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LATEST NEWS UPDATES | Wal-Mart in bribe scandal

Wal-Mart in bribe scandal

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published Published on Apr 23, 2012   modified Modified on Apr 23, 2012

-The Telegraph

 

The New York Times has reported that Wal-Mart, the US-based retail giant, hushed up an internal investigation sometime after the company was told of a bribery campaign to obtain licences and facilitate rapid expansion in Mexico. Some of the alleged instances of bribery are certain to ring a bell in India where it is not too difficult to bend rules for a price.

The New York Times said its “examination uncovered a prolonged struggle at the highest levels of Wal-Mart, a struggle that pitted the company’s much publicised commitment to the highest moral and ethical standards against its relentless pursuit of growth”.

Excerpts from The New York Times article, written by David Barstow, follow:

In September 2005, a senior Wal-Mart lawyer received an alarming email from a former executive at the company’s largest foreign subsidiary, Wal-Mart de Mexico.

In the email and follow-up conversations, the former executive described how Wal-Mart de Mexico had orchestrated a campaign of bribery to win market dominance. In its rush to build stores, he said, the company had paid bribes to obtain permits in virtually every corner of the country.

The former executive gave names, dates and bribe amounts. He knew so much, he explained, because for years he had been the lawyer in charge of obtaining construction permits for Wal-Mart de Mexico.

Wal-Mart dispatched investigators to Mexico City, and within days they unearthed evidence of widespread bribery. They found a paper trail of hundreds of suspect payments totalling more than $24 million.

They also found documents showing that Wal-Mart de Mexico’s top executives not only knew about the payments, but had taken steps to conceal them from Wal-Mart’s headquarters in Bentonville, Arkansas.

In a confidential report to his superiors, Wal-Mart’s lead investigator, a former FBI special agent, summed up the initial findings this way: “There is reasonable suspicion to believe that Mexican and USA laws have been violated.”

The lead investigator recommended that Wal-Mart expand the investigation. Instead, an examination by The New York Times found, Wal-Mart’s leaders shut it down.

Neither American nor Mexican law enforcement officials were notified. None of Wal-Mart de Mexico’s leaders were disciplined. Indeed, its chief executive, Eduardo Castro-Wright, identified by the former executive as the driving force behind years of bribery, was promoted to vice-chairman of Wal-Mart in 2008. Until this article, the allegations and Wal-Mart’s investigation had never been publicly disclosed.

Struggle at the top

But The Times’s examination uncovered a prolonged struggle at the highest levels of Wal-Mart, a struggle that pitted the company’s much publicised commitment to the highest moral and ethical standards against its relentless pursuit of growth.

Under fire from labour critics, worried about media leaks and facing a sagging stock price, Wal-Mart’s leaders recognised that the allegations could have devastating consequences, documents and interviews show.

Wal-Mart de Mexico was the company’s brightest success story, pitched to investors as a model for future growth. (Today, one in five Wal-Mart stores is in Mexico.)

Confronted with evidence of corruption in Mexico, top Wal-Mart executives focused more on damage control than on rooting out wrongdoing.

In one meeting where the bribery case was discussed, H. Lee Scott Jr, then Wal-Mart’s chief executive, rebuked internal investigators for being overly aggressive. Days later, records show, Wal-Mart’s top lawyer arranged to ship the internal investigators’ files on the case to Mexico City.

‘Truly lacking’

Primary responsibility for the investigation was then given to the general counsel of Wal-Mart de Mexico — a remarkable choice since the same general counsel was alleged to have authorised bribes.

The general counsel promptly exonerated his fellow Wal-Mart de Mexico executives.

When Wal-Mart’s director of corporate investigations — a former top FBI official — read the general counsel’s report, his appraisal was scathing. “Truly lacking,” he wrote in an email to his boss.

The report was nonetheless accepted by Wal-Mart’s leaders as the last word on the matter.

In December, after learning of The Times’s reporting in Mexico, Wal-Mart informed the US justice department that it had begun an internal investigation into possible violations of the Foreign Corrupt Practices Act, a federal law that makes it a crime for American corporations and their subsidiaries to bribe foreign officials.

Wal-Mart said the company had learned of possible problems with how it obtained permits, but stressed that the issues were limited to “discrete” cases.

“We do not believe that these matters will have a material adverse effect on our business,” the company said in a filing with the Securities and Exchange Commission.

Bribes held the key

But The Times’s examination found credible evidence that bribery played a persistent and significant role in Wal-Mart’s rapid growth in Mexico, where Wal-Mart now employs 209,000 people, making it the country’s largest private employer.

