FCPA Compliance and Ethics Blog

November 8, 2012

Wal-Mart Cover Up- Would a Hot-Line Have Helped?

Ed. Note-we continue our series of guest posts from our colleague Mary Shaddock Jones, who today draws some lessons from the Wal-Mart matter.

On November 8, 2006 Wal-Mart entered the Canadian Market opening three supercenters in Ancaster, London and Stouffville in Ontario, Canada.  On April 21, 2012, the New York Times published an article which included the following statements:

“In September 2005, a senior Wal-Mart lawyer received an alarming e-mail from a former executive at the company’s largest foreign subsidiary, Wal-Mart de Mexico. In the e-mail 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 totaling 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, Ark. In a confidential report to his superiors, Wal-Mart’s lead investigator, a former F.B.I. special agent, summed up their 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.”

This is not the type of news that the Board of Directors of U.S. public company wants to learn about through a newspaper headline. Section 301(4) of the Sarbanes-Oxley Act requires the audit committee of every United States based  publicly traded company to establish procedures for “the confidential, anonymous submission by employees….of concerns regarding questionable accounting or auditing matters” (emphasis supplied). To comply with § 301(4), many employers have designed whistle blowing systems, such as telephone “hotlines”, enabling employees to report potential violations anonymously.

I do not know if Wal-Mart had a “hotline” in 2005, but in order to give employees and/ or third parties the tools necessary to alert executives or members of the Board of Directors to potential illegal or questionable activity- the existence and promotion of an anonymous hotline system is invaluable.

The practical pointer for today’s blog is this- one essential element of a compliance program is an anonymous hotline. Companies do have to be careful when implementing a hotline to understand and abide by European data privacy laws.  However, in the United States,  under most of the recent “Schedule C’s” attached to Deferred Prosecution Agreements, the Department of Justice clearly outlines anonymous reporting systems as one of the required “best practices” for a compliance program: “The Company should establish or maintain an effective system for: a) Providing guidance to directors, officers, employees, and its agents and business partners, on complying with the Company’s anti-corruption compliance policies, including when they need advice on an urgent basis or in any country in which the Company operates; b) Internal and confidential reporting and protection of those reporting breaches of the law or professional standards or ethics concerning anticorruption occurring within the company, suspected criminal conduct, and/or violations of the compliance policies directors, officers, employees; and c) Responding to such requests and undertaking appropriate action in response to such reports.”

 Consider the following policy language on reporting questions and concerns, along with a clear statement regarding non-retaliation for such reporting:

 Reporting Obligations of Company Personnel, Agents, and Partners

All Company Personnel, Agents, and Partners are required to report any knowledge, awareness or suspicion of a potential violation of: (i) the FCPA, the UKBA, or any other anti-corruption and/or anti-bribery laws applicable to the Company; (ii) the Policy; or (iii) the Compliance Manual by the Company or any of its Personnel, Agents, or Partners.

  • Company Personnel are required to report such information to the Company Compliance Officer or his or her designee, or to the hotline described below.
  • Company Agents and Partners are required to report such information to a Company representative, the Company Compliance Officer or his or her designee, or to the hotline described below.  Any Company representative that receives such a report from an Agent or Partner must report that information to the Company Compliance Officer or his or her designee, or to the hotline described below.

Non-Retaliation Policy

The Company has zero tolerance for any retaliation of any kind against any individual who in good faith makes inquiries, reports concerns, or participates in external or internal investigations.  This policy extends to any whistleblower or individual who makes a report to government authorities outside of the procedures described in this Manual.  Any individual who is concerned about retaliation or feels he or she has been subjected to such retaliation should immediately contact your Human Resources representative, the Vice President of Human Resources, the Company Compliance Officer or his or her designee, or through XYZ Hotline .

Retaliation against any individual for making a report as described in this Section in good faith can result in serious disciplinary action up to and including termination.

On a final note, it is not sufficient to just have an anonymous reporting system/hotline number tucked away in a Code of Conduct or a company’s Anti-Corruption policy.  The existence of the hotline should be prominently displayed through the use of posters or wallet cards, preferably in the native language of the employees at each particular location.  Periodic reminders should also be sent out to employees and to third party business agents encouraging them to use the anonymous reporting system if they have questions or concerns that they want answered or reported.

 Mary Shaddock Jones has practiced law for 25 years in Texas and Louisiana primarily in the international marine and oil service industries.  She was of the first individuals in the United States to earn TRACE Anti-bribery Specialist Accreditation (TASA).  She can be reached at msjones@msjllc.com or 337-513-0335. Her associate, Miller M. Flynt, assisted in the preparation of this series.  He can be reached at mmflynt@msjllc.com.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor.

