Raul Larios

Did Walmart CEO Know of Mexican Bribes?

Walmart de MexicoThis month marks the 1-year anniversary of the New York Times article by Pulitzer Prize winner David Barstow alleging a vast conspiracy of bribery and corruption in Mexico that dated back to 2002, when Walmart was aggressively expanding its footprint in that all-important emerging market. The Times claimed that it was only after learning of its investigation in November 2011 that Walmart “voluntarily” disclosed to the U.S. Justice Department that it had begun an internal investigation into possible violations of the Foreign Corrupt Practices Act (FCPA), which outlaws the bribery of foreign officials by American executives.

All along, Walmart has claimed that none of their senior officers (including its current CEO Michael T. Duke) knew anything about any Mexican bribes.

Yet earlier this year, Democratic Congressmen Elijah Cummings and Henry Waxman, who are investigating certain aspects of the bribery allegations, released emails that indicate that several senior executives, including Mr. Duke (CEO since 2009 and previously the Vice Chairman responsible for Walmart International and its Mexican subsidiary), had specific knowledge that “Wal-Mart paid hundreds of thousands of dollars in bribes to secure approvals to build its store in Teotihuacan on the site of ancient ruins.”

The Cummings/Waxman letter (a copy of which can be read here: http://waxman.house.gov/reps-cummings-and-waxman-release-documents-showing-wal-mart%E2%80%99s-ceo-was-informed-mexican-bribery), focuses on only 1 particular store.

But the New York Times article from last year alleged a massive bribery scheme throughout the entire country.  You can read the stunning article here (http://www.nytimes.com/2012/04/22/business/at-wal-mart-in-mexico-a-bribe-inquiry-silenced.html?ref=davidbarstow).

Due to that New York Times report, Walmart is having to spend a lot of money on defending itself against multiple shareholder lawsuits and on the FCPA investigations.  In its most recent Annual Report, which the company filed just last week with the Securities and Exchange Commission, the company disclosed that it spent $157 million during the fiscal year that ended January 31, 2013, and that it expected to incur an additional $45 million during the first quarter alone.  Given the amount of money Walmart is spending on its legal defense, it’s hard to predict at this point whether any Walmart executive(s) will be going to jail.  The investigations are ongoing, and no criminal indictments have been handed down to date.

In addition to the alleged cover-up by Walmart executives in Arkansas, what troubles me is the sophistication of the supposed bribery scheme masterminded by the Mexican executives.  If proven to be true, the scheme should serve as a huge wakeup call to any foreigner wanting to invest, or already doing business, in Latin America.  You should assess your current operations there, and take concrete steps to protect yourself and your company from corruption risks in this region.

Consider, for example, that the main perpetrator of the alleged Walmart bribery scheme was a 10-year veteran in the company’s real estate department by the name of Sergio Cicero Zapata, who feeling under-appreciated when he was passed over for the job of general counsel of Walmart de Mexico, began to assemble a record of all the bribes he had helped to orchestrate.  He then contacted Walmart’s general counsel at the time (Ms. Maritza Munich) in Arkansas with “information about irregularities authorized at the highest levels of Walmart de Mexico.”

According to The Times, in the ensuing internal investigation ordered by Ms. Munich, Mr. Cicero spent hours explaining the mechanics of how he had helped funnel bribes through trusted facilitators, known in Mexico as “gestores” (pronounced hes-TOR-ehs).

Gestores are facilitators who help individuals and companies to get things done in Mexico, especially when dealing with slow-moving government agencies.  They grease the wheels of progress and are a daily reality of Mexican culture.  Although some are legitimate, many are not and it was Mr. Cicero’s job to recruit the latter.  Operating in the shadows, Mr. Cicero recounted how he worked closely with them, sharing strategies on whom to bribe and for how much. He described how they targeted mayors and city council members, urban planners, bureaucrats who issued construction permits, and anyone who might get in the way of Walmart’s relentless quest for growth. The bribes, he said, bought zoning approvals, reductions in environmental impact fees and the allegiance of community leaders.  Furthermore, they got zoning maps changed; they made environmental objections vanish; and they expedited permits that typically took months to process.

According to The Times, Mr. Cicero further described how Walmart de Mexico perfected the art of fraudulent accounting.  The gestores submitted invoices with brief, vaguely worded descriptions of their services, with secret codes written on the invoices.  The invoices covered the bribe and the gestor’s fee, typically 6 percent of the bribe.  The codes identified the specific “irregular act” performed.  One code would indicate a bribe to speed up a permit; another would describe the elimination of a fine, etc.

