Archive for the ‘Obtain or Retain Business’ Category

Foreign Corrupt Practices Act Enforcement As Seen Through Wal-Mart’s Potential Exposure

Tuesday, September 18th, 2012

I am pleased to share my article “Foreign Corrupt Practices Act Enforcement As Seen Through Wal-Mart’s Potential Exposure” recently published in the Bloomberg BNA White Collar Crime Report.

The abstract is as follows.

High-profile instances of Foreign Corrupt Practices Act scrutiny focus attention on the law and its enforcement across a broad spectrum. In spring 2012, arguably the most high-profile instance of scrutiny in the FCPA’s 35-year history occurred as Wal-Mart’s alleged conduct in Mexico dominated the news cycle. Wal-Mart’s scrutiny has been instructive in many ways at a key point in time for the FCPA. The article uses Wal-Mart’s potential FCPA exposure as a prism to view the current FCPA enforcement environment.

Among the issues discussed in the article are the following: whether Congress intended in passing the FCPA to capture the type of payments at issue in Wal-Mart; what caselaw instructs as to the payments; whether what Congress intended or what courts have concluded even matters; the impact of Wal-Mart’s scrutiny on the company as well as industry peers; and the politicization of Wal-Mart’s scrutiny and its impact on FCPA reform.

The complete article can be downloaded here.

A Wide-Ranging Interview

Wednesday, September 12th, 2012

The FCPA Report is an online publication that contains articles on a variety of FCPA topics to assist lawyers in relevant practice areas, in-house counsel,  and risk and compliance managers stay ahead of the curve.  It launched this June and features thematic sourced and researched by primarily lawyers, as well as contributed articles by experts in the field, interviews with leading figures, and reports on important developments. It is available to subscribers and trial subscribers at

I was pleased to do a telephone interview with the FCPA Report in mid-August.  Today’s post sends you to the wide-ranging Q&A previously published, in two parts, in the FCPA Report and linked to here with permission.

Topics covered in the Q&A include the following:  statute of limitations, judicial scrutiny, the duration of FCPA scrutiny, voluntary disclosure, Wal-Mart’s FCPA scrutiny, facilitation payments, obtain or retain business, foreign official, corporate fines, victims issues, a private right of action, FCPA Inc. and the revolving door, the three buckets of FCPA financial exposure and Foreign Corrupt Practices Act reform.

An Important FCPA Case You’ve Likely Never Heard About

Monday, May 7th, 2012

Last week (here) I noted, in connection with Wal-Mart’s potential FCPA exposure, that the enforcement theory that payments outside the context of foreign government procurement fall under the FCPA’s anti-bribery provisions has been subjected to judicial scrutiny three times.  After summarizing those three instances, I noted that the scorecard was as follows:  US – 1; Defendants – 2; or if you prefer US – .5; Defendants – 2.5 (recognizing that the 5th Circuit decision in Kay is equivocal).

Last week in doing some research, I stumbled upon a fourth instance where this enforcement theory was subjected to judicial scrutiny.

The result?  DOJ lost.

Thus, the scorecard is as follows when an enforcement agency is put to its burden of proof on the enforcement theory that payments outside the context of foreign government procurement fall under the FCPA’s anti-bribery provisions:  US – 1; Defendants – 3; or if you prefer US – .5; Defendants – 3.5 (again recognizing that the 5th Circuit decision in Kay is equivocal).

This 1990 FCPA enforcement action is so obscure it was not even cited in any of the decisions of the other challenges which occurred between 2002-2004.   For instance, in the Kay trial court decision in 2002, the court stated that it was confronting an issue of first impression in the federal courts.

Below is a summary of U.S. v. Alfredo Duran.

AEA Aircraft Recovery (“AEA”) was a division of Summerland Engineering Corp. (a Florida corporation) and engaged in the business of recovery of seized aircraft.  The sole shareholder of Summerland was Robert Gurin.

