Alexandra Wrage
Imagine yourself sitting in the corporate headquarters of Wal-Mart Stores Inc. in Bentonville, Arkansas, in 2005. You have recently been promoted to head your company’s international operations. On your desk you have a series of reports, made by a former Walmart in-house counsel, of an alleged bribery scheme at your company’s operations in Mexico. One of the emails concerning the matter ends with “PS: Welcome to Wal-Mart international” [PDF].
This appears to be the situation in late 2005 faced by Mike Duke, who now serves as CEO of Walmart. Sergio Cicero Zapata, a former in-house counsel for Walmart de Mexico (Walmex) dismissed after 28 years of service, had recently met with Walmart’s external counsel and alleged that bribes were paid to Mexican officials to expedite the company’s expansion in Mexico. Internal Walmart emails and memos detailing Mr. Zapata’s allegations were recently made public as a result of a Congressional investigation into the company. These documents offer a rare glimpse inside a company’s internal communications as a potential U.S. Foreign Corrupt Practices Act (FCPA) issue unfolds.
Last month, Walmart stated that the company incurred “$157 million of professional fees and expenses” in the last fiscal year related to an ongoing FCPA investigation, and expects to pay an additional $40 – 45 million in the first quarter of fiscal 2014. Congress is also investigating the matter and, in January, requested that Duke explain his knowledge of the bribery allegations.
Walmart could have avoided many of these costs by implementing a few basic FCPA compliance processes: ensuring a proper tone from the top, conducting proper due diligence on all third parties, and carefully monitoring foreign subsidiary compliance with antibribery laws. Below are some of the key compliance takeaways from the internal Walmart documents:
1. The Goal Justifies the Means
According to Zapata’s interview, Walmart followed a policy of “the goal justifies the means,” including sponsoring irregular payments. “The basic premise was to make whatever was necessary to obtain the result,” Zapata said, describing aggressive growth goals and the need for Walmart to open new sites in record time.
To control the bribery risks faced by the company, in-house counsel must ensure that the proper tone is set at the highest level. In-house counsel should meet regularly with foreign subsidiaries, conduct in-person training on anticorruption compliance policies and procedures, and make it clear to all employees that corruption will not be tolerated by headquarters.
A hotline or other internal whistleblower mechanism should be available to all employees, and they should be confident that management will quickly respond to serious bribery allegations. Exit interviews are another important means of assuring employees have an internal opportunity to air any grievances—disgruntled employees will report externally if they believe internal reports are not taken seriously.
“When he left the company he was angry at the lack of recognition of his work, in addition to the fact that nobody asked him to stay even after 28 years of work,” observed the attorney who interviewed Zapata. “Nobody called [him] when he left the company, something that he resented after 28 years of service.”
Your company’s employees know what you need to know. Make sure you’re ready to hear it.
2. Third Parties Used to Keep the Company from Direct Involvement in Corrupt Activity
Zapata’s interview reflects the mistaken belief that hiring third parties to pay bribes insulates the company from wrongdoing.
“In order not to involve the company directly in any type of corruption, a pair of outside firms were hired so that they would be the one in charge of making any irregular payment,” according to the interview notes with Zapata.
Zapata pointed to several other key FCPA issues in hiring third parties, including Walmex’s strategy of hiring law firms not based upon legal acumen, but for their willingness to pass along bribes.
According to notes, Zapata explained that, “ law firms were picked because of their ability to be available and perform according to the instructions given, not because of their sophisticated or important legal practices. The law firms were typically one-person operations (solo practitioners).”
He also stated that third parties were hired based upon their relationships with officials: “In some cases architect firms were also used given their relationship with authorities in those cases where construction licenses or the like were involved. These firms would perform the same role in terms of receiving fees and being in charge of delivering the irregular payments.”
Third parties should be chosen based solely on their professional ability, and this ability should be clearly documented for in-house counsel. Due diligence should be performed on all third parties, including checking the parties’ ties to government officials, verifying professional credentials, and investigating any previous corrupt activity. Contract language should expressly prohibit inappropriate payments.
3. Dirty Clothes are Washed at Home
Walmart’s allegedly corrupt expenses were not known outside of Mexico. “Dirty clothes are washed at home,” Zapata said during the interviews.
But there were red flags, and skilled and interested in-house counsel might have picked up on those indicators. For example, in relation to one Mexico project, Zapata said that during monthly telephone conference calls with Walmart executives in the United States, references were made to certain problems, but no details were provided about the proposed solutions. Moreover, some stores allegedly started their expansion process in Mexico with no permits in place but were still able to conclude this process within an unrealistic time frame and without any issues.
Zapata also described a catalog containing internal accounting codes to identify the specific purpose of a payment, such as “speed of applications” and “elimination of a requirement.”
He stated that, “[a]ll of this information was always hidden from Bentonville although with the accounting codes the payments could be traced as to what their real purpose was.”
In-house counsel must keep close tabs on their company’s foreign subsidiaries. Corporate headquarters should question how problems and issues are being resolved locally. If permitting processes have been complicated and now they’re quick and easy, in-house counsel should find out why.
Zapata indicates that many of these activities were not discovered because Walmart’s corporate headquarters did not conduct regular full audits on its subsidiaries. Companies should regularly review subsidiary accounting records to ensure compliance with U.S. regulations, including the FCPA.
Alexandra Wrage is the president of TRACE, a business association that offers compliance tools and services to companies, including a free due diligence platform: TRAC.
