So this might not be the most important question in the world, but I’ve been wondering why the U.S. Government’s investigation into Walmart’s alleged violations of the Foreign Corrupt Practices Act (or, more accurately, FCPA violations committed by Wal-Mart’s Mexican subsidiary, Walmex) has yet to produce a final settlement.
A quick and somewhat simplified recap (for those among our readers who don’t obsessively follow every FCPA case in the pipeline): In April 2012, two New York Times reporters broke a blockbuster story about how Wal-Mex had been systematically paying bribes to scores of Mexican officials to get permits for new stores (often circumventing local environmental protection and historical preservation regulations in the process), and—perhaps even more damningly—about how Walmart’s senior leadership, upon learning of the bribery allegations from an internal whistleblower and preliminary internal investigation, had decided to cover up the problem and reject its own compliance department’s calls for a thorough investigation. (Walmart tried to get out in front of the story by including a disclosure of possible FCPA problems in its December 2011 FCPA filing, though that disclosure downplayed the seriousness of the issue.) The original New York Times story, along with a follow-up story published in April 2012, netted the two reporters a Pulitzer Prize. Those reports, along with Walmart’s December 2011 disclosure, prompted the Department of Justice Securities & Exchange Commission to begin investigating Walmart for FCPA violations.
That was back in April 2012. It’s now three and a half years later, and there’s still no resolution of the case; the investigation is still ongoing—something that has prompted grumbling in some quarters about both the length and cost of the investigation (see here and here). Why is this taking so long?
This is a question I’ve heard several people raise at various conferences and meetings. I don’t have any good answers, but I thought I’d throw out a few hypotheses:
The first, and perhaps simplest, possibility is that there’s in fact nothing special about the Walmart case, and that for better or worse, resolving these sorts of complex, high-stakes FCPA cases simply takes a long time. There’s certainly plenty of data to corroborate that hypothesis: The OECD’s 2014 Foreign Bribery Report found that the average resolution time for foreign bribery cases was over seven years; that statistic includes non-U.S. cases, but other analyses have concluded that recent large FCPA cases take about that long (unsurprising, since the lion’s share of foreign bribery cases considered in the OECD report are FCPA cases). If that’s right, then Walmart is hardly an outlier, and we may well be only about halfway into the investigation. (There’s a debate about whether it’s reasonable for these investigations to take so long, which I’m not going to get into here. The point is that those who think that Walmart is somehow unusual may simply not have a sense of what’s normal for these kinds of investigations.)
That hypothesis is perhaps the most straightforward, and I suspect it’s probably right. But it’s not much fun. So just for the sake of keeping things interesting, let me assume for the moment that Walmart is (or will end up) taking longer than the typical FCPA case. Why might that be? (And again, lots of people I talk to who are purportedly experts in this field do seem to think the case is dragging on.) Here are a few possibilities:
- First, the DOJ may want to drop the hammer on Walmart, and so it’s harder for the parties to settle the case. Virtually all FCPA investigations targeting corporations end in a settlement (usually a deferred prosecution agreement or non-prosecution agreement), one that the parties work out through negotiations. In most cases, the government has an incentive to wrap up the case reasonably expeditiously, which means it may sometimes be willing to make some concessions to the company, even though the company almost always wants to avoid indictment at (almost) all costs. But there’s a sense out there that the DOJ wants to make an example of Walmart, because Walmart’s (alleged) conduct was so egregious—and here I’m not so much referring to the extent of Walmex’s bribery scheme, but to Walmart HQ’s decision to squelch the internal investigation and cover things up. After all, the DOJ very much wants to encourage companies to self-disclose potential FCPA violations (at least when they’re serious), and also wants to encourage companies to take internal compliance seriously. The government has in the past used individual cases to try to send signals to companies that it’s in their interest to do these things. A leading example was the decision not to prosecute Morgan Stanley for one of its employees’ FCPA violations in China; in a rare public announcement of a declination decision, the DOJ emphasized that Morgan Stanley had an elaborate compliance program (which the employee had willfully circumvented), and that the company had promptly disclosed the misconduct to the government and cooperated with the investigation. It may well be that the DOJ wants Walmart to be the counterexample, so they can say (implicitly or explicitly) to the corporate world, “This is what happens when you play nice and cooperate (Morgan Stanley); and this is what happens when you don’t (Walmart).” If that’s right, that the DOJ will be much less willing to give Walmart any sort of break on the sanctions to be imposed, which will extend the length of the negotiating process.
