Business In Russia Just Got Riskier

Former Yukos auditor PwC could face criminal charges in a politically tinged case

Without warning, Russian police raided a Moscow office building on Mar. 9, seizing box loads of documents. Such scenes were common three years ago when authorities were investigating oil giant Yukos and its chairman, Mikhail Khodorkovsky, for tax evasion. This time, though, the target wasn't a Russian oligarch. It was the Moscow headquarters of Big Four accounting firm PricewaterhouseCoopers (PwC).

The raid on PwC is the latest sign of Russia's difficult legal environment for business. The police visit came four months after a Moscow court ordered the auditor to pay $15 million in back taxes and fines for alleged tax evasion in 2002. The police are now investigating whether criminal charges are justified, which could threaten PwC partners with jail sentences. In another case, a local court ruled on Mar. 20 that PwC had issued false audits for Yukos from 2002-04. (Yukos was convicted of evading $27 billion in taxes from 2002-04. Khodorkovsky is currently serving a prison term.) The court called PwC "practically a participant in illegal tax schemes" at Yukos and confiscated its $645,000 in audit fees.

PwC denies any wrongdoing and is appealing the Russian cases. "We believe we applied the best principles of our profession and we made reasonable judgments at that point in time," says Michael L. Kubena, PwC's managing partner in Moscow. Now the firm is awaiting a decision due in May on the renewal of its auditing license.

Is it all the start of a widespread crackdown? Probably not. "We see the situation as part of the process of doing business in this country," says Roger Munnings, CEO of KPMG in Russia. Most observers link PwC's problems to its Yukos work: Russia's case against the oil company captured worldwide attention, and many analysts considered it politically motivated because the Kremlin viewed Khodorkovsky's influence as a threat. The charges against PwC coincide with Yukos' final breakup—its last assets are now being sold in auctions. And prosecutors filed new charges against former Yukos executives in February. "One should look at it as an individual case, not an attack on the whole auditing market," says Agvan Mikaelyan, deputy general director of accounting firm Finexpertiza.

Still, accountants and lawyers worry about the consequences of a new government effort to tighten financial monitoring. They complain of a growing tendency by Russian tax authorities to demand confidential information about clients without a legal basis. Auditors are also concerned about proposed legal amendments that would require them to report potentially suspicious activity by their banking clients to the Central Bank. "I think the law enforcement organs want us to do their job for them," complains Julia Emelyanova, a partner at Russian accountancy BKR-Interkom-Audit.

Another problem is the fickle nature of Russian law. At the time of PwC's Yukos audits, the use of havens and other schemes to minimize taxes was widespread in Russia, and the law was ambiguous. Only later were such schemes declared illegal and challenged retroactively in court. That has caused critics to complain about selective enforcement of Russian law. Even U.S. Commerce Secretary Carlos M. Gutierrez on a recent visit to Moscow called for fair treatment of PwC.

That may be small comfort for PwC's embattled Russian operation. But if the partnership's license is renewed, the firm should bounce back. PwC is Russia's No. 1 auditor, with 2,000 clients. Revenues last year rose 16%, to $215 million. Says PwC's Kubena: "Our business continues to do incredibly well."

By Jason Bush

    Before it's here, it's on the Bloomberg Terminal.