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The Underwhelming Walmart Enforcement Action

Last week Walmart resolved its long-standing Foreign Corrupt Practices Act scrutiny by agreeing to pay approximately $283 million to the DOJ/SEC (see here [1] and here [2] for prior posts).

$283 million is $283 million.

However, as highlighted in this post (a post informed by FCPA practice experience including conducting FCPA internal investigations around the world and having read and analyzed every FCPA enforcement action in the 40+ year history of the FCPA), the actual allegations / findings in the enforcement action are truly underwhelming and bear little resemblance to the “bribery” and “corruption” headlines that have been written by various media outlets in recent days.

The Walmart enforcement action involved conduct in Brazil, Mexico, India and China.

Brazil

On one level, the Brazil conduct can be viewed as the most egregious as it involved a criminal information against WMT Brasilia (a wholly-owned subsidiary) for violating the FCPA’s books and records provisions.

However, the actual allegations in the information are truly underwhelming.

In short, Walmart Brazil hired two Brazilian construction companies to build stores in Brazil and the construction companies hired a Brazil Intermediary to obtain permits for the stores. According to the DOJ, “without knowledge or awareness” of anyone at Walmart Brazil (let alone at Walmart Inc.), the Brazilian construction companies made improper payments to government inspectors in connection with the construction of two stores in Brazil. There is no specific discussion in the information regarding the licenses and permits including whether the company satisfied the criteria for the permits or was seeking to obtain permits that it was not entitled to receive. Moreover, no Walmart entity was charged with violating the FCPA’s anti-bribery provisions in connection with the above conduct.

Rather, the DOJ charged WMT Brasilia with violating the FCPA’s books and records provisions based merely on the allegation that “Walmart Brazil recorded its payments to Brazil Intermediary for its services as payments to the Brazil construction companies, not as payments to Brazil Intermediary.” In other words, there is no allegation that the $527,000 in payments to the Brazil Intermediary in 2009 and 2010 were substantively mischaracterized (as is often the case in FCPA enforcement actions) just that the payee was wrong.

According to the DOJ, Walmart Brazil earned approximately $3.6 million in profits from certain Walmart Brazil stores built by the Brazilian construction companies – a completely underwhelming allegation given that retail companies tend to earn profits when construction companies build stores.

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The same Brazil conduct is also mentioned in the Walmart NPA and the core allegation against Walmart itself is as follows:

“From in or around 2008 through in or around early 2011, one or more Walmart senior employees in the United States knew or had reason to know that at Walmart Brazil: certain anti-corruption related internal controls were not in place sufficient to ensure that all of Walmart Brazil’s service contracts were properly kept and stored to enable Walmart Brazil to ensure its books, records, and accounts were accurate and fairly reflected its disbursement transactions; and a formal third party due diligence process was not implemented at Walmart Brazil as required.”

This underwhelming allegation could likely be made against most issuers during the relevant time frame. Notably, according to the NPA, in April 2012 when the Walmart Brazil Ethics and Compliance department informed the Construction and Indirect Sourcing Departments at Walmart Brazil that the construction company had failed due diligence due to cases of corruption, and that no further contracts were to be signed with the company, no further contracts were signed by Walmart Brazil with Brazil Construction Company.

Regarding the underlying permits, the NPA terms them “operational licenses and permits needed to open the store on a compressed timeline.” However, once again the NPA does not mention whether the company satisfied the criteria for the permits or was seeking to obtain permits that it was not entitled to receive.

The SEC administrative order also mentions the same Brazil conduct highlighted above and regarding the permits states that “a new Walmart store that was originally scheduled to open on or around November 19, 2009” was delayed into mid-December “because Brazil Construction Firm was unable to timely obtain all permits.”  According to the order, on December 7, 2009 “certain members of Brazil Subsidiary management approved hiring another TPI – indirectly through Brazil Construction Firm – to secure the license” and that “nine days later, the TPI obtained all governmental approvals for the store.”  Once again, there is no mention whether the company satisfied the criteria for the permits or was seeking to obtain permits that it was not entitled to receive.

China

The China allegations in the Walmart NPA are even more underwhelming than the Brazil allegations. In short, the DOJ alleges:

“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.”

Once again, this underwhelming allegation could likely be made against most issuers during the relevant time frame.

The one paragraph in the SEC’s administrative order regarding China 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.”

India

The India allegations in the Walmart NPA focus on “India Wholesale Business” (described as joint venture between Walmart and an Indian JV Partner) and state:

“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.”

Once again, this underwhelming allegation could likely be made against most issuer joint ventures during the relevant time frame.

