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Who’s Next? Eldorado Incriminated in Tax Evasion and Contraband

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Analyst and Consultant for Russian IT

ElDoradoSearch and confiscation of accounting documents in Eldorado’s Moscow headquarters by agents of the Russian Federal Tax Services sent shock waves throughout Russian retail business circles.

The main question on everyone’s mind is: Who will be next?

Eldorado sells through 1100 Eldorado stores in Russia. Eldorado also owns 6 superstores under ETO brand name, 450 salons of mobile communication and 40 stores in Kazakhstan under the brand Sulpak. The turnover of Eldorado brand in Russia is estimated around USD $2.5 billion, while consolidated turnover including franchising is around USD $6 billion.

But as of today is still unclear who is responsible and who could be charged for tax evasion and contraband? It is logical to assume it can be one of the company’s CEOs at the time when the company was alleged to be involved in “grey market” imports. According to FNS, Eldorado’s tax evasion took place in 2004-2005 fiscal years when Alexander Shifrin was General Director. FNS raised charges against him on April 1st, normally an April Fool’s day that encourages people to make practical jokes. But these charges might be not so funny for Shifrin as criminal charges could get him up to 5 years in prison.

YakovlevThe FNS alleges Shifrin defrauded the Russian tax authority by a scam of buying merchandise through a network of especially registered companies that existed for a few days and then disappeared without paying any taxes. According to FNS, the fraud is more than USD $300 million, but Igor Yakovlev, owner and main shareholder of Eldorado, insists the amount should be only half of that USD $300 million.

If that lower amount will not be confirmed and agreed by FNS, Yakovlev argues he will be forced to sell part of the business since the company already has financial obligations (accounts payable) for USD $1 billion.

Additionally Eldorado is already under investigation for another criminal case in the Central District of Moscow in connection with contraband import shipments in 2004, i.e., the custom terminal in Kursk region where imported computers were listed as “screw-drivers.” Ilya Novohatsky, Press-Secretary of Eldorado, says the company is discussing a pre-case settlement with FNS. He insists all the documents confiscated in the office are only identical to those Eldorado submitted earlier.

Since the use of “import companies” was very common at the time (and was practiced by many companies as their only solution to skip high taxes), probably Eldorado will not be the last big Russian retailer to be charged with tax evasion.

In 2005, DSG International bought an option to purchase 10% of Eldorado for USD $190 million until Jan. 2008 (so company value was estimated around USD $2 billion at that time). Now the value of Eldorado is estimated to be around USD $5 billion. In the beginning of this year DSG cancelled the deal, citing instances of “doubtful business practices” by Eldorado-- which probably meant the use of those small one-day companies used for tax evasion.

More Background on Eldorado