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Approximately 7.5 Years After Disclosing FCPA Scrutiny, Walmart FINALLY Resolves FCPA Enforcement Action

As highlighted in this prior post [1], in late 2011 Walmart disclosed that it began “an internal investigation into whether certain matters, including permitting, licensing and inspections, were in compliance” with the FCPA.

So began arguably one of the most high-profile instances of corporate scrutiny in Foreign Corrupt Practices Act. history. The scrutiny FINALLY came to an end yesterday as the DOJ and SEC announced (here [2] and here [3]) a coordinated $282 million enforcement action. As highlighted in this prior post, Walmart disclosed this likely settlement amount in November 2017,  yet it still took approximately 1.5 additional years to formally resolve the matter.

This post summarizes the DOJ and SEC’s enforcement action concerning alleged improper conduct in the following countries: Mexico, Brazil, India and China.  Future posts will explore numerous other issues relevant to the enforcement action.

The DOJ component of the enforcement action included this criminal information [4] against Walmart Brasilia (a wholly-owned subsidiary of Walmart and majority owner of Walmart’s wholly-owned subsidiary in Brazil) charging knowing and willful violations of the FCPA’s books and records provisions and resolved through this plea agreement [5]and this non-prosecution agreement [6] involving Walmart. The total DOJ settlement amount was approximately $137 million.

The parallel SEC action involved this administrative order [7] in which the company agreed to disgorge approximately $145 million based on findings that the company violated the FCPA’s books and records and internal controls provisions.

DOJ

Walmart Brasilia Information

In summary fashion, the information alleges:

“From in or around 2009 through in or around 2010, Walmart Brazil knowingly and willfully caused Walmart to maintain certain records, which did not, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of Walmart. Specifically, Walmart Brazil falsely recorded $527,000 in payments to Brazil Intermediary [described as a third-party intermediary (“TPl”) hired by two Brazilian construction companies to obtain permits for two Walmart Brazil stores] as payments to certain Brazil construction companies even though Walmart Brazil employees intended that the payments would go to Brazil Intermediary and knew that the payments would go to Brazil Intermediary. These false records were then consolidated into Walmart’s financial records and were used to support Walmart’s own financial reporting. Walmart Brazil caused these payments to be falsely recorded in Walmart’s books and records.

Walmart Brazil earned approximately $3,624,490 in profits from certain Walmart Brazil stores built by (1) a Brazilian construction company (“Brazil Construction Company”) that facilitated the indirect hiring of Brazil Intermediary on behalf of Walmart Brazil and, without Walmart Brazil’s knowledge, made improper payments on Walmart Brazil’s behalf directly and through Brazil Intermediary, and (2) another Brazilian construction company that facilitated Brazil Intermediary’s indirect employment on behalf of Walmart Brazil …”.

Under the heading “Walmart Brazil’s Causing Walmart to Maintain Certain False Books, Record and Accounts,” the information alleges in pertinent part:

“Walmart Brazil did not conduct any due diligence on Brazil Construction Company prior to hiring it in 2008. Later, in or around late 2009, Brazil Construction Company failed a preliminary round of vendor due diligence. However, the Walmart Brazil Ethics and Compliance Department had no mechanism in place in 2009 to ensure that third parties who failed preliminary due diligence were suspended pending final due diligence, and, during the relevant time period, Walmart Brazil did not ensure that Brazil Construction Company was no longer used or paid. During the relevant time period, Brazil Construction Company was permitted to continue working for Walmart Brazil, and according to an employee of Brazil Construction Company who is no longer employed by Brazil Construction Company, Brazil Construction Company made improper payments to government inspectors in connection with the construction of two stores in Brazil without the knowledge of Walmart Brazil employees.

In or around 2009, Walmart Brazil directed Brazil Construction Company to retain an intermediary to assist it in obtaining a construction permit needed to begin construction of another store for Walmart Brazil. Brazil Construction Company retained Brazil Intermediary who, working for and under the direction of Brazil Construction Company, assisted in obtaining the construction permit.

In late 2009, Walmart Brazil sought Brazil Intermediary’s assistance on the same store and negotiated Brazil Intermediary’s scope of work and fees directly with Brazil Intermediary. Rather than hiring Brazil Intermediary directly, Walmart Brazil instead amended the contracts with Brazil Construction Company to include a description of Brazil Intermediary’s work and the cost associated with that work. All of this occurred despite red flags indicating that Brazil Intermediary was a government employee and was an individual, not a business with a registered corporate form.

Specifically, a Walmart Brazil Government Affairs employee informed a Walmart Brazil Ethics and Compliance employee and Senior Walmart Brazil Attorney that he believed that Brazil Intermediary was a government official and that Walmart Brazil itself was not allowed to hire civil servants. The Walmart Brazil Government Affairs employee and the Walmart Brazil Ethics and Compliance employee agreed that hiring Brazil Intermediary could expose Walmart Brazil to certain risks. Further, a member of Walmart Brazil’s construction department later recounted the member’s belief that Walmart Brazil could not hire Brazil Intermediary directly because Brazil Intermediary used to be a government official and did not have a company. Despite these red flags, Walmart Brazil hired Brazil Intermediary indirectly through Brazil Construction Company and later through another Brazilian construction company in connection with work on a second store in Brazil. Senior Walmart Brazil Attorney knew about the indirect hiring of Brazil Intermediary through Brazil Construction Company for the first store and was involved in a discussion regarding how Walmart Brazil would pay Brazil Intermediary.

In or around December 7, 2009, Senior Walmart Brazil Attorney was informed by others at Walmart Brazil that Brazil Intermediary’s proposal to obtain licenses and permits for Walmart Brazil been approved by Walmart Brazil.

