Wal-Mart Stores Inc.’s probe of possible bribery in Mexico may prompt executive departures and steep U.S. government fines if it reveals senior managers knew about the payments and didn’t take strong enough action, corporate governance experts said.
Wal-Mart said in an April 21 statement it is looking into a New York Times story that said its representatives in Mexico bribed local officials to get stores opened faster and that executives probed allegations as far back as 2005. In a December 2011 U.S. Securities and Exchange Commission filing, Wal-Mart said it was examining whether it was in compliance with the Foreign Corrupt Practices Act, without saying what region or when time period was in question.
At the time Wal-Mart conducted an initial internal probe and ended it in 2006, the U.S. Department of Justice was starting to crack down on foreign bribery cases. Waiting for years to disclose the case may mean tougher sanctions for the retailer and for individuals, governance and legal experts said.
“Does the conduct at issue squarely fall into the type of enforcement actions the DOJ and SEC have been bringing over the last couple of years? That answer is clearly yes,” said Michael Koehler, a law professor at Butler University in Indianapolis who runs the FCPA Professor blog. “If there is enforcement action, the DOJ and SEC are likely to be more harsh because of how it handled this situation over the last six years.”
Wal-Mart, in its April 21 statement, said it takes compliance with the corruption law seriously and is moving to find out what happened. When asked yesterday whether the retailer’s board was notified about the allegations in 2005 and why the company didn’t move sooner, spokesman David Tovar said, “That’s one of the things we are looking into.”
Wal-Mart has hired auditing firm KPMG and law firm Greenberg Traurig LLP for a compliance review of its global operations and law firm Jones Day to investigate its Mexican operations, said a person familiar with the matter.
Tovar said the company isn’t making executives available for comment.
The expansion of Wal-Mart de Mexico, mainly in the last decade, left the world’s largest retailer with about 20 percent of its stores in Mexico, out of more than 10,000 worldwide. Bentonville, Arkansas-based Wal-Mart’s sales rose about 6 percent last year to $447 billion.
Wal-Mart stock traded at the equivalent of $61.06 at 12:11 p.m. in Germany, down 2.2 percent from its April 20 close of $62.45 in New York. Wal-Mart stock has risen 4.5 percent this year, trailing Minneapolis-based Target Corp.’s 12 percent gain.
Wal-Mart executives, including then-Chief Executive Officer and current board member Lee Scott, were made aware of the bribery allegations in 2005, the New York Times reported. So was Mike Duke, the current CEO, who at the end of that year was just taking over international operations, the article said.
Scott didn’t return a phone call to his home.
Wal-Mart will face pressure from shareholders to take action against any executives who didn’t act fully on the bribery allegations sooner, said Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware.
“If this is all true, it’s problematic,” Elson said in a telephone interview. “If any officer was significantly involved, their position has to be reviewed. You have to do the investigating and determine what did the CEO know and when.”
The Times article said the bribes may have amounted to more than $24 million in payments.
The Times identified executive Eduardo Castro-Wright as a central figure in the expansion of the alleged payments. Castro-Wright ran Wal-Mart de Mexico as CEO from 2003 to 2005 and was president and chief operating officer of the unit from 2001 to 2003. Some of the alleged bribery took place during that time, the newspaper reported.
In a telephone interview, Tovar declined to discuss the future of Castro-Wright, who is now a Wal-Mart vice chairman scheduled to retire July 1.
Wal-Mart said it has met voluntarily with the Justice Department and the SEC to discuss the case. The company is also enhancing its audit procedures and internal controls to escalate to management possible violations of the bribery law.
“We take compliance with the U.S. Foreign Corrupt Practices Act very seriously and are committed to having a strong and effective global anti-corruption program in every country in which we operate,” Tovar said in the company’s statement. “We will not tolerate noncompliance with FCPA anywhere or at any level of the company.”
Wal-Mart started the latest investigation last fall through the board’s auditing committee, and Tovar said in the statement that the company hasn’t reached any conclusions yet. Wal-Mart will conduct training for its employees and put in place more robust policies and controls, according to the statement.
The newspaper detailed the company’s 2005 investigation by examining hundreds of internal documents, as well as more than 15 hours of interviews with former Wal-Mart de Mexico executive Sergio Cicero Zapata, who recounted years of payoffs to government officials.
The Times said it looked at thousands of government documents related to store permit requests throughout Mexico and found many instances of permits being granted within weeks or days of Wal-Mart de Mexico’s payments to two outside lawyers who gave cash to the officials.
The Times report said that Wal-Mart decided in February 2006 to turn the investigation over to the then-general counsel of the Mexican subsidiary, Jose Luis Rodriguezmacedo Rivera, himself a target of the investigation. Rodriguezmacedo finished the probe within weeks, concluding there was no evidence of bribes paid to Mexican government officials, the Times said.
Rodriguezmacedo declined to comment to the newspaper, and attempts by Bloomberg to reach him were unsuccessful.
The Times reported that in December 2011, after learning of the newspaper’s reporting in Mexico, Wal-Mart told the Justice Department of its investigation into whether some of its actions violated U.S. anti-corruption laws. The company is investigating permitting, licensing and inspections, according to its form 10-Q filed with the SEC on Dec. 8, 2011.
The company’s filing didn’t mention Mexico and stated that, “We do not believe that these matters will have a material adverse effect on our business, financial condition, results of operations or cash flows.”
Wal-Mart also has hired outside advisers to help with the investigation.
“In a large global enterprise such as Wal-Mart, sometimes issues arise despite our best efforts and intentions,” Tovar said in the statement. “When they do, we take them seriously and act as quickly as possible to understand what happened. We take action and work to implement changes so the issue doesn’t happen again.”
While Mexico may be an isolated case, “shareholders will be wondering about Wal-Mart’s other 25 markets,” Natalie Berg, an analyst at Planet Retail in London, said today in an interview. “International growth targets may need to be revised downward, at least in the near-term,” she said.
The 1977 U.S. law bars companies or individuals regulated or based in the U.S. from paying bribes to foreign officials to win business. Foreign companies and nationals also can be prosecuted if their corrupt acts were committed in the U.S.
In a crackdown on overseas bribery that started during the Bush administration, the government settled 57 cases against companies from 2005 through 2011 without trial, reaping $4.1 billion for the U.S. Treasury, according to Justice Department data. A push to prosecute more individual defendants during the same period has produced mixed results, with some beating charges outright and others getting less punishment than prosecutors sought.
The Wal-Mart allegations will do nothing to help Mexico fight a reputation for government corruption. Latin America’s second-biggest economy last year fell to No. 100 out of 183 countries for perceived levels of corruption, according to Berlin-based Transparency International.
Mexican Finance Minister Jose Antonio Meade said his government hasn’t decided whether to open a probe of its own. The government is collecting more information on the allegations, he said.
“I’ve seen the story and we’re looking into it,” Meade said in an interview in Washington after participating in a panel discussion at the World Bank. He later told reporters in the hallway that officials “don’t have enough elements” to open an investigation and “when we have enough, we’ll decide how to proceed.”