The Walmart FCPA Investigation Revisited (Again): Some Musings and Speculations on the Most Recent Reports

Earlier this month, there was yet another intriguing story about new developments in the US government’s investigation into possible Foreign Corrupt Practices Act (FCPA) violations by the Walmart’s foreign operations. The Walmart case is probably the most high-profile (and controversial) FCPA case of the last decade, and the reports suggest that it may finally be lurching toward a conclusion, though the recent story raises as many questions than it answers.

Before proceeding to the most recent developments, here’s a quick, and admittedly oversimplified, recap: In 2005, Walmart received a report from a disgruntled former employee that its Mexican subsidiary had engaged in an extensive bribery scheme to pay off government officials to speed the opening of new stores. After internal investigation, however, Walmart’s executives decided in 2006 not to take meaningful action or disclose the apparent FCPA violations to the US government. In 2011, Walmart’s new general counsel initiated a review of Walmart’s anticorruption compliance worldwide; this audit revealed evidence of significant problems in several countries, including Mexico, China, Brazil, and India. Around the same time, Walmart learned that reporters from the New York Times were conducting an extensive investigation into bribery allegations involving Walmart’s Mexico operations. In attempt to get out in front of the story, in December 2011 Walmart disclosed to the DOJ and SEC potential FCPA problems in its Mexican subsidiary, but indicated that the problems were limited to a handful of discrete cases. In April and December 2012, the New York Times published two lengthy articles (here and here) detailing extensive bribery by Walmart’s Mexican subsidiary, orchestrated by the subsidiary’s CEO and general counsel—allegations that went far beyond the isolated incidents Walmart had disclosed the previous year. Since then, the DOJ and SEC investigation into Walmart’s alleged FCPA violations—not only in Mexico, but in other foreign subsidiaries as well—has been ongoing.

There have been quite a few twists and turns in the story. Perhaps the most dramatic was the Wall Street Journal’s surprising report, from almost exactly one year ago. The highlights from that report included the claims (from “people familiar with the probe”) that (1)the investigation was nearly complete (and, by implication, the case would be resolved soon); (2) the US government’s investigation had found “few signs of major misconduct in Mexico”; and (3) although the investigation had uncovered evidence of “widespread but relatively small payments” in India, the Walmart case turned out to be “a much smaller case than investigators first expected” that “wouldn’t be likely to result in any sizeable penalty.”

The first of those three claims has been refuted by the passage of time—it’s more than a year after the WSJ story, and the case has still not been resolved. The latter two claims are flatly contradicted by the more recent report published by Bloomberg (also based on anonymous “people familiar with the matter”). According to the Bloomberg report:

  • First, it may be true that at the moment the U.S. government does not have sufficient evidence to prosecute Walmart for FCPA violations in Mexico. But this is not because (as some suggested in the wake of the WSJ’s 2015 story) that the New York Times reporting was inaccurate. Rather, according to this month’s Bloomberg report, the problem appears to be that the bulk of the misconduct in Mexico took place too long ago. The FCPA has a five-year statute of limitations (with a limited extension of three years possible for gathering foreign evidence), but the most serious FCPA violations in Mexico, as reported by the New York Times, took place in 2005 or earlier. Some observers had speculated that the DOJ would find a way around the statute of limitations problem, for example by finding a way to charge Walmart with an ongoing conspiracy (a legal theory that allows the government to treat a set of separate incidents as one criminal act, with the statute of limitations running from the most recent act in furtherance of the conspiracy). If the Bloomberg report is accurate, it seems that the US government couldn’t find a way to make that legal theory work, given the available evidence. But that doesn’t mean that there was not “major misconduct” in Walmart’s Mexican subsidiary. It just means that the misconduct took place long enough ago that the US can no longer bring FCPA charges based on that conduct. (To be fair, last year’s WSJ explicitly noted that the problem with the Mexico allegations may have been that the most serious violations took place too long ago, with the more recent Mexico misconduct much less serious. And I’ll give myself a quick pat on the back for having highlighted exactly this possibility immediately after the WSJ story came out. But that nuance was obscured by the WSJ headline and much of the contemporaneous commentary, which portrayed the WSJ report as having essentially refuted the NYT.)
  • Second, far from being a relatively minor case with a modest fine, Bloomberg reports that the US government is seeking a penalty of $600 million, based on the profits Walmart allegedly earned through FCPA violations, principally in India and Brazil. If imposed, that would be the third-largest FCPA penalty ever (after the $800 million paid by Siemens in 2008 and the $772 million paid by Alstom in 2014). According to Bloomberg , Walmart is resisting—more on this in a moment—but these reports are certainly inconsistent with last year’s news that there wouldn’t be a substantial penalty.