According to Mr. Cicero, the invoices with the secret codes were carefully monitored by a handful of Walmart de Mexico executives in the know, which included the board chairman, the CEO, the general counsel and the chief auditor, among others.  Each month, they received a detailed schedule of all of the payments performed.  Walmart de Mexico then “purified” the bribes in accounting records as simple legal fees.  All told, over $8 million dollars were paid in bribes.

But wait, there’s more!!  According to the New York Times, an internal probe by Bentonville investigators found that the corruption in Walmart’s largest foreign subsidiary might be far more extensive than even Mr. Cicero had described.  In going through Walmart de Mexico’s database of payments, investigators found large “contributions” and “donations” directly to state, municipal and local governments all over Mexico — nearly $16 million in all since 2003 — in return for the licenses, zoning approvals and construction permits needed to build their stores.

Then there’s the reaction by the American bosses in Arkansas, who when upon learning of the scheme, allegedly tried to cover it up…

You might be thinking that this sounds more like the script for a Hollywood fictional thriller about corporate corruption, and not the dealings of a respected Fortune 500 company listed on the New York Stock Exchange.  I thought so myself at first, until I started to wonder about the $200 million in legal fees that Walmart has shelled out to defend itself and its executives.  You just don’t spend that kind of money unless there is some truth to the allegations!

With over $100 Billion in worldwide sales per quarter, it would seem that Walmart can easily afford $200 million.  Now ask yourself, as a foreigner doing business in Latin America, could you survive an investigation on alleged corrupt practices?

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April 2, 2013 - Posted by | New York | , , , , ,

7 Comments »

  1. EXCELLENT post Raul!

    I can’t stand corruption whether that occurs in the USA, Mexico or anywhere else. Unfortunately the majority of politicians in Mexico and business men are part of this corruption. Mexico and its mid and low class people have been kidnapped by a privileged group of people… this group control the media, telecommunications, etc. the result more poverty, violence and migration mainly to the USA.

    Comment by Cury | April 3, 2013 | Reply

  2. Thanks for your comments, Cury. I couldn’t agree with you more. What’s worse, no one has been incarcerated yet for the alleged crimes, either in the U.S. or Mexico. Not even the whistleblower who implicated himself.

    Comment by Raul Larios | April 4, 2013 | Reply

  3. I have worked in Mexico now for 5 years and run a company here that is also based in the US. True, there is a lot of corruption here. But there is a growing number of companies, like ours, who refuse to participate. While it has a long way to go, ethics are improving. The FCPA and what the Feds eventually do with Walmart will be a big deal here. Everyone is watching this from South of the border.

    Comment by Mike Barrett | April 18, 2013 | Reply

    • You make an excellent point, Mike!

      Ethics are indeed improving (albeit slowly), thanks to companies like yours. In fact, the code of business principles championed by the Caux Round Table, and Corporate Social Responsibility in general, are movements that are actually growing in Latin America.

      It’s a fascinating subject, and one that I hope to blog about in the future. Perhaps you’d be willing to share some of your experiences?!

      Thanks for your insightful comments.

      Comment by Raul Larios | April 19, 2013 | Reply

  4. David Barstow, the New York Times journalist who broke the story of alleged massive corruption at Walmart de Mexico, was recently bestowed the prestigious Pulitzer Prize for 2013. Mr. Barstow was recognized along with his Mexican colleague Alejandra Xanic von Bertrab for a “distinguished example of investigative reporting” on the Walmart story. This is Ms. von Bertrab’s first Pulitzer and Mr. Barstow’s third.

    Congratulations to both!

    Comment by Raul Larios | May 12, 2013 | Reply

  5. In its most recent 8-K report, filed on 5-16-2013, Walmart disclosed that it spent $73 million on FCPA-related compliance expenses in the first quarter of 2013, versus the $40 to $45 million it had projected. It also announced that it expected to need another $65 to $70 million during the second quarter in the widening Mexican bribery probe.

    However, the company is unable to predict when it might resolve the investigations by the Securities & Exchange Commission and Department of Justice. You might recall that Walmart spent $157 million in fiscal year 2012 when the Mexican bribery story broke.

    Comment by Raul Larios | May 18, 2013 | Reply

  6. […] […]

    Pingback by Walmart Central - Page 55 | November 25, 2013 | Reply


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