Exhibit RWS-003

Witness Statement of Sr. Arnaldo Alvarado, January 30, 2012

UNDER THE RULES OF THE INTERNATIONAL CENTRE FOR SETTLEMENT OF INVESTMENT DISPUTES Rene Rose Levy de Levi, Claimant v. The Republic of Per, Respondent ICSID Case No. ARB/10/17

Witness Statement for Mr. Arnaldo Alvarado Partner, Dongo-Soria Gaveglio y Asociados (PricewaterhouseCoopers) I. Introduction 1. My name is Arnaldo Alvarado, and I am a Partner at Dongo-Soria, Gaveglio

y Asociados Sociedad Civil de Responsabilidad Limitada, a member firm of PricewaterhouseCoopers (PwC). The firm was formerly known as Collas Dongo-Soria y Asociados. 2. I am a Certified Public Accountant in Peru (registration no. 01-007576). I

graduated from the Universidad Nacional Federico Villareal, and I received an MBA from the Universidad San Ignacio de Loyola. 3. I have been an Audit Partner at PwC since January 1997. In 2009, I took on

the additional responsibility of serving as the firms Risk Management Partner. I am the partner who supervised the PwC audits of the annual financial statements of Banco Nuevo Mundo (BNM) for the years 1997 to 2000. 4. I have more than 20 years experience in leading audit engagements for

companies in a wide range of industries, notably financial institutions and insurance companies. I have also led financial advisory assignments for major Peruvian companies involved in the process of becoming listed on the New York Stock Exchange and major European exchanges. I am a professor of financial instruments at the Universidad del Pacfico, and I have also taught at the Universidad de Lima and Pontificia Universidad Catlica del Per. I am a regular lecturer and round table member in a large number of Peruvian conferences on financial audits, accounting standards, financial instruments, money laundering, and audit and accounting best practices.

II.

Audit Procedure A. 5. Process of Conducting an Audit The purpose of an audit is to express an opinion on the financial statements

of a company. An audit should be conducted in accordance with auditing standards generally accepted in Peru. Those standards require the auditors to comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. 6. Normally, audits begin in August/September of the financial year with a

discussion with the management of the company to plan the audit, and with a review of the companys internal financial controls and a review of the companys preliminary financial statements. After the end of the year, when the company has compiled its December financial statements, the auditors then review the companys updated financial statements. 7. In general, the auditors plan the substantive review of the companys

financial files with an appropriate assurance level to permit them to gather the audit evidence necessary to form an audit opinion about the companys financial statements. If the auditors believe that the companys internal controls are adequate, the auditors may rely on those internal controls and therefore review a narrower range of the companys underlying documentation. If, however, the auditors have reason to believe that the companys accounting and internal controls are not adequate, the auditors will broaden the scope of their review and will check a wider range of the underlying documentation. 8. The auditors typically complete their work on the audit at the end of

February, at which point they make recommendations to the companys management and directors about adjustments (if any) that need to be made to the financial statements in order for the auditors to issue their opinion. Assuming that the company accepts the auditors recommendations, the companys management is then responsible for making the adjustments to the companys financial statements consistent with those recommendations. 9. When all adjustments (if any) have been made, the company finalizes the

financial statements and the auditors issue their opinion to accompany those financial statements. The opinion will typically carry the date on which the auditors finished their on-site work at the company, even if the audit opinion is not actually released until some time later, after the financial statements are adjusted and finalized. 10. This process is usually complete by the second quarter of the following year.

In other words, for an audit of a companys December 31, 2000 financial statements, the

shareholders would typically vote to accept the audited financials by March 2001. However, if there are problems with the companys financial records, if the audit needs to be more comprehensive, or if the companys process of considering and implementing the auditors recommendations takes some time, this typical schedule could be significantly delayed. 11. PwC has audited a number of banks that have been intervened by the

