07MOSCOW1210, RUSSIA: PWC FINED IN YUKOS TAX AUDIT CASE

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Reference ID Created Released Classification Origin
07MOSCOW1210 2007-03-21 11:33 2011-08-30 01:44 CONFIDENTIAL Embassy Moscow

VZCZCXYZ0000
PP RUEHWEB

DE RUEHMO #1210 0801133
ZNY CCCCC ZZH
P 211133Z MAR 07
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC PRIORITY 8437
INFO RUEHFT/AMCONSUL FRANKFURT PRIORITY 3251
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RHEHNSC/NSC WASHDC PRIORITY

C O N F I D E N T I A L MOSCOW 001210 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR EUR/RUS, EB/CBA 
FRANKFURT FOR COTTER 
TREASURY FOR BAKER/ALIKONIS 
NSC FOR KLECHESKI AND MCKIBBEN 
USDOC FOR 4231/IEP/EUR/JBROUGHER 
 
E.O. 12958: DECL: 03/21/2017 
TAGS: EFIN ECON RS
SUBJECT: RUSSIA: PWC FINED IN YUKOS TAX AUDIT CASE 
 
REF: MOSCOW 1028 
 
Classified By: ECON M/C Pam Quanrud, Reasons 1.4 (b/d). 
 
1.  (SBU) On March 20, the Moscow District Federal 
Arbitration Court (FAC) ruled against PricewaterhouseCoopers 
(PWC), agreeing with the Federal Tax Service that PWC had 
falsified its 2002-2004 audits of former oil giant Yukos. 
The panel rendered its decision after only four hours of 
testimony and presentation of arguments.  According to the 
ruling, the written version of which is expected out in 5 to 
10 days, PWC must pay the Federal Tax Service USD 645,000, a 
sum equal to the amount PWC received for its audit services 
plus administrative fines.  PWC representatives said they 
plan to file an appeal, a process which would then play out 
over the next six to eight weeks. 
 
2.  (C) The head of PWC's Russia operations, Mike Kubena 
(Amcit, protect), told us he was disappointed with the 
outcome.  The legal merits of PWC's case were largely 
ignored, and prosecutors denied the PWC defense team's 
request to examine and comment on the Tax Service's evidence 
before the court ruled in the case.  The prosecution used 
documents investigators obtained during an inspection of 
PWC's Moscow office on March 9 to show that PWC allegedly 
deceived Yukos investors by showing them an audit that 
differed substantially from the report to management, which 
in turn facilitated the former oil giant's tax evasion 
schemes.  Kubena lamented that the ruling reflects a 
fundamental misunderstanding of the auditor's roles and 
responsibilities and common international accounting practice. 
 
3.  (SBU) Media coverage of the FAC ruling has suggested that 
criminal charges could apply, but Kubena explained that no 
criminal charges have been filed, nor has a criminal 
investigation been opened.  In the second PWC tax case, 
involving the treatment of expat salaries, the Interior 
Ministry waited for the appeals process to play out before 
initiating criminal investigations, which explains why the 
MVD waited until January to launch a criminal investigation 
in that case.  That investigation is already in its second 
month, with no criminal charges filed to date.  The Supreme 
Arbitration Court has also not responded to PWC's February 16 
request for a hearing on the expatriate salary issue. 
 
4.  (SBU) Kubena said that PWC is deeply concerned about this 
ruling and is mapping out its next steps, but continues to 
hold out hope for a reasonable solution.  The firm has no 
plans to further air its disappointment about yesterday's 
ruling publicly, beyond what has already been released from 
its Moscow office.  He remains confident in the strength of 
the legal merits of the firm's audit practices and urges 
continued restraint when discussing this case in public. 
BURNS

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