Wal-Mart Bribery Allegations: What can companies do to stop FCPA fines?

Avoid FCPA Investigations.

Many companies ask what can be done to avoid the increasing long arm of the U.S. law enforcers who are vigorously pursuing violations of the FCPA. The short answer: train employees to eliminate corruption. The long answer: set up an effective legal framework aimed to combat corruption with comprehensive policies and procedures to address the risk of corruption; and continuously nurture a corporate culture with zero tolerance of corruption from the top executives to individual employees to third party partners.

Tranparency.

The best way to prevent penalties is to build a tangible training program with results and transparent evidence of a corporate effort to cultivate integrity. The worst thing to do is to cover up any evidence of wrong doing. Bribery by a subsidiary is unacceptable and failing to take immediate action to deal with the violations is even worse. Wal-Mart is an example of what not to do when allegations occur.

The Wal-Mex Scandal

Under U.S. law, it is a crime for companies and their subsidiaries to bribe foreign officials. On April 21st, 2012 the New York Times reported a former employee told Wal-Mart executives about a bribery campaign used to help the retailer expand in Mexico. Wal-Mart officials launched an investigation into its subsidiary, (Wal-Mex) and discovered Mexican and U.S. laws were likely violated. Allegedly, management at Wal-Mex orchestrated bribes of $24 million to local government officials to skip over permit rules and environment guidelines in order to grow quickly.

Self Reporting.

When top executives, including the CEO, Michael Duke, learned of the evidence of the bribery scheme in 2005, they declined to notify U.S. and Mexican law enforcement authorities, and discontinued their own internal investigation. Wal-Mart continued the rapid expansion and lavished promotions on the alleged ringleader, Eduardo Castro-Wright. Wal-Mex became Wal-Mart’s largest subsidiary, and one out of every five Wal-Mart stores is in Mexico. Now it appears bribery played a significant role in the rapid growth in Mexico of the U.S.-based superstore.

Consequences.

If Wal-Mart is found to have violated the Foreign Corrupt Practices Act (FCPA), which forbids paying bribes to foreign officials, the company could face fines of hundreds of millions of dollars. Top Wal-Mart executives could lose their jobs – or worse, go to jail. The retailer could suffer a public relations nightmare if a lengthy investigation ensues. The company’s failing reputation has the potential to influence stock market performance which ultimately harms all employees and stakeholders.

It only gets worse.

What began with an investigation of an alleged bribery with one government official has grown into investigations taking place in other countries as well as multiple law suits filed against Wal-Mart. Both the SEC and the DOJ launched criminal investigations since the April New York Times report. An UBS analysis of previous FCPA violations show a typical investigation slogs on for two to six years. Past SEC and DOJ penalties are usually about 1% to 2% of annual sales. For Wal-Mart this would mean at least a $4.5 billion, or 77 cents per share, penalty for the world’s largest retailer and the biggest private employer in Mexico.

Litigation with Shareholders.

Shareholders filed suits accusing Wal-Mart’s officers and directors of breaching their fiduciary duties to Wal-Mart and its shareholders. An August 16th report by Nate Raymond of Reuters stated an Indiana union pension fund that owns Wal-Mart shares sued to gain access to thousands of internal documents related to allegations that a Wal-Mart subsidiary bribed Mexican government officials. The California State Teachers’ Retirement System and New York City’s public pension funds filed similar suits against Wal-Mart. Chancellor Leo Strine, the court’s top judge, declined in July to name two other pension fund shareholders as lead plaintiffs in consolidated litigation.

Congressional Investigation.

Then two Democratic U.S. congressmen Elijah Cummings and Henry Waxman launched an investigation into the matter. According to members of Congress, an investigation into alleged tax evasion and money laundering has expanded beyond Mexico to Wal-Mart operations in five other countries. The letter from the congressmen to Michael Duke, CEO of Wal-Mart Stores stated, “We have obtained internal company documents, including internal audit reports, from other sources suggesting that Wal-Mart may have had compliance issues relating not only to bribery, but also to ‘questionable financial behavior’ including tax evasion and money laundering in Mexico.”

No shortcuts.

The pressure to accelerate retail expansion with new stores has ultimately slowed down expansion as Wal-Mart’s chief financial officer Charles Holley told reporters the company would pull back its expansion plans overseas as a result of the investigations into the Mexico allegations. He noted this would apply especially to its operations in Brazil and China. If there is a lengthy government investigation, it could increase the monitoring of its businesses in other regions which could hamper its international growth.

Implement a Compliance Program.

The government is usually more lenient when a company discloses wrong-doing rather than when it tries to cover up the violations. It’s usually the cover-up that causes the authorities to raise penalties. The first step is to cooperate with authorities and assist them to resolve the allegations. The regulators will review the existing compliance program to determine if the company instilled a culture of compliance through training, leadership, continuous awareness and tone from the top.

Integrity First.

When a leadership team is so entrenched in growth it will do anything to keep evolving forward. Where it was a small step to pay bribes in order to open more stores in Mexico it became a gigantic multi-country fiasco with numerous lawsuits and various agencies investigating. The leadership of Wal-Mart must put their priorities in order. The goal was to keep stores open and to open more stores. The goal must be to keep stores open with integrity and to open more stores with integrity.

No Excuses.

The guilty will probably claim the bribes were “doing what it takes” to defend their business model and claim “business as usual” in a foreign market. This attitude must be eradicated and Wal-Mart must send a message to make it clear how rapid growth does not warrant breaking the law.

Whistleblower.

It took a former Wal-Mart employee to step forward and expose the wrongdoings. Wal-Mart should provide employees with clear guidelines of how to report questionable behavior. The fundamental model of a strong compliance program is to guide current employees to self-govern. The exorbitant cost of time, resources and penalties would have been much less if the alleged crimes were properly reported by Wal-Mart management or better yet, by an existing employee. Resources which allow any employee to leave a message anonymously via telephone or website must be accessible in all locations and frequent training to remind employees to self-govern is essential.

Culture of Compliance.

Continuous training is required to cultivate a compliant culture. Management must carry out the code of conduct and impose sanctions for ignoring it. The allegations in Mexico demonstrate the anti-corruption policy was not implemented. Wal-Mart may have a strong policy however, in this instance; Wal-Mart did not apply their compliance tools rendering the policy useless. No matter how well the policy is written it must be simplified and repeated enough to become a part of the company culture.

Adequate Resources.

Wal-Mex Chief Executive Scot Rank said on a call in July that as part of efforts to improve compliance with laws such as the Foreign Corrupt Practices Act (FCPA), the company hired a former Pricewaterhouse Coopers partner as head of compliance, real estate and corporate affairs. Rank also said another executive would join in August with responsibility for anticorruption efforts, reporting directly to Wal-Mart’s global FCPA compliance officer Tom Gean. No matter how many employees are added to the problem, it is essential the company instills continuous training to cultivate a compliant culture.