A Wal-Mart spokesman confirmed that the company’s Mexico operations — and its handling of the 2005 case — were now a major focus of its inquiry.

“If these allegations are true, it is not a reflection of who we are or what we stand for,” the spokesman, David W. Tovar, said. “We are deeply concerned by these allegations and are working aggressively to determine what happened.”

In the meantime, Tovar said, Wal-Mart is taking steps in Mexico to strengthen compliance with the Foreign Corrupt Practices Act. “We do not and will not tolerate non-compliance with FCPA anywhere or at any level of the company,” he said.

The Times laid out this article’s findings to Wal-Mart weeks ago. The company said it shared the findings with many of the executives named here, including Scott, now on Wal-Mart’s board, and Castro-Wright, who is retiring in July. Both men declined to comment, Tovar said.

The Times obtained hundreds of internal company documents tracing the evolution of Wal-Mart’s 2005 Mexico investigation.

Tabs on inquiry

The documents show Wal-Mart’s leadership immediately recognised the seriousness of the allegations. Working in secrecy, a small group of executives, including several current members of Wal-Mart’s senior management, kept close tabs on the inquiry.

Michael T. Duke, Wal-Mart’s current chief executive, was also kept informed. At the time, Duke had just been put in charge of Wal-Mart International, making him responsible for all foreign subsidiaries. “You’ll want to read this,” a top Wal-Mart lawyer wrote in an October 15, 2005, email to Duke that gave a detailed description of the former executive’s allegations.

The Times examination included more than 15 hours of interviews with the former executive, Sergio Cicero Zapata, who resigned from Wal-Mart de Mexico in 2004 after nearly a decade in the company’s real estate department.

The payoffs

In the interviews, Cicero recounted how he had helped organise years of payoffs. He described personally dispatching two trusted outside lawyers to deliver envelopes of cash to government officials. They targeted mayors and city council members, obscure urban planners, low-level bureaucrats who issued permits — anyone with the power to thwart Wal-Mart’s growth. The bribes, he said, bought zoning approvals, reductions in environmental impact fees and the allegiance of neighbourhood leaders. He called it working “the dark side of the moon”.

The Times also reviewed thousands of government documents related to permit requests for stores across Mexico. The examination found many instances where permits were given within weeks or even days of Wal-Mart de Mexico’s payments to the two lawyers.

Again and again, The Times found, legal and bureaucratic obstacles melted away after payments were made.

The Times conducted extensive interviews with participants in Wal-Mart’s investigation. They spoke on the condition that they not be identified discussing matters Wal-Mart has long shielded. These people said the investigation left little doubt Cicero’s allegations were credible. (“Not even a close call,” one person said.)

Internal resistance

But, they said, the more investigators corroborated his assertions, the more resistance they encountered inside Wal-Mart. Some of it came from powerful executives implicated in the corruption, records and interviews show. Other top executives voiced concern about the possible legal and reputational harm.

In the end, people involved in the investigation said, Wal-Mart’s leaders found a bloodlessly bureaucratic way to bury the matter. But in handing the investigation off to one of its main targets, they disregarded the advice of one of Wal-Mart’s top lawyers, the same lawyer first contacted by Cicero.

“The wisdom of assigning any investigative role to management of the business unit being investigated escapes me,” Maritza I. Munich, then general counsel of Wal-Mart International, wrote in an email to top Wal-Mart executives.

The investigation, she urged, should be completed using “professional, independent investigative resources”.

On September 21, 2005, Cicero sent an email to Munich, telling her he had information about “irregularities” authorised “by the highest levels” at Wal-Mart de Mexico. “I hope to meet you soon,” he wrote.

Munich was familiar with the challenges of avoiding corruption in Latin America. Before joining Wal-Mart in 2003, she had spent 12 years in Mexico and elsewhere in Latin America as a lawyer for Procter & Gamble.

At Wal-Mart in 2004, she pushed the board to adopt a strict anti-corruption policy that prohibited all employees from “offering anything of value to a government official on behalf of Wal-Mart”. It required every employee to report the first sign of corruption, and it bound Wal-Mart’s agents to the same exacting standards.

Quick reaction

Munich reacted quickly to Cicero’s email. Within days, she hired Juan Francisco Torres-Landa, a prominent Harvard-trained lawyer in Mexico City, to debrief Cicero. The two men met three times in October 2005, with Munich flying in from Bentonville for the third debriefing.

During hours of questioning, Torres-Landa’s notes show, Cicero described how Wal-Mart de Mexico had perfected the art of bribery, then hidden it all with fraudulent accounting. Cicero implicated many of Wal-Mart de Mexico’s leaders, including its board chairman, its general counsel, its chief auditor and its top real estate executive.