According to the same employee of Brazil Construction Company who worked on the first store and who is no longer employed by Brazil Construction Company, the employee, without the knowledge or awareness of Walmart Brazil, gave Brazil Intermediary cash in connection with obtaining the construction permit for the first store in or around July 2009 even though Brazil Intermediary had told the Brazil Construction Company employee that the some of the money was for “people I have to pay,” which the employee stated he understood meant making improper payments to government employees.

Brazil Intermediary’s ability to obtain licenses and permits quickly earned Brazil Intermediary the nickname “sorceress” or “genie” within Walmart Brazil based on Brazil Intermediary’s ability to acquire permits quickly by “sort[ing] things out like magic.”

Knowing that Walmart was a U.S. issuer, and that Walmart Brazil’s books and records were used by Walmart to create financial records to be publicly filed with the U.S. Securities and Exchange Commission, Walmart Brazil falsely recorded its payments to Brazil Intermediary for its services as payments to the Brazil construction companies, not as payments to Brazil Intermediary. These records were then consolidated into and used to support certain Walmart financial reports and did not accurately and fairly reflect the transactions and dispositions of Walmart’s assets in relation to the Brazil Intermediary payments.”

[8]

Walmart Brasilia Plea Agreement

The plea agreement highlights the following factors relevant to the enforcement action.

“a. the Parent Company is entering into a non-prosecution agreement (the “Walmart NPA”) simultaneously to the Defendant entering its guilty plea;

b. the Defendant did not receive voluntary disclosure credit because it did not voluntarily and timely disclose, through the Parent Company, to the Fraud Section and the Office the conduct … Although the Parent Company disclosed the conduct related to Brazil prior to the Fraud Section or the Office learning of that conduct, such disclosure was after the Fraud Section and the Office had already begun investigating the Parent Company relating to conduct in another country;

c. the Defendant received full credit for its cooperation with the Fraud Section and the Office’s investigation through the Parent Company. Its cooperation included:

conducting a thorough internal investigation; proactively identifying issues and facts that would likely be of interest to the Fraud Section and the Office and providing updates to the Fraud Section and the Office; making regular factual presentations to the Fraud Section and the Office and sharing information that might not have been otherwise available to the Fraud Section and the Office; voluntarily making foreign-based employees available for interviews in the United States; producing documents, including translations, to the Fraud Section and the Office from entities in Brazil in ways that did not implicate foreign data privacy laws; obtaining cooperation of former employees and third parties, including their consent to interviews; providing counsel to individual employees and former employees to facilitate their cooperation; collecting, analyzing, and organizing voluminous evidence and information for the Fraud Section and the Office; and identifying, investigating, and disclosing conduct to the Fraud Section and the Office that was outside the scope of the Parent Company’s initial disclosures;

d. by the completion of the investigation, the Defendant, through the Parent Company, provided to the Fraud Section and the Office all relevant facts known to it, including information about the individuals involved in the conduct … and conduct disclosed to the Fraud Section and the Office prior to the Agreement;

e. the Defendant, through the Parent Company, has engaged in significant remedial measures, including enhancing its anti-corruption compliance program and internal accounting controls related to anti-corruption, including: (1) hiring a Global Chief Ethics & Compliance Officer (“CECO”) who holds an Executive Vice President position, an International Chief Ethics & Compliance Officer (“International CECO”), and a dedicated Global Anti-Corruption Officer, with separate reporting lines to the Audit Committee of the Board of Directors; (2) adding dedicated regional and market Chief Ethics & Compliance Officers, foreign market anti-corruption directors and anti-corruption compliance personnel at the Parent Company’s home office and in the Company’s foreign markets, with separate reporting lines to the Audit Committee of the Board of Directors; (3) conducting, across each of the Parent Company’s markets, enhanced monthly and quarterly anti-corruption monitoring by dedicated Company Financial Controls and Continuous Improvement Teams (who monitor at the store level), with results tracked in a centralized, real-time automated monitoring system; (4) enhancing annual anti-corruption risk assessments across all international markets; (5) enhancing on-site global anti-corruption audits to test adherence to enhanced anti-corruption related internal accounting controls and procedures; (6) enhancing anti-corruption related internal accounting controls on the selection and use of third parties, including building a custom third party automated portal to evaluate, manage and identify third party intermediaries and conducting third party audits and risk-based anti-corruption training of third parties; (7) enhancing global anti-corruption training and awareness program, including enhanced on-boarding and annual in-person and computer-based anti-corruption training for Directors, senior management, and employees most likely to interact directly or indirectly with government officials; (8) implementing an automated global license management system for obtaining and renewing licenses and permits and a global donation management system, which enhances controls relating to charitable donations; and (9) terminating business relationships with third parties involved in the conduct at issue;

f. the Defendant, through the Parent Company, has enhanced and has committed to continuing to enhance its compliance program and internal controls;

g. based on the Defendant’s remediation and the state of its compliance program, and the Parent Company’s agreement in its NPA to retain an independent compliance monitor, the Fraud Section and the Office determined that an independent compliance monitor was unnecessary for the Defendant;

h. the nature and seriousness of the offense conduct;

i. the Defendant has no prior criminal history; and

j. the Defendant has agreed to continue to cooperate with the Fraud Section and the Office in any ongoing investigation of the conduct of the Defendant, its subsidiaries, Parent Company and affiliates, and its officers, directors, employees, agents, business partners, distributors, and consultants relating to violations of the FCPA.”

The advisory guidelines range set forth in the plea agreement is $7.7 million to $15.4 million and it states:

“[The DOJ] and the Defendant agree that the appropriate disposition of this case” is a criminal fine of $724,898 and criminal forfeiture of $3,624,490.”

The plea agreement further states:

“The parties agree that, in light of the Walmart NPA which requires the Parent Company to pay a total monetary penalty of $137,955,249, in part as a result of conduct by the Defendant, and the criminal forfeiture of $3,624,490 imposed on the Defendant, a $724,898 fine should be imposed on the Defendant.”

