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. Last Updated: 07/27/2016

Echoes of Yukos Surround PwC Case

PricewaterhouseCoopers is to appeal a conviction on tax evasion charges in a Moscow court Tuesday, as authorities step up a campaign that Kremlin critics say is dragging the international auditor into the legal onslaught against Yukos.

Prosecutors accuse the firm's Moscow office of failing to pay 243 million rubles ($9.4 million) in taxes. The city's high arbitration court, which provides decisions of final instance, is due to hear the case.

Former Yukos managers accuse the accounting firm of yielding to legal pressure in its controversial decision last month to withdraw a decade's worth of audits for Yukos, which had provided the foundation for the bankrupt firm's defense in a series of continuing trials.

"They do what they're told -- they're scared to lose money," former Yukos vice president Alexander Temerko said by telephone from London. "It's a political thing."

Temerko and other Yukos officials said their firm, as well as former CEO Mikhail Khodorkovsky and former majority shareholder Platon Lebedev, were the real targets of the campaign.

In early March, nearly a dozen police officers and investigators raided PwC's central Moscow offices, confiscating documents and computers files in relation to the case.

Images of the raid were eerily reminiscent of the early moves against Yukos, as tax authorities clamped down on the firm amid claims of a total of $33 billion in back tax charges.

Khodorkovsky and Lebedev are halfway through their eight-year jail terms on charges of fraud and tax evasion, meaning they would have been up for parole this year. They are currently awaiting a fresh trial on charges that they embezzled up to $25 billion through offshore trading companies.

Lawyers for Khodorkovsky and Lebedev say the new charges, announced in February, are the state's attempt to keep the two men locked up ahead of State Duma elections in December and the presidential vote in March.

PwC itself faces two court cases in Moscow this month -- an appeal on a conviction that it helped Yukos in a massive tax evasion scheme, as well as an appeal on a conviction that it underpaid millions of dollars in taxes.

On June 24, PwC's Moscow office said it was withdrawing all audits carried out from 1995 through 2004 because of new information resulting from a recently concluded investigation by the Prosecutor General's Office.

"PwC now believes information and representations [that were] provided to PwC by Yukos' former management may not have been accurate," the office said in a statement announcing the withdrawal of the audits.

At the center of the dispute are three firms that PwC says Yukos management and shareholders failed to disclose as belonging to the Yukos parent company, thus excluding them from auditor scrutiny.

Yukos had presented the three foreign-registered firms -- Behles Petroleum, Baltic Petroleum Trading Limited and South Petroleum Limited -- as separate, unconsolidated entities. The firms were registered in Switzerland and the Isle of Man.

The prosecutor's investigation showed the firms "were controlled by the shareholders of Group Menatep Limited and were used to their advantage," Michael Kubena, the head of PwC's office in Moscow, said in a June 15 letter mailed to Yukos' state-appointed bankruptcy manager.

PwC has been at the heart of the new push-and-pull surrounding Yukos. Lawyers for Khodorkovsky and representatives of Group Menatep, now known as GML, warned that the audit withdrawal would bode ill for future trials.

PwC's Moscow office denies that its decision to withdraw the audits was related to its upcoming court hearings.

In March, the company was found guilty by a Moscow court of violating professional standards while conducting Yukos audits from 2002 to 2004, allowing the oil firm to evade taxes. The ruling carried a fine of 16.8 million rubles ($650,000). The company is due to appeal the decision July 17.

"We still stand by our audits and will do so in the courts. But they were based on information we had at the time," a PwC spokeswoman said. She declined to be identified, citing company policy.

Temerko, the former Yukos vice president, accused the auditing firm of bowing to state pressure. "This illustrates the fact that audits are done under the control of the Prosecutor General's Office," he said.

"The PwC decision was something they had to do to keep their Russian business," said Tim Osborne, the London-based director of GML.

In the past six months, PwC has lost two key audit clients -- oil pipeline monopoly Transneft and carmaker AvtoVAZ. It has denied that the companies' desire to switch auditors was related to the Yukos case. But any further damage through the courts could prompt other major Russian clients, such as Gazprom and Sberbank, to drop its services.

PwC says it audits more than 2,000 companies countrywide, which together account for nearly half of gross domestic product.

"There should be no impact on other clients," said Mike Davies, PwC's London-based chief spokesman.

"The circumstances surrounding Yukos are highly unusual," he said, calling the decision to withdraw the audits "very particular to Yukos."

Four years after the arrest of Lebedev launched the demise of Yukos, the firm's name still carries the sting of poison. Nearly a dozen international lawyers and auditors contacted for this article declined to comment on the case.

Meanwhile, the new case against Khodorkovsky and Lebedev continues to be postponed. Lawyers for the two men say they have received no explanation for the delay.

Late last month, a court in the Siberian city of Chita extended their pretrial detention through October 2. Lawyers for the men declined to comment on the ruling.

The Kremlin has been eager to paint the Yukos case as a Russian equivalent of Enron, likening the jailing of Khodorkovsky to the downfall of Enron CEO Kenneth Lay. The case also prompted the collapse of Arthur Anderson, a leading global accounting firm.

Yet some observers said they believed the purported pressure on PwC would more greatly affect international litigation brought by Yukos' GML-affiliated former managers. The former managers are fighting in a Dutch court to hold on to the profits from the sale of Yukos' international assets.

That trial sees them pitted against Yukos bankruptcy receiver Eduard Rebgun, who earlier this year was put forward by the Yukos bankruptcy administration as a candidate to join Rosneft's board. The state-controlled oil company has profited most from Yukos' downfall, propelled to success in large part through the acquisition of Yukos' main oil production units at knockdown prices.

Rebgun's spokesman acknowledged that the withdrawal of the PwC audits could affect the outcome of that process.

"Before they always relied on these PricewaterhouseCoopers audits; now they have nothing," he said.

The auditing company had until now adamantly defended its association with Yukos.

"It is inconceivable that there is any 'new information' that PwC did not have already or had access to because they had full access to everything available to the management of the company," Steve Theede, Yukos CEO from July 2004 to July 2006, and Bruce Misamore, the company's CFO from April 2001, said in a statement.