- Second, and perhaps related to the above idea, the fact that the ongoing investigation is costing a huge amount each day in legal fees and associated expenses may not bother the DOJ so much in this case, relative to other cases, precisely because Walmart looks like it was such a bad-faith actor. A number of commentators have complained about the high cost of FCPA investigations, and have often cited to Walmart as a leading example of this. In responding to such criticisms, I quipped a while back that Walmart may not be the best case to use to arouse sympathy for these beleaguered targets of FCPA investigations (and indeed, I’m not terribly sympathetic). Perhaps some of the government folks working on the case feel the same way. To be clear, I doubt that anyone in the government would deliberately draw out the investigation as a means of punishing Walmart. But I could easily imagine that a Walmart representative urging the government to wrap things up quickly in light of the financial burden of the investigation would get a much less sympathetic hearing than would the representative of some other company that had tried to do the right thing, at least after discovering possible FCPA violations.
- Third, it’s at least possible that the government’s legal case in Walmart is not a strong as it appears from the outside. Perhaps there are statute of limitations issues, given that the bribery took place in 2005 and 2006 (and the FCPA has a 5-year statute of limitations)—though the government may be able to establish an ongoing conspiracy to violate the FCPA right up to 2011. Perhaps it might be difficult to attribute Wal-Mex’s unlawful conduct to Walmart (though I doubt it). Still, it might be the case that the government is having a harder time constructing such an airtight legal case that Walmart’s attorneys feel like they have to cave and accept whatever punishment the DOJ wants to impose. And if my first point above is right, then both factors could work in tandem: The DOJ wants to hammer Walmart to set an example, but Walmart’s attorneys are resisting due to possible legal or factual weaknesses in the government’s case.
- Fourth, it might be that the extent of the Walmart’s misconduct is much worse than we know. It’s possible (indeed, likely) that the DOJ is insisting that Walmart conduct an investigation not only into its Mexico operations, but its operations all over the world, including places like India, Brazil, and China. Who knows what those investigations will turn up, or have already turned up?
Of course, this is all rank speculation. As noted above, it’s not at all clear that the Walmart case is in fact taking unusually long, despite the fact that many people seem to think it is. And even if the case is proceeding slower than we’d expect, I really have no idea why that would be. But I’ve thrown out some guesses, and I’d be interested in what other people out there in ReaderLand think about this.
Matt-I think another plausible explanation might be that as Wal-Mart is the world’s biggest retailer, all eyes are on the DOJ. Whatever the DOJ does, the actions will come under intense scrutiny not only from the FCPA commentariat, such as you and me, but also the much wider business commentary, Congress and the public. Predictably, the wider commentary will come down on both sides of the coin; either the penalty was a joke because it was Wal-Mart or the penalty was too substantial because bribery is just a cost of doing business in places like Mexico. I think this means the DOJ wants to make sure it is fully aligned on the penalty, whatever it is at the end of the day.
Yes, I’m sure you’re right about that. I think I’d implicitly folded the idea that everyone is watching into my “drop the hammer” hypothesis (my thinking was, since everyone’s watching this, DOJ wants to send a strong message). But I was focused on the severity of the sanction, while you rightly point out that it might be just as much about being super-careful to get everything exactly right.
Of course, there’s still the very real possibility that we’re making up explanations for something that’s not actually a puzzle, given that many other big FCPA cases take a very long time too.