[9]

Walmart NPA

The NPA’s statement of facts state:

“… From in or around July 2000 until in or around April 2011, certain Walmart personnel responsible for implementing and maintaining the Company’s internal accounting controls related to anti-corruption were aware of certain failures involving these controls, including relating to potentially improper payments to government officials in certain Walmart foreign subsidiaries, but nevertheless failed to implement sufficient anti-corruption related internal accounting controls that, among other things, ensured: (a) that sufficient anti-corruption-related due diligence was conducted on all TPIs who interacted with foreign officials; (b) that sufficient anti-corruption related internal accounting controls relating to payments to TPIs existed; (c) that proof was required that TPIs had performed services before Walmart paid them; (d) that TPIs had written contracts that included anti-corruption clauses; (e) that donations ostensibly made to foreign government agencies were not converted to personal use by foreign officials; and (f) that policies covering gifts, travel, and entertainment sufficiently addressed giving things of value to foreign officials and were implemented. Despite these issues being raised to some Walmart personnel responsible for implementing and maintaining the Company’s internal accounting controls related to anti-corruption … sufficient changes were not made to Walmart’s internal accounting controls related to anti-corruption until in or around April 2011. Consequently … these failures allowed Walmart foreign subsidiaries in Mexico, India, Brazil, and China to hire certain TPIs without establishing sufficient controls to prevent those TPIs from making improper payments to government officials in order to obtain store permits and licenses.”

According to the NPA:

“These failures in controls allowed Walmart’s foreign subsidiaries in Mexico, India, Brazil, and China to hire TPIs without ensuring that those TPIs did not make improper payments to government officials in order to obtain store permits and licenses. The failures in internal accounting controls related to anti-corruption allowed the foreign subsidiaries in Mexico, India, Brazil, and China to open stores faster than they would have with sufficient internal accounting controls related to anti-corruption. Consequently, Walmart earned additional profits through these subsidiaries by opening certain of its stores faster.”

Under the heading “Mexico,” the NPA states:

“Walmart began operating in Mexico in or around 1991. Walmart grew in Mexico by acquiring other companies and by opening its own stores through Mexico Subsidiary. Before Mexico Subsidiary opened a store in Mexico, it had to obtain many licenses and permits from government departments and agencies. The employees of the government agencies that approved permits and licenses were “foreign officials” as that term is defined in the FCPA … In or around September 2005, over a year after he was separated from the Mexico Subsidiary in or around August 2004, Mexico Subsidiary Attorney told a senior attorney at Walmart International and an outside attorney hired by Walmart that when he worked at Mexico Subsidiary, he directed TPIs to make improper payments to government officials. Mexico Subsidiary did not have sufficient internal accounting controls related to anti-corruption to ensure that TPIs did not make improper payments to government officials or that donations made to municipalities and other local governmental entities were proper and that the goods donated were not being converted to personal use. Although Walmart learned that both TPIs and donations posed serious corruption risks, Walmart did not implement internal accounting controls related to anti-corruption sufficient to provide reasonable assurances that Mexico Subsidiary did not make improper payments to government officials through either method until in or around April 2011.

From at least in or around 1999 to in or around 2004, Mexico Subsidiary obtained certain real estate permits and licenses required to open and operate stores by using TPIs. On or about September 21, 2005, Mexico Subsidiary Attorney, who was responsible for obtaining real estate licenses and permits for Mexico Subsidiary, contacted Walmart and said that when he worked at Mexico Subsidiary he had overseen a scheme for several prior years in which TPIs made improper payments to government officials to obtain permits and licenses for Mexico Subsidiary. He also said that Mexico Subsidiary had paid approximately $6,000,000 to TPIs, some of which was paid in improper payments to government officials and that in some cases, Mexico Subsidiary Attorney made the payments himself. In most cases, however, Mexico Subsidiary Attorney explained that Mexico Subsidiary made improper payments to government officials through TPIs called “gestores,” who were attorneys and ostensibly provided legal services but in reality did nothing for Mexico Subsidiary other than make improper payments. Although Mexico Subsidiary was permitted to use only law firms that were authorized to represent it and had 11 such law firms, Mexico Subsidiary Attorney said that he used the gestores, who were not authorized to work for Mexico Subsidiary, to obtain permits and licenses. Unlike the authorized law firms, the gestores did not have contracts with Mexico Subsidiary, were not subject to any anti-corruption due diligence, did not include anti-corruption clauses in their contracts, and did not send Mexico Subsidiary detailed bills or other documents showing the work they had done. Mexico Subsidiary Attorney stated that several Mexico Subsidiary executives, including Mexico Subsidiary Executive #1 and Senior Mexico Subsidiary Attorney, knew about and approved of the scheme, but that he was the only employee of Mexico Subsidiary who had any contact with the gestores.

In or around October 2005, Mexico Subsidiary Attorney explained that the gestores scheme worked as follows:

a. Mexico Subsidiary would determine which government officials needed to receive an improper payment to obtain a permit or license. Mexico Subsidiary Attorney would then tell one of the gestores which official to make an improper payment to.

b. The gestores would send Mexico Subsidiary Attorney an invoice with a false justification for the payment, which was usually identified as legal services.

c. Mexico Subsidiary recorded the gestores’ payments in each store’s budget as line items for “external services” or “contract services.”

d. Most of the gestores’ invoices included a numeric or alphabetic code developed by Mexico Subsidiary Attorney and another Mexico Subsidiary employee specifying why Mexico Subsidiary had made an improper payment to the official. The codes, referred to as “clave” codes, indicated the improper advantage that Mexico Subsidiary received in exchange for the improper payment, including: (1) avoiding a requirement; (2) influence, control, or knowledge of privileged information known by the government official; and (3) payments to eliminate fines. Mexico Subsidiary Attorney said that the meanings of the codes were known only to the gestores, himself, Mexico Subsidiary Executive #1, and two other Mexico Subsidiary executives.

e. After Mexico Subsidiary Attorney received the invoice from the gestor, it paid the gestor with a manual check. The gestores kept between 6 to 8 percent of the payment and used the rest of the money to make an improper payment to the government official.

f. The government official then issued the permit or license for Mexico Subsidiary.

