Wal-Mart Stores Inc. may spend hundreds of millions of dollars investigating $24 million in alleged Mexican bribes as the U.S. government weighs whether the company or executives also broke the law by covering up an internal probe, former federal prosecutors said.
The company said it’s aiding U.S. probes of payments detailed April 21 in the New York Times. The newspaper said Wal-Mart de Mexico failed to fully investigate the bribe claims as well as well as $16 million in “donations” to Mexican local governments to fuel store expansion in the country up to 2005.
Wal-Mart disclosed the payments to the Justice Department and Securities and Exchange Commission, according to a December 2011 regulatory filing, and said its outside advisers are briefing the agencies on its own probe. Prosecutors will want to know why Wal-Mart didn’t fully examine claims in 2005 by a company lawyer that he funneled bribes to Mexican officials, said Paul Pelletier, a former federal prosecutor.
“If somebody put the kibosh on the investigation, a good prosecutor would ask a lot of questions to figure out why,” said Pelletier of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, who previously supervised foreign bribery cases. “It may not be just about the bribery scheme anymore. The questions about why it was or wasn’t investigated fully are going to have potential legal ramifications for the company and individuals, which is why the company would want to dig in there.”
The Justice Department is investigating potential criminal charges under the U.S. Foreign Corrupt Practices Act, according to a person familiar with the probe who wasn’t authorized to speak publicly. The FCPA bans payments by companies or their agents to foreign governments to obtain or retain business.
The probe will probably expand beyond Mexico if the company or government unearth red flags elsewhere or if the government questions both management’s response to reports of misconduct and its current compliance program, said Amy Conway-Hatcher, a former federal prosecutor at Kaye Scholer LLP in Washington.
“The investigation alone could cost Wal-Mart in the tens of millions of dollars or more, and that’s if it’s limited to Mexico,” Conway-Hatcher said. “The cost of a global investigation under these circumstances could rise into the hundreds of millions. This would not include penalties and fines if charges are brought.”
Government investigators, she said, “will look at the acts of individuals to see if they can prove violations of law, how high up it went, who knew about it, who authorized it, and the extent to which there was any coverup.”
In an FCPA crackdown, the government settled 57 cases against companies from 2005 through 2011, reaping $4.1 billion for the U.S. treasury. In 2008, Siemens AG, Europe’s largest engineering company, agreed to pay $800 million to the U.S. and $814 million to German authorities. Siemens also spent $1 billion on lawyers and accountants and its internal controls.
Wal-Mart has hired the Jones Day law firm to investigate its Mexican operations, as well as auditing firm KPMG and law firm Greenberg Traurig LLP for a compliance review of its global operations, said a person familiar with the matter.
The Times reported that a former executive in Wal-Mart de Mexico’s real estate department, Sergio Cicero Zapata, e-mailed a former senior lawyer in September 2005 to describe how he had funneled cash bribes to government officials through fixers known as “gestores.” Top executives, the paper reported, focused more on damage control than on uncovering misconduct.
Former FCPA Supervisor
Pelletier, who supervised more than 50 FCPA corporate probes at the Justice Department from 2005 to 2011, said government investigations typically proceed with one or two DOJ attorneys, one or two SEC attorneys, and a couple of agents from the Federal Bureau of Investigation. Outside law firms could use as many as 100 people for intensive document searches, he said.
“Prosecutors would want to know if false representations were made by an executive of the company to anybody, to whom they were made, how and when,” he said. “Those would be viewed in the context of whether they tried to prevent any government or regulatory body from learning of those cases.”
In a statement on April 21, Wal-Mart said: “We are committed to getting to the bottom of this matter. The audit committee and the outside advisers have at their disposal all the resources they may need to pursue a comprehensive and thorough investigation.”
Don’t Reflect Wal-Mart
It said allegations in the Times story, if true, “are not a reflection of who we are or what we stand for.”
Wal-Mart, which had sales of $444 billion in fiscal 2012 and operates in 27 countries, said it is taking a “deep look” at its FCPA training and internal controls in every country.
Corporate investigations, which can take years in FCPA cases, are nearly always resolved through negotiation. The DOJ may agree to so-called deferred prosecution agreements, where prosecutors file criminal charges that they agree to withdraw after a period if the company meets required improvements in governance and compliance.
Prosecutors may also reach so-called non-prosecution agreements that require payment of penalties and improvements to compliance programs. Many more investigations result in no prosecution at all.
The Justice Department follows a nine-step guide on business prosecutions in examining cases. The criteria include the seriousness of the crimes, a company’s history of wrongdoing, the extent of its compliance program, and its willingness to cooperate. Companies often get credit if they voluntarily disclose their internal investigations and hand over company e-mails, memos, employee interviews and other evidence.
Need Voluntary Disclosure
“The government relies on voluntary disclosure because they’re not going to get the evidence overseas and they’re not even sure where to look,” said Peter Henning, a law professor at Wayne State University in Detroit. “They won’t have access to the employees, who will talk to in-house counsel because they’re compelled to or they feel a measure of loyalty.”
Wal-Mart disclosed the case to the government in December “out of the fear of publicity and not so much out of a desire to make sure a wrong was righted,” Henning said.
While the conduct may not be obstruction of justice, “it’s also not an example of good corporate citizenship of identifying a problem and dealing with it,” he said.
“Instead, they saw a problem and swept it under the rug,” he said. “It’s not going to sit well with the Department of Justice or the SEC. They’re going to want an assurance that this will be a thorough investigation, and not just in Mexico.”
A key strategic question for Wal-Mart will be whether it can convince government investigators that its new internal probe will be “sufficiently thorough” to let it progress, said Kevin Abikoff, an FCPA attorney at Hughes Hubbard & Reed LLP.
“Wal-Mart is well served to try to get out ahead of the investigation and let the government rely on what it has done,” said Abikoff. “That tends to be a lot less disruptive to the company.”
Attorney Robert Tarun of Baker & McKenzie LLP said that government investigators will talk to Wal-Mart’s outside law attorneys regularly.
“The DOJ and SEC are not going to just assume that the company will conduct an investigation and get back to them in six months,” he said. “They’re going to stay on top of it.”
The advisers must conduct extensive forensic work before deciding whether to charge executives, he said.
“It’s way too early to tell whether the government will charge individuals criminally or civilly,” he said.
© Copyright 2015 Bloomberg News. All rights reserved.