New bribery charges a thorn in Wal-Mart’s side

Allegations that Wal-Mart Stores Inc. covered up the findings of an internal probe that proved its Mexican subsidiary bribed officials in that country could have huge implications for the world’s biggest retailer and its executives.

The alleged bribery scheme was revealed by The New York Times, which reported that Wal-Mart failed to notify law enforcement after the company’s investigators found evidence of millions of dollars in bribes given to Mexican officials in exchange for getting building permits faster and other favours to help it aggressively expand in the region.

If Wal-Mart violated the Foreign Corrupt Practices Act, which forbids paying bribes to foreign officials, the company could face fines of hundreds of millions of dollars. Top Wal-Mart executives could lose their jobs — or worse, go to jail. And the retailer could suffer a public relations nightmare if a lengthy investigation ensues.

“Unlike prior bad PR stories in recent years, this will be a material distraction for Wal-Mart on multiple fronts,” said Charles Grom, a retail analyst at Deutsche Bank.

The Times reported on Saturday that Wal-Mart top brass learned of the bribery campaign in 2005 when a former company executive provided details about how it was used to help the retailer expand rapidly in Mexico. The paper said Wal-Mart officials launched an investigation, but shut it down despite a report by its lead investigator that Mexican and US laws likely were violated.

Over the weekend, Wal-Mart said it had disclosed the findings of its investigation to the US Department of Justice and the Securities and Exchange Commission in December and that it met with officials from both agencies to discuss the company’s on-going investigation. But, according to the Times, Wal-Mart only did so after being informed that the paper was looking into the allegations.

“We are committed to getting to the bottom of this matter,” Dave Tovar, a Wal-Mart spokesperson, said in a statement.

The Department of Justice and the SEC declined to comment for this story. But legal experts say the government will likely launch its own investigation into the bribery allegations. They say they’ll be looking at whether the company had controls to discourage bribery, whether there was adequate training to discourage the practice before the violations occurred, and how high up any alleged cover-up took place.

Eduardo-Castro Wright, who was head of Wal-Mart de Mexico at the time of the alleged bribes, could face intense scrutiny, experts say. As could Wal-Mart’s CEO Mike Duke, who was head of the company’s international division at the time of the investigation, experts say.

H. Lee Scott Jr., who was CEO at the time of the allegations and remains on its board, could also be probed. According to the Times story, he rebuked internal investigators at one meeting for being overly aggressive. Shortly thereafter, the newspaper said, the investigation was turned over to the general counsel for Wal-Mart de Mexico, who himself was alleged to have authorised bribes. He exonerated his fellow executives, according to the Times story.

To charge or not to charge
Kevin Abikoff, a partner at law firm Hughes Hubbard and the chairperson of the anti-corruption and practice group, said that the government will decide whether to file criminal charges against the company and its executives based on how hard it allegedly tried to cover-up the allegations, including destruction of records or accounting irregularities.

Abikoff said the government is usually more lenient when a company discloses wrong-doing rather than when it tries to cover up the violations.

“The government can’t tolerate that behaviour,” he said. “It’s usually the cover-up that kills.”

Either way, the charges could be a headache for Wal-Mart, based at a time when the Bentonville, Ark. based company is depending more on emerging markets like Mexico to fuel its growth and offset sluggish sales in the US.

The company, which faces fierce competition from dollar stores to online rivals like , is focused on expanding internationally: That portion of the business accounted for more than a quarter of its overall sales of $418.9-billion in its latest fiscal year.

Financial pain
The company’s international business, which enjoyed a 15.2% increase last year, has had the fastest growth compared to its Wal-Mart U.S. business and Sam’s Club division. In particular, Mexico, which it entered in 1991, has been a strong market: Wal-Mart de Mexico is now Wal-Mart’s largest subsidiary, and one out of every five Wal-Mart stores is now in Mexico.

If there is a lengthy government investigation, it could increase the monitoring of its businesses in other regions like China and Brazil, which could hamper its international growth. Additionally, any penalties would be a financial pain for Wal-Mart, which recently reversed more than two years of sales declines at its namesake US business.

“This is going to be a major distraction for Wal-Mart,” said Leonard Bayners, professor at business law at St. John’s University. — Sapa-AP

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