Wal-Mart has been rocked in recent days by a bribery scandal in Mexico. Evidence that the company bribed Mexican government officials in order to speed store openings was brought to light by the New York Times. Eduardo Castro-Wright, former president and chief operating officer of Wal-Mart de Mexico, is alleged to have been a central figure in the scandal. The company has failed to comment on his future. He is currently a vice-chairman, scheduled to retire July 1.
The Times reported that Wal-Mart concealed evidence of the bribery following a quashed internal investigation. The company lost $10 billion in market value yesterday as investors fled possible costly fines and identified the bribery as a threat to the company’s growth plans. The company has 2,088 stores in Mexico, and has more than doubled its presence since 2008.
According to several news sources, Wal-Mart is facing a Justice Department probe for its alleged violation of the Foreign Corrupt Practices Act (FCPA). The FCPA exists to prevent US companies from engaging in corrupt practices abroad. Under the current enforcement regime, companies are required to self-monitor and self-report possible bribery or corruption that occurs on its behalf. Wal-Mart launched an internal investigation that revealed the possibility of widespread corruption over building permits in 2005, but failed to follow up or to self-report the results. The Justice Department has recently begun enforcing the FCPA, leading many companies to pay steep fines or enter plea bargains. In the biggest case to date, Siemens paid between $1.6 billion and $3 billion to settle FCPA claims, after its executives were charged with SEC violations and bribing officials in Argentina.
In a damning statement, the Times reported that former Chief Executive Lee Scott was aware of the allegations as early as 2005, as was current Chief Executive Mike Duke. The bribery was allegedly carried out by executives of Wal-Mart de Mexico, which is a 69% owned subsidiary of Wal-Mart Stores Inc. If the Wal-Mart claims prove true, the value of the fines against it could potentially exceed the Siemens record. According to Bloomberg, past fines have averaged 1 to 2 percent of sales, which, , would come to about $4.5 billion for every 1% of sales for Wal-Mart. The company did report in a December 2011 SEC filing that it was examining its compliance with the FCPA, without referencing a specific situation.
Wal-Mart has touted Mexico as an example of its long-term growth model, which involves expanding into developing countries as traditional markets reach maturity or saturation. Currently, one in five Wal-Mart stores is in Mexico. The bribery raises the possibility that Wal-Mart will face difficulty expanding further in Mexico and in other nations, on concerns about corruption. The company operates in 27 countries and estimates FY 2012 sales at $444 billion.
Eliot Spitzer, former Governor of New York and current host of Viewpoint With Eliot Spitzer, a nightly news and comment program, has called for an investigation into the charges. Additionally, two top members of congress moved to start a probe yesterday. Wal-Mart will also face pressure from shareholders, if the drops in its share price continue. The company released a statement Saturday claiming that the allegations, many of which are over six years old, do not reflect the current state of the company. They also claimed to have implemented robust reporting practices and internal controls – claims at odds with the apparent failure to address bribery concerns.