FAQ: Wal-Mart de Mexico scandal and how it triggered FCPA violations

FAQ: Wal-Mart de Mexico scandal and how it triggered FCPA violations

The details surrounding the Wal-Mart de Mexico bribery scandal sound like a cliché: Envelopes stuffed with cash handed off to mayors, bureaucrats and other government officials who wield the power to stand in the way of business. Wal-Mart Stores Inc. is accused of not only participating in such bribery at its Mexican subsidiary, but also of sweeping it under the rug once it came to light.

On April 21, The New York Times published a lengthy article alleging that Mexico-based Wal-Mart officials participated in an ongoing bribery scheme several years earlier to achieve market dominance in the country, and that top executives had covered it up. The allegations are corroborated by internal company documents, according to lawmakers investigating the conduct.

This FAQ is part of SearchCompliance.com's IT Compliance FAQ series.

Table of contents:

Why are U.S. authorities investigating Wal-Mart with regard to the Foreign Corrupt Practices Act (FCPA)?

The alleged bribes, which amounted to more than $24 million, were paid to mayors, city council members, bureaucrats and other Mexican government officials to win zoning approvals and other sanctions needed to secure or hasten building permits. This violates the Foreign Corrupt Practices Act (FCPA) prohibiting U.S. companies from bribing foreign officials in order to obtain or retain business.

A whistleblower -- a former Wal-Mart de Mexico executive -- informed a company attorney of the widespread practice via email in 2005. According to Reps. Elijah Cummings (D-Md.) and Henry Waxman (D-Calif.), who are investigating the allegations, Wal-Mart former general counsel Maritza Munich pressed the company to establish a stricter anti-bribery policy after being informed of the bribes. Munich recommended that a follow-up investigation look into "other potentially suspect transactions not yet identified." Three months after Munich resigned on Feb. 1, 2006, however, the new general counsel ended the investigation.

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What actions does the FCPA prohibit?

The FCPA, enacted in 1977, prohibits U.S. companies from bribing foreign officials to secure any improper advantage in order to obtain or retain business. Over the past decade, U.S. authorities have ramped up enforcement of the law. The U.S. Justice Department has also encouraged companies to notify them if they suspect employees of FCPA violations.

Wal-Mart's reaction shortly after the whistleblower released the allegations may prove to be as damaging as the bribery scheme itself. The company did not notify U.S. law enforcement authorities when it was investigating the bribes in 2005-2006, according to The New York Times. Instead, in December 2011 -- after being informed that the newspaper was investigating Wal-Mart's Mexican business practices -- Wal-Mart notified the U.S. Department of Justice and the U.S. Securities and Exchange Commission (SEC) that it had initiated its own investigation. The two agencies share responsibility for enforcing the FCPA, with the SEC pursuing civil actions and the Department of Justice pursuing both civil and criminal cases.

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What penalties could Wal-Mart pay for its alleged FCPA violations?

Typically, companies charged with FCPA violations agree to pay steep fines to settle the charges rather than fight them in court. The highest FCPA settlement to date – more than $800 million -- was paid by Siemens AG in 2008 to put to rest charges that it engaged in a systematic practice of paying bribes to foreign government officials. Siemens paid German authorities approximately $854 million to settle similar charges.

In some cases, companies charged with FCPA violations agree to pay back ill-gotten profits or to have an independent consultant oversee operations. In criminal cases, convicted individuals can be fined and sentenced to prison. In recent years, the government has shown an increased willingness to seek prison terms for defendants.

Companies have also pushed out executives for FCPA violations, and resignations of some Wal-Mart executives could be forthcoming as a result of the allegations.

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What compliance-related measures has Wal-Mart taken due to the alleged bribery scheme?

Three days after The New York Times exposé, Wal-Mart issued a statement outlining steps it has taken to bolster its global compliance program. It created a new global FCPA compliance officer position, which is in charge of the company's FCPA compliance worldwide.

Wal-Mart's global FCPA compliance officer will also oversee FCPA compliance directors in other countries. At Wal-Mart de Mexico, the retail giant said, strengthened compliance measures include policies, procedures, internal controls, training, auditing procedures and escalation and remediation protocols.

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What is Wal-Mart's involvement in lobbying for FCPA amendments?

The U.S. Chamber of Commerce, via its Institute for Legal Reform (ILR) division, has been lobbying for changes to the FCPA. Wal-Mart executives have served on the ILR board, and among the group's recommended amendments is a restriction on a company's liability for its subsidiaries' actions. Lawmakers have argued that such changes would weaken the law.

The ILR issued a policy paper in October 2010 proposing a variety of amendments to the FCPA, including adding a compliance defense and a "willfulness" requirement for corporate criminal liability.

The law "should take into account the realities that confront businesses that operate in countries with endemic corruption … or in countries where many companies are state-owned (e.g. China) and it therefore may not be immediately apparent whether an individual is considered a 'foreign official' within the meaning of the act," the group argued.

Lawmakers looking into the Wal-Mart de Mexico alleged bribery scandal have raised concerns about an apparent conflict of interest for companies facing FCPA violation allegations while also serving on a board trying to change the law. According to Reps. Cummings and Waxman, from 2007 to 2010, "14 out of 55 ILR board members -- almost one in four -- were affiliated with companies that were reportedly under investigation for violations or had settled allegations that they violated the Foreign Corrupt Practices Act."

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