely that PWC's
troubles will go away any time soon or that the firm will
emerge unscathed.
BURNS