Walmart case trashes US brand

Financial Review 

PUBLISHED: 05 May 2012

 Anna Bernasek

Every once in a while a business scandal takes your breath away. The discount retailer Walmart, the largest corporate employer in the world, is reported to have systematically paid bribes to Mexican officials to facilitate its rapid expansion.

By American standards that’s pretty shocking. Since 1977 it’s been illegal for US companies to bribe foreign government officials, and virtually every significant US company has a compliance program designed to stop that happening. For most, compliance with the Foreign Corrupt Practices Act (FCPA) is practically a given.

But apparently not at Walmart. If the reports are true, there was an organised approach to bribing Mexican officials in connection with Walmart’s dramatic expansion there. It seems that company records establish the amounts, times and other details. Which in itself is bad enough.

But it gets worse. Reports said the matter was referred to the highest levels of Walmart where a full investigation was shut down in favour of a quick whitewash.

The details of Walmart’s bribery scandal were revealed in The New York Times late last month and the company is now under federal investigation. Whether or not the government will prosecute Walmart remains to be seen, but the case turns a spotlight on the law and its significance.

There’s always been a temptation for aggressive companies to bribe governments in countries where the rule of law is not robust, because that approach is cheap and effective in the short term. While the ultimate benefits of cutting down on corruption are likely to be widespread, the near-term costs of doing the right thing tend to fall on specific companies and individuals. If not paying a bribe means losing a deal, that creates a lot of pressure.

Yet for years corruption has been one of the biggest obstacles to economic development in places like Africa, Asia and South America. That doesn’t just hurt the developing world. It also hurts companies and countries in the developed world that trade with corrupt regimes, in effect putting a drag on the global economy.

So when the FCPA was introduced during Jimmy Carter’s presidency it was a breakthrough.

The FCPA certainly wasn’t in the short-term interest of American companies back then and there was considerable opposition to the law from the corporate sector. Companies said they would not be able to compete with other nations such as Japan, Germany and France which didn’t face the same restrictions against bribery.

Legislators took a long view. They believed that American leadership on an important integrity issue would eventually become the global standard.

And they were right. When the OECD countries adopted the convention on combating bribery of foreign officials in 1997, they were finally coming up to the standard set by the US. Australia passed its own anti-corruption law modelled on the FCPA in 1999.

The FCPA was a down payment leading to investments in integrity around the world. At the time, the US was truly a global leader and had the confidence to take justified actions even if there was a short-term domestic cost. And after all, isn’t that what integrity is all about?

It’s hard to imagine that Congress would pass the FCPA today. With concerns about the economy, debt and taxation running high, taking a far-sighted approach to global leadership is not on the agenda.

Once the laws are in place, though, it all comes down to enforcement. In recent years, the US has stepped up its policing of the FCPA. In 2004, there were two cases of criminal enforcement. By 2010, there were 48. Currently, there are perhaps 100 cases open.

Which brings us back to Walmart, a huge, successful and influential company in the US. It occupies a position of prestige. As a company slogan says, its policy is to “get the right results, the right way”.
But befitting its famously hard-nosed style, Walmart has its share of detractors. In recent years, it has come under attack for its treatment of employees, fierce opposition to unions and impact on the environment.

So reports of systematic bribery in Mexico, apparently conceived by top management and condoned by the chief executive, look positively radioactive.

That’s because under US law an FCPA violation is a crime, plain and simple. That’s not to say that corruption never happens in other ways, but it generally isn’t so black and white. By the time your lawyers tell you that you have a problem, as they are reported to have done at Walmart, it’s too late to just close your eyes.

Walmart faces a pretty big challenge. Even if the government decides not to prosecute it under the FCPA, a Securities and Exchange Commission enforcement looks likely based on record-keeping and reporting violations. It seems as if Walmart won’t escape without significant consequences.