So, what else can we learn from all this, and what questions does this new report raise? Here are a few scattered thoughts:

  • Let’s assume for the moment (1) that the U.S. government is convinced that Walmart’s Mexican subsidiary engaged in exceptionally egregious FCPA violations, and Walmart HQ’s handling of the matter in 2005-2006 was grotesquely irresponsible, but also (2) that the statute of limitations on that particular conduct has already expired. Can the government nonetheless take into account the Mexico misconduct when deciding the size of the penalty to demand as part of a negotiated settlement for other misconduct (that occurred within the limitations period)? To be clear, it would presumably be unlawful to try to force a company to pay fines in excess of what it would be obligated to pay for the violations the government thinks it could actually make stick in court. But the government also has a fair amount of discretion in how stubborn or flexible it will be in settlement negotiations. Suppose, for the sake of argument, that based on Walmart’s more recent misconduct in Brazil, the FCPA and associated statutes would permit a maximum fine of $700 million. Suppose further that the DOJ’s usual practice in a case like this would be to settle for something in the neighborhood of $300 million. But suppose the DOJ lawyers decide that Walmart’s earlier Mexico misconduct, though outside the limitations period, shows that Walmart was a sufficiently bad actor that they decide to insist on a $600 million penalty instead. Is that legitimate? Or would taking that out-of-limitations misconduct into account, when deciding on a negotiating position in settlement talks, be legally impermissible or otherwise inappropriate? I really don’t know enough about the law or practice in this area to have a well-considered view, so I’m throwing this out there more as a question.
  • According to the Bloomberg report, in response to Walmart’s resistance to accepting the $600 million penalty, the DOJ has sent investigators to dig up more evidence about Walmart’s Mexcio operations—presumably to find some way to show either more recent serious violations, or else evidence of an ongoing conspiracy that can help get around the statute of limitations problem. If this is true, it calls into question one common narrative—often advanced by the business community and its academic sympathizers—according to which companies cannot credibly threaten to go to trial (or even risk indictment) on FCPA charges, and the DOJ uses this leverage to extract pretty much whatever settlement the government wants without regard to the actual strength of the evidence. But if that strong, perhaps caricatured version of the narrative were accurate, the DOJ wouldn’t need to send investigators back to gather more evidence; instead, the DOJ could just threaten to indict Walmart if it didn’t capitulate, and the helpless company would have no choice but to comply. The fact that the DOJ is now trying to gather more evidence could be a sign that Walmart has in fact credibly threatened to allow the case to proceed to trial, rolling the dice that it will be able to defeat the government’s most serious charges. Alternatively, even if Walmart hasn’t credibly claimed it is willing to go to trial, it could be that the US government believes that its negotiating position will be stronger if it gathers more compelling evidence, or that it must do so to justify the fine it seeks to impose.
  • I wonder whether the upcoming presidential election may be playing into both sides’ calculations. On the U.S. government side, as the Bloomberg article notes, there may be some pressure to finalize a settlement before a new president is inaugurated in January. After all, even if Hillary Clinton wins (meaning no substantial change in U.S. government policy on FCPA prosecutions), there may well be considerable staff turnover once a new administration comes in. Perhaps—and this is nothing but raw, uninformed speculation—the DOJ and SEC officials working on this case would like to get it wrapped up on their watch, so they can make the big announcements at the press conference, add it to their resumes when they return to private practice, etc. And perhaps Walmart’s lawyers, recognizing this, feel like they can resist a bit more than they might under other circumstances, in the hopes that the government’s lawyers will be willing to take a cut on the penalty in order to get the case wrapped up. And that’s all on the assumption that Secretary Clinton wins. There’s still an outside chance that Donald Trump—who has publicly denounced the FCPA as a “horrible law”—will be the next president. While it’s not completely clear how a Trump Justice Department would act (and I’d really prefer to avoid thinking about it), it would probably be good news for Walmart, at least with respect to this investigation. Again, Walmart might feel like it has a bit more leverage than it would in other cases because the DOJ and SEC lawyers who have, along with their predecessors, invested five years in this investigation would prefer not to see it go up in smoke if Donald Trump wins the election.
  • Finally, maybe the biggest lesson from the media reporting on the Walmart case is that we should be hesitant to believe everything we read in the papers, especially when it is based on anonymous inside sources. Let’s see what happens when this thing actually settles. Until then, much fun as it is to speculate, we should recognize that we really don’t know much about what’s going on behind closed doors.

One thought on “The Walmart FCPA Investigation Revisited (Again): Some Musings and Speculations on the Most Recent Reports

  1. While taking into account the limitations of speculation noted in your final point, I suspect that some reader(s) of this blog might have insight into the note regarding leeway the government has at the negotiating table. I would echo your call for anybody who has knowledge about how government-corporation negotiations over FCPA fines are conducted to describe what falls within the scope of the negotiations. If an argument wouldn’t provide the basis for an enforceable claim if the case went to court, then is that argument essentially off the table? If the additional evidence that the government gathers concerns actions that occurred more than 5 years ago, then would that evidence essentially provide no additional pressure for the government side when negotiating? And if the conspiracy theory has, lets say, a 10% chance of actually sticking in court (putting aside how you would make this risk analysis when these matters are usually settled), how much leverage would that give the government?

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