Walmart has been charged by US Securities and Exchange Commission (SEC) for violating the Foreign Corrupt Practices Act (FCPA) by failing to comply with US’ anti-corruption laws through schemes in Mexico, Brazil, China and India. According to the SEC’s order, Walmart failed to sufficiently investigate or mitigate certain anti-corruption risks and allowed subsidiaries in the four countries to employ “third-party intermediaries” who made payments to foreign government officials “without reasonable assurances” that they complied with the FCPA. “Walmart valued international growth and cost-cutting over compliance and could have avoided many of these problems” said Charles Cain, Chief of the SEC Enforcement Division’s FCPA Unit. WMT Brasília, the company’s Brazilian subsidiary, pleaded guilty to violating the FCPA rules. The company has agreed to pay $282.7 million in penalties to settle the charges – of which it’ll pay the SEC $144.7 million for failing to comply with FCPA rules and another $138m to resolve related criminal charges from the Department of Justice. Apart from the penalty, the retailer has agreed to non-prosecution for three years, provided that it would appoint an independent corporate compliance monitor for two years to ensure that there would be no corruption in the firm’s foreign ventures.

Under US’ Foreign Corrupt Practices Act (FCPA) enacted in 1977, payment of bribes to foreign officials to assist in obtaining or retaining business is prohibited. The Act applies to prohibited conduct anywhere in the world. Publicly traded companies and their officers, directors, employees, stockholders, and agents – all fall under the ambit of this regulation. Agents can include third party agents, consultants, distributors, joint-venture partners, and others. The Act also requires American companies to maintain accurate books and records and have a system of internal controls sufficient to provide reasonable assurances that transactions are executed and assets are accessed and accounted for in accordance with management’s authorisation.

The Justice Department began its investigation in Walmart following a series of 2012 New York Times articles (paywall) that described payments Walmart made in Mexico to obtain permits to build stores there. The probe later examined Walmart’s business across the globe, including in Brazil, China and India.

Walmart’s ‘sorceress’ in Brazil and ‘wink’ in India: What the SEC found during its investigation

The SEC found that Walmart’s rapid international growth, combined with its low-cost philosophy, contributed to the Company’s insufficient anti-corruption related internal accounting controls in Walmart’s subsidiaries in Mexico, India, China, and Brazil from in or around July 2000 until in or around April 2011. Here’s how Walmart’s subsidiaries in these countries pulled it off:

India: Lack of transparency, shady book keeping

In or around November 2006, prior to the formation of India Joint Venture, a Walmart real estate employee wrote to a Walmart Executive that he had received a “wink and nod” when he “brought up transparency and clean transactions relative to the FCPA” with an employee of its Indian partner.

  • Questionable payments were recorded as vague expenditures titled “professional fees”, “incidental” and “miscellaneous”.
  • Between in or around March 2009 and in or around January 2011, Walmart’s internal audit team in India conducted at least three reviews of India Subsidiary and India Joint Venture. All of those reviews identified certain weaknesses in anti-corruption related internal accounting controls that required remediation, which were not immediately addressed.
  • Investigations also found out that in 2011, Walmart had received a tip-off about these improper payments, but the company never looked into it.
  • Because of Walmart’s failure to implement sufficient internal accounting controls related to anti-corruption, from in or about 2009 through in or about at least 2011, India Joint Venture and India Retail Business were able to retain TPIs that made improper payments to government officials.

Mexico: Prior knowledge of corruption practices, no action taken

SEC found out that Walmart had received an email from a lawyer who previously worked for them which read, “[I]f you’re interested to know confidential details about the way we achieved 300 projects…contact me and in that case, I would ask you do it before you contact [Mexico Subsidiary] because [of] the kind of issues (for instance, we used to undercover expenses identified with a code known and authorised by the highest levels).” This shows that Walmart had enough knowledge about the shady business its Mexican subsidiary was indulging in.

  • The Mexico subsidiary would determine which government officials needed to receive an improper payment to obtain a permit or license.
  • The gestores (TPI in Mexican) cashed the checks and delivered the agreed-upon improper payments.
  • At least a Walmart executive, internal auditor, and lawyer were all involved in this scheme.
  • In or around November 2005, a Mexico Subsidiary employee explained to investigators that when problems arose when obtaining licenses, Mexico Subsidiary typically negotiated a payment with the relevant official to resolve the problem.
  • After an investigation was initiated into this matter a report was prepared to tackle corruption done by Walmart’s Mexican employees and associates, but the company did not follow the investigators’ proposed action plans.
  • Another corruption risk identified was Mexico Subsidiary’s practice of donations in the form of checks, cash, and merchandise to Mexican municipalities and local government entities.

Brazil: Acquired govt permits ‘like magic’

At Walmart’s Brazilian corporate offices, the firm worked with a third party intermediary (TPI) known as ‘sorceress’ because of her abilities to obtain government permits ‘like magic’.

  • Starting in or around 2008 to in or around April 2012, Walmart’s Brazil Subsidiary employed Brazil Construction Firm to build or renovate eight stores and obtain all required construction permits. While certain Brazil Subsidiary employees were aware of the Brazil Construction Firm’s reputation for corruption, no due diligence was conducted until in or around 2009, a year after Brazil Construction Firm was engaged.
  • Brazil Construction Firm had made improper payments to Brazilian officials for non-Walmart projects and engaged in other illegal acts for non-Walmart projects. Citing these allegations, the report recommended that Brazil Subsidiary not renew Brazil Construction Firm’s contract. Notwithstanding the due diligence results, Walmart continued to use Brazil Construction Firm until in or around April 2012.
  • A Financial Times report says that Walmart’s Brazilian subsidy funneled $527,000 in payments through local construction companies to a go-between who helped the retailer secure a building permit.

China: Funnelled money for ‘government relationship consulting services’

Walmart China’s internal audit team had between 2006 and 2011 identified certain weaknesses in anti-corruption related internal accounting controls.

  • 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
  • Money was funneled to a local landlord for “government relationship consulting services”.
  • Although internal audit raised recurring issues during this time period, China Subsidiary’s anti-corruption related internal accounting controls were not improved until in or around April 2011.