Walmart employees knew of the corruption risks associated with obtaining permits and licenses in Mexico since at least in or around 2004, but did not address those risks by implementing sufficient internal accounting controls related to anti-corruption. For example:

a. In or around October 2005, Mexico Subsidiary Attorney stated that in or about early 2002, Mexico Subsidiary Attorney told Mexico Subsidiary Executive #1 several times that Mexico Subsidiary had made improper payments through gestores to obtain licenses and permits and that Mexico Subsidiary Executive #1 approved Mexico Subsidiary’s continuing the scheme.

b. In or around November or December 2004, Mexico Subsidiary’s audit team prepared a draft report evaluating Mexico Subsidiary’s internal accounting controls related to anti-corruption. The draft report said the gestores payments and donations made by Mexico Subsidiary to local entities were “unusual.” The draft report noted internal accounting controls related to anti-corruption concerns. For instance, it noted two related problems with Mexico Subsidiary using manual checks to pay external vendors. First, it found that Mexico Subsidiary’s use of manual checks to pay outside vendors made it difficult to identify why payments were made. Second, it said that internal accounting controls applicable to manual checks did not require sufficient descriptions. In preparing the final version of the internal audit report, senior Mexico Subsidiary employees in Mexico Subsidiary’s audit team removed the statement that the payments to gestores were “unusual.”

After Walmart employees working in the United States learned of the allegations from Mexico Subsidiary Attorney in or around 2005, Walmart sought advice from outside counsel in Mexico and in the United States. Outside counsel in Mexico interviewed Mexico Subsidiary Attorney multiple times, and sent memoranda reflecting those interviews to Walmart. Walmart Senior Attorney #1, Walmart Senior Attorney #2, the same senior attorney at Walmart International, and other Walmart executives received those reports. Outside counsel in the United States reviewed the allegations and drafted an investigative plan.

Instead of hiring outside counsel to conduct an investigation, Walmart used its own employees from IAS and its Corporate Security Group, who were not implicated in the allegations, to perform a limited preliminary inquiry to determine whether the allegations were credible and whether a full investigation was necessary. The investigators obtained evidence corroborating some of Mexico Subsidiary Attorney’s allegations.

In addition, one Mexico Subsidiary employee told the investigators that, when Mexico Subsidiary had problems obtaining licenses, it would determine how much it had to pay and would give a check payable to the municipality to a government official, who would then give Mexico Subsidiary a receipt. The same employee said that although he was not sure whether improper payments were made to government officials, Mexico Subsidiary used gestores “smooth out the road” so that “there would not be any bumps during the request for a license” and conceded that it was unusual that Mexico Subsidiary paid the gestores when most of the payments were supported by only one invoice and that no records showed what work the gestores did, with whom the gestores met, or how many hours the gestores worked.

In or around December 2005, Corporate Security and IAS prepared investigation reports. The Corporate Security report identified potential violations of laws. Also, the Corporate Security report and IAS report recommended several investigative next steps. Walmart did not follow the recommendations.

Instead, in or about December 2005 or January 2006, Walmart Senior Attorney #1 and another Walmart executive tasked a senior officer of Mexico Subsidiary and Senior Mexico Subsidiary Attorney, who Mexico Subsidiary Attorney had alleged knew about the improper payments scheme, with leading the remainder of the investigation.

In or around early 2006, as part of Walmart’s investigation into Mexico Subsidiary Attorney’s allegations of improper payments, Walmart Senior Attorney #1 conducted a limited interview of Mexico Subsidiary Executive #1, who had by then been promoted to a senior position at Walmart.

On or about May 9, 2006, Senior Mexico Subsidiary Attorney wrote his final report about the gestores investigation. The report stated that no evidence existed to substantiate that Mexico Subsidiary made unlawful payments to government officials.

Between in or around late 2004 and in or around 2010 … Walmart employees learned about other corruption risks associated with obtaining permits and licenses and learned of allegations of a risk of improper payments to obtain permits and licenses in Mexico, but Walmart did not address those risks by implementing sufficient anti-corruption related internal accounting controls or take remedial actions until in or around April 2011.

Although Mexico Subsidiary’s use of real estate gestores stopped after Mexico Subsidiary Attorney was separated from the Company in or around August 2004 and before Walmart’s 2005 investigation into the gestores allegations, its use of donations to municipalities and other local governmental entities, already identified as a corruption risk, increased …

From in or around 2006 until in or around 2011, Mexico Subsidiary had a practice of donating goods and services to municipalities and other local governmental entities. Some of the goods donated, such as cars, which were valued at approximately $11,000 to $17,000, and computers, were capable of being converted to personal use. Walmart did not begin to implement sufficient internal accounting controls related to anti-corruption, including those to ensure that these donations were proper and that the goods donated were not being converted to personal use until in or around April 2011.

On or about November 19, 2009, Mexico Subsidiary informed Walmart International that local government officials in Mexico had closed certain Mexico Subsidiary stores in an attempt to get Mexico Subsidiary to make improper payments to government officials. Walmart did not investigate this issue or implement sufficient internal accounting controls related to anti-corruption to provide reasonable assurances that Mexico Subsidiary did not make improper payments until in or around April 2011.”

Under the heading “India,” the  NPA states:

“In or around late 2005, Walmart began to explore long-term business opportunities in India and quickly learned that, similar to its operations in Mexico, it would face corruption risks in India obtaining licenses and permits. Walmart also learned of specific corruption risks with India JV Partner. The internal accounting controls related to anti-corruption that Walmart implemented in India, however, were insufficient to mitigate the risk of corruption.

