Wal-Mart Bribery Probe: Why the Stakes Are So High

The $24 million in illicit payments that Wal-Mart has been accused of making in Mexico amount to roughly two hours’ revenue for the world’s largest retailer. But if the allegations prove true, the payments could become huge issues for the company, its executives and directors.

Source: walmart.com

United States law is among the strictest in the world when it comes to paying bribes to foreign officials.

The Foreign Corrupt Practices Act (FCPA), enacted in 1977, makes it a federal crime for any company, officer, director, employee or agent of a company to pay or even offer anything of value “to any foreign official for purposes of influencing any act or decision of such foreign official in his official capacity, inducing such foreign official to do or omit to do any act in violation of the lawful duty of such official, or securing any improper advantage.”

The Obama administration has made enforcement of the law a priority.

“There are few more destructive forces in society than the effect of widespread corruption on a people’s hopes and dreams, and I believe it is incumbent upon us to work as hard as we can to eradicate corruption across the globe,” said Assistant Attorney General Lanny Breuer, head of the Justice Department’s criminal division, in a speech late last year.

The Securities and Exchange Commission, which shares enforcement duties with the Justice Department, set up a special FCPA unit in 2010.

The law includes stiff penalties for violations, including fines of up to $25 million for willful violations of the law, and prison sentences of up to 20 years for individuals.

But the penalties are just the beginning of the headaches for companies suspected of running afoul of the law — a list that reads like a who’s who of corporate America.

Among the companies that have disclosed ongoing FCPA inquiries in their filings with the SEC:

• Avon which has been dealing with questions about illicit payments since 2008, revealed in October that it has received a subpoena from the SEC.

• Alcoa says it is continuing to deal with questions about payments made in 2008 to government officials in Bahrain.

• Hewlett-Packard has been dogged by questions about a five-year deal beginning in 2001 to supply computer equipment to the government prosecutor’s office in Russia.

• Kraft Foods , which purchased Cadbury in 2010, took over questions about Cadbury’s payments in India. Kraft says it has received a subpoena from the SEC.

• Marathon Oil disclosed last May that it had received an SEC subpoena regarding payments to government officials in Libya.

All the companies say they are cooperating with authorities, but cooperation itself — and especially what the government considers cooperation — can be painful.

The ultimate example is Siemens AG, the multi-national electronics firm that pleaded guilty in 2008 in the largest FCPA case in history, agreeing to pay $1.6 billion to U.S. and German regulators.

Siemens went through wholesale management changes after the scandal, which involved $100 million in bribes in Argentina. The new management then escalated the company’s cooperation with U.S. authorities.

In December, a federal grand jury in New York indicted eight former executives and agents of Siemens for their alleged role in the scheme.

Wal-Mart - Corruption in Mexico - A CNBC Report
Wal-Mart - Corruption in Mexico - A CNBC Report

In announcing the indictments, the Justice Department cited “the laudable actions of Siemens AG and its audit committee” in disclosing the alleged violations.

While it is far from clear whether Wal-Mart’s scandal will ever approach the scale of the Siemens case, some experts say Wal-Mart executives need to be prepared to show more than just contrition if the allegations are true.

Former SEC enforcement attorney Jacob Frenkel, now head of the white collar practice at Shulman Rogers in Washington, said in an interview on CNBC’s Squawk Box that any Wal-Mart executive or officer whose conduct can be traced to potential violations should immediately be suspended—for starters.

“The issue is clean this up as quickly as possible. Show proactive steps,” Frenkel said.