Superintendencia de Banca y Seguros (SBS) in addition to BNM. The fact of the intervention indicates that the bank had problems with its internal risk controls. Therefore, the scope of the audit will be more extensive and the auditors will conduct a more thorough review of the underlying documentation, rather than rely on the banks own systems for recording its financial information. B. 12. Applicable Audit Standards In Peru, the auditors of financial institutions follow the international

standard of audit and standards set in SBS regulations for the evaluation of the institutions assets, including its risky loans. The financial statements of financial institutions are prepared according to SBSs regulations; if a specific accounting treatment is not provided in SBSs regulations, then the International Accounting Standards (IAS) as approved by the Consejo Normativo de Contabilidad are applied; in some cases, IAS rules will be followed even if they have not yet been formally endorsed by the Consejo Normativo de Contabilidad or SBS regulations. If the IAS does not include a specific accounting treatment, then the auditors look to the United States Generally Accepted Accounting Principles (USA GAAP). 13. Certain IAS rules were particularly relevant to BNMs financial statements

in the years 1999 and 2000. For example, IAS 38 requires that intangible assets be recognized only if it is likely that they will generate future economic benefits that are attributable to the asset and if it is possible to determine that effect with some certainty. At the time of BNMs acquisition of Banco del Pas in 1999, SBS permitted BNM to recognize S/. 45 million of goodwill as an asset, and to amortize that goodwill over a period of five years. PwC relied on that SBS authorization in its audit opinion for BNMs 1999 financial statements. 14. As another example, IAS 10 provides that, in certain circumstances, an

entity shall adjust the amounts recognized in its financial statements to reflect events that occur after the reporting period for those statements. Information may be received after the

reporting period ends that indicates that an asset was impaired at the end of the reporting period, or that the amount of a previously recognized impairment for that asset needs to be adjusted. For example, if fraud or errors are discovered after the end of the reporting period that show that the financial statements are incorrect, adjustments must be made. As another example, the bankruptcy of a customer (e.g. a borrower at a bank) that occurs after the end of the reporting period usually indicates that an impairment existed on the trade receivable from that customer (e.g. the borrowers loan) as of the end of the reporting period, and that the entity needs to adjust the carrying amount of the trade receivable (e.g. the risk and the loss provisions for the loan). As will be discussed below, such issues required the adjustment of BNMs year-end 2000 financial statements based on information that was discovered after December 31, 2000. III. 1999 and 2000 Financial Audits of BNM 15. I will discuss here certain aspects of PwCs audits of BNMs December 31,

1999 and December 31, 2000 financial statements. I should note that according to SBSs regulations, Peruvian auditors only have the obligation to keep their working papers of any audit for a period of 10 years after the end of the audit; consistent with this rule, PwC has already disposed of the corresponding audit papers. Accordingly, my statements are based on my personal recollections and certain reports issued by PwC in relation to the audit of the financial statements of BNM, which were provided by the SBS and that have been introduced in this arbitration. A. 16. 1999 Audit Findings One of the issues that PwC reviewed in the audit of BNMs 1999 financial

statements was the financial consequences of BNMs 1999 acquisition of Banco del Pas. The accounting treatment for this transaction was specifically approved by the SBS. This situation was mentioned by PwC in a paragraph with emphasis in its audit opinion. 17. PwC noted that SBS had authorized several measures, including measures

with respect to Banco del Pas in particular, that improved the financial situation of BNM as recorded in its financial statements. 1 These measures were further detailed in the Notes to the financial statements. They included:

PricewaterhouseCoopers Audit of BNMs December 31, 1999 Financial Statements, February 4, 2000 (PwC Audit of BNMs 1999 Financial Statements), p. 2 (Audit Opinion) [Exhibit R-155].

Rather than require BNM to raise new capital to increase its loan loss provisions, SBS authorized BNM to increase its loan loss provisions by allocating an additional S/. 28 million in exchange for reducing the value of BNMs shareholder equity by the same amount. 2 SBS authorized BNM to record goodwill arising from the Banco del Pas acquisition in the amount of S/. 43.5 million in a special account in net equity, to be amortized over a period of five years. 3 SBS approved a proposal by BNM to make use of a loan portfolio exchange program and temporarily transferred S/. 117.3 million (US $33.7 million) in poorly performing loans off its balance sheet. Of the total amount of loans transferred under the program, approximately 41% (S/. 47.7 million) came from the consumer loan portfolio that BNM acquired when it merged with Banco del Pas at the end of 1999. 4 SBS approved BNMs revaluation of its headquarters building, which allowed BNM to increase its capital by S/. 41.2 million.5 2000 Audit Findings 1. Preliminary Review

B.

18.

