Last month, global news outlets reported that a Mexican subsidiary of Wal-Mart had paid millions of dollars in bribes to Mexican officials for construction permits, zoning approvals, reduced environmental impact fees and the goodwill of local officials - all in an effort to expand its Mexican presence. Many of the payments in question were allegedly funneled through "gestores" - individuals (some of whom may be entirely legitimate) who assist in navigating Mexico's byzantine and inefficient bureaucracy. Payments made by the gestores to officials were described in "code" on invoices, and the Mexican subsidiary concealed their true nature from Wal-Mart's US headquarters by characterizing them as routine legal fees.
The allegations most likely to concern federal authorities, however, are the reports that senior US management rejected recommendations from internal compliance executives to conduct an independent internal investigation, and instead turned the matter over to Mexican management - some of whom had been implicated in the allegations. Not surprisingly, local management absolved itself of any wrongdoing and summarily dismissed the matter.
In the wake of these reports, Wal-Mart has announced a massive internal investigation into whether its payments to Mexican officials violated the Foreign Corrupt Practices Act ("FCPA"), a federal law outlawing bribes to foreign officials to obtain or retain business. In addition, it seems certain that the Department of Justice will launch a full-blown criminal investigation into possible FCPA violations, which could be in conjunction with an SEC inquiry. The Mexican government, too, may conduct its own investigation. Whatever the outcome of those investigations, Wal-Mart has already suffered significant economic and reputational loss due to these allegations. Although it has since recouped most of its losses, the day after the New York Times broke the story, Wal-Mart lost approximately $10 billion in market value.
What then, are the lessons to be learned from Wal-Mart's travails? Here are several, of many:
Companies must carefully vet their service providers in foreign countries, particularly where those providers may interact with foreign government officials. The fact that Wal-Mart's subsidiary made many of the suspected payments through local third parties (in this case, the gestores) is a familiar scenario in FCPA cases. Vetting and monitoring foreign service providers is even more critical in countries where bribery is culturally accepted or tolerated. The FCPA makes no allowances for what may be a common practice in particular countries, and for years DOJ has adamantly rejected such a defense.
Companies should recognize the limits of "facilitation" payments. Unlike many prior FCPA cases, many of the Wal-Mart payments were not made to secure lucrative government contracts in a quid pro quo arrangement. Instead, they appear to have been made to simply expedite legitimate governmental actions, such as processing building permits and zoning approvals. Although the FCPA allows "facilitation" payments made to "expedite or to secure the performance of a routine governmental action," this exception has been narrowly construed to apply only to nominal payments for non-discretionary, routine official actions. The large amounts Wal-Mart's Mexican subsidiary allegedly paid to local officials, standing alone, are likely enough to make the facilitation payment exception unavailable.
Make sure that internal investigations are independent and swift. Wal-Mart could have minimized its legal, financial and reputational harm had it promptly conducted an independent, internal investigation when initially confronted with the allegations. Its failure to do so will likely invite federal authorities to levy the maximum amount of fines, as well as expose individual executives to criminal liability.
Parker Poe's Government Investigations & White Collar Defense team, led by former federal prosecutor and DOJ veteran Rick Glaser, regularly advises clients on FCPA matters, and more broadly, on mitigating FCPA risk without hampering their overseas business operations. The team also has extensive experience successfully defending companies in DOJ investigations into FCPA violations, including a high-profile defense contractor operating in some of the world's most corrupt locales. For more information, please contact Eric Cottrell (704.335.9850/ firstname.lastname@example.org) or Turner Herbert 704.335.6629/ email@example.com).