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general / Criminal Law

How Walmart pulled off an FCPA win

A Walmart store in Chalco, outside Mexico City. (New York Times News Service)

While the government is touting Walmart's $282 million settlement to resolve a seven-year Foreign Corrupt Practices Act investigation as a victory, the settlement is actually a win for the company. The financial penalties may be headline grabbing but are a small fraction of Walmart's annual $7 billion in profits. They are far less than the reported government's original $1 billion demand. Walmart Inc., the parent company, got a non-prosecution agreement, and although the settlement requires a corporate monitor, the monitor's activities are limited in an almost unprecedented fashion and will last only two years. Moreover, despite providing what looks like an almost decade-long master class in what not to do in the corporate compliance context, not a single executive, board member or employee faces prosecution or other government-imposed sanction.

Walmart certainly has paid a steep price for its actions in both reputational terms and real dollars -- reportedly spending $900 million on legal fees and related costs and settling a shareholder suit for $160 million, all in addition to the settlement with the government -- but things could have been a lot worse if the company and its lawyers had not played their cards so well.

The case first caught the public eye in April 2012 when The New York Times reported that Walmart's Mexico subsidiary made suspicious payments of at least $24 million to officials and intermediaries in Mexico, and then tried to conceal them from Walmart's headquarters. It further reported that executives at Walmart headquarters, when they learned about the case, took extraordinary steps to quash the internal investigation despite the advice of their outside counsel and at least one in-house lawyer (who resigned apparently in part due to Walmart's failure to comply with its own policies). Walmart reportedly assigned the internal investigation to the executive who had authorized the bribes, who then "promptly exonerated his fellow ... executives."

The corporate response was such that only after learning that the New York Times was investigating the story did Walmart make a self-disclosure to Department of Justice regarding potential FCPA violations. The current settlement makes clear that the Mexico debacle was only the tip of the iceberg of corruption activity that had been plaguing the company's international operations for almost a decade.

According to the order issued by the Securities and Exchange Commission last month, the problems dated back to at least 2003 and spanned the globe, from Mexico to China to Brazil and to India. This was a period of intense and rapid international growth for Walmart and the company wanted to keep things rolling. Time and again, reports of corruption would make their way to Walmart headquarters in Arkansas only to be swept under the rug by the company's top executives. Moreover, while Walmart has always prided itself on its moral and ethical standards, its roll-out of an anti-corruption policy was halting at best, beginning with a 2002 plan for a compliance and training program that was delayed, revised and put on hold for almost nine years.

Nonetheless, Walmart walked away with a settlement that is far less onerous than what might have been. Perhaps foreshadowing last month's settlement, a certain reality TV star who would four years later be elected president responsed to the original New York Times story, criticizing the FCPA as "ridiculous" and a "horrible law" that makes it difficult for companies to compete internationally. His administration appears to have taken note. At the same time, the settlement shows that DOJ's departures from the Obama-era Yates Memo -- which emphasized individual accountability in corporate crime cases -- continues to grow.

Walmart's Pre-2012 Anti-Corruption Efforts & Responses Are a Lesson in What Not to Do

Despite numerous warnings of potential FCPA issues around the globe, Walmart did not implement a strong anti-corruption program using outside counsel or consultants. Instead, it tried to handle things in-house, making halting and ineffective efforts to come up with a program on its own. The SEC's summary of those efforts is devastating.

In 2002, Walmart planned "within a few months" to implement a "worldwide comprehensive and anti-corruption compliance training program." But it did not prepare a draft of compliance materials until 2003, and then did not revise those materials for over a year. In early 2005, it distributed the materials, but then formally put the program on hold just a few months later.

In February 2007, the company announced the launch of a "new and enhanced" program with rollout to come two months later; instead, the new policy was published in December 2008. Shortly thereafter, Walmart changed course yet again and, instead of a worldwide standard, rolled out its "Freedom within a Framework" program which allowed its subsidiaries to design and implement their own country-specific anti-corruption programs. Finally in 2011, with the New York Times and government investigation looming, Walmart hired outside counsel and an international consulting firm to get its program on track.

Throughout the relevant period of 2003 to 2011, Walmart at best ignored serious red flags its foreign subsidiaries and audit teams reported, and at worst actively worked to quash those reports.

As early as 2003, Walmart's China subsidiary requested FCPA training and a clear policy in light of an internal audit report showing payments to government officials and weaknesses in internal accounting controls. Walmart declined to provide either. And in 2006, Walmart allowed the China subsidiary to draft an anti-corruption policy that excluded employees of state-owned enterprises from the definition of "government official," despite internal warnings that this did not comply with Walmart's corporate policies and likely would not comply with the FCPA.

Walmart did not do any better in India. Starting in 2006, Walmart executives received repeated whistleblower emails detailing a scheme to make improper payments to government officials and a history of the same. Walmart did nothing. And like in China, when Walmart's India audit team reported for four years running that internal controls were ineffective and needed attention, the company did not respond.

In Brazil, Walmart likewise ignored warnings from its internal audit team that the company had accounting controls weaknesses. When allegations were uncovered in 2009 that a construction firm employed by the company had made illegal payments for certain non-Walmart projects, Walmart did not respond. Moreover, the company used an intermediary who was referred to internally as "sorceress" or "genie" for her ability to conjure permits and licenses, at huge fees.