Before Walmart began operating in India, it hired a consulting firm to assess potential business risks there. The report stated that Walmart would “be targeted by corrupt individuals and organizations seeking bribes or kickbacks in exchange for favorable business relationships or the easing of bureaucratic restrictions.” The report also said that corruption would likely cause Walmart “delays in the processing of permits, licenses and other paperwork.” The consulting film advised that Walmart could mitigate its corruption risk with “strict adherence” to the FCPA and by establishing “strong internal controls and management oversight.”

After Walmart learned of potential corruption concerns related to India JV Partner, in or around late 2006, one Walmart employee was concerned with the willingness of an employee of India JV Partner to follow the FCPA and told a Walmart executive in an email message that the India JV Partner employee had given him a “wink and a nod” when the employee “brought up transparency and clean transactions relative to the FCPA” and the India JV Partner employee admitted that “speed payments” were used in the past by the India JV Partner.

Between in or around 2008 and in or around early 2011, Walmart’s audit team in India conducted at least six reviews of India Wholesale Business. All of those reviews identified weaknesses in anti-corruption related internal accounting controls that required remediation and were sent to Walmart executives in the United States and to IAS.

Between in or around 2008 and in or around early 2011, one or more Walmart senior employees in the United States knew or had reason to know that at India Wholesale Business: certain India Wholesale Business vendors operated without contracts; certain India Wholesale Business third party contracts lacked standard FCPA provisions; certain India Wholesale Business employees had failed to sign anti-corruption certifications and there was no procedure for obtaining those certifications; certain India Wholesale Business disbursements lacked supporting documents; certain India Wholesale Business employees had not completed FCPA training; and there was no formal third party due diligence process at India Wholesale Business.

On or about July 23, 2011, senior Walmart and Walmart International executives received an anonymous whistleblower allegation stating that an employee of India Wholesale Business and India Retail Employee #1 were involved in a scheme to make improper payments to government officials in order to obtain store operating permits and licenses, and that a senior legal employee of India Wholesale Business knew about the scheme. A senior Walmart International executive forwarded the whistleblower email to Walmart International’s human resources department and stated, “[s]eems there are some specifics here that we can check out.” Over the next two months, some Walmart and Walmart International executives received two additional emails from the same whistleblower following up on the initial email, but Walmart never investigated the allegations.

Despite the audit reports discussing control deficiencies and the whistleblower report alleging improper payments to government officials, Walmart did not implement and maintain a system of sufficient internal accounting controls related to anti-corruption to address anti-corruption concerns in India. Because of Walmart’s failure to implement sufficient internal accounting controls related to anti-corruption, from in or about 2009 through in or about at least 2011, India Wholesale Business and India Retail Business were able to retain TPIs that made improper payments to government officials in order to obtain store operating permits and licenses during that period. These improper payments were then recorded in the joint venture’s books and records with vague descriptions like “misc fees,” “miscellaneous,” “professional fees,” “incidental,” and “government fee.”

[…]

On or about November 24, 2011, the General Counsel for India Retail Business executed a vendor services agreement with a TPI that lacked standard anti-corruption provisions and audit rights provisions. Those provisions were removed by an employee of the joint venture prior to the execution of the contract. Audit reports prepared by IAS in or around November 2008 and in or around March 2011 and circulated to certain employees at Walmart in the United States had noted the omission of key provisions of Walmart’s anti-corruption standards from its standard contracts in India.”

The Walmart NPA also contains a separate section regarding Brazil similar to the allegations set forth above in the Walmart Brasilia criminal information and plea agreement.

[10]

Under the heading “China,” the NPA states:

“Walmart proposed training China Subsidiary’s management about the FCPA in or around the first quarter of 2003. That training was not held. On or around October 2003, the International Division of IAS issued an FCPA Compliance Review report for China Subsidiary which included a finding that China Subsidiary employees had provided gifts with an average dollar value of less than $20 to government officials to build and maintain relationships with government officials and help obtain approvals for business licenses.

That same year, Walmart’s Audit Committee and other executives, including at least one Walmart executive who had later learned of the gestores allegations in Mexico in 2005, received a summary of the audit. Nonetheless, Walmart did not provide FCPA training to China Subsidiary personnel until years later and as a result, the problems relating to the provision of small gifts to government officials were repeatedly noted in subsequent internal audit reports distributed to certain Walmart executives, including at least one executive who learned of the gestores allegations in Mexico in 2005, in the United States until in or around early 2011.

On or about October 18, 2006, China Subsidiary’s audit team issued a China Subsidiary Business Practices Review report which identified certain FCPA awareness and training deficiencies. In addition to the reports described above, the China Subsidiary internal audit team conducted regular Business Practices audits between in or around 2003 and in or around 2011. The China Subsidiary internal audit team flagged numerous weaknesses in internal accounting controls related to anti-corruption at China Subsidiary, sometimes repeatedly, but many of these weaknesses were not addressed. In fact, from in or around April 2007 until in or around January 2010, Walmart and China Subsidiary failed to address nearly all of the anti-corruption related internal controls audit findings. Walmart did not begin to significantly enhance internal accounting controls related to anti-corruption at China Subsidiary until in or around April 2011.

Between in or around 2007 and in or around 2010, one or more Walmart senior employees in the United States knew or had reason to know that at China Subsidiary: certain third party contracts with China Subsidiary lacked required anti-corruption provisions and some also lacked documentation of required third party due diligence, approvals, and required FCPA certifications; certain payments were made by China Subsidiary without required documentation or approvals; the majority of China Subsidiary department heads surveyed were unaware of the purpose of the FCPA and were not provided with any formal training on the FCPA or Walmart’s anti-corruption policy.”