PwCs audit of BNMs 2000 financial statements began before BNM was

intervened. PwC conducted its planning process between August and September 2000, and started its review of BNMs preliminary financial statements (i.e. the financial statements as of September 30, 2000) with a visit to the bank in the second half of October 2000. 19. PwC then discussed the results of its preliminary review of BNMs

September 30, 2000 financial statements with BNMs management. In particular, I recall that these issues were discussed with, among others, Sr. Edgar Choque de la Cruz, because he was the accountant who served as PwCs liaison at the bank both before and after the intervention (he was part of the banks staff who remained in place after the intervention). 20. PwC ultimately prepared a progress report to BNM on the results of its

preliminary review. 6 However, PwCs analysis and the progress report were not completed until after BNM was intervened on December 5, 2000. Therefore, the report, which is dated December 27, 2000, was addressed to Banco Nuevo Mundo In
2 3 4 5 6

PwC Audit of BNMs December 31, 1999 Financial Statements, p. 14 (Note 6(f)) [Exhibit R-155]. PwC Audit of BNMs December 31, 1999 Financial Statements, p. 2 (Audit Opinion) [Exhibit R-155]. PwC Audit of BNMs December 31, 1999 Financial Statements, p. 11 (Note 6(c)) [Exhibit R-155]. PwC Audit of BNMs December 31, 1999 Financial Statements, p. 16 (Note 7) [Exhibit R-155].

PricewaterhouseCoopers Progress Report on Audit of BNM in Interventions Financial Statements of December 31, 2000, December 27, 2000 (PwC Progress Report) [Exhibit R-173]. PwC also prepared a report on recommended improvements to BNMs internal control systems dated December 27, 2000, and later followed up with a final set of recommendations regarding internal controls dated March 5, 2001.

Intervention and was delivered to the SBS intervenors who had taken over the management of the bank, because according to SBSs regulation once the intervention is executed, the legal representatives of the intervened bank are the people selected by SBS, in this case, the intervenors. PwCs report referred, at various points, to comments by BNMs management. In most cases, the management in this context meant the SBS intervenors who were in control of the bank after intervention. 21. During the preliminary review, PwC found several discrepancies that

indicated that there were losses that BNM had not reported on its financial statements. Specifically, PwC found the following: Discrepancies in classifying the risk of borrowers: Of the 110 clients that PwC examined, it found discrepancies in the risk classification for 52 borrowers. PwC estimated that the discrepancies could result in a deficit of loan loss provisions of approximately S/. 47.8 million because BNM had underreported the risk of its loan portfolio. 7 Lack of documentation for consumer loans and mortgage loans: PwC noted that BNMs former management (i.e. the management prior to the intervention) did not turn over to PwC the documentation for BNMs consumer loans or mortgage loans, totalling S/. 129 million and S/. 80.7 million respectively. 8 It is highly unusual for management not to make all relevant documentation available to the external auditors, and therefore, this omission was a red flag. Refinanced loans recorded as current (vigentes): PwC found that BNM was mis-recording overdue loans on its balance sheet by refinancing them and then recording them as new, current operations, rather than properly recording them as refinanced loans. 9 Failure to properly value deteriorating investment assets: PwC recommended that BNM evaluate the deterioration of certain investments equal to S/. 3.6 million that had declined in value and that BNM should then make the necessary loss provisions, as required by SBS regulations.

7 8 9

PwC Progress Report, p. 2 [Exhibit R-173]. PwC Progress Report, p. 2 [Exhibit R-173]. PwC Progress Report, p. 3 [Exhibit R-173].

