Wal-Mart probe lifts lid on culture of bribery in Mexico

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By Dave Graham | Reuters

MEXICO CITY (Reuters) - Whether you are the world's No. 1 retailer or a humble street vendor, paying public officials a bribe may be the quickest way to get your business growing in Mexico.

The New York Times reported this weekend that Wal-Mart Stores Inc investigators probing its Mexican operations found a paper trail of hundreds of suspect payments worth more than $24 million made to grow its business there, and that the company then quashed the investigation.

Wal-Mart said it was "deeply concerned" about the allegations, which have lifted the lid on a culture of corruption in Mexico that many of its residents take for granted.

One global study said Mexican firms were perceived to be the third most likely behind those in China and Russia to pay bribes abroad.

When 40-year-old market stall owner Adrian Martinez decided to open a second spot to sell his wares in Mexico City, he said he figured it was better to pay a bribe to a "gestor", or intermediary, to get a permit than wait for authorities to process his request.

Martinez paid the equivalent of several hundred dollars for the permit, a fraction of the sum the New York Times said Wal-Mart de Mexico - the country's top retailer - had given to middlemen to help it get permits to build and open new stores.

"I greased his palm," said Martinez, who said he earns about 400 pesos ($30) a day selling clothes and cosmetics. "Lots of others do the same here. If you want to do things by the book, you'll be waiting a long time."

According to the New York Times, Wal-Mart came to the same conclusion as it rapidly expanded its business from an initial joint venture in 1991 to becoming Mexico's top retailer and biggest private employer, with a network of more than 2,000 stores and restaurants.

"This is really no surprise to Mexicans," said John Ackerman, a legal expert at the National Autonomous University of Mexico (UNAM). "It's a surprise that it's so well documented, but it's no surprise to read this story about Wal-Mart."

Paying bribes has a long tradition in Mexico dating back to the colonial era, and Wal-Mart is not the first company to come under scrutiny for allegations of illicit payments.

In May 2011, a U.S. court handed down guilty verdicts against executives at a California company who were behind a cash-for-contracts scheme involving Mexico's Federal Electricity Commission, a utility known as CFE.

The temptation to skirt red tape in Mexico has been encouraged over time by a weak justice system and the relatively low salaries of many lower-level public sector workers.

Mexican police often earn well below $1,000 a month.

Mexico's biggest daily newspapers gave scant coverage on Sunday to the Wal-Mart story, with most relegating it to their back business sections. Only one newspaper, Reforma, put the story on its front page, but even then it only summarized the article's allegations and gave the company's response.

However, leftist presidential candidate Andres Manuel Lopez Obrador, who has long railed against corruption in Mexico and almost won the last election in 2006, said the reports provided fresh evidence of the "rotten" state of government in Mexico.

It was particularly illuminating that the investigation about Wal-Mart had been launched abroad, and "not from Mexico", said Lopez Obrador, who accused President Felipe Calderon of rigging the vote to defeat him in the 2006 election.

Recent polls suggest Lopez Obrador may be moving into second place in this year's race, behind favorite Enrique Pena Nieto of the opposition Institutional Revolutionary Party (PRI), Mexico's longstanding rulers whose name became a byword for corruption.

EVERYDAY BRIBES

Javier Oliva, a political scientist at UNAM, said payment of corporate bribes began to increase after the North American Free Trade Agreement (NAFTA) came into force in Mexico in 1994.

"Foreign companies in the main started to look for ways of speeding up official procedures," Oliva said. "Regrettably, this is how it works in much of Mexico."

And Mexicans are used to it.

A study by anti-corruption watchdog Transparencia Mexicana, the local arm of Transparency International (TI), showed Mexicans in 2010 paid a bribe to deal with more than one in 10 items of official paperwork or access to public services.

Illicit payments cover everything from connecting a telephone line to obtaining a driver's license and average around 165 pesos, Transparencia Mexicana said.

That figure leaps when big corporations try to operate in Mexico's capital and 31 different states, each of which has its own set of rules on how to set up a business or lease property, the watchdog's director Eduardo Bohorquez said recently.

On top of this come payments made by victims of extortion attempts to criminals, which TI said accounted for nearly one in four of bribe demands made in Mexico between 2007 and 2010.

A 2011 TI study of 28 major economies gauging perceptions of how likely companies were to pay bribes abroad put Mexican firms third behind those in China and Russia.

All told, corruption costs Mexico around 1.5 trillion pesos ($114 billion) annually, or about 10 percent of gross domestic product (GDP), according to an estimate this week from the Private Sector Center for Economic Studies think tank.