In the NPA, Walmart acknowledged “that certain employees who had responsibility for implementing and maintaining internal accounting controls related to anticorruption with respect to Walmart’s subsidiaries in Brazil, China, India, and Mexico had knowledge that the anti-corruption related internal accounting controls in those subsidiaries were not adequate and willfully failed to implement and maintain them.”

Pursuant to the NPA, Walmart agreed to pay a total monetary penalty in the amount of approximately $138 million which reflects a discount of 25% off of the bottom of the U.S. Sentencing Guidelines fine range for the portion of the penalty applicable to conduct in Brazil, China, and India, and 20% off of the bottom of the U.S. Sentencing Guidelines fine range for the portion of the penalty applicable to conduct in Mexico.

Similar to the Walmart Brasilia plea agreement, the Walmart NPA is based on the following factors:

(a) the Company did not receive voluntary disclosure credit because it did not timely and voluntarily disclose to the Fraud Section and the Office the Mexico conduct described in the Statement of Facts, and because, although the Company disclosed the conduct related to Brazil, China, and India prior to the Fraud Section or the Office learning of that conduct, such disclosure was after the Fraud Section and the Office had already begun investigating the Company relating to the Mexico conduct;

(b) the Company received full credit for its cooperation with the Fraud Section and the Office’s investigation into conduct in Brazil, China, and India and partial cooperation credit for its investigation into conduct in Mexico; its cooperation included: conducting a thorough internal investigation; proactively identifying issues and facts that would likely be of interest to the Fraud Section and the Office, and providing updates to the Fraud Section and the Office; making regular factual presentations to the Fraud Section and the Office and sharing information that would not have been otherwise available to the Fraud Section and the Office; voluntarily making foreign based employees available for interviews in the United States; producing documents, including translations, to the Fraud Section and the Office from foreign countries in ways that did not implicate foreign data privacy laws; obtaining cooperation of former employees and third parties, including their consent to interviews; providing counsel to employees and founer employees to facilitate their cooperation; collecting, analyzing, and organizing voluminous evidence and information for the Fraud Section and the Office; and identifying, investigating, and disclosing conduct to the Fraud Section and the Office that was outside the scope of the Company’s initial disclosures; the Company received partial cooperation credit for the conduct in Mexico because, in the view of the Fraud Section and the Office, Walmart did not timely provide documents and information to the Fraud Section and the Office in response to certain requests and did not deconflict with the Fraud Section and the Office’s request to interview one witness before the Company interviewed that witness;

(c) by the completion of the investigation, the Company provided to the Fraud Section and the Office all relevant facts known to it, including information about the individuals involved in the conduct described in the attached Statement of Facts and conduct disclosed to the Fraud Section and the Office prior to the Agreement;

(d) the Company has engaged in significant remedial measures, including enhancing its anti-corruption compliance program and internal accounting controls related to anti-corruption, including: (1) hiring a Global Chief Ethics & Compliance Officer (“CECO”) who holds an Executive Vice President position, an International Chief Ethics & Compliance Officer (“International CECO”), and a dedicated Global Anti-Corruption Officer, with separate reporting lines to the Audit Committee of the Board of Directors; (2) adding dedicated regional and market Chief Ethics & Compliance Officers, foreign market anti-corruption directors and anti-corruption compliance personnel at the Company’s home office and in the Company’s foreign markets, with separate reporting lines to the Audit Committee of the Board of Directors; (3) conducting, across each of the Company’s markets, enhanced monthly and quarterly anti-corruption monitoring by dedicated Company Financial Controls and Continuous Improvement Teams (who monitor at the store-level), with results tracked in a centralized, real-time automated monitoring system; (4) enhancing annual anti-corruption risk assessments across all international markets; (5) enhancing on-site global anti-corruption audits to test adherence to enhanced anti-corruption related internal accounting controls and procedures; (6) enhancing anti-corruption related internal accounting controls on the selection and use of third parties, including building a custom third party automated portal to evaluate, manage and identify third party intermediaries and conducting third party audits and risk-based anti-corruption training of third parties; (7) enhancing global anti-corruption training and awareness program, including enhanced onboarding and annual in-person and computer-based anti-corruption training for directors, senior management, and employees most likely to interact directly or indirectly with government officials; (8) implementing an automated global license management system for obtaining and renewing licenses and permits and a global donation management system, which enhances controls relating to charitable donations; and (9) terminating business relationships with third parties involved in the conduct at issue;

(e) the Company has enhanced and has committed to continuing to enhance its compliance program and internal accounting controls related to anti-corruption, including ensuring that its compliance program satisfies the minimum elements set forth in Attachment B to this Agreement (the “Corporate Compliance Program”);

(f) although the Company has engaged in significant remedial measures, the Fraud Section and the Office have determined that an independent compliance monitor is necessary to ensure that the Company’s compliance program is operating effectively and adequately tested to ensure that it meets the minimum elements set forth in the Corporate Compliance Program;

(g) the nature and seriousness of the offense conduct;

(h) the Company has no prior criminal history related to corruption; and

(i) the Company has agreed to continue to cooperate with the Fraud Section and the Office in any ongoing investigation of the conduct of the Company’s officers, directors, employees, agents, business partners, distributors, and consultants relating to violations of the Foreign Corrupt Practices Act (the “FCPA”).”

Pursuant to the NPA, Walmart agreed to engage an independent compliance monitor for a two year period.

In the DOJ’s release, Assistant Attorney General Brian Benczkowski stated:

“Walmart profited from rapid international expansion, but in doing so chose not to take necessary steps to avoid corruption. In numerous instances, senior Walmart employees knew of failures of its anti-corruption-related internal controls involving foreign subsidiaries, and yet Walmart failed for years to implement sufficient controls comporting with U.S. criminal laws.  As today’s resolution shows, even the largest of U.S. companies operating abroad are bound by U.S. laws, and the Department of Justice will continue to aggressively investigate and prosecute foreign corruption.”

