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The Walmart FCPA case

In the beginning…

The Foreign Corrupt Practices Act (FCPA) was enacted in 1977, applies to companies listed on U.S. stock exchanges and private companies organized under U.S. laws, their shareholders, directors, employees and agents, as well as other individuals who violate the statute while in U.S. territory.

The first FCPA case undertaken by the Department of Justice was in 1979 in “United States V. Kenny International Corp. Court Docket Number: 79-CR-372”. This apparent scheme involved a U.S. person, Finbar B. Kenny through his corporation Kenny International Corp., a New York corporation agreeing to pay the travel expenses of Cook Island Party supporters to vote in a Cook Island election for a new leader.

Mr. Kenny had exclusive rights to the distribution and sale of Cook Islands postage stamps outside the Cook Islands. According to the Order of Proof the sale of these stamps outside of the Cook Islands amounted to $1.5 million in 1978. Proceeds of the sale of these stamps were to be split 50/50 with the government of the Cook Islands. Mr. Kenny was concerned the contract that he had with the Cook Islands since 1965 would not be renewed if a new leader of the Cook Islands Party were elected.

The scheme was eventually discovered, the votes of the “transported” supporters were ignored, and a new leader of the Cook Island was installed. The criminal penalty in that case was $50,000.00

And 42 years later…

Fast forward to today and the recent Walmart FCPA case (June of 2019) and we have a criminal fine of $724,898 and criminal forfeiture of $3,624,490 against WMT Brasilia, a Walmart subsidiary. Walmart Inc. the parent company entered into Non-Prosecution Agreement (NPA) which requires Walmart Inc. to pay a total monetary penalty of $137,955,249. The Total Monetary Penalty is in addition to the $144,691,172 disgorgement of profits plus prejudgment interest by the Company in connection with its resolution with the U.S. Securities and Exchange Commission in a related matter. Grand total $315,995,809. The total amount of the fine was reduced from the maximum allowable. According to a Wall Street Journal article the government had been looking to fine Walmart one billion dollars.

The essence of the FCPA violations are that from in or around July 2000 through in or around April 2011, Walmart’s subsidiaries in Mexico, India, Brazil, and China hired certain Third-Party Intermediaries (TPIs) without establishing sufficient controls to prevent those TPIs from making improper payments to government officials in order to obtain store permits and licenses. Walmart earned additional profits through these subsidiaries by opening its stores faster.

As part of the agreements a guilty plea was entered into by WMT Brasilia S.a.r. and there was the imposition of an independent compliance monitor for a term of two years with a possible extension of one year should there be violations of the NPA. Walmart had already secured the services of a Corporate Monitor before the agreement was signed. Former FBI Director Louis Freeh is Walmart’s Corporate Monitor.

Several notable items from the three separate documents (the WMT Brasilia Plea Agreement, The Walmart Inc. Non-Prosecution Agreement and the SEC Cease and Desist Order) Walmart executed to resolve the matter with the Department of Justice and the Securities and Exchange Commission.

  • “Walmart admits, accepts, and acknowledges that it is responsible for the acts of its officers, directors, employees, and agents ….”
  • “The Defendant (WMT Brasilia) did knowingly and willfully cause Walmart to maintain certain false books, records, or accounts such that certain Walmart books, records, or accounts did not fairly reflect the transactions and dispositions of Walmart’s assets.”
  • “A Brazilian construction company (“Brazil Construction Company”) that facilitated the indirect hiring of Brazil Intermediary on behalf of Walmart Brazil and, without Walmart Brazil’s knowledge, made improper payments on Walmart Brazil’s behalf directly and through Brazil Intermediary,”
  • “Brazil Intermediary was a government employee and was an individual, not a business with a registered corporate form.”
  • “In or around 2009, Walmart Brazil directed Brazil Construction Company to retain an intermediary to assist it in obtaining a construction permit needed to begin construction of another store for Walmart Brazil.”
  • “Senior Walmart Brazil Attorney knew about the indirect hiring of Brazil Intermediary through Brazil Construction Company for the first store and was involved in a discussion regarding how Walmart Brazil would pay Brazil Intermediary.”
  • “Walmart Brazil falsely recorded its payments to Brazil Intermediary for its services as payments to the Brazil construction companies, not as payments to Brazil Intermediary.”

Similar issues were discovered in Walmart’s operations in India, Mexico and China as well.

A couple of observations

According to government documents Walmart was made aware of these practices in 2005. First by a former employee of the legal department and then by a whistleblower. While it appears certain governance efforts were undertaken in fits and starts in the early 2000’s nothing of substance was done until 2011.

What appeared to get the U.S. government’s interest was a December 2012 New York Times exposé on the matter. The government documents indicate that Walmart initiated disclosure efforts with governmental agencies in 2011.While the government took issue with certain aspects of the disclosure Walmart did receive credit i.e. reduction in penalties given the way Walmart cooperated throughout the long running affair.

Some of the restructuring Walmart has undertaken since the signing of the agreements with the government agencies include:

  • Hiring a Global Chief Ethics &Compliance Officer (“CECO”) who holds an Executive Vice President position,
  • Employing dedicated Global Anti-Corruption Officer, with separate reporting lines to the Audit Committee of the Board of Directors,
  • Enhancing anti-corruption related internal accounting controls on the selection and use of third parties,
  • Enhancing global anticorruption training and awareness program, and
  • Terminating business relationships with third parties involved in the conduct at issue; amongst other things.

In July of this year the Wall Street Journal reported that “The retailer spent over $900 million on investigations and compliance enhancements during a probe into alleged Foreign Corrupt Practices Act violations.” From a shareholder perspective it is still nearly a billion dollars in expenditures on getting compliance right. Better spent on increasing controls than paying a fine to the government. But it is still a billion dollars.

Moral of the story: “You can pay me now, or you can pay me later.” It is my observation that paying earlier is a more cost-effective alternative.

2 thoughts on “The Walmart FCPA case”

  1. You actually make it seem so easy with your presentation but
    I find this topic to be actually something which I think I
    would never understand. It seems too complex and extremely broad for me.
    I am looking forward for your next post, I will try to get the hang of it!

    Reply
    • I am sorry to give you that impression. This is all very complex stuff – but doable. To be effective at implementation you need three things 1) subject matter expertise, 2) method, and 3) a very good understanding of human behavior. Number one can be attained through hard work. Number two is highly person dependent and arguably the most critical. Number three is attainable but at times the most distressing.

      Hang in there.

      MRB

      Reply

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