To small businessmen like stall holder Martinez, who said he had saved himself up to a year's wait by paying a bribe, the system is able to flourish because it stems from above.

"It's all come down from the politicians," he said.

Corruption allegations have helped bring down figures right at the top of the political establishment in Mexico.

Raul Salinas, brother of former President Carlos Salinas, the architect of NAFTA in Mexico, served 10 years in prison on corruption and murder charges until 2005. ($1 = 13.1166 Mexican pesos)

(Additional reporting by Elinor Comlay, Mica Rosenberg and Patrick Rucker; Editing by Kieran Murray and Philip Barbara)

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From Yahoo News:

By Jessica Wohl and Carlyn Kolker

(Reuters) - Allegations that Wal-Mart Stores Inc stymied an internal investigation into extensive bribery at its Mexican subsidiary are likely to lead to years of regulatory scrutiny and could eventually cost some executives their jobs.

The New York Times reported on Saturday that in September 2005, a senior Wal-Mart lawyer received an email from Sergio Cicero Zapata, a former executive at the company's largest foreign unit, Wal-Mart de Mexico, describing how the subsidiary had paid bribes to obtain permits to build stores in the country.

Wal-Mart sent investigators to Mexico City and found a paper trail of hundreds of suspect payments totaling more than $24 million, but the company's leaders shut down the investigation and neglected to notify U.S. or Mexican law enforcement officials, the Times reported.

Legal and retail experts said that the allegations, if proven true, could badly hamper the company and its management for years. They could lead to a time-consuming global probe, substantial financial penalties paid to U.S. authorities, and the departure of some executives.

One option Wal-Mart will have is to remove some of those involved in the alleged bribery or cover-up as this could make it easier to reach an out-of-court settlement with the U.S. Department of Justice concerning possible breaches of the Foreign Corrupt Practices Act (FCPA), a U.S. law that forbids the payment of bribes to foreign government officials.

"Among the remedial actions is 'house cleaning' of anyone involved in illegal conduct," said Richard Cassin, a lawyer who is an expert on the FCPA and writes a blog about it. "If a company can say those involved in the questionable conduct are already gone, the DOJ is likely to look more favorably on the company and current management."

Wal-Mart said it had disclosed its probe to the DOJ and the Securities and Exchange Commission. The company also said it had taken steps at the Mexico unit, which is widely known as Walmex, to boost internal controls to make sure it was FCPA compliant.

But, according to the Times, the disclosure came only after it informed Wal-Mart that it was looking into the bribery allegations, years after the bribes were said to first come to management's attention.

A spokesman at the SEC said on Saturday he did not have any comment on the Times article. A DOJ spokeswoman declined to comment.

"Because of Wal-Mart's inaction for a very long time, it's likely its exposure is only going to increase," said Michael Koehler, a professor at Butler University and an expert on the FCPA.

According to the Times, current Wal-Mart Chief Executive Mike Duke and former CEO Lee Scott, who still sits on the company's board, were among senior executives allegedly aware of the situation. Duke was put in charge of Wal-Mart's international division in 2005.

"DEEPLY CONCERNED"

The newspaper also reported that the whistleblower Cicero had identified former Walmex CEO Eduardo Castro-Wright as the driving force behind years of bribery.

Castro-Wright became CEO of Walmex in 2003 and was named CEO of Walmart US in 2005 and became a vice chairman in 2008. He led Wal-Mart's e-commerce business from 2010 until January this year, and is set to retire on July 1 after the company said last September that he was going to leave to spend more time with his family. He could not be reached for comment.

Wal-Mart said in a statement on Saturday it was "deeply concerned" about the allegations in the Times report. It said it began an investigation into its compliance with anti-bribery laws last autumn. The company declined to make Duke or any other executives available for comment, and said the investigation was continuing.

On Sunday, Wal-Mart spokesman David Tovar said Duke had instructed the company to conduct a worldwide FCPA compliance review in March 2011.

"Mike is fully supportive of the independent investigation being conducted in Mexico with oversight by the Audit Committee, including ensuring that all resources necessary are available to pursue the independent investigation aggressively," Tovar said.

On Friday, Walmex announced that one executive named the next day in the Times report, its general counsel and secretary to the board Jose Luis Rodriguezmacedo, had been assigned to other duties. He was removed from his role "in the interest of the investigation," Walmex spokesman Antonio Ocaranza said in an email, adding that he could not give further details about Rodriguezmacedo's status at Walmex. Calls to Rodriguezmacedo were referred to the spokesman.

COSTLY AND FAR-REACHING

Experts in bribery laws said Wal-Mart will be forced to devote millions of dollars and enormous amounts of manpower to its internal investigation. In many FCPA cases involving large companies, they do a large part of the investigation themselves and then hand the results over to the authorities.