U.S. Attorney G. Zachary Terwilliger of the Eastern District of Virginia stated:

“Walmart violated the Foreign Corrupt Practices Act because it failed to implement the internal controls necessary to ferret out corrupt conduct. For more than a decade, Walmart experienced exponential international growth but failed to create safeguards to protect against corruption risks in various countries.  This resolution is the result of several years of steadfast work by the prosecutors and our law enforcement partners at the FBI and IRS-CI.”

Assistant Director Robert Johnson of the FBI’s Criminal Investigative Division stated:

“The FBI will hold corporations responsible when they turn a blind eye to corruption. If there is evidence of violations of FCPA, we will investigate. No corporation, no matter how large, is above the law.”

Special Agent in Charge Kelly Jackson of IRS Criminal Investigation’s (IRS-CI) Washington, D.C. office stated:

“Walmart’s guilty plea is another step in IRS-CI’s ongoing effort to pursue corporations that engage in corruption that prevents fair competition around the world. Through our efforts, we delved through layers of transactions and uncovered the bribery of foreign officials.  Today’s announcement is a statement that no company, even one as large as Walmart, is above the law.”

SEC

The SEC’s administrative order is based on the same core conduct alleged in the DOJ enforcement action and finds in summary fashion as follows:

“This matter concerns violations of the books and records and internal accounting controls provisions of the Foreign Corrupt Practices Act (“FCPA”) by Walmart, a global retailer. From in or around July 2000 through in or around April 2011, Walmart’s subsidiaries in Brazil, China, India, and Mexico operated without a system of sufficient anti-corruption related internal accounting controls. As a result, during this time period, those Walmart subsidiaries paid certain third-party intermediaries (“TPIs”) without reasonable assurances that certain transactions were consistent with their stated purpose or consistent with the prohibition against making improper payments to government officials. Additionally, during this time period, when Walmart learned of certain anti-corruption risks, the Company did not either sufficiently investigate the allegations or sufficiently mitigate the known risks.”

The order contains the following background section.

“At the end of Walmart’s fiscal year 1990, the Company had 1,528 stores which had generated annual sales of $26 billion—all within the United States. Walmart, recognizing that international expansion could help it become the world’s largest retailer, entered its first foreign market, Mexico, in 1991. In 1993, Walmart established Walmart International as an operating segment, headquartered in Bentonville, Arkansas, responsible for overseeing the Company’s operations outside the United States. Between 1994 and 1996, the Company established additional outposts in other countries, including Brazil and China. During fiscal year 2010, the year in which Walmart opened its first Indian wholesale outlet, the Company operated stores in 14 foreign countries, with international sales of approximately $100 billion.

Walmart’s formula for success centered on Everyday Low Prices and Everyday Low Cost. Walmart’s rapid international growth, combined with its low-cost philosophy, contributed to the Company’s insufficient anti-corruption related internal accounting controls in Walmart’s subsidiaries in Mexico, India, China, and Brazil from in or around July 2000 until in or around April 2011.”

Under the heading “Early Corruption Warnings,” the order finds:

“In or around 2002 and 2003, Walmart received a request for FCPA training from China Subsidiary and also a request for a detailed FCPA policy covering TPIs and joint venture partners for China Subsidiary. Walmart did not immediately provide widespread anti-corruption training to China Subsidiary or implement TPI and joint venture anti-corruption policies at China Subsidiary.

In or around June 2003, China Subsidiary identified a potentially troubling historical payment made by a certain China Subsidiary joint venture. In 1999 or 2000, the joint venture had entered into an agreement to pay RMB 500,000 (approximately $60,000) to the landlord of a China Subsidiary store for government relationship consulting services and various permits. The permit costs should have likely been nominal but China Subsidiary did not further inquire into the matter at the time.

In or around October 2003, China Subsidiary’s internal audit team analyzed gifts with an average dollar value of less than $20 given to Chinese government officials by China Subsidiary corporate affairs employees and small amounts of cash provided to other Chinese officials for travel and meal expenses related to business meetings by the Chinese partner of a China Subsidiary joint venture. China Subsidiary’s internal audit team observed that these transactions appeared to be inconsistent with corporate policy. China Subsidiary’s internal audit team also observed that certain China Subsidiary anti-corruption related internal accounting controls had weaknesses. In response, Walmart did not promptly implement all of China Subsidiary internal audit’s suggested remedial actions.”

Under the heading, “Walmart’s First Anti-Corruption Compliance Program,” the order finds:

“In or around 2001, Walmart’s anti-corruption policy consisted of a paragraph in the Company’s Statement of Ethics. The paragraph summarized the FCPA’s prohibitions and described the statute’s facilitating payment exception and the procedure for making such payments. In or around July 2002, Walmart planned to implement a worldwide comprehensive anticorruption compliance and training program within a few months. In or around 2003, Walmart prepared draft anti-corruption compliance materials. However, nearly a year passed before the Company took additional steps to revise the proposed anti-corruption compliance program.

Walmart published its International Anti-Corruption Policy and Procedures on or around March 21, 2005, and distributed them to the Company’s foreign markets. In or around November 2005, the implementation of Walmart’s anti-corruption compliance program was formally put on hold until further notice.”

Thereafter, the order contains relevant to Mexico, China, India and Brazil similar to the above-described DOJ allegations. As it relates to China, the order finds:

“Between in or around 2006 to in or around early 2011, China Subsidiary’s internal audit team identified certain weaknesses in anti-corruption related internal accounting controls. In January 2006, it observed: China Subsidiary’s draft anti-corruption policy and procedures were inconsistent with the policy adopted by Walmart in or around March 2005; China Subsidiary’s policy excluded employees of state-owned and state-controlled enterprises from the definition of “government official;” and formal anti-corruption training at China Subsidiary had not yet been provided and most Chinese managers were unfamiliar with the FCPA and misunderstood the concept of facilitating payments. Other anti-corruption related internal accounting controls weaknesses at China Subsidiary observed by China Subsidiary internal audit included lack of TPI retention procedures and lack of a charitable donation policy. Although internal audit raised recurring issues during this time period, China Subsidiary’s anti-corruption related internal accounting controls were not improved until in or around April 2011.”