I think Matt’s point is a good one about all eyes being on this case because it involves Wal-Mart. I also wonder about the potential for this case to expand to other countries. I get the sense that this is a more common occurrence today than it used to be? I also might add that this blog has covered several changes in the way DoJ approached enforcement and cooperation. Could evolving expectations from the DoJ slow the process down? For example, if partial cooperation was somewhat acceptable before but is now not, could that have blown up a negotiation or required an unanticipated expansion of the investigation?
Also, do think it’s a problem that we don’t know what’s taking the Wal-Mart investigation as long as it is? For example, if the investigation has expanded to other countries should that information should be public knowledge? And how should that happen? Press releases from the DoJ, or do we wait until it shows up in SEC disclosures?
I also wondered about Courtney’s point regarding DOJ’s changing approach and policies toward FCPA enforcement and its impact on ongoing cases such as this one. Not only is the government pouring more resources into clarifying its FCPA approach (e.g. the SEC and DOJ released its first joint resource guide for FCPA practitioners in 2012), it is also promulgating new policies like the Yates Memo to signal a more hard-line approach when dealing with alleged FCPA violators. Another hypotheses to add to the mix then is a slight amendment to Matthew’s first point: in order to make the best example it can out of the Walmart case, the government may be considering ways to use the new policy tools in its toolbox to build a stronger case against not only the corporation, but culpable individuals as well.
While the plausible reasons for DoJ’s delay all appear valid, I wonder the efficacy of any of these seemingly well-intentioned motives. It’s been almost 4 years since the offense came to light and almost everyone seems to have moved on. To a citizen in Mexico, India or China concerned about what happened, DoJ would appear just as any other government agency of their home country who failed them by going soft on a crime of such monstrous proportions. Even assuming that DoJ manages to finally indict Wal-Mart, I wonder if it would send a strong enough signal to those concerned. Wal-Mex has benefitted from the status quo and continued to make profits from its operations and the protestors like Mr. D’Herrera have died and others have moved on. From this sense, this looks like a case of justice being denied by its delay.
This is a great point about public perceptions among citizens of countries where corruption occurs. The longer the delay between a claim (or even proof) of corruption and disposition of the investigation (either a settlement or a judgment) the less effective citizens are likely to view anticorruption agencies and laws. One concern you raise is that unless the DOJ really hammers Wal-Mart, the delay will largely make people forget about the allegations, and the PR consequences for Wal-Mart diminish as time goes on. In light of this, perhaps DOJ should set internal guidance on how long investigations and/or settlement negotiations should go on, given that a non-trivial portion of the value of laws like the FCPA is the deterring influence of public shaming when allegations are leveled. If there is a long “lag” between allegations and resolution, then the public is more likely to forget about what the company is alleged to have done, and the company may not actually bear the full economic consequences of its actions.
That’s an interesting idea, though I’m not sure how practically feasible it is. There are very good reasons that DOJ might not want to discuss details of an ongoing investigation. And these things do take a long time. I’m also not so sure that this case will fade from memory — or if it does, the announcement of a settlement is likely to revive attention (especially from the business community).
But I do think the two of you are onto something important. My guess (and it really is only a guess) that DOJ is thinking a lot about how this case, and its resolution, will be perceived by the US/multinational business community, but not thinking so much about perceptions in Mexico. I’m actually curious to know whether, or how, the Mexican press has been covering this case. I speak no Spanish, but for someone who does, it might be worth looking into.
It strikes me that there is a common assumption that settlements are “easier” than trials. A prospective defendant company may prefer settlement to an indictment, but the only thing that seems to be truly easier about settlement is avoiding the reputational costs of prosecution. In terms of financial and labor costs, settlement can be even more complex and challenging than trial. While sentencing may take good corporate behavior into account, a trial looks to to conduct in the past. Settlement requires paying a fine, but also agreeing to standards intended to shape conduct in the future. Inevitably, this takes some time. Given that misconduct within Wal-Mart was not confined to a few operational teams, but actively and repeatedly concealed by senior leadership, a whole lot of future conduct requires consideration.
Today’s updates on the case: Little evidence of misconduct in Mexico; bulk of evidence found in India. Being covered extensively in Indian media