"This is very likely to last two to four years for Walmart. These worldwide investigations tend to take two to four years in the normal course of business; it simply takes time," said Koehler.

Cassin said Wal-Mart faces an uphill battle to convince U.S. regulators that its problems are confined to Mexico. The U.S. retailer also has major operations in the UK, Brazil, Japan, China and Canada, and it is also seeking to expand rapidly in emerging markets such as India and parts of Africa.

"Before any resolution with U.S. authorities is possible, the company has to look under every stone for possible corruption. Are there any similar issues in China or other countries? That's what U.S. authorities will want to know. Wal-Mart's shareholders will be asking the same question," said Cassin.

The allegations could prove a huge problem for Wal-Mart if proven true, said Deutsche Bank retail analyst Charles Grom. "It would put a broadside in the growth engine of the company," he said. "Unlike prior bad PR stories in recent years, this will be a material distraction for Wal-Mart on multiple fronts."

Some retail experts said they thought that Wal-Mart would be unlikely to sacrifice Duke in the investigation and any related talks over a settlement with the government.

"I don't get the sense that Mike Duke's going to lose his job over this," said Joseph Feldman, senior retail analyst at Telsey Advisory Group. "I think that they'll try to put the spin on it that they have been putting on it - that it happened years ago, they rooted it out and it doesn't happen anymore."

The company's corporate structure may also reduce the chances of outside pressure from shareholder activists and others leading to drastic changes in the executive suite. The family of Wal-Mart founder Sam Walton owns nearly 50 percent of the shares and Walton's eldest son, S. Robson (Rob) Walton, is chairman, and his younger brother Jim is also on the board.

According to the Times, Rob Walton, Duke and Scott also had received an anonymous email in January 2006 saying Wal-Mart de Mexico's top real estate executives were receiving kickbacks from construction companies.

IMAGE STRUGGLES

Wal-Mart, which employs 2.2 million people and runs more than 10,000 stores around the world, is often targeted by labor and community activists who argue that it underpays its workers and its sprawling stores undercut smaller shops, often putting them out of business. It has fought hard to improve its image in recent years with a number of campaigns, including one to make its operations more environmentally friendly.

Wal-Mart executives have, though, been active in a lobbying group that is pushing to scale back the FCPA. A 2010 tax return for the U.S. Chamber Institute for Legal Reform lists Jeff Gearhart, Wal-Mart's general counsel since 2009, and Thomas Hyde, who retired in August 2010 as Wal-Mart corporate secretary, as two of 40 people who served as board members.

The board includes top lawyers and executives from other major corporations. Dow Chemical Co, Exxon Mobil Corp and State Farm Insurance each had two people among the 40 listed board members during 2010.

The U.S. Chamber Institute for Legal Reform is associated with the U.S. Chamber of Commerce, the largest business lobbying organization in Washington, D.C. It wants lawmakers to make several changes to the corruption law, for example by adding a provision that would protect a corporation from liability if one of its employees circumvented compliance measures.

(Additional reporting by Jennifer Ablan, Aruna Viswanatha, Jeremy Pelofsky, David Ingram, Elinor Comlay and Suzi Parker; Editing by Maureen Bavdek and Martin Howell)

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From The Washington Post:

Edgard Garrido/Reuters - A shopper carts her purchases from a Wal-Mart store in Mexico City on Tuesday.

By Tom Hamburger, Brady Dennis and Jia Lynn Yang,

Wal-Mart, the giant retailer now under fire over allegations of foreign bribery in Mexico, has participated in an aggressive and high-priced lobbying campaign to amend the long-standing U.S. anti-bribery law that the company might have violated.

The push to revisit how federal authorities enforce the statute has been centered at a little-known but well-funded arm of the U.S. Chamber of Commerce where a top executive of Wal-Mart has sat on the board of directors for nearly a decade.

The effort has intensified in the past two years, drawing on the backing of several large companies and trade groups such as the Retail Industry Leaders Association, where one of Wal-Mart’s top executives serves as a director. It also has involved high-powered lobbyists, including former attorney general Michael B. Mukasey.

The 1977 law, known as the Foreign Corrupt Practices Act, prohibits U.S. companies from offering fees or gifts to foreign officials to advance corporate interests.

There is no evidence that suggests Wal-Mart participated in the Chamber’s efforts because of its problems in Mexico. But even as the company has pledged zero tolerance for corruption around the globe, it has been a party to an effort that, some advocacy groups argue, would eviscerate the Watergate-era anti-corruption statute.