Under the heading “Walmart’s Subsequent Anti-Corruption Compliance Programs,” the order finds:

“Although certain Walmart executives discussed revising the anti-corruption policy and procedures shortly after their publication in March 2005, the Company did not announce the launch of a “new and enhanced” anti-corruption program until on or around February 8, 2007. The program would feature a revised policy, new procedures, and improved auditing and investigative protocols—with an emphasis on training and TPI due diligence. Its rollout was scheduled to begin two months later and conclude in or around 2008.

Walmart published the revised anti-corruption program as Company policy on or around December 12, 2008. However, this policy was not sufficiently implemented at that time. Shortly thereafter, Walmart appointed Walmart Compliance Employee as the Company’s first vice president of international compliance and tasked him with updating the anti-corruption compliance program.

In or around April 2009, Walmart informed its foreign subsidiaries that it would soon promulgate anti-corruption standards that would be more flexible and easier and quicker to implement. Instead of taking a centralized approach, each country would be required to devise its own program based on the standards. On or around June 11, 2009, Walmart circulated to the 10 subsidiaries a one-page document entitled Global Anti-Corruption Standards that: 1) summarized the FCPA; 2) acknowledged that in certain instances Walmart may provide gifts, meals, travel, and entertainment to government officials; 3) noted that the standards applied to TPIs; and 4) provided contact information for the Company’s global ethics office. The markets were instructed to design and implement risk-based internal accounting controls, procedures, and training to ensure the standards were met.

Walmart’s fiscal year 2010 FCPA reviews in Brazil, India, and Mexico identified certain of its anti-corruption related internal accounting controls had weaknesses in each subsidiary.

By around April 2011, Walmart recognized that its existing anti-corruption compliance program was not sufficient and hired an international law firm and an international consulting firm to conduct a worldwide anti-corruption compliance review for the purpose of reviewing and testing Walmart’s anti-corruption compliance program in various foreign subsidiaries around the world, including in Mexico, India, Brazil, and China.”

Based on the above findings, the SEC’s order finds that Walmart violated the FCPA’s books and records and internal controls provisions.

Under the heading “Walmart’s Disclosure, Cooperation, and Remediation,” the order states:

“Walmart made an initial self-disclosure of the potential FCPA violations in Mexico to the Commission’s staff in November 2011, after it retained outside counsel to conduct an internal investigation under the direction of the Audit Committee of Walmart’s Board of Directors. Subsequently, Walmart voluntarily expanded its investigation and disclosed its findings concerning Brazil, China, and India to the Commission staff, although such disclosure was after the Commission staff had already begun investigating the Company related to conduct in Mexico.

Walmart further cooperated by identifying issues and facts that would likely be of interest to the Commission and the staff and providing regular updates to the staff; making regular factual presentations to the staff and sharing information that would not have been otherwise readily available to the staff; making foreign-based employees available for interviews in the United States; producing translations of relevant documents; and obtaining cooperation of former employees and third parties, including their consent to interviews.

Walmart’s remedial measures include: (1) hiring a Global Chief Ethics & Compliance Officer , an International Chief Ethics & Compliance Officer, and a dedicated Global Anti-Corruption Officer, with separate reporting lines to the Audit Committee of Walmart’s Board of Directors; (2) adding dedicated regional and market Chief Ethics & Compliance Officers, foreign market anti-corruption directors, and anti-corruption compliance personnel at Walmart’s home office and in Walmart’s foreign markets; (3) conducting, across each of Walmart’s markets, enhanced monthly and quarterly anti-corruption monitoring; (4) enhancing on-site global anti-corruption audits to test adherence to enhanced anti-corruption related internal accounting controls and procedures; (5) enhancing anti-corruption related internal accounting controls on the selection and use of third parties; (6) enhancing global anti-corruption training and awareness programs; (7) implementing an automated global license management system for obtaining and renewing licenses and permits and a global donation management system, which enhances controls relating to charitable donations; and (8) terminating business relationships with third parties involved in the conduct at issue.”

In resolving the matter, Walmart agreed to cease and desist from committing future violations of the FCPA’s books and records and internal controls provisions and agreed to pay approximately $144 million in disgorgement and prejudgment interest.

In the SEC’s release, Charles Cain (Chief of the SEC’s FCPA Unit) stated:

“Walmart valued international growth and cost-cutting over compliance. The company could have avoided many of these problems, but instead Walmart repeatedly failed to take red flags seriously and delayed the implementation of appropriate internal accounting controls.”

Walmart issued this release [11] which states in pertinent part:

“These agreements relate to Walmart’s anti-corruption internal controls in Brazil, Mexico, India and China prior to April 2011. Walmart, under the direction of its Audit Committee, conducted a thorough internal investigation, cooperated with the DOJ and the SEC, and took extensive steps that have established its strong Global Anti-Corruption Compliance Program. Over the past seven years, Walmart spent more than $900 million on FCPA inquiries and investigations, its Global Compliance Program and organizational enhancements. Walmart’s actions were acknowledged by the DOJ and the SEC in the resolution agreements.”

In the release, Walmart President and CEO Doug McMillion stated:

“We’re pleased to resolve this matter. Walmart is committed to doing business the right way, and that means acting ethically everywhere we operate. We’ve enhanced our policies, procedures and systems and invested tremendous resources globally into ethics and compliance, and now have a strong Global Anti-Corruption Compliance Program. We want to be the most trusted retailer, and a key to this is maintaining our culture of integrity.”

On the day the enforcement action was announced, Walmart stock closed up .6%.

Karen Hewitt [12] (Jones Day) represented Walmart.

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