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Harry Cassin
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Andy Spalding
Senior Editor

Jessica Tillipman
Senior Editor

Richard L. Cassin
Editor at Large

Elizabeth K. Spahn
Editor Emeritus

Cody Worthington
Contributing Editor

Julie DiMauro
Contributing Editor

Thomas Fox
Contributing Editor

Marc Alain Bohn
Contributing Editor

Bill Waite
Contributing Editor

Shruti J. Shah
Contributing Editor

Russell A. Stamets
Contributing Editor

Richard Bistrong
Contributing Editor

Eric Carlson
Contributing Editor

Bill Steinman
Contributing Editor

How Walmart outgrew its compliance program

Despite well-documented missteps in Germany and South Korea, the late 2000s were a dynamic time for Walmart’s expansion efforts worldwide. Beginning with forays into Canada, Mexico and the UK in the mid-90s, by 2015 Walmart International had become an empire unto itself, operating in 26 countries and accounting for over a quarter of the retail giant’s net sales.

Quoted in an August 2, 2006 New York Times article, Deutsche Bank analyst Bill Dreher stated “I’m hard pressed to name a U.S.-based general merchandise retailer that is doing better than Walmart International”. This explosion in growth was especially evident in Brazil, following Walmart’s 2004 acquisition of the 118-store Bompreço chain and a 2005 purchase of the 140-store Sonae chain. As noted in a December 14, 2005 piece by MarketWatch, the $757 million Sonae deal nearly doubled Walmart’s presence in Brazil. Walmart’s Annual Reports also touted this expansion, charting the chain’s presence from 15 stores in 2000 to 434 units at the close of the decade.

However, the recent conclusion of a multi-year investigation into Walmart’s international operations underscores the risks of such a single-minded focus on growth. On June 20, 2019, Walmart agreed to pay $282 million in fines following a civil suit and criminal charges filed by the U.S. Department of Justice alleging violations of the books and records provision of the FCPA by the company’s subsidiaries in Mexico, India, China, and Brazil. The criminal charges brought against Walmart’s Brazilian subsidiary, WMT Brasilia S.a.r.l. provide a useful cautionary tale when thinking through the possible hazards of expansion into high-risk territories without clearly defined and adhered to anti-bribery policies and procedures.

According to the Statement of Facts outlined in WMT Brasilia’s plea agreement and Walmart Inc.’s Non-Prosecution Agreement, WMT Brasilia’s subsidiary, Walmart Brazil, hired a local construction company (referred to in the filings as “Brazil Construction Company”) to build eight new stores from 2008 through 2012.

Despite being aware of corruption risks in Brazil as early as July 2000, Walmart did not perform a due diligence review of the construction entity prior to initiating the contract, and when a preliminary due diligence review was conducted in late 2009, the construction company failed. However, as Walmart Brazil’s Ethics and Compliance Department had no protocol for handling failed contractors, the construction company continued working for Walmart Brazil.

Around that time, the construction company was tasked with retaining a third-party intermediary (TPI or “Brazil Intermediary”) to assist in obtaining construction permits for Walmart Brazil. The Brazil Intermediary earned a reputation for his ability to swiftly obtain permits by “sort[ing] things out like magic” and became known within Walmart Brazil as the “genie.”

As the plea agreement noted, Walmart Brazil’s Ethics and Compliance Department ignored a number of red flags regarding its so-called genie. Notably, an employee in Walmart Brazil’s Government Affairs Department warned a compliance official and corporate attorney that he believed the TPI was a government official and was thus barred from contracting with Walmart Brazil. Although Walmart Brazil directly negotiated with the TPI for the “scope of work and fees” Walmart Brazil “amended the contracts with Brazil Construction Company to include a description of Brazil Intermediary’s work and the cost associated with the work” thereby bypassing any direct contract between Walmart Brazil and the TPI.

Meanwhile, the Brazil Construction Company provided the TPI with cash with the understanding that this cash would be used for “making improper payments to government employees” in order to obtain the required permits. This activity continued until 2012 when the Ethics and Compliance Department ultimately terminated the relationship with the construction company, citing “cases of corruption.”

As a result of the plea agreement, WMT Brasilia was charged with $725,000 in fines and $3.6 million in criminal forfeitures. The criminal case against WMT Brasilia also figured prominently in the $137 million non-prosecution agreement (NPA) between Walmart Inc. and the Department of Justice as well as the $144 million settlement for the civil suit brought by the Securities and Exchange Commission for Walmart’s FCPA violations in Mexico, Brazil, India, and China. As reported in the June 20, 2019 DOJ press release regarding the NPA, during the period between 2000 and 2011, Walmart failed to enact sufficient compliance safeguards, including controls related to TPI due diligence, specifically with relation to foreign government officials, and neglected to include clear anti-corruption clauses within its TPI contracts.

As quoted in the press release, Assistant Attorney General Brian A. Benczkowski remarked that “Walmart profited from rapid international expansion, but in doing so chose not to take necessary steps to avoid corruption…  In numerous instances, senior Walmart employees knew of failures of its anti-corruption-related internal controls involving foreign subsidiaries, and yet Walmart failed for years to implement sufficient controls comporting with U.S. criminal laws.”

As part of the Non-Prosecution Agreement, Walmart Inc. agreed to develop and promulgate a robust international compliance program including an internal accounting system regarding anti-corruption controls and a “rigorous” anti-corruption program. Additionally, Walmart agreed to conduct periodic compliance risk assessments and designate a senior compliance executive with direct reporting channels to independent monitoring bodies, the auditing committee, and the Board of Directors. Finally, Walmart agreed to retain an independent compliance Monitor for a two-year period and comply fully with all of the Monitor’s mandated assessment needs and compliance recommendations.

* * * 

The case of Walmart Brazil presents several key takeaways for companies looking to expand into territories with high rates of corruption while not risking criminal prosecution, 9-figure fines, and court-appointed monitors. As seen from the details of this case, the mere presence of an Ethics and Compliance Department and a due diligence review process is not enough. First, due diligence is best conducted in a pre-emptive manner, to be initiated prior to onboarding and contracting activities. Post-hoc due diligence is less effective, as it’s harder to take action on an adverse report once a relationship is up and running.

Second, in high-risk jurisdictions and industries, where concerning due diligence reviews are common, it pays to have a secondary (and even tertiary) plan, in the event that a first-choice vendor is found to carry too high of a risk for corruption. Walmart Brazil continued to contract with the construction company, despite warning signs, in part because no protocols were in place for handling failed due diligence reviews.

Third, robust compliance programs are enhanced by effective lines of communication and authority between the Compliance Department and other relevant departments within the company, such as the internal auditing committee and Government Affairs department, thus creating internal systems of checks and balances. In the case of Walmart Brazil, a compliance official and company attorney received the initial tip-off regarding the TPI’s government affiliations from an individual in the Government Affairs office. While the compliance employee agreed that this would pose a risk to Walmart, the attorney and other executives were able to create an end-run around guidelines prohibiting the hire of the TPI by contracting with the individual indirectly through the construction company.

Finally, the compliance mindset requires a healthy dose of skepticism. A genie who can generate permits as if by magic may seem like a wish come true, but a proper due diligence review would have revealed the FCPA risks associated with the hire, indirect or otherwise, of a government official.

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Lauren Caryer, pictured above, is an investigator for the Kreller Group. She conducts domestic and international due diligence with an emphasis on high-risk industries and received a PhD in Philosophy from Emory University in 2016. She can be contacted here.

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