 

April 30, 2012

Wal-Mart and the Strategic Transformation of a Compliance Culture

In every crisis there is an opportunity. This was presented, perhaps less starkly, in an article in the spring 2012 Issue of the MIT Sloan Management Review, entitled “Achieving Successful Strategic Transformation, by authors Gerry Johnson, George S. Yip and Manual Hensmans, “Happy accidents are unanticipated circumstances or events that ultimately support [strategic] transformation”. While those in Bentonville, Arkansas are probably not thinking that their current situation is a ‘happy accident”; Wal-Mart is presented with a unique opportunity to create a world-class compliance program. It will most probably be required to do so to aid in its inevitable negotiations with the US Department of Justice (DOJ) over any fine and penalty for any violations of the Foreign Corrupt Practices Act (FCPA), however it may also do so to demonstrate its absolute commitment to doing business ethically to the US and world’s courts of public opinion.

The authors begin by noting that companies which radically alter entrenched ways of doing business are the “exception rather than the rule.” Further, most companies do not adopt such new strategies without being forced to do so by some type of financial trauma. The authors studied 215 companies to find out if there were any key lessons from companies which were able to affect such transformational change. Their article can provide guidance to Wal-Mart or any other company which may find itself in the position where it needs to make a major strategic change to a culture of ethics and compliance.

The authors start with the proposition that to make strategic transformations, companies must “foster alternative management coalitions and value constructive tension and challenges to the status quo.” They have developed eight recommendations for making such transformational changes.

  1. Build on history. A company should recognize the “importance of valuing history and building on it.” This requires managers within the company to “reflect on the evolution of their organization and the legacy they can build on.” The authors end this section by noting in light of what the response might be, what steps could be taken?
  2. Select and develop a new generation of leadership. If a company is serious about transformation, succession planning must involve looking at different capabilities in a new set of up and coming leaders within the company. There needs to be a new generation of leaders groomed who have alternative ways of looking at problems and doing business. The authors note that this will not be easy as it will require the current senior leadership to “nurture replacements who will question, modify or even be willing to reject the company’s heritage.”
  3. Accept and encourage constructive mobility. A company must not select the “most predictable successors” but rather “adopt a deliberate policy of cultivating internal talent.”  To do so, a company must foster alternative coalitions within the company and “encourage divergent perspectives on the future of the business” by identifying up and coming leaders who respect the past but “have a distinctly different view on the future.”
  4. Ensure that decision making allows room for dissent. The authors begin this section by noting “There is a fundamental difference between an organization built to maintain consensus around a dominant logic and one where managers naturally challenge it.” I know of Law Departments that are viewed as “the land of No” because the business folks think that is the only word the legal department can articulate. The authors believe that a transformational decision making process must allow for dissent and the company must not only live with such a process but welcome and embrace it.
  5. Create enabling structures that encourage tension. Creative tension occurs when there are opposing views which can be “fostered structurally.” This means that alternative views should be sought out and heard. In the compliance arena, it means that you might listen to certain front line business unit personnel to better understand how something might be accomplished. The authors write that even by creating such a structure, a company can “make a difference in how people see ideas internally.”
  6. Expect everyone to get behind decisions once they are made. As important as the above structures and procedures are to creating transformational change, “there needs to be some point when leadership makes a decision and the different parties fall into line.” This is the concept of “corporate maturity” and the authors emphasize that it is not a way to stifle dissent but a realization that at some point it is time to move on for the greater corporate good. The authors conclude this section by noting that most companies did not fail in their transformational efforts because they made the wrong decision but because they otherwise botched the internal debate.
  7. Develop an arching rationale. A company needs to have a clear position on “what we are about”. There should be “emphasis on a clear rationale supported by strong values” that allows for the necessary diversity of views, ideas and debates. This should be the set piece to begin the transformational change within the organization.
  8. Beware of market size and dominance. No matter whether a company has a small share of its industry’s market, or, as in the case of Wal-Mart, it is the industry leader, the authors note that “ongoing strategic transformation requires relatively focused businesses.” In the case of Wal-Mart that means retailing and all aspects around its business model.

