To disclose or not to disclose? That is the burning question that could play a significant role in how federal authorities deal with Wal-Mart Stores Inc. amid allegations that its Mexican subsidiary carried out a bribery campaign to win market dominance.

A former in-house lawyer, Sergio Cicero Zapata, alleged in The New York Times over the weekend that some $24 million in bribes helped secure licenses and permits for new stores throughout Mexico while he worked for Wal-Mart from 1994 to 2004. The company has painted him as a disgruntled ex-employee.

The Times said Wal-Mart’s corporate headquarters learned of the allegations in 2005, but didn’t voluntarily disclose them to the U.S. Department of Justice or the Securities and Exchange Commission until last year, after it learned that the Times was pursuing the story.

David Tovar, Wal-Mart’s vice president of corporate communications, issued a statement saying the alleged activities are more than six years old. “If these allegations are true, it is not a reflection of who we are or what we stand for,” Tovar said.

He said the company began a global internal investigation last fall and “we have met voluntarily with [the DOJ and the SEC] to report progress of the investigation.” Wal-Mart also generally disclosed the probe to shareholders in its quarterly financial report to the SEC last December.

But that doesn’t explain why the company failed to report the allegations and an internal investigation in 2005.

For years, the DOJ has urged companies to voluntarily report violations of the Foreign Corrupt Practices Act, which prohibits bribing foreign officials. Prosecutors have said they take such cooperation into account when making charging decisions.

But many companies have been leery of doing so, unsure of whether it really wins them any favorable treatment.

And it’s not a crime not to report violations. Furthermore, if a company stops the violations for at least five years, then the statute of limitations has run, and the DOJ may not be able to prosecute the bribery even if a whistleblower spills the beans.

Experts are divided on whether or not reporting is a wise move.

“Not disclosing may have been a brilliant business decision that saved Wal-Mart millions of dollars in criminal fines,” said Ryan McConnell, an FCPA lawyer and partner at Baker & McKenzie in Houston.

McConnell explained that there’s a growing “negative view” of voluntary self-disclosure, and “now you hear more defense attorneys talking about it.” But he added that the company still had to stop the violations in 2005 and not aid or abet further illegal conduct.

It is unclear in the Times’ reporting when and if the illegal conduct ended; the last date the story cites was in 2006.

Alexandra Wrage, president of the anti-bribery group TRACE International Inc. and a CorpCounsel columnist, agreed that the trend is toward not disclosing. “Over and over again I hear from companies that they haven’t disclosed, or they wouldn’t, because they don’t see a clear benefit from it,” Wrage said. “It’s my understanding from in-house counsel that those who disclose are in the distinct minority.”

But Wrage warned that it’s “an incredibly high-risk strategy to rely on the statute of limitations defense.” And in this instance, Wal-Mart could still face criminal charges in Mexico, where the statute of limitations is 10 years, she said.

Besides, she added, the potential damage for a retail company like Wal-Mart is not only criminal fines, but also the harm to its reputation with consumers and shareholders. “The reputational damage from a story like this can be devastating, especially for a company that sells directly to the public,” she said.

In an interview, Michael Koehler, a Butler University business law professor who writes the popular FCPA Professor blog, called Wal-Mart’s reaction to the bribe allegations in 2005 “remarkable” in its failure to follow best practices. Not only did it not disclose, but it handed the internal investigation back over to the subsidiary accused of making the bribes, and it failed to terminate or discipline the alleged wrongdoers, he noted.

“Another remarkable aspect is how Eduardo Castro-Wright [at the time the CEO of Wal-Mart de Mexico] was known by others at Wal-Mart to be involved in the Mexican payments, but was nevertheless continuously promoted,” Koehler said.

He predicted that “both DOJ and the SEC will be under public pressure to come down hard on Wal-Mart. They’ve been preaching voluntary disclosure and termination of wrongdoers. If they don’t come down hard, what message will it send?” (For more of Koehler thoughts on Wal-Mart, visit his blog.)

On Friday, Wal-Mart de Mexico announced that general counsel Jose Luis Rodriguezmacedo, who was alleged as a bribe participant in the Times stories, had been assigned to other duties. But Castro-Wright continues as Wal-Mart’s president and CEO of global e-commerce and global sourcing, a job to which he was promoted last June.

Another aspect to this probe is whether the subsidiary paid the money as legitimate “facilitation payments” rather than bribes. The U.S. is one of just four countries that allow facilitation payments in some instances; Mexico outlaws them as bribes.

McConnell and Wrage agreed that facilitation payments occupy a gray area of the law, but federal prosecutors usually look to the frequency of payments and the pattern of behavior to determine if there was a bribe.

Koehler, the law professor, said, “We’re talking about foreign license and permit issues, and it’s debatable whether it [a payment] even violates the FCPA.”

But he acknowledged “even if the Mexican payments do not meet the elements of an FCPA anti-bribery violation, the enforcement agencies are likely to assert that such payments violate the FCPA books and records and internal control provisions.”

Koehler said the SEC will be particularly interested in the company’s current executive leadership and whether they made any serious material omissions in their Sarbanes-Oxley Act certifications during the 2005 time period. “If you knew that one of your highest-profile subsidiaries had problematic conduct, but you made SOX certifications that the company had effective internal controls and everything was fine there, that could easily be an area of liability for current executives,” he said.

The experts also warned that class action attorneys are already writing up suits to file on behalf of shareholders against the company and its executives.

LeClairRyan white-collar defense partner Michael Volkov, based in Washington, D.C., and Alexandria, Va., said another big question is: In light of DOJ’s push to hold more company executives responsible, “How high does this go, and can they make cases against individuals?”

For the business community, which has been lobbying Congress for changes in the FCPA and awaiting guidance from the DOJ about how the law will be enforced, the timing couldn’t have been worse, politically or legally.

“The business community has been all over them,” said Volkov, who testified at a Senate hearing on the FCPA last year. “Now, [the DOJ] can say how even big companies, with a good compliance program on paper, even they messed up at the highest levels.”
Todd Ruger, a reporter for CorpCounsel sibiling publication The National Law Journal, contributed to this story.

See also: “The Day After, Everyone’s Talking About Wal-Mart,” CorpCounsel, April 2012.

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