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