The authors conclude by stating that this type of transformational change does not happen overnight and readily admit that the concepts “are the antithesis of short-term management.” This would fit precisely into the place that Wal-Mart finds itself in now. The FCPA investigation could well take between 2-4 years; the negotiations regarding any fines or penalties could add significant length to that time frame. Avon is over four years into its FCPA journey and there is no public end in sight. However, this means that the opportunity for a truly transformational change is available to Wal-Mart or any other company which finds itself similarly situated. The authors have laid out for Wal-Mart or any other company concrete steps on a path forward which could give them the title of not only the World’s Largest Retailer but also the World’s Most Ethical Company.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2012

April 23, 2012

Wal-Mart and the Death Knell for Amending the FCPA

In a development that can only be called stunning, the New York Times (NYT) on Sunday, April 22, 2012, reported, in an article entitled “Vast Mexico Bribery Case Hushed Up by Wal-Mart After Top-Level Struggle”, on an alleged multi-year bribery and corruption scheme advanced by Wal-Mart in its Mexico operations. The alleged bribery scheme was truly breath-taking in its scope and operation. I am certain others will write about it extensively, beginning as soon as today, and I certainly will review the article in greater depth in upcoming blog posts, the first thing that struck me is that this case will sound the death knell for any efforts to amend the Foreign Corrupt Practices Act (FCPA). Whether you believe such efforts constitute badly needed reform because the Department of Justice (DOJ) has gone too far in enforcement; that any amendments would water down the FCPA and simply make bribery easier; or perhaps some minor clarification of certain terms and definitions is needed; I think you can kiss all of that good-bye.

Allegations

As reported in the NYT article, Wal-Mart executives at its Mexico subsidiary, 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.” This alleged bribery scheme included routine payments to Mexican governmental officials for “every conceivable type of permit, license, piece of paper, or any other type of approval needed or required to plan, build and operate a Wal-Mart in Mexico. Literally, millions of peso was paid out for everything from routine approvals to extraordinary consents.”

To facilitate this alleged bribery scheme Wal-Mart de Mexico kept two sets of books on the illegal payments through third party agents, which were made to Mexican governmental officials. As reported, Wal-Mart de Mexico “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 neighborhood leaders.” These payments were coded in a manner which hid their true basis. Later, reporting sent to the home office, in Bentonville, AR, were scrubbed so that the illegal payments were moniked as “legal fees”.

The time frames of the events reported were from the 1990’s to 2006. It is unclear if any alleged bribes were paid after this time. The purpose of the alleged bribes “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 materialized in days. What we were buying was time”. The article also reported that “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.)”

The End of FCPA Amendment

So how does all of this portend the end of efforts to amend the FCPA? As reported, “Wal-Mart’s ethics policy offered clear direction. “Never cover up or ignore an ethics problem,” the policy states.” What do you think a compliance defense would do for Wal-Mart about now? Wal-Mart prided itself on its world-wide FCPA anti-corruption compliance program. The claim that companies would act more ethically and in compliance if they could rely on a compliance defense would seem to be negated by facts reported about Wal-Mart. Do these facts seem like a rogue employee or even junta of rogue Mexican employees going off on their own? Whatever your thoughts on that question may be, it certainly appears that having a best practices compliance program did not lead to Wal-Mart doing business more ethically. And what if Wal-Mart’s corporate headquarters in Bentonville AR was not involved in any illegal conduct or even kept in the dark by Wal-Mart de Mexico? What does that say about having a robust compliance program?

Amending the FCPA to protect corporate headquarters in the US from liability under the doctrine of Respondeat Superior? You can forget about that happening in a heartbeat. No one can argue with anything close to a straight face that this problem was exclusive to Mexico. The corporate parent received the benefits from any profits made due to the bribery so it is difficult to imagine why a corporation should not be a part of any enforcement action. And as the FCPA Professor recently noted in a blog post, entitled “A Q&A with Claudius Sokenu on Where Else?”, that question may be close to someone’s thoughts at the DOJ about now.

How about that grace period for those companies which have a compliance program and self-reporting violations? Wal-Mart corporate was made aware of the allegations set forth in the NYT article in 2004 and chose not to self-report. As noted in the article “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.” Indeed Wal-Mart did not report (I cannot say self-disclose) any FCPA investigation to the DOJ and Securities and Exchange Commission (SEC) until after the NYT notified those agencies that it was investigating these allegations back in 2011. As stated in the article, “Until this article, the allegations and Wal-Mart’s investigation had never been publicly disclosed.” How’s that for transparency in a publicly held US company? If a company as ethical as Wal-Mart will not self-disclose, what does that say about the rest of corporate America and its thinking on self-disclosure?

How about those claims that US companies were being unfairly prosecuted because they did not know their counter-parties were employees of state owned enterprises or that the person they were lavishly entertaining was an official of a foreign government? You mean those “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”? Whatever the merits of those companies who said “it’s not fair – we didn’t know” they were a government official – waive that proposed amendment bye-bye, with both arms over your head.

So whether you were pro or anti-FCPA amendment, I think that you have Wal-Mart to thank for the fact that any such thoughts now will Rest in Peace as this new saga in FCPA enforcement moves forward.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2012

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