Investigations, compliance responses to corruption allegations have cost Wal-Mart $738 million

by Kim Souza (ksouza@talkbusiness.net) 240 views 

Allegations of bribery and violation of the Foreign Corrupt Practices Act (FCPA) have cost Wal-Mart Stores $738 million in legal fees and compliance restructuring efforts over the past four years.

Wal-Mart plans to spend between $100 million and $120 million again this year on FCPA matters, which would bring the tally to more than $848 million since 2013.

It’s now four and a half years since Wal-Mart launched its own internal investigation and confirmed an FCPA probe was underway in Mexico. The public disclosure by Wal-Mart occurred in November 2011 but it became public knowledge with the New York Times story publicized Nov. 21, 2012. A year later, Wal-Mart said the investigation had now expanded to include Brazil, India, China and elsewhere it also conducted business.

FCPA professor Mike Koehler, who spent 10 years as an FCPA lawyer and now teaches law at Southern Illinois University, told Talk Business & Politics that there are equal chances the investigation could wrap up this year or linger into 2017. Koehler said the expense for Wal-Mart to date is “eye popping” but not surprising given FCPA litigation is a multi-billion dollar industry because government agencies often work at their own leisure with no real time table.

Wal-Mart typically gives an update on the FCPA expenditures each quarter but it has not given a full update on the aggregate spent, leaving the public to keep their own tally until this matter is settled. The retailer released three corporate reports Wednesday (April 20) and none included FCPA-related expenses.

Following is the fiscal-year tally of FCPA costs gleaned from previous Wal-Mart reports:

2017: $100 million-$120 million (estimated)
2016: $126 million
2015: $173 million
2014: $282 million
2013: $157 million

The retailer said in a supplemental report to the fourth quarter earnings in February that it expected FCPA-related expenses to range between $100 million and $120 million this year (fiscal 2017). The retailer didn’t break out the legal costs from internal compliance spending.

Koehler, who tracks the FCPA investigation of dozens of companies, said two-thirds of the public companies he tracks provide less transparency than Wal-Mart regarding the FCPA expenditures.

In fiscal 2016, Wal-Mart said $95 million of the $126 million was spent on legal expenses for the ongoing investigations and the remaining $31 million was spent on program and process improvements. In the year prior Wal-Mart also spent $121 million of the $173 million on lawyers and legal help involving the probe. The U.S. Securities and Exchange Commission has told Wal-Mart to disclose the costs each quarter to shareholders in federal filings until the matter is closed.

Some experts say the probe is one of the most expensive in U.S. history. Koehler said the scope of the investigation has broadened and while they may have the Mexican case settled, investigators also look for “where else” the company operated in high risk areas and those points of entry also have to be scrutinized. With Wal-Mart operating in at least 10 areas of high risk, Koehler said that adds time to the investigation.

“It’s in Wal-Mart and the government’s best interests to have one settlement,” Koehler said.

Two to four years is the normal time frame for an FCPA investigation, according to Koehler. And while the Wal-Mart case is on the outer limits of that, it’s not that uncommon for a case this large to last five or six years, he said.

Since the FCPA investigation first became public in an April 2012 report by the New York Times, Wal-Mart execs have vowed to investigate the allegations and deal swiftly with any individual that might be implicated. Koehler credits Wal-Mart with doing lots of things right, namely investing heavily in its own internal compliance program to build a stronger firewall around the business. He said these types of remedial acts are viewed positively when a settlement is negotiated.

When former Wal-Mart CEO Mike Duke rolls off the board of directors in June, almost all implicated in the bribery will have left the company or no longer serve in the public light. The one exception would be Rob Walton who is still a director, though he stepped down as chairman in June 2015. Following is the status of others with a connection to the allegations.

• Eduardo Castro Wright was linked the bribery allegations in Mexico, a market he grew to prominence. Castro Wright quietly retired in July 2012.

• Tom Mars, former chief administrative officer, exited Wal-Mart in March 2013 after 11 years. He served as general counsel during the period under scrutiny for violations of the Foreign Corrupt Practices Act. From 2002 to 2009, Mars was involved in an investigation into bribery allegations regarding a Walmart store built near Mexican pyramids, according to company emails released by Congressional members. Internal emails mentioned in a New York Times report connect Mars to the possible violations as the senior corporate lawyer who briefed top executives such as former CEO Mike Duke and board chairman Rob Walton in 2005 on the Mexican bribery allegations.

• Former CEO Mike Duke, headed up Walmart International during the time under investigation. He retired as CEO in January 2014 and will retire from the board in June.

• Former CEO Lee Scott was CEO of Wal-Mart Stores Inc. during the time under investigation. Scott stepped down from the board of directors in June 2013.

Koehler said just because someone was named in a news story doesn’t mean they will be implicated by the SEC or Department of Justice. But if any of the culpable executives have already been removed from the business that would be a positive for Wal-Mart in their settlement negotiations.

He said settlement negotiations can last up to a year once all the cases are completed. Koehler reiterated that Wal-Mart self-reported after its own legal counsel began to focus on potential FCPA violations following the Tyson Foods FCPA settlement in 2011. He said Wal-Mart has been proactive in this issue despite what other media outlets may have reported.

“Wal-Mart doesn’t want this gray cloud hanging over its business and would likely choose to settle sooner rather than later. But it’s not up to them,” Koehler said.

In the company’s recent 10K filing with the SEC, the retailer said the investigations regarding potential FCPA violations include, but are not limited to Brazil, China and India. Wal-Mart also warns that bigger losses are possible as the cases are eventually settled.

“We could be exposed to a variety of negative consequences as a result of these matters. One or more enforcement actions could be instituted in respect of the matters that are the subject of some or all of the on-going government investigations, and such actions, if brought, may result in judgments, settlements, fines, penalties, injunctions, cease and desist orders, debarment or other relief, criminal convictions and/or penalties,” the filing noted. “Additional shareholder lawsuits may result in judgments against us and our current and former directors and officers named in those proceedings. We cannot predict at this time the outcome or impact of the government investigations, the shareholder lawsuits, or our own internal investigations and review.”

The company also warned that the ongoing investigations can impinge on the time of certain executives and ongoing media and government interest in this situation could have a negative impact on the company’s standing as a corporate citizen.

“Although we do not presently believe that these matters will have a material adverse effect on our business, given the inherent uncertainties in such situations, we can provide no assurance that these matters will not be material to our business in the future,” the company said.

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