The rising star

But the person most responsible, he told Torres-Landa, was the company’s ambitious chief executive, Eduardo Castro-Wright, a native of Ecuador who was recruited from Honeywell in 2001 to become Wal-Mart’s chief operating officer in Mexico.

Cicero said that while bribes were occasionally paid before Castro-Wright’s arrival, their use soared after Castro-Wright ascended to the top job in 2002. Cicero described how Wal-Mart de Mexico’s leaders had set “very aggressive growth goals”, which required opening new stores “in record times”. Wal-Mart de Mexico executives, he said, were under pressure to do “whatever was necessary” to obtain permits.

In an interview with The Times, Cicero said Castro-Wright had encouraged the payments for a specific strategic purpose. The idea, he said, was to build hundreds of new stores so fast that competitors would not have time to react. Bribes, he explained, accelerated growth. They got zoning maps changed. They made environmental objections vanish. Permits that typically took months to process magically materialised in days. “What we were buying was time,” he said.

Wal-Mart de Mexico’s stunning growth made Castro-Wright a rising star in Bentonville. In early 2005, when he was promoted to a senior position in the US, Duke would cite his “outstanding results” in Mexico.

Fixers and codes

Cicero’s allegations were all the more startling because he implicated himself. He spent hours explaining to Torres-Landa the mechanics of how he had helped funnel bribes through trusted fixers, known as “gestores”.

Gestores (pronounced hes-TORE-ehs) are a fixture in Mexico’s byzantine bureaucracies, and some are entirely legitimate. Ordinary citizens routinely pay gestores to stand in line for them at the driver’s licence office. Companies hire them as quasi-lobbyists to get things done as painlessly as possible.

But often gestores play starring roles in Mexico’s endless loop of corruption scandals. They operate in the shadows, dangling payoffs to officials of every rank. It was this type of gestor that Wal-Mart de Mexico deployed, Cicero said.

Cicero told Torres-Landa it was his job to recruit the gestores. He worked closely with them, sharing strategies on whom to bribe. He also approved Wal-Mart de Mexico’s payments to the gestores. Each payment covered the bribe and the gestor’s fee, typically 6 per cent of the bribe.

It was all carefully monitored through a system of secret codes known only to a handful of Wal-Mart de Mexico executives.

The gestores submitted invoices with brief, vaguely worded descriptions of their services. But the real story, Cicero said, was told in codes written on the invoices. The codes identified the specific “irregular act” performed, Cicero explained to Torres-Landa. One code, for example, indicated a bribe to speed up a permit. Others described bribes to obtain confidential information or eliminate fines.

‘Dirty clothes’

Each month, Castro-Wright and other top Wal-Mart de Mexico executives “received a detailed schedule of all of the payments performed”, he said, according to the lawyer’s notes. Wal-Mart de Mexico then “purified” the bribes in accounting records as simple legal fees.

They also took care to keep Bentonville in the dark. “Dirty clothes are washed at home,” Cicero said.

Torres-Landa explored Cicero’s motives for coming forward. Cicero said he resigned in September 2004 because he felt under-appreciated. He described the “pressure and stress” of participating in years of corruption, of contending with “greedy” officials who jacked up bribe demands.

As he told The Times, “I thought I deserved a medal at least.”

The breaking point came in early 2004, when he was passed over for the job of general counsel of Wal-Mart de Mexico. Cicero said he began to assemble a record of bribes he had helped orchestrate to “protect him in case of any complaint or investigation”, Torres-Landa wrote.

According to people involved in Wal-Mart’s investigation, Cicero’s account of criminality at the top of Wal-Mart’s most important foreign subsidiary was impossible to dismiss. He had clearly been in a position to witness the events he described. Nor was this the first indication of corruption at Wal-Mart de Mexico under Castro-Wright.

A confidential investigation, conducted for Wal-Mart in 2003 by Kroll, an investigation firm, discovered that Wal-Mart de Mexico had systematically increased its sales by helping favoured high-volume customers evade sales taxes.

One last discovery

A preliminary investigative team made one last discovery — a finding that suggested the corruption might be far more extensive than even Cicero had described.

In going through Wal-Mart de Mexico’s database of payments, investigators noticed the company was making hefty “contributions” and “donations” directly to governments all over Mexico — nearly $16 million in all since 2003.

“Some of the payments descriptions indicate that the donation is being made for the issuance of a licence,” an investigator wrote.

The Telegraph, 23 April, 2012, http://www.telegraphindia.com/1120423/jsp/frontpage/story_15407057.jsp#.T5UCAVL5nYQ


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