Finally, executives in Arkansas effectively crushed an investigation in Mexico into the company's years-long practice of paying intermediaries to make improper payments to government officials. Ignoring the advice of both in-house and outside counsel, the company had its own employees determine whether a full investigation was necessary, and put a lawyer who was allegedly involved in the bribery in charge of those efforts. Despite the previous findings by internal investigators that laws had potentially been violated and that a full, independent investigation was needed, the matter was quickly closed and everyone was deemed exonerated.

Walmart made no efforts at self-disclosure before the New York Times's reporting efforts came to its attention. Despite the government's FCPA program -- which rewards self-disclosure and cooperation with governmental investigation -- it appears Walmart made every effort to squelch any reports of what was happening at its subsidiaries around the world.

Post-2012, Walmart Played It Exactly Right

Things began to turn around after Walmart finally hired outside counsel to conduct an internal investigation and a global compliance review, and made changes at the executive level.

Walmart self-disclosed potential FCPA violations in Mexico to DOJ and the SEC in November 2011. As the results of its expanded internal investigation rolled in, it then disclosed the findings concerning Brazil, China and India. Walmart received full cooperation credit for these three countries, and partial credit for Mexico because DOJ already was investigating there by the time Walmart made disclosures. In the settlement, Walmart is credited for, among other things (1) giving regular presentations to the government of the internal investigation's factual findings and other information; (2) making its foreign employees available for interviews; (3) providing documents and translations; and (4) obtaining cooperation of former employees and third parties.

Walmart also is getting credit for robust remediation efforts. With the benefit of outside counsel, Walmart finally put in place a full-scale, global compliance program. It hired global and dedicated regional ethics, compliance and anti-corruption officers and personnel. It began conducting monthly and quarterly anti-corruption monitoring. And it implemented enhanced anti-corruption internal accounting controls focused on the selection and use of third parties.

At the same time, Walmart did not simply roll over for the government. While FCPA investigations typically take some time, the seven-year span of this case is an outlier. The shareholder derivative suit actually settled more quickly than the federal investigation, and for a larger amount than either of the individual agency penalties.

During that seven-year period, by all accounts, Walmart smartly balanced an aggressive settlement posture with its cooperative investigative approach. For instance, it was reported that Walmart was able to convince a judge to quash a 2016 DOJ grand jury subpoena for testimony from a former Walmart general counsel, based on a prior agreement regarding evidence gathering between the company and DOJ. The company apparently battled with the SEC at times about certain document disclosures. And the company also refused an Obama-era settlement with penalties of approximately $600 million because it would have impacted the company's ability to accept food stamps.

All of this served to delay the government's investigation. The government's initial demand that Walmart Inc. plead guilty to a crime and pay $1 billion in penalties fell away as time wore on. The enforcement agencies experienced significant turnover at the start of the Trump administration, reportedly hampering their efforts. And with that delay came a change in administrations and changes in attitudes towards the FCPA law itself.

Walmart's efforts were rewarded. Although Walmart's Brazilian subsidiary pleaded guilty to a books and records violations, the conviction is essentially meaningless for Walmart Inc. given that the Brazilian subsidiary was sold off by Walmart last year. Importantly, not a single officer, executive, or employee -- in the United States or elsewhere -- was prosecuted.

The parent company itself got a three-year non-prosecution agreement and, considering the money on the table under the previous administration, relatively low fines. DOJ's two-year corporate monitorship is far less burdensome than is standard. As other commentators have noted, DOJ made several concessions from the norm, including limiting the monitorship as to timing, geographic scope, and covered business scope.

The Takeaways

While DOJ and the SEC tout the Walmart case as an "aggressive" investigation and prosecution, the result suggests otherwise. Companies and executives examining the case must be excused if they wonder how Walmart got the settlement it did in light of the conduct that came to light. This case is not the norm.

Walmart's early approach to compliance efforts is not recommended. Compliance programs must be robust, uniform, and professionally created and implemented, ideally by counsel familiar with the relevant regulatory environment. Anti-corruption efforts for a massive, international corporation should not be approached lightly. And once a program is identified as necessary, it should be fashioned and put in place at the earliest possible date, without delay or hesitation.

Moreover, when allegations of criminal conduct come to light, they must be thoroughly and independently investigated. The investigation, perhaps obviously, should not be placed in the hands of anyone who might be implicated in the misconduct, and the results should not be swept under the rug.

Finally, when misconduct is found, early and full disclosure to governmental authorities must be carefully considered. Given the reported facts, it is a wonder that Walmart not only was able to avoid obstruction of justice charges, but actually secure cooperation credit. But if it had self-disclosed earlier, it likely would have been able to take full advantage of DOJ's FCPA policy and perhaps avoid prosecution altogether.

At the same time, after the issues came to light, Walmart did things exactly right. The common wisdom that delay generally helps the accused has been proven true once again. Walmart rode out the Obama administration for the less-FCPA friendly Trump administration, a tactic which is serving other companies in their own cases as well. This delay also gave Walmart the time necessary to implement the remediation policies and procedures which the SEC and DOJ could point to as signs of the company's good faith to justify a lesser punishment.

The case also demonstrates that it is important to not completely roll over even if your client chooses to cooperate with the government. Too often counsel fear that if they stand strong on critical issues the government will walk away from the table. The reality is that the government usually wants a deal just as badly as the company in this kind of case.

The Walmart case will no doubt be used as a case study for years to come. Counsel and clients would do well to look at it closely to learn what they should and should not do in the realm of anti-corruption work. 

#463

Ilan Isaacs

Associate Legal Editor
ilan_isaacs@dailyjournal.com

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