The Justice Department launched an investigation into Wal-Mart’s Mexican subsidiary in December over payments of more than $24 million in bribes to win construction permits there.

A company whistleblower told top corporate officials about the alleged bribes in 2005, The New York Times reported recently. The company launched but then shut down an internal inquiry and then failed to notify the Justice Department or the Securities and Exchange Commission of the allegations as required by law.

Wal-Mart’s corporate secretary and top ethics officer, Thomas D. Hyde, who stepped down from his job at Wal-Mart in 2010, was among the company executives who received initial reports of the bribes in 2005, the Times reported.

Between 2003 and 2010, public records show, Hyde sat on the 40-member board of the Institute of Legal Reform, a division of the U.S. Chamber that has led the way in criticizing parts of the law and talking about the need to change it.

Wal-Mart is one of more than 20 companies represented on the ILR’s board, according to the most recent tax filings from the Chamber group. Other companies include General Electric, ExxonMobil and Dow Chemical.

The retailer did not respond to questions about its participation in the Chamber’s campaign. But a person familiar with the effort, who spoke on the condition of anonymity because the board’s deliberations are private, said Wal-Mart was “not particularly active” on the board or in the FCPA lobbying effort.

Wal-Mart issued a statement on Tuesday, saying that it had instituted new protocols to make sure that FCPA investigations are “managed consistently and independently” and that it had created a new role for a global FCPA compliance officer. “We are taking a deep look at our policies and procedures in every country in which we operate,” said company spokesman David Tovar.

Mukasey was at the Justice Department during the latter years of the George W. Bush administration, when enforcement of the anti-bribery law escalated after the Sept. 11, 2001, terrorist attacks.

Over the past two years, the former attorney general’s law firm has received more than $200,000 in fees from the Chamber to work on clarifying the way in which the law is enforced. Although the lobbying campaign has remained largely out of the public spotlight, it has triggered a vigorous debate in the Justice Department and on Capitol Hill, where a handful of lawmakers have considered introducing legislation to amend parts of the law.

“I am bothered by the Chamber’s effort to gut this law,” said Stanley Sporkin, former enforcement director of the SEC who helped write several parts of the statute. “This law has made an important contribution in the world. The Justice Department has been aggressive in enforcing [it], and it has produced good results.”

The debate over the FCPA has intensified in recent years, in part because of the increase in federal enforcement.

In 2004, Justice pursued two cases under the FCPA. By 2008, there were 20 actions. The tough enforcement has continued under President Obama. In 2010, Justice worked on a record 48 cases, including one that resulted in an $800 million fine against German conglomerate Siemens.

Paul Pelletier, a former supervisor for the unit at Justice charged with enforcing the FCPA, said two prosecutors were dedicated to the issue when he began in 2002. By the time he left in 2011, there were 15, as well as additional units at the FBI and the SEC.

“The more we lifted up rocks, the more we saw of it,” said Pelletier of the bribery, adding that cases turned up as companies aggressively globalized their operations.

Last fall, assistant U.S. attorney general Lanny A. Breuer said officials were planning during 2012 to release “detailed new guidance” about how the FCPA should be enforced. Still, he made clear that he had little intention of scaling back the decades-old anti-corruption law.

“This is precisely the wrong moment in history to weaken the FCPA,” Breuer said then. “There is no argument for becoming more permissive when it comes to corruption.”

Breuer’s comments came as several business groups boosted efforts to rework parts of the law. The Chamber’s Institute for Legal Reform released a 28-page policy paper detailing a wish list of FCPA reforms. Among them: Measures limiting a company’s liability for the actions of its subsidiaries and a clearer definition of who qualifies as a “foreign official.”

That push has continued this year, as Justice and SEC officials have met with a wide range of industry and advocacy groups regarding the guidance the agencies plan to issue in coming months.

In February, the Chamber enlisted a disparate collection of other groups, including the American Gaming Association, the Faulkner County Farm Bureau in Arkansas and the Retail Industry Leaders Association, to sign onto an 11-page letter publicly advocating tjat federal officials clarify the statute. The letter argues that vague language in the law and the way in which investigators have enforced it have resulted in “a chilling effect on legitimate business activity.”

Those groups and others have said that they are merely looking for a measure of certainty and clear-cut guidelines from federal authorities.

Mukasey also rejected any suggestion that the Chamber effort is undermining the bribery statute, saying the proposals could ultimately strengthen the effort to fight corruption. “The clarity we are seeking will strengthen incentives for compliance,” he said, adding that the criticism of the Chamber campaign is off base. “I understand why people use that rhetoric. But I don’t see it as accurate.”

