The $24 million Wal-Mart Stores'Mexican affiliate allegedly paid in 2005 to win market dominance may look like a bribe to U.S. regulators but it's standard operating procedure in Mexico, according to a former government official in Mexico.
Source: Walmart
Walmart Home Office
"I have no idea how Wal-Mart operates but I do know how Mexico operates," former foreign minister Jorge Castaneda told CNBC's Squawk on the StreetMonday.
The New York Times reported Sunday that a former Wal-Mart de Mexico employee had warned headquarters of the bribes but management shut down an investigation into whether the company had violated the U.S. Foreign Corrupt Practices Act.
Castaneda, now a New York University professor, said government on the federal level in Mexico has gotten cleaner and more transparent, but that hasn't come to the local level. Wal-Mart is "a new company in Mexico," only there 15 years, he said, and it might've made payoffs to overcome competition from local companies there 50 or 60 years.
"At the municipal level, anyone who wants to open a business, it’s difficult to get all the permits you want to get without paying off low-level officials," he said. "It's pretty hard to get anything done unless you spread money around...The quicker you want to do something, you'd better do it this way."
From a market standpoint, the whole matter came as a surprise to MKM Partners senior analyst Patrick McKeever, who has covered Wal-Mart for 10 years and called the allegations "the most damaging story that I have seen."
"Wal-Mart has a squeaky clean image when it comes to this sort of thing and they make quite a big deal about corporate integrity and ethics," he told Squawk on the Street in a separate interview. "It would be disappointing if management tried to sweep [the matter] under the rug."
International expansion has been a key focus at Wal-Mart, whose Mexican unit, with 2,100 stores and more than 200,000 employees, has become the nation's biggest employer. But the scandal has pushed Wal-Mart shares down on fear the news could shake up management in Arkansas, McKeever said.
The company didn't help itself with its responseto the New York Times report, he added.
"It really didn’t do the company any favors," he said of the response. "I found it fairly weak. They certainly didn’t refute what had been said, and in some respects allowed for the possibility the allegations might be true."
That's what worries the U.S. Justice Department, a former SEC official told Squawk Box.
How Wal-Mart officials may have acted on the allegation is a "study in how not to conduct a corporate investigation, how not to respond to [FCPA] violations," said Jacob Frenkel. "It highlights the challenges even for what is on paper one of the best companies in America."
The Justice Department "has placed a high premium on investigating and prosecuting cases involving violations of our antibribery law," he said, and would love an investigation that creates a high-profile "perp walk" a la Enron.
As far as the U.S. government is concerned, "you benefit with U.S. laws, you have to comply with U.S. laws," and following what might be standard operating procedures by making alleged payments to expedite a business foothold won't cut it, he said.
"These allegations were not about this is the only way you can do business," he said. "This is how you can do business faster. This is about a massive coverup."
That could mean jail time for some U.S. Wal-Mart officials if they were found to have swept the alleged Mexican matter under the rug.
"Anybody who had their fingerprints on this conduct in Mexico has potential vulnerability, civilly and criminally," Frenkel said.
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