Terminated leases with assets that had not been recovered: PwC observed that, with respect to certain leases that had been terminated, BNM had listed the full value of assets underlying those leases even though the bank had not recoverd those assets. The value of the unrecovered assets equalled S/. 36.8 million.10 Because BNM had not recovered the assets, SBS regulations required that it make loss provisions to take into account the deterioration of the value of the asset and the risk of not being able to recover the asset. After a year, a bank must make provisions equal to 100% of the book value of the asset. In other words, after a year of failing to recoup a given asset, the bank must write off its value. BNMs missing provisions totalled S/. 4.4 million. Facilities acquired during the merger with Banco del Pas that had not been written off: PwC observed that even though BNM had closed all of Banco del Pass consumer loan operations, and therefore was not using the facilities associated with those operations, BNM had not written off the value of those fixed assets, which were worth S/. 8.7 million.11 No inventory of fixed assets: PwC noted that BNM did not keep a physical inventory of its fixed assets against which to reconcile its accounting records. Therefore, there could be adjustments to the value of BNMs fixed assets that were not being recorded in BNMs financial statements. 12 Deficit of loss provisions for recovered, but not yet sold, collateral assets: When a bank seizes an asset that served as collateral for a defaulted loan or lease, it must allocate loss provisions for each month that the bank holds the collateral asset until it is able to sell the asset. This is because the value of the asset deteriorates over time. PwC discovered that BNM had not made the proper monthly provisions in accordance with SBS regulations for the assets it had recovered but not yet sold, equal to S/. 5 million.13 Expenses that should be fully realized: PwC found that BNM had improperly deferred certain expenses that it should have charged in full against its income. Due to the nature of the expenses, PwC recommended that BNM charge the full value of the expenses, rather than keep the deferred expenses listed as an asset, as BNM had done. The amount of improperly deferred expenses equalled S/. 19.5 million. 14 Inconsistencies in BNMs accounting for debts owed to other banking entities: A comparison between data collected by SBS about all banking institutions in Peru and BNMs accounting records revealed discrepancies in the amounts owed by BNM to certain banking entities. 15

10 11 12 13 14 15

PwC Progress Report, p. 4 [Exhibit R-173]. PwC Progress Report, p. 4 [Exhibit R-173]. PwC Progress Report, p. 5 [Exhibit R-173]. PwC Progress Report, p. 5 (assets adjudicated and assets recovered, combined) [Exhibit R-173]. PwC Progress Report, p. 6 [Exhibit R-173]. PwC Progress Report, p. 6 [Exhibit R-173].

Goodwill credit should be reevaluated: PwC recommended that the goodwill credit that BNM had been permitted to record in connection with its merger with Banco del Pas should be reconsidered in accordance with IAS, which provide that if there are signs that future income flows are not the ones originally expected, an evaluation must be performed in order to record the corresponding deterioration. 16 Here, after intervention, BNM was not a going concern and thus could not expect to realize any future profits from the 1999 merger (which was the original basis of the goodwill credit). To summarize, the unrecorded losses that PwC identified in the 30

22.

September 2000 financial statements and subsequent events until December 27, 2000, even based only on the limited sample of BNMs records that PwC evaluated during its preliminary review, were significant: Category of Loss Deficit of loan loss provisions Deterioration of investment assets Written-off Banco del Pas facilities Deficit of loss provisions for recovered and adjudicated assets Deferred expenses Possible removal of goodwill credit Total Amount in S/. S/. 47.8 million S/. 3.6 million S/. 8.7 million S/. 5 million S/. 19.5 million S/. 37.6 million S/. 121.5 million

2. 23.

Final Audit Results

After BNM (then under the supervision of the SBS intervenors) prepared the

banks financial statements as of December 31, 2000, PwC proceeded with its substantive audit of those year-end financial statements. Based in part on PwCs observations about significant discrepancies and inaccuracies in BNMs accounting from the preliminary review of the September 30, 2000 statements, the auditors conducted a much more extensive review of BNMs documentation. PwC looked at documentation for nearly all of BNMs loans, leases, other assets, and liabilities.

16

PwC Progress Report, p. 7 [Exhibit R-173].

24.

PwC was also aware of the findings of SBS from its August-October 2000

inspection of BNM. Like PwCs preliminary review, SBS had also found significant losses because BNM had, for example, misclassified the riskiness of its loans and failed to properly account for its refinanced and restructured loans. This was another reason for PwC to conduct a more extensive review of BNMs financial records. 25. Indeed, PwCs audit uncovered additional losses to those identified in either

PwCs preliminary review or in SBSs inspection visit report. This was because the scope of PwCs audit was broader, PwC directly examined more of BNMs documentation, and PwC had the full cooperation of the SBS intervenors. PwCs audit also took into account certain adjustments that were as a result of the intervention, such as the removal of the Banco del Pas goodwill credit and the return of loans from the loan portfolio exchange program. 26. PwCs audit identified extensive losses and recommended to BNM In

