Bribery and corruption in Mexico – Principles that organisations should adopt to avoid a Wal-Mart scenario

June 3, 2014

Background

According to the New York Times article “Wal‑Mart Hushed Up a Vast Mexican Bribery Case”, published on 21 April 2012, allegations of widespread corruption throughout Wal‑Mart de Mexico (Walmex) first surfaced in September 2005, when a senior Wal‑Mart lawyer in the US received an email from Sergio Cicero Zapata, a former executive of Walmex. In short, Mr Zapata’s email described how Walmex had for some time engaged in paying bribes to Mexican local government officials as a means of ensuring development permits were obtained to build Wal‑Mart stores throughout the country.

In response to this, Wal‑Mart sent an investigatory team to Mexico City to make further enquiries. It is alleged that the investigators found a paper trail of hundreds of suspect payments, totalling more than US$24 million. It was also found that top Walmex executives knew about these suspect payments and took steps to conceal them from Wal‑Mart headquarters in the US. In summarising their initial investigation to the Wal‑Mart board, investigators asserted that there was reasonable suspicion to believe that Mexican and US laws had been violated, and recommended that the investigation be expanded. Instead, the investigation was allegedly shut down with neither US nor Mexican law-enforcement officials being notified.

In the scathing New York Times report, the author, David Barstow, describes a culture fostered within the senior echelons of Wal‑Mart which focused on pursuing growth and market-dominance at all costs. In light of obvious Wal‑Mart concerns about such knowledge reaching the public forum, executives focused on “damage control” opposed to identifying and prosecuting those who had breached any laws.

Analysis

The gravity of these allegations not only suggests a company-wide disregard for ethical business practice, but potentially substantial breaches of the Foreign Corrupt Practices Act (FCPA). Considering the potential repercussions for Wal‑Mart in light of these allegations, this incidence serves as a reminder to companies of the importance of having good corporate governance and compliance systems in place.

Communication of legislation in policies, procedures and training

Employees at all levels of an organisation must have a thorough understanding of the key components of the legislative instruments that are applicable to them, as well as the ambit of their jurisdictional reach. This can often be a difficult exercise, particularly in cross-border enterprises. In the wake of the Wal‑Mart allegations, the interpretation of the FCPA provisions that define acts of bribery have become the subject of discussion amongst legal and compliance circles. In the broadest sense, the FCPA forbids any offering, giving, paying or promising to pay money or give anything of value to any foreign government official or foreign political party for the purpose of influencing, gaining improper advantage or retaining or directing business. “Anything of value” can mean:

  • gifts
  • product discounts
  • meals
  • entertainment
  • travel expenses
  • company shares
  • benefits extended to family members of foreign officials.

Knowledge of wrongdoing (either as actual knowledge or conscious disregard), or wilful ignorance of any wrongdoing, constitutes a breach of FCPA provisions. This translates to a large amount of information that must be grasped in terms of knowing what constitutes a bribe, but the intricacies of this legislation and its application in the practical sense must be understood by all persons. Obviously this requires different forms of communication to different levels of an organisation; however, it is important that organisations telegraph the key applicable legislation to all employees. The following are some recommended practices to help achieve this effect, and to minimise the risk of legislative requirements not being communicated.

  • Provide examples and case studies in policy documents or during training seminars that relate specifically to the function of an individual employee.
  • Provide information in a language and context appropriate to the target audience.
  • Provide translated versions of policy documents and training materials for non-English speakers.
  • Utilise features such as commonly asked questions and do’s and don’ts to cover all possible scenarios.
  • Demonstrate to lower-level employees that implementing legislative requirements is a directive of the entire organisation, with provisions being applicable to all levels.

Commitment to ethical business conduct

The Wal-Mart incident demonstrates the importance of adopting a top-down responsibility structure in which business leaders are responsible for establishing a culture where corruption is not tolerated. It also serves as a reminder of the importance of appointing a senior officer to monitor and implement anti-bribery measures, particularly in foreign jurisdictions, and having frequent, detailed reports back to senior managers. It is imperative that when conducting business abroad, firms must align their vision, mission, and corporate value systems with their cross-border subsidiaries.

The distribution of policies on bribery and corruption as well as a code of conduct is essential to ensuring a high standard of corporate governance practice. In particular, Wal‑Mart has demonstrated the importance of a scheme which includes clearly-defined protocols for reporting incidents of corrupt behaviour. Whilst Mr Zapata eventually approached internal counsel at Wal‑Mart, it seems he was aware of corrupt behaviour for some time beforehand. In many companies there is a tendency for employees to be hesitant to report matters directly to management due to other relationships they have within the organisation. An easy-to-understand policy and anonymous reporting hotline can identify potential issues quickly and reduce the risk of ethical violations, while ensuring senior management are made aware of any issues so a prompt, proactive response can be made. A company’s approach to governance and compliance should demonstrate that even executive directors are not immune from breaching policy and that ethical behaviour throughout the organisation is paramount.

Third party relationships and due diligence in foreign countries

One of the standout features of the Wal‑Mart case was Walmex’s practice of retaining third parties to conduct external administrative work with Mexican government officials. This highlights the importance of thoroughly understanding the customs and cultures of overseas countries, and ensuring that due diligence controls address the specific risks associated with conducting business in a foreign environment. Walmex had retained the services of people known as gestores – a profession largely unique to Mexican society. Gestores are individuals who are retained by those seeking assistance with dealing with bureaucracy, and are sometimes simply lawyers performing a dual role. This is often an entirely legitimate practice in Mexico with a gestor simply being the person who, for example, attends a government office to file forms. However, they have been at the forefront of many corruption scandals, as the “facilitation service” they provide has been known to go well beyond simply routine administrative work. The gestores retained by Walmex are said to have received sums of money from the retail giant with instructions to “do what is necessary” to convince officials to approve building permits.

There remains some ambiguity as to whether these gestores worked for Walmex under legitimate bona fides and whether the estimated millions of dollars paid to them by Walmex ended up as bribes to local and provincial governments. Regardless, when third parties are retained by an enterprise for a sincere purpose, appropriate due diligence should be conducted on that third party and a clear document trail kept which demonstrates the legitimacy of the engagement. Adopting a comprehensive due diligence process to choose reputable agents and business partners mitigates risk. In Wal‑Mart’s case, performing due diligence on gestores and having documentation relating to the business relationship may have alleviated perception of them being engaged to behave in a corrupt fashion.

Summary

Many of the facts which surround the allegations against Wal‑Mart will not become clear for some time. The costs faced by the retailer in conducting another internal investigation are already estimated to be in the millions; not to mention the severe damage their reputation has received as well as the increased scrutiny from authorities. Wal‑Mart recently announced that it has taken steps to ensure that Walmex’s internal controls have been boosted to ensure FCPA compliance, however, it is clear that more needs to be done at the top-level of Wal‑Mart to compound this point. For the sake of preserving corporate image, organisations should take careful note of the circumstances that led Wal‑Mart to the situation it is currently in, and ensure that their internal controls are of a standard that eliminate such risks.

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