Thursday, April 26, 2012

We Are Shocked About Walmex!

Wal-Mart's first international store opened in Mexico in 1991 through a joint venture with Cifra.  As retailing gurus spoke about the U.S. being overstored, shareholders wanted their companies to invest in future growth opportunities abroad.  Mexico, because of its proximity to the U.S., its large underserved consumer base, and its existing supply chain to the U.S. was a logical choice. Today, Wal-Mart de Mexico, SA is the largest retailer in Latin America, reporting first quarter net of about $166 million, up 35% due to a surge in Mexican consumer spending. Shareholders should be pleased, no?

Unfortunately, breaking news stories allege persistent, widespread violations of the U.S. Foreign Corrupt Practices Act (FCPA) by senior Wal-Mart executives, including former Wal-Mart Vice-Chairman Eduardo Castro-Wright and others. 
The FPCA talks about "corrupt intent" to persuade foreign officials to misuse their positions to direct business to a person.  The payment, or promise of payment, of money or anything of value is prohibited. 

Then, in a nod to the real world, the FCPA has a section the Justice Department brochure linked above describes as follows: "There is an exception to the anti-bribery prohibition for payments to facilitate or expedite performance of a "routine governmental action." The statute lists the following examples: obtaining permits, licenses, or other official documents; processing governmental papers, such as visas and work orders; providing police protection, mail pick-up and delivery; providing phone service, power and water supply, loading and unloading cargo, or protecting perishable products; and scheduling inspections associated with contract performance or transit of goods across country

The early news stories reported that much of the alleged illegal payments made by Wal-Mart were to municipal and local government officials in Mexico for the issuance of building permits and other approvals to open stores.  Would building permits fit into the exception language above?  The Mexican government's original position was that it was not going to launch a Federal investigation of Wal-Mex practices, as the alleged violations were a local matter.  As this story unfolds, they may choose to take a different position for PR purposes. 

Foreign expat executives moving into their houses in New Delhi probably have third party managers who make payments to the local utility clerks to turn on gas and electricity.  This baksheesh is a long-standing fact of life and would seem to be the intent of the exceptions.  Both in India and China, if a motorist knocks over a cyclist in traffic, in plain view of a policeman, the typical sequence of events  is a conversation between motorist and cyclist, expressions of concern, and the pulling out of a large wad of bills, and a settlement of the grievance in cash, without any intervention by the constabulary.  Is this corruption? 

The FCPA prohibits corrupt payments through third parties, which is a common mechanism for large companies operating overseas which may be required to employ local law firms, which bill at rates equal to or higher than their foreign counterparts.  If the foreign company tries to claim deliberate ignorance, then they run afoul of the law, but this would seem very expensive and hard to prove.  Would we be shocked if there were widespread violations of this kind by foreign companies doing business in China? 

Global medical device companies have long wrestled with these issues with respect to payments to physicians in Europe. Often times, they have tried to incorporate strict standards into their corporate codes of conduct.  However, European executives with MBA's from U.S. universities may see customary practice in a different way than we do. 

Aerospace procurement has been a classic breeding ground for FCPA actions, and it was probably one of the industries which led to the passage of the Act back in 1977.

What seems peculiar about the Wal-Mart story is how such a global corporate giant would not have had well-established, well-staffed corporate oversight for FCPA compliance that came into the board of directors independently, through either interal audit, corporate counsel or a combination.  One story alleges that an internal Wal-Mart investigation was quashed by executive management by itself without board oversight. 

Hopefully, in the coming days and weeks, we'll start to separate facts from the noise in the particular Wal-Mart case. 

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