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The NPA alleges that “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 [described as owned by India JV partner which operated as a franchisee of Walmart] were able to retain TPIs that made improper payments to government officials in order to obtain store operating permits and licenses during that period.”

Once again, there is no mention whether the relevant entities satisfied the criteria for the operating permits and licenses or was seeking to obtain the permits and licenses that it was not entitled to receive.

The SEC administrative order also mentions the same India conduct highlighted above. Reflective of the fact that the root cause of many FCPA enforcement actions are foreign trade barriers or distortions, the order finds:

“Due to foreign direct investment restrictions, Walmart proposed that retail operations initially be franchised to India Partner with a wholesale business structured as a joint venture majority owned by Walmart. In or around August 2007, Walmart and India Partner executed franchise and joint venture agreements. Walmart tasked its partner with obtaining all licenses, permits, certifications, and zoning for retail stores in India.”

Once again however, there is no mention whether the relevant entities satisfied the criteria for the licenses, permits, certifications and zoning or was seeking to obtain something that it was not entitled to receive.

Mexico

The country allegations driving the Walmart FCPA scrutiny train has always been Mexico.

Yet here too the allegations/findings are underwhelming and are consistent with my view first expressed in 2012 that the company’s scrutiny was a corporate governance sandwich with the FCPA as a mere condiment.

In short, here is what the Mexico conduct was about.

Before Walmart’s Mexican Subsidiary (itself a publicly traded company with more than 2,000 stores and 200,000 employees) opened a store in Mexico it had to obtain licenses and permits from government departments and agencies.

In September 2005 (in other words approximately 15 years ago), an attorney at the Mexican Subsidiary told a senior attorney at Walmart International and an outside attorney hired by Walmart (approximately one year after he was separated from the Mexican Subsidiary) that when he worked at Mexican Subsidiary “he directed TPIs to make improper payments to government officials.” According to the attorney at the Mexican Subsidiary, the Mexican 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.” According to the individual, “he was the only employee of Mexico Subsidiary who had any contact with the gestores” but he also stated that “several Mexico Subsidiary executives … knew about and approved of the scheme.”

In short, the allegations establish that certain individuals at the Mexican Subsidiary knew that the entity made improper payments to government officials through “gestores” to obtain licenses and permits. There is no allegation or suggestion that anyone at Walmart Inc. knew of this conduct.

Rather, the government alleges that when Walmart employees working in the U.S. learned of the allegations in 2005 Walmart sought advice from outside counsel in Mexico and in the U.S. According to the government, outside counsel in Mexico interviewed the Mexico Subsidiary Attorney several times regarding his allegations and outside counsel in the U.S. reviewed the allegations and drafted an investigative plan.

The DOJ next alleges:

“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.” (emphasis added)

Up until this point, there is really nothing inherently problematic with Walmart’s conduct even if “best practices” (using the modern concept of the term) was to have outside counsel conduct an investigation in 2005.

Thereafter, the DOJ alleges:

“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.”

With the benefit of hindsight, one can certainly take issue with how Walmart handled this internal investigation issue and it is easy to say that Walmart “woulda, coulda, shoulda” done things differently. But again this is a corporate governance issue with the FCPA as mere condiment and the allegation would have likely been the same concerning the 2005 time frame regardless of the whether the issue being investigated was a potential FCPA issue or rather a potential antitrust issue, tax issue, etc.

Did Walmart’s potential corporate governance deficiency have any real ongoing impact regarding the use of “gestores” to secure licenses and permits in Mexico?

No, according to the DOJ, as the NPA next states that “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 the gestores allegations.”

In other words, even if Walmart has dotted all the “i’s” and crossed all the “t’s” regarding its internal investigation into the gestore issues, it didn’t really matter because even the government alleges that the conduct at issue had already stopped.

What is interesting about the DOJ’s NPA is that it then contains another allegation that between 2006 and 2011 Mexico Subsidiary “had a practice of donating goods and services to municipalities and other local government entities” and that some of the good donated such as cars and computers “were capable of being converted to personal use.” Here again, however there is no allegation or suggestion that anyone at Walmart knew anything about this and even if individuals at Walmart knew something about this making donations to government departments or agencies (as reflected in several DOJ opinion procedure releases) is not per se prohibited under the FCPA.

Regarding Mexico, the SEC’s order contains the same basic findings as highlighted above.

In short, the actual allegations / findings in the Walmart enforcement action are truly underwhelming and bear little resemblance to the “bribery” and “corruption” headlines that have been written by various media outlets in recent days.

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