Walmart 2005 Case Study

Background:

In 2005, a senior Wal-Mart lawyer received an alarming e-mail from a former executive at the company's largest foreign subsidiary, Wal-Mart de Mexico. In the e-mail and follow-up conversations, the former executive described how Wal-Mart de Mexico had orchestrated a campaign of bribery to win market dominance. In its rush to build stores, he said, the company had paid bribes to obtain permits in virtually every corner of the country. He also gave names, dates and bribe amounts he knew.

Wal-Mart sent out investigators to Mexico City, and within days they unearthed evidence of widespread bribery. They found a paper trail of hundreds of suspect payments totaling more than $24 million. Wal-Mart's lead investigator, a former F.B.I. special agent, summed up their initial findings as "There is reasonable suspicion to believe that Mexican and USA laws have been violated." The lead investigator recommended Wal-Mart to expand the investigation. But the case was closed.

But an examination by The New York Times found, Wal-Mart's leaders shut it down. The Times' examination uncovered a prolonged struggle at the highest levels of Wal-Mart, a struggle that pitted the company's much publicized commitment to the highest moral and ethical standards against its relentless pursuit of growth.

The New York Times' published an article detailing "vast Mexico bribery case hushed up by Wal-Mart" includes many accusations of bribery that may not be illegal under the Foreign Corrupt Practices Act.

Immediately Wal-Mart Stores' stock fell by 4.6% after the New York Times reported during the weekend that Wal-Mart quashed an internal investigation in 2006 into allegations that its subsidiary in Mexico paid bribes to "obtain permits in virtually every corner of the country." Some are already calling for the ouster of Wal-Mart CEO Mike Duke.

But many of the allegations reported in the New York Times can reasonably be interpreted as falling under the so-called "facilitating payments" exception. A facilitating payment, often referred to as a grease payment, is a payment that is made to influence the timing of something like a permit and not intended to influence the outcome of routine government actions. These kinds of payments are generally not considered to fall under the definition of bribery under the FCPA, the main U.S. anti-bribery law.

Wal-Mart officials may have violated the Foreign Corrupt Practices Act, a U.S. statute that makes it unlawful for U.S. persons and foreign issuers, as well as foreign firms whose actions have an impact in the United States, to, among other things, bribe foreign government officials to assist in obtaining or retaining business. FCPA investigations are exploding and corporations are thus being required to spend significant resources on in-house counsel and outside law firms to ensure compliance.

But according to some experts view, in this case U.S. law will ostensibly be applied to conduct occurring in whole or in part in a foreign country. Regardless of whether or not the alleged conduct violates Mexican law, we see a real potential here for regulatory conflict-a species of the conflict of laws-between U.S. interests and foreign interests and arguably no doctrinal way to negotiate such a conflict, except the discretion of U.S. government officials to exercise their authority in ways that are sensitive to international relations and foreign regulatory authority. As such, this case brings to the forefront yet again the question of the extraterritorial application of U.S. law that has recently become a steady diet of recent Supreme Court case law, as illustrated by the recent Morrison and Kiobel cases.

FCPA cases often expose faults in corporate internal controls, said Kara Novaco Brockmeyer, chief of the SEC's FCPA unit. Under 2002′s post-Enron Sarbanes-Oxley accounting and corporate governance reforms, auditors must test and review every corporate client's internal controls.

According to Brockmeyer when an issue arises, the auditor must alert the board, and if it responds inadequately, alert regulators. Bribery can be a tricky issue for auditors because the amounts of money may be relatively small, said Howard Scheck, chief accountant of the SEC's division of enforcement.

At Wal-Mart, as the Times article stated bribes totaled $24 million. That is not much compared to the company's $15.5 billion in sales in Mexico and $312 billion globally in 2005, the last year covered in The Times investigation.

As Scheck said, even small amounts could be material to a company's stock price. "Investors would care that they're getting their business through bribes," he said. Wal-Mart has launched an internal investigation. Mike Koehler, an assistant professor of business law at Butler University, and the author of the FCPA Professor Blog, said the inquiry is likely to go global and cost millions of dollars. Auditors rarely face fallout from bribery problems. In seven of 10 large FCPA cases, the original auditors were still reviewing the books today, a Reuter's review found. One exception is German engineering giant Siemens, which replaced its auditor, KPMG, with Ernst &