Walmart Finally Settles Anti-Corruption-FCPA Investigations

“Its been a long time coming. . .” according to song writer David Crosby’s lyrics. While those words probably were not penned with the Foreign Corrupt Practices Act in mind, many in Bentonville, Arkansas may well feel it has been a “long time coming.” For years after expanding from a huge U.S. retailer into a global one the firm’s international compliance procedures were ineffective to virtually non-existent. For years after the New York Times reported on long running foreign corruption at Walmart the investigations continued. On Friday it all seemingly ended. The DOJ and the SEC each reported that the company settled. While the duration of this saga may remind many David Crosby’s lyrics, it may seem line the over $280 million settlement has been a long time coming. The real question is whether the end has in fact come for Walmart and the critical compliance issues that includes facilitation payments have come to an end.

By 1990 the family firm from Bentonville had over 1,500 retail stores. Everyday Low Cost was more than a marketing slogan to the firm, it was in some senses a way of life. Consumers flocked to the low cost sales approach of Walmart, fueling its enormous growth. That growth was all in the U.S markets.

As the 1990s unfolded things changed. In 1993 Walmart International was established as an operating segment. Over the next two years the retail giant opened in Mexico, India, China and Brazil. The Everyday Low Cost approach continued for consumers and apparently as an operating philosophy. For consumers in Mexico, India, China and Brazil the formula the approach was also a success. For the business it was not. In China executives at the Walmart subsidiary identified potentially troubling practices as early as 2001 and 2002. The local culture of gift giving apparently infected the operations. Cash was being provided for small gifts, raising concerns about compliance with firm policy. No action was taken until March 2005 when the company published its first policy addressing the issues – the International Anti-Corruption Policy and Procedures. Later that year the implementation was put on hold. The foreign business operations continued.

Mexico: The Mexican subsidiary of Walmart pursued a rapid development strategy, quickly opening new stores. A former attorney at the subsidiary detailed the approach used to secure the necessary permits and approvals about one year after his departure: Payment were made to facilitate the process or “smooth the road” as it was called in Spanish. Those payments were coded to identify the reason the payments were made, according to the DOJ case papers. The receipt of this information at the company sparked action. Investigations were conducted by internal personnel – the economical approach. Draft reports were prepared. Eventually a report compiled by an internal attorney concluded that the claims were unsubstantiated but that the controls were deficient. The report was addressed by the parent company five years later in 2011.

China: Operations in China differed little from those in Mexico. Local employees were aware of control inadequacies and deficiencies and the resulting misconduct. For example, it was understood as early as 2006 that the policies and procedures adopted that year were inconsistent with others and failed to address key points. As the SEC’s Order states: The subsidiary “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.” There was also a lack of third party retention procedures and no charitable donation policy. The improper payments continued.

India: The retailer entered this country through a joint venture with India Partner because of foreign direct investment restrictions. In 2007 Walmart and India Partner executed franchise and joint venture agreements. Under these arrangements India Partner was tasked with matters such as obtaining licenses, permits, certifications and zoning for retail stores in the country. The internal audit team identified control deficiencies as reflected in the three reports on the operations prepared between 2009 and early 2011. Reliance on India Partner continued. The misconduct continued.

In mid-2011 Walmart executives received an anonymous report that certain employees were engaged in a scheme to make “improper payments to government officials to obtain store operating permits and licenses, and that a senior legal employee of India Joint Venture knew about the scheme,” according to the SEC Order. No inquiry was conducted at that time. In fact, until 2011 the control deficiencies were not addressed. As a result “India Joint Venture and India Retail Business were able to retain TPIs [third party agents] that made improper payments to government officials in order to obtain store operating permits and licenses . . .” according to the SEC. The payments were recorded as “misc fees,” or “professional fees,” or “incidental,” or “government fee,” according to the DOJ papers.

Brazil: Brazil Subsidiary also focused on opening new stores. It retained Brazil Construction Firm to build a new store scheduled to open in 2009. The construction firm has a reputation for making payments to officials to achieve results – a point confirmed by a due diligence process. Nevertheless, a store under construction opened late. Prior to the opening the real estate committee at the subsidiary met. The committee learned that an “extraordinary process” would be required to secure the license to open. A new TPI was retained and paid $127,000 – far more than others in that position. While there were objections by subsidiary employees to this approach, it was a success. A few days later the store was able to open. The same TPI was used to secure the opening of two additional stores. The TPI was paid about $400,000 indirectly through Brazil Subsidiary’s contractor. No due diligence was done on this process.

In 2005 Walmart discussed a revised anti-corruption policy. Two years later the policy was announced but not fully implemented. In 2009 the firm announced a new policy. It had four key components: 1) a summary of the FCPA; 2) an acknowledgement that in some instances gifts, meals, travel and entertainment of government officials was permitted; 3) a statement that the policy extended to TPIs; and 4) contact information for the firm’s global ethics office. Control weaknesses continued. Payments to facilitate matters or “smooth the road” continued.

In April 2011 Walmart retained an international law firm and consulting firm to review its corruption compliance procedures.

The SEC’s Order alleges violations of Exchange Act Sections 13(b)(2)(A) and 13(b)(2)(b). The Commission acknowledged the firm’s cooperation which included self-reporting FCPA violations in Mexico in November 2011 after retaining outside counsel to conduct an internal investigation under the direction of the Audit Committee. The firm continued to cooperate throughout the period. It also undertook a series of remedial measures. The DOJ also acknowledged the cooperation of the firm.

To resolve the proceedings with the SEC, the firm agreed to implement an extensive series of undertakings and consented to the entry of a cease and desist order based on the sections cited in the Order. The firm will also pay disgorgement of $119,647,735 and prejudgment interest of $25,043,437 for a total of $144,691,172. In the Matter of Walmart Inc., Adm. Proc. File No. 3-19207 (June 20, 2019).

To resolve matters with the DOJ Walmart entered into a three-year non-prosecution agreement and agreed to retain an independent corporate compliance monitor for two years. The firm will also pay a $137 million penalty which is a 20% reduction off the bottom of the applicable Sentencing Guidelines calculation as to the conduct in Mexico and 25% for the conduct applicable to the other subsidiaries. The total amount includes a forfeiture of $3.6 million and a fine of $724,898 from WMT Brasilia, the Brazilian Subsidiary. That subsidiary also agreed to plead guilty.

Walmart’s long saga of making payments to speed the opening of its international stores should be at an end. The firm’s Government investigations should be at an end. The firm’s failure to implement appropriate policies and procedures at its foreign subsidiaries should be at an end. Whether questions about the underlying conduct here, which includes the use of so-called facilitation payments, will come to an end remains to be seen. There seems to be little mention of the question, or of bribery for that matter, just books, records and internal controls. Is this the “coming” that David Crosby had in mind when he wrote it has been a “long time coming?”

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