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Wed April 25, 2012
Business

The Wal-Mart Dilemma: When Is A Payment A Bribe?

Originally published on Thu April 26, 2012 8:10 am

Allegations that Wal-Mart officials in Mexico paid local authorities to speed up permits to build new stores could result in a trial and a huge financial penalty under a U.S. anti-corruption law. But legal experts who spoke to NPR have their doubts it will ever come to that.

The alleged activity was made public over the weekend in a New York Times story. The report said executives at Wal-Mart de Mexico authorized payments to Mexican government officials in exchange for expedited zoning and construction permits. The article also said former Wal-Mart CEO Lee Scott became aware of the payments but tried to cover them up.

If true, the activity could be illegal under a 1977 law called the Foreign Corrupt Practices Act, which prohibits U.S. companies operating overseas from bribing local government officials. But the law has a spotty history.

Only twice in its 35-year history has the Justice Department brought a company to court — and in both cases, the government lost. The department also has a decidedly mixed record when it comes to prosecuting individuals under the law.

Fight Or Settle?

"The corporations almost never litigate these charges. They settle," says Andrew Spalding, who teaches international business law at the Chicago-Kent College of Law of the Illinois Institute of Technology. Spalding has written extensively on the FCPA.

"The reason is they can't afford the bad press of litigation — particularly criminal litigation." he said.

The impact of the Times' article illustrated that point. Wal-Mart's share price plummeted Monday, shaving nearly 5 percent from the stock's value in a single day.

"So, you can imagine what would happen if all this dirty laundry got aired in a trial," Spalding says, adding that the potential hit to the company's share price and reputation would be far worse than if its executives decided to bite the bullet and settle.

It also might be in the government's interest to settle, he says. The law contains an exception for what is known as "facilitating payments," in legal parlance — and that makes prosecution more difficult.

In other words, if a company needs a construction permit, but it's only a question of how long that permit will take to work its way through the bureaucracy, making such a facilitating payment to a local government official to speed up the process is considered acceptable under FCPA, Spalding says.

"Many of the payments detailed in that Times article appear to fit that description," he says. What is illegal, he says, is paying a government official to influence a decision on whether to actually grant a permit.

"There is almost certainly some liability here, but it may not be as bad as the reporting would suggest," he says.

Spalding is not alone in his assessment, but there is some disagreement. Former Securities and Exchange Commission enforcement attorney Richard Grime has argued that "the DOJ and the SEC's narrow interpretation of the facilitating payments exception is making that exception ever more illusory, regardless of whether the federal courts — or Congress — would agree."

NPR contacted Wal-Mart for comment on this story. In a statement, company spokesman David Tovar said it was "obviously premature for us to speculate about what we would or wouldn't do."

Untested Law

A big part of the problem is a lack of defining case law, says Jan Handzlik, who represented Lindsey Manufacturing Co. in the only FCPA case to go to court in two decades. That company, along with CEO Keith Lindsey and CFO Steve Lee, was found guilty. However, U.S. District Judge Howard Matz threw out the convictions and said the government's lawyers had engaged in "flagrant" misconduct.

"Many of the provisions in the FCPA are vague and in need of clarification," Handzlik says.

What is the definition of a public official? What is a state-owned entity? What does the statute require to prove a corrupt intent? Those are some of the questions facing courts.

"Unfortunately, there are very few appellate court decisions interpreting the statute, because so few defendants have gone to trial," says Handzlik, who is a partner at Baltimore-based law firm Venable LLP, where he deals with FCPA issues. "This means that the Department of Justice has been able to interpret the statute pretty much on its own."

When the Department of Justice chooses to go after executives implicated in bribery or a cover-up, it will have a tougher time proving they acted with guilty knowledge and criminal intent, Handzlik says.

"When a corporation is prosecuted, its intent may be inferred from the actions of all of its employees considered together," he says. "However, when an individual is prosecuted, the government must prove that she or he knew what they were doing was wrong and specifically intended to act in a corrupt way."

Mike Koehler, a professor of business law at Butler University in Indianapolis, agrees the case law as it applies to FCPA has left a gaping legal hole.

Companies are eager to avoid damage to their balance sheets that might result from going to trial, and since "it's so easy to resolve these cases short of judicial scrutiny, the end result, unfortunately, is not good from a development-of-law perspective," Koehler says.

If a case against Wal-Mart did go to trial, the potential penalty could be significant, Spalding says. Under the FCPA, the retailer could be fined three times the profits derived from the alleged $24 million in bribes.

"Wal-Mart's operations in Mexico have ... apparently grown very profitable. And, now, any part of those profits that were made possible by bribes can be multiplied by three," he says.

Hundreds of millions dollars? A billion? It's anyone's guess, says Spalding.

If the Justice Department decides to make a deal with Wal-Mart, the dollar amount of any penalty would come down to how well the company responds to certain "carrots and sticks," says Koehler.

"Two factors the DOJ will consider are cooperation, as well as acceptance and acknowledgement of responsibility," he says. "If a company cooperates and accepts responsibility through a plea agreement, or a nonprosecution or deferred prosecution agreement, the fine and penalty is going to be lower."

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