In 1989, the DOJ charged Joaquin Pou (a Dominican Republic citizen and an agent of AEA, Summerland and Gurin), Alfredo Duran (a U.S. citizen and agent of AEA, Summerland, and Gurin)  and Jose Guasch (a U.S. citizen and agent of AEA, Summerland, and Gurin) with conspiracy to violate the FCPA’s anti-bribery provisions.  See here for the criminal indictment.  In a criminal information (see here) the DOJ also charged Robert Gurin.

According to the charging documents, the defendants conspired to make payments to officials of the Dominican Republic in order to obtain the release of two aircraft seized by the government of the Dominican Republic.  The charging documents then proceed to set forth various acts in furtherance of the conspiracy.

Gurin and Guasch pleaded guilty and Pou (a citizen of the Dominican Republic) became a fugitive.  Gurin was sentenced to 5 years probation and 100 hours of community services and Guasch was sentenced to 4 years probation, 1 month of house arrest and 75 hours of community service.

Duran, a former Florida state Democratic Party chairman, pleaded not guilty and put the DOJ to its burden of proof at trial.  At the close of the DOJ’s case, he filed a motion for judgment of acquittal (see here).  Duran argued that “no reasonable jury could find that the purpose of any of the alleged intended payments was to assist [...] in obtaining or retaining business” and that the government “has failed to adduce sufficient evidence to prove any intended payments were not facilitating or expediting payments for the purpose of expediting or securing routine governmental action (i.e. grease payments).”

The motion stated that “the legislative history to the 1977 Act makes clear that the evil redressed by the Act was the use of bribery by U.S. corporations to obtain contracts for the sale of good or services to foreign countries.”  The motion then referenced that in 1988 Congress “created an exception for expediting or facilitating payments for the purpose of securing routine governmental action.”  The motion stated, “by clear implication, payments in respect of the awarding of procurement contracts of the foreign government are the type of payments targeted” by the FCPA.

The motion then stated as follows.  “The evidence, taken in the light most favorable to the government, shows at best that payments were to be made to Joaquin Pou and, through him, to unidentified Dominican government officials for the purpose of obtaining the release of a single aircraft to its owner.  Clearly, this is not what Congress intended by the phrase obtaining or retaining business …  The fact that this intended payment may have indirectly benefited Gurin’s business by facilitating the release of an aircraft does not establish the type of direct business purpose contemplated by the statute.”  Duran argued that “the government has failed to establish that the intended payments in this case were for the specific purpose of obtaining or retaining business … and, accordingly, a judgment of acquittal should be entered.

Turning next to facilitating payments, the motion argued that “the government bears the burden of disapproving that the payment was not a ‘facilitating or expediting payment” and that had “Congress intended the ‘facilitating or expediting payment exception’ to be an affirmative defense, it would have placed it” in the portion of the FCPA containing affirmative defenses.  The motion stated as follows.  “By its nature, therefore, the exception creates an additional element which the government must disprove beyond a reasonable doubt to establish the crime.”  The motion then goes through the legislative history of facilitating payments and how in the original FCPA the concept was imbedded in the definition of “foreign official” and how in 1988 Congress created the stand-alone facilitating payment exception.

As to the evidence at trial, the motion stated as follows.  “Here the evidence introduced by the prosecution is only consistent with a finding that the purpose of the alleged intended payments was to facilitate or expedite the release of an aircraft.  The Defendant had been told by an undercover government informant that there was no legal holds upon the aircraft.  He was led to believe that neither the Dominican Republic nor any other government held any legal claim to or right in the aircraft.  He understood that it was simply a straightforward matter of expediting the release of an aircraft on behalf of the owner.  Any intended payment was simply for the purpose of hurrying along a bureaucratic process.  The purpose of the alleged intended payment was to expedite a routine governmental action.  Consequently, no reasonable jury could conclude that the Defendant agreed upon an illegal objective.”

