The long-awaited Walmart Inc. (Walmart) Foreign Corrupt Practices Act (FCPA) enforcement action was announced last week. This massive case came in with multiple documents, a long list of instances of bribery and corruption, a slew of individuals who turned some very blind eyes to evidence literally in front of them, some $900+ million in pre-resolution investigative and remediation costs and a total fine and penalty of $282 million. The documents for this matter include, from the Department of Justice (DOJ): Criminal Information(Information); Non-Prosecution Agreement(NPA); Plea Agreement and Statement of Facts(Plea Agreement). From the Securities and Exchange Commission (SEC), a Cease and Desist Order(Order). Today, we consider the bribery schemes used by Walmart.
The matter involved bribery schemes in Brazil, Mexico, India and China. Walmart came to FCPA grief with the ubiquitous problem of third-parties or what both the DOJ and SEC moniker as “TPIs” [third-party intermediaries]. Both the DOJ NPA and SEC Order were focused on internal control violations. The illegal conduct occurred largely from 2000 to 2011, although in Mexico, it may have been going on for some time prior to 2000.
In Mexico, a former attorney for Walmart’s local subsidiary reported to Walmart in 2005 that he had overseen a scheme for several years prior in which TPIs made improper payments to government officials to obtain permits and licenses for the subsidiary and that several executives at the subsidiary knew of and approved of the scheme. Most of the TPI invoices included a code, called clave specifying why the subsidiary had made 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. These codes were only known to the highest level of the Mexican subsidiary which ran the bribery scheme.
Walmart’s corrupt payments in Mexico were the basis of a New York Times (NYT) article, entitled “Wal-Mart Hushed Up a Vast Mexican Bribery Case”, by David Barstow back in April 2012 that broke the story. Its basic facts were detailed in the NPA and Order. The bribery schemes used Mexican outside lawyers called gestoresto make illegal payments to Mexican government officials for licenses, permits, zoning waivers. The Order noted that one internal Walmart report said, “approximately USD $4 million paid to one of the gestoresthat Mexico Subsidiary Lawyer A alleged was corrupt.”
In India, the TPI form Walmart utilized was a Joint Venture (JV) partner. Due to the company’s failure to implement sufficient internal accounting controls related to anti-corruption, from 2009 until 2011, Walmart’s operations there were able to retain TPIs that made improper payments to government officials in order to obtain store operating permits and licenses. The NPA related that when informed that compliance with the FCPA was required for its transactions, a JV partner responded with a “wink and a nod”. Moreover, the JV partner had TPIs which operated without contracts; without standard FCPA provisions; certain TPIs had failed to sign anti-corruption certifications and there was no procedure for obtaining those certifications; certain TPI disbursements lacked supporting documents; FCPA training was lacking; and there was no formal third party due diligence process at the JV partner. The Plea Agreement also noted that improper payments were then falsely recorded in Walmart’s JV’s books and records with vague descriptions like “misc fees,” “miscellaneous,” “professional fees,” “incidental” and “government fee.”
Walmart’s Brazilian subsidiary was the corporate entity which pled guilty. The guilty plea was a result of Walmart’s failure to implement sufficient internal accounting controls related to anti-corruption. Despite repeated findings in internal audit reports that such controls were lacking, Walmart Brazil continued to retain and renew contracts with TPIs without conducting the required due diligence. Improper payments were in fact paid by some of these TPIs, including a construction company, which had been banned from doing business with the company for prior corruption issues. Walmart Brazil indirectly hired a TPI whose ability to obtain licenses and permits quickly earned her the nickname “sorceress” or “genie” within Walmart Brazil.
Apparently, there was widespread knowledge of the corruption at the Brazilian subsidiary. The Order stated, “Certain Brazil Subsidiary employees expressed their concerns regarding the TPI to Brazil Subsidiary management prior to the TPI’s engagement. Their concerns included the possibility that the TPI was a government official and that the TPI did not have a formal corporation to accept payment. A former employee of Brazil Construction Firm later stated that the TPI told him at that time that when the TPI was working on obtaining the construction permit under the direction of Brazil Construction Firm, 1) the TPI needed cash which the TPI had requested from Brazil Construction Firm and had received from the former employee; and 2) the TPI stated the money was for “people I have to pay,” which the former employee stated he understood to mean would be used to provide improper payments to Brazilian government officials.”
Walmart Brazil employees knew they could not hire the intermediary directly because of several red flags. In 2009, the TPI made improper payments to government inspectors in connection with the construction of a Walmart Brazil store without the knowledge of Walmart Brazil. WMT Brasilia was a wholly-owned subsidiary of Walmart and was a majority-owner of Walmart Brazil, Walmart’s wholly-owned subsidiary in Brazil, and the majority-owner of retail stores operating as Walmart Brazil.
In China, Walmart’s local subsidiary’s internal audit team flagged numerous weaknesses in internal accounting controls related to anti-corruption at the subsidiary between 2003 and 2011, sometimes repeatedly, but many of these weaknesses were not addressed. The Order stated, “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.” Furthermore, from 2007 until early 2010, Walmart and the subsidiary failed to address nearly all of the anti-corruption-related internal controls audit findings and they were not improved until 2011.
The resolution documents are a cautionary tale for every compliance practitioner. They lay out what can happen if there are insufficient controls in place and how mandatory controls can be ignored, subverted or over-ridden. Check back tomorrow when we consider Walmart’s actions that led to the reductions in its overall fine and penalty.
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