Intervention (that is, to the SBS intervenors) that those losses should be reflected in BNMs financial statements as of 31 December 2000. The SBS intervenors agreed with and implemented PwCs recommendations. In total, based on PwCs recommendations and the intervenors implementation of those recommendations, the final financial statements showed that BNM had S/. -329 million in losses as of 31 December 2000. 17 27. By far the most significant losses arose from BNMs required loan loss

provisions (S/. 220 million). This category of losses included loan loss provisions that were required after BNMs participation in the loan portfolio exchange program ended on December 6, 2000. That participation was terminated because, after intervention, BNM was no longer operating and thus would not able to reacquire the loans it had temporarily exchanged for Treasury bonds over five years, as required by its contract with COFIDE. Therefore, the loans were placed back onto BNMs balance sheet, along with the requirement to make loan loss provisions according to the riskiness of the loans. For those loans, BNM had to make loan loss provisions of S/. 65 million.18 28. However, the rest of the S/. 220 million in loan loss provisions arose from

the weakness of BNMs loan portfolio. As PwC had noted in its preliminary review, BNM had misclassified the risk of borrowers, and had also restructured and refinanced overdue
PricewaterhouseCoopers Recommendations from the Evaluation of BNMs Internal Accounting Controls from the Audit of BNMs December 31, 2000 Financial Statements, March 5, 2001 (PwC Recommendations from December 31, 2000 Audit), Profit & Loss Statement (net loss for the year) [Exhibit R-182].
18 17

PwC Recommendations from December 31, 2000 Audit, pp. 15-16 (Note 6(d)) [Exhibit R-182].

loans and masked their risk by improperly recording them as new, current loans. 19 PwCs thorough and extensive evaluation of BNMs loan portfolio during its final audit revealed the full scale of the loan portfolios weakness, including previously misclassified loans or improperly recorded refinanced loans. 29. The other categories of losses tracked PwCs preliminary review, e.g., loss

provisions for fixed assets and unrecovered assets. However, the loss amounts were far larger in the final audit results as of 31 December 2000 than in PwCs preliminary review as of September 30, 2000, because PwC had performed a more thorough review of BNMs records. IV. Comments on Claimants Allegations 30. I understand that Claimant has alleged that many of the S/. 329 million in

losses that were recorded on the December 31, 2000 financial statements, as audited by PwC, were incurred during the intervention. This is not correct. The December 31, 2000 audited financial statements reflect the state of BNMs losses as of that date; they do not reflect any further deterioration of BNMs loan portfolio after that date (except to the extent that such post-recording period information indicates the true prior state of the portfolio as of the recording date, according to IAS 10). The substantial majority of those losses were ones that that BNM had incurred during its operations (i.e. prior to December 5, 2000), although in many cases BNM had used improper accounting methods that had hidden the full extent of the losses in its earlier financial statements. 31. The proposed classification of BNMs loans by PwC was discussed with the

SBS intervenors and there were no disagreements; in consequence, the SBS intervenors implemented the necessary adjustments to BNMs financial records. 32. Finally, I understand that Claimant alleges that SBS violated accounting

principles by making retroactive changes to BNMs December 31, 2000 financial statements as late as June 2001. Claimant simply misunderstands the audit process. PwC completed its on-site audit evaluation in March 2001 and then made its recommendations to BNMs management (i.e. the SBS intervenors) about adjustments that needed to be made to the 31 December 2000 financial statements in order for PwC to be able to issue its audit opinion verfiying those statements. I recall that there were some complex issues about how certain items should be recorded in BNMs financial statements, that those issues were

19

PwC Progress Report, pp. 2-3 [Exhibit R-173].

discussed at some length during the first and second quarters of 2001, and that they ultimately resulted in PwCs audit opinion containing two reservations. 20 The SBS intervenors accepted the rest of PwCs recommendations, and therefore they needed to make adjustments to the December 31, 2000 financial statements so that the statements would accurately reflect the financial status of BNM as of that date. 33. It was only after those adjustments were made that the financial statements

were treated as final, and then PwC issued its audit opinion verifying the adjusted, final statements. Although, consistent with audit practice, the PwC audit opinion is dated as of the completion of PwCs on-site audit work (March 5, 2001), PwC did not actually release the opinion until July 11, 2001 and it was delivered to SBS on July 12, 2001. 21 Thus, it is entirely consistent with normal audit practice that adjustments were being made up through June 2001 at the instructions of the SBS intervenors, because the financial statements were not finalized and the audit opinion was not released until July 2001.

PwC Recommendations from December 31, 2000 Audit, p. 3 (Audit Opinion, items 3 & 4) [Exhibit R182]. Letter from PricewaterhouseCoopers to SBS Submitting BNMs Audited Financial Statement, July 11, 2000 [Exhibit R-236].
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