The requests by Chamber and its allies for adjustments and clarifications to the law have provoked strong criticisms from some government officials and a coalition of human rights and corporate governance groups.

In a speech last month, Secretary of State Hillary Rodham Clinton reiterated that the Obama administration has no intention of allowing a scaled-down FCPA.

“We are unequivocally opposed to weakening the Foreign Corrupt Practices Act,” Clinton said. “We don’t need to lower our standards. We need to work with other countries to raise theirs. I actually think a race to the bottom would probably disadvantage us.”

Harvard law professor David Kennedy co-wrote a report last year on the FCPA called “Busting Bribery,” which was published by the Open Society Foundation, backed in part by liberal philanthropist George Soros. The paper denounced proposed amendments to the law.

“In the guise of clarifying,” Kennedy said, “they are gutting the law.”

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Monday, May. 07, 2012
By Rana Foroohar [Time Magazine]:

Walmart became the world's largest retailer by offering "everyday low prices" around the globe. Apparently, though, Walmart was offering something else too. The company has been plunged into a major scandal since a New York Times investigation revealed that Walmart's Mexico subsidiary paid $24 million in bribes to local officials to sidestep regulations and obtain construction permits for new stores. The worst part: the story alleges that then CEO H. Lee Scott and other top executives knew exactly what was going on and tried to hush it up. "This looks to me like a comprehensive failure on the part of Walmart's board," says Stephen Davis, director of the Millstein Center for Corporate Governance at Yale.

The markets agree. Walmart's stock has already fallen 7.5%, knocking $17 billion in value off the company. If there is a too-big-to-fail retailer, Walmart would have to be it. It has sales of $444 billion, employs 2 million people and supports tens of thousands of suppliers, some of them consumer-product giants in their own right. Its stock is held by many of the world's major pension funds--meaning that Walmart's troubles are very likely affecting your retirement money right now.

(MORE: The 97-lb. Recovery)

The bad news is that the corruption scandal doesn't seem to stop with Mexico. According to the Times, the company received 31 similar reports of "significant" allegations of corporate violations, including potential crimes by senior executives, in various global markets in 2006 alone. (The company wouldn't respond to Time's questions about any of this; that might "compromise the investigation," said a spokesperson.) It seems that many of those cases were buried, just like the problems in Mexico. Ironically, at home Walmart has strict policies for its buyers: they can't accept so much as a coffee mug from vendors.

The scandal tells you that doing business in the world's fastest-growing markets can be fraught with peril. Emerging markets now account for the bulk of the world's economic growth, as well as about 30% to 60% of the revenues at many U.S. multinational firms. Indeed, one of the reasons that the stock market has done relatively well throughout the downturn is that it was buoyed by U.S. multinationals earning more and more of their money in these still relatively fast-growing economies. This is particularly true of packaged-goods and retail firms like Walmart.

Many of these markets are rife with corruption--but graft is not necessarily perceived as a serious crime in some places. It's more a way of doing business. In Mexico, "the bulk of retailers pay bribes," says one veteran Mexican fund manager for a large U.S. financial institution. Indeed, Mexican firms are the third most likely to have to pay bribes, right after Russian and Chinese ones, according to Transparency International, an anticorruption NGO.

Most of the hottest markets--Mexico, China, India and others--score quite badly on TI's overall corruption index. But the nuances of corruption differ. I once interviewed a British businessman who led an international rollout for a major U.K. retailer and asked him which emerging markets had the most corruption. He said, only slightly tongue in cheek, "In China, you might pay 20 on the dollar to get your project done, and it will get done quickly. In India, it's 40, and it will get done in a few years. In Russia, it's 80--and you may get shot before it gets done."

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There are no such nuances for American companies subject to the Foreign Corrupt Practices Act (FCPA): regardless of the local practice, bribery is illegal. And as U.S. firms' business in foreign markets has grown, so has the Justice Department's aggressiveness in pursuing FCPA cases, which have been on the rise over the past few years. A number of big retailers have decided that the risk-reward ratio in such markets simply isn't good enough. Ikea, for example, stopped opening stores in Russia because of corruption and delayed its India expansion in part because it didn't believe it could adequately police complex local supply chains there.

It was an unusually proactive move; another lesson from the Walmart case is that it usually takes a crisis to spur real change. Siemens, the German industrial conglomerate, has been rehabilitating itself since a 2006 corruption scandal involving more than $1 billion in bribes across several countries torpedoed its reputation and stock price. After Siemens worked with Justice officials, its codes of conduct became a competitive selling point and were widely copied by other firms. Walmart should take note. As anyone familiar with Watergate knows, the cover-up is usually worse than the crime.