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What to Expect in the Wake of the FCPA Investigation of Wal-Mart

On April 21, the New York Times front page story contained stunning allegations of Wal-Mart’s extensive cover-up of widespread corruption and bribery in Mexico. The story alleged that in 2005, Wal-Mart learned that its Mexican subsidiary—Wal-Mart de Mexico—had paid over $24 million in bribes to Mexican government officials to secure construction, zoning, and other permits potentially in violation of the U.S. Foreign Corrupt Practices Act (“FCPA”).

Wal-Mart commissioned a brief internal investigation which uncovered the potentially improper payments and showed that Wal-Mart de Mexico’s executives may have known about and taken steps to conceal the payments.   Armed with this knowledge, Wal-Mart executives shut the investigation down against the advice of their investigators.

After closing the investigation, Wal-Mart chose not to contact any law enforcement agency or to discipline any Wal-Mart de Mexico executives or employees.   In fact, Wal-Mart de Mexico’s Chief Executive, who was alleged to have had an instrumental role in the misconduct, was promoted to Vice-Chairman of Wal-Mart in 2008.   Moreover, Wal-Mart did not disclose to the U.S. Department of Justice (“DOJ”) or the Securities and Exchange Commission (“SEC”) that it was conducting an internal investigation into potential violations of the FCPA until December 2011, when it learned of the Times’s investigation.

Although the U.S. enforcement authorities continue to investigate Wal-Mart’s conduct, the Wal-Mart disclosures and corresponding press coverage identify important issues for companies operating in  Mexico.

Recently, U.S. enforcement agencies have targeted various industries, including  energy, pharmaceuticals and biomedical technology, and telecommunications, through industry-wide FCPA investigations.  This trend towards coordinated industry investigations and enforcement actions has produced some of the largest fines in FCPA enforcement history.  The enforcement authorities’ sweeps typically are triggered when one or both of the agencies learn of potential corruption related to a particular industry, service provider, or government agency, whether through a company’s voluntary disclosure or a third-party tip or report.  Working with the initial target, enforcement agencies are able to focus on other potential violators, identifying industry players with similar business operations and making use of the same government processes as the intial target.  Even companies unaware of the specific circumstances of the potential corruption driving the initial inquiry can find themselves a target of the investigation simply by participating in the same industry or making use of the same service providers or government agencies as the disclosing or initially targeted company.    In the last several years, the DOJ and SEC have proven adept at capitalizing on an initial disclosure or limited inquiry in one industry or jurisdiction, resulting in highly-publicized and significant FCPA settlements.

The Panalpina investigation, perhaps the most talked-about FCPA enforcement action to date, followed a similar pattern.   In February 2007,  Vetco Gray, an oil and gas services company, settled FCPA charges for improper payments to Nigerian customs officials, including payments  made on the company’s behalf by the Swiss logistics provider, Panalpina.   Knowing that numerous U.S. companies and issuers relied on Panalpina for services in Nigeria, the U.S. enforcement authorities waited for companies to come forward and make disclosures similar to Vetco Gray.  Four companies did just that, disclosing an awareness of potential issues related to Panalpina, and informing the agencies of on-going internal investigations.  In July 2007, after waiting several months for additional companies to come forward, the DOJ sent letters of inquiry to eleven of Panalpina’s customer companies, inquiring not only about their use of Panalpina, but also the reasons for not contacting the enforcement authorities following the Vetco announcement.  Investigations of each of these companies ensued, and in November 2010, Panalpina and six of its customers settled the resulting FCPA charges for a total of approximately $236 million in criminal and civil fines.  Some five years after the investigations were begun, a handful of companies implicated in the Panalpina investigation have yet to resolve their investigations.

More recently, in April 2011, Johnson & Johnson settled an FCPA enforcement action concerning the practices of its subsidiaries in the medical device industry. As part of the company’s settlement, the DOJ highlighted J&J’s cooperation with the authorities, including with respect to their continuing investigation of other industry participants.  On the heels of investigating the pharmaceutical company, enforcement agencies began a comprehensive review of the medical device industry.  Already two other medical device companies implicated in the sweep, Smith & Nephew, Inc. and Biomet, Inc., have settled with the DOJ and SEC, resolving their investigations in February and March 2012, respectively.

The Wal-Mart investigation contains the hallmarks of an FCPA investigation ripe for similar industry-wide scrutiny.   Such a review could take many forms, but the most likely may be for the enforcement authorities to make inquiries with companies operating in the retail industry in Mexico or in similar industries requiring a significant, physical footprint in Mexico, such as chain restaurants, vehicle dealerships, or other types of retail services like grocery stores.  Enforcement authorities also could target the construction industry itself, focusing on construction project management companies and builders.  These types of companies are dependent on Mexican government officials to provide permits and licensing for any construction and construction-related projects in Mexico.   Should the corruption disclosed by Wal-Mart prove to be as pervasive as reported in the Times, companies that routinely rely on the same Mexican government agencies to provide construction permits and licensing could find themselves the target of U.S. government inquiries.   This unwanted scrutiny may be even greater should Wal-Mart, as part of its on-going investigation and efforts to resolve any resulting FCPA enforcement action, cooperate with U.S. enforcement agencies and name other companies potentially implicated in similar corrupt practices in Mexico.

Companies with operations in Mexico that require construction of facilities and those in the commercial construction and related industries in Mexico should take a close look at local operations, with particular emphasis on the effectiveness of their compliance programs in Mexico.   Whether as part of any regularly scheduled or special audit, companies operating in Mexico should careful review local practices to determine whether the corruption implicated in the Wal-Mart disclosure has had impact on their business.  Any such review should involve interviews with local management, sales and marketing personnel, project managers responsible for any construction projects, and finance and accounting professionals tasked with oversight for any construction project estimates, contracts, and resulting payments.   Particular  emphasis should be placed on reviewing any payments made for construction and similar permits with the goal to understand the process for making such payments, including whether third-parties are involved, to secure copies of any official and published fees for identified permits and licenses, and to review any supporting documentation that can demonstrate the legitimacy of such payments.

In addition to reviewing for the specific areas of potential corruption implicated in the Wal-Mart disclosure, these same companies should take stock of how effectively local Mexican operations have implemented the companies’ compliance programs.  As part of any review, steps should be taken to assure that not only are the policies consistent with current U.S. enforcement authorities’ compliance expectations, but also that such policies are designed from an operational stand-point to effectively prevent and detect potential FCPA violations.   To test for effective implementation, companies may wish to interview local management and personnel to gauge their level of understanding of program requirements, and how those compliance requirements and processes impact their day-to-day responsibilities.   Companies may also wish to identify certain areas of the compliance program, such as due diligence procedures for engaging third-parties, requirements for reviewing contracts and invoices before compensating third-parties, and local petty cash policies and procedures, and perform a targeted audit to objectively test for compliance at the local level.

U.S. enforcement agencies have actively pursued potential FCPA violations in numerous industries and jurisdictions in the last several years, and with recent settlements topping hundreds of millions of dollars in criminal and civil fines, and numerous individuals prosecuted and sent to jail, the government is showing no signs of backing off what is arguably the U.S. enforcement agencies’ most successful fraud prosecution program to date.   Indeed,  Wal-Mart is just one of a list of approximately 100 companies known to be currently under investigation for potential FCPA violations.  Through effective policies for detecting and preventing potential FCPA violations, clear procedures for handling potential violations, and trained personnel at all levels of a company who understand and are dedicated to company compliance programs, companies can help to assure that they do not become the subject of the U.S. government’s next FCPA inquiry.

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