VZCZCXYZ0033
OO RUEHWEB

DE RUEHMO #3123/01 3611517
ZNR UUUUU ZZH
O 271517Z DEC 06
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC IMMEDIATE 6110
INFO RUEHFT/AMCONSUL FRANKFURT IMMEDIATE 3063
RHEBAAA/DEPT OF ENERGY WASHDC IMMEDIATE
RUCPDOC/DEPT OF COMMERCE WASHDC IMMEDIATE
RUEATRS/DEPT OF TREASURY WASHDC IMMEDIATE
RHEHNSC/NSC WASHDC IMMEDIATE

UNCLAS MOSCOW 013123 
 
SIPDIS 
 
SENSITIVE 
 
SIPDIS 
 
DEPT FOR EUR/RUS, EB/ESC/IEC, EB/CBA 
FRANKFURT FOR SUSAN STANLEY, BILL COTTER 
TREASURY FOR BAKER/GAERTNER 
NSC FOR TOM GRAHAM AND TRACY MCKIBBEN 
USDOC FOR 4231/IEP/EUR/JBROUGHER 
DOE FOR HARBERT/EKIMOFF/PISCITELLI 
 
E.O. 12958: N/A 
TAGS: EFIN EINV ECON RS
SUBJECT: PRICEWATERHOUSECOOPERS CAUGHT IN YUKOS NET 
 
¶1. (SBU) Summary.  Russian Prosecutors at the Federal Tax 
Service (FTS) have brought a civil case against International 
accounting firm PriceWaterhouseCoopers (PWC) in connection 
with their role as outside auditor of the Russian oil company 
Yukos.  In addition, the firm has been defending itself in 
Russian arbitrage court over the past six months against 
charges that its internal accounting practices are 
inconsistent with Russian law; this case is now in the final 
appeal stage before the Supreme Arbitration Court.  PWC 
maintains that both cases are without substance, and has said 
it is willing to cooperate fully with Prosecutors.  Civil 
charges have also been brought against PWC's lead Yukos 
accountant, Doug Miller (amcit), who is not currently under 
threat of arrest.  At the firm's request, the Embassy is 
assisting PWC obtain appointments for senior PWC management 
with the GOR.  The firm has otherwise not asked for further 
USG assistance, and wishes to be allowed to work this issue 
in private with the GOR.  End Summary. 
 
¶2. (SBU) According to PWC Russia Managing Partner Mike Kubena 
(Amcit), PWC was informally notified on December 22 that the 
FTS had brought civil charges against the firm in connection 
with the firm's role as lead outside auditor of Yukos from 
2002 to 2004.  PWC has not yet received official 
notification, but has obtained copy of an indictment against 
the firm dated December 11, which accuses the firm of 
collaborating with Yukos in tax evasion.  The charge appears 
based on the allegation that PWC exploited the difference 
between Russian accounting standards and US GAAP to Yukos' 
advantage, and in violation of Russian law. On December 25, 
business daily "Kommersant" in a front page story suggested 
that the case against PWC may lead to criminal charges being 
brought against the auditing firm, but Kubena said no such 
action has been taken to date. 
 
¶3. (SBU) Kubena calls the charges without substance and 
misleading.  PWC was diligent in informing Yukos in those 
instances where they felt the firm was engaging in 
questionable tax accounting practices, and can prove this in 
court.  PWC long ago sequestered all internal documents 
pertaining to its Yukos-related work, expecting them to be 
subpoenaed by the procuracy.  In the event, the Russian 
Government has never seriously asked PWC to cooperate in the 
case against Yukos, although the firm is willing to do so. 
The head of PWC's Yukos audit team, Doug Miller (amcit) was 
notified December 26 that he was personally named in the 
civil suit.  Miller did not think he was under threat of 
arrest. 
 
¶4. (SBU) In addition to the Yukos-related case brought on 
December 11, the firm has been in and out of court for the 
last six months in connection with another civil case brought 
against the firm concerning its internal bookkeeping 
practices in tax year 2002.  PWC also maintains its innocence 
in this case.  On a number of occasions, the firm seemed 
close to resolving this case in their favor, and even had the 
support of Finance Minister Kudrin at the last appeal 
hearing, but to no avail.  Of some concern, at the last two 
appeal hearings (the last of which was in late November) the 
prosecutor began to introduce Yukos into the case, even 
though in one instance the judge ruled the argument 
irrelevant. In the last appeal, the prosecutor focused 
approximately 30% of his argument on PWC's work with Yukos. 
PWC believes that despite this, the judges were prepared to 
rule in PWC's favor, but we dissuaded from doing so at the 
last moment.  The case now faces its final appeal, before the 
Supreme Arbitration court.  The firm must file its appeal by 
mid-February, and while it has not yet done so, it will.  FTS 
inspectors have already approached the firm in connection 
with tax years 2003-2005.  No criminal charges have been 
brought, even though the sum involved would seem to 
automatically trigger criminal code provisions.  This PWC 
chalks up to its good relations with the MVD. 
 
¶5. (SBU) Comment.  The Kommersant article draws broad 
analogies between PWC's role in the Yukos' case and the 
demise of Arthur Andersen in the Enron case, hardly a welcome 
development.  It also comes amid strong speculation in the 
press here about a new round of accusations being brought 
against Yukos.  Yet PWC has allies here -- it is the official 
auditor of firms comprising more than 50% of Russian GDP, 
including giant Gazprom, and has reached out to many of its 
client over the past few days for support.  That said, the 
vehemence of the current upswing in anti-PWC public rhetoric 
is very disquieting, and PWC is looking to bring senior HQ 
management to bear in meetings with the GOR this week.  At 
the firm's request, the Embassy is working to facilitate 
those meetings, and we expect to meet/brief PWC reps should 
their appointments come through.  We have encouraged PWC to 
brief the Washington interagency, as well.  The firm has 
otherwise not asked for further USG assistance; prefers to 
keep their problems out of the headlines; and is offering to 
cooperate fully with the Russian authorities. 
 
 
BURNS