Elsewhere, the motion stated as follows.  “The facts simply show that the army of the Dominican Republic had no discretion in the matter of the release of the aircraft, and that some government officials were simply trying to line their pockets outside of their official capacities.”  Further the motion stated as follows.  “There was no decision-making process in this case, the facts merely demonstrate a ministerial or clerical matter involving the processing of government papers and the automatic release of the aircraft.”

On April 17, 1990, U.S. District Court Judge Jame Kehoe granted a judgment of acquittal (see here).

Original source media accounts note that  Judge Kehoe said “the government failed to prove the charges against [Duran] were a crime under the Foreign Corrupt Practices Act.”  According to media reports, Judge Kehoe refused a government request to stay acquittal while prosecutors appealed.  Duran is reported as stating, “I feel that I have been throughly vindicated.  I was ready to take the stand in my own defense.  I am very happy.”

An additional dynamic in the case was that Pou fled the U.S. and Judge Kehoe agreed with the defense that all evidence concerning Pou should be excluded from the case.

According to media reports, the case began when the Government used an informant to pose as an agent for the owner of a drug plane seized by the Dominican military.    Media reports suggest that the government was investigating Gurin in light of allegations he had bribed high-ranking military officials in the Dominican Republic and other Caribbean countries to recover drug planes.

Understanding Wal-Mart

Tuesday, May 1st, 2012

Prior posts here and here discussed and analyzed the New York Times April 21st article regarding Wal-Mart and its potential FCPA exposure.  As noted in the prior posts, the New York Times article was both unremarkable and remarkable at the same time.  Wal-Mart has dominated the news cycle not because it is under FCPA scrutiny (this was known since December 2011 when Wal-Mart disclosed its FCPA scrutiny joining a list of approximately 100 companies known to be under FCPA investigation).  Rather, Wal-Mart has dominated the news cycle because of how the company acted, or failed to act, since learning of potential FCPA issues in approximately 2005.  Thus, Wal-Mart is mostly a corporate governance story.

Even so, there are some core and fundamental FCPA issues worthy of exploration.  This post discusses many of the same issues I’ve discussed with journalists and others over the past week.  Given the space constraints of media outlets, the below was understandably reduced to one or two sentences.  It is in instances like this when I particularly enjoy having my own website and having the ability to go long and deep.

So long and deep we shall go and the issues discussed below are informed by, among other things, my review of the FCPA’s entire legislative history and my years as an FCPA practitioner.  Although focused on the FCPA’s “foreign official” element, a thorough and comprehensive review of the FCPA’s legislative history can be found here (my “foreign official” declaration used in connection with several recent judicial challenges).  My article “The Story of the Foreign Corrupt Practices Act” is forthcoming in the Ohio State Law Journal.

Do the Wal-Mart Mexico payments at issue violate the FCPA’s anti-bribery provisions?  From a practical standpoint, does it even matter?

The FCPA’s Anti-Bribery Provisions

Two distinct and important questions can be asked about many instances of FCPA scrutiny, including Wal-Mart’s, in this new era of FCPA enforcement.

The first question is whether, given the DOJ and SEC’s current enforcement theories, the Mexican payments at issue - allegedly in connection with permitting, licensing and inspection issues - can expose Wal-Mart to an FCPA enforcement action?  The answer is likely yes and in the past several years the enforcement agencies have brought several FCPA enforcement actions premised on payments to obtain foreign licenses, permits and the like.  For instance see here (and embedded posts therein) for the numerous Panalpina related enforcement actions in 2010.  See here at pages 972-975  for a listing of such cases 2007-2009.

The second (and from my perspective more important) question is whether Congress, in passing the FCPA, intended the law to capture payments occurring outside the context of foreign government procurement and involving ministerial and clerical acts by foreign officials.  The answer from the FCPA’s legislative history is no.

In the mid-1970′s Congress learned of a variety of foreign corporate payments to a variety of recipients and for a variety of reasons.  Congress accepted and acknowledged in passing the FCPA that it was capturing only a narrow range of foreign payments.  For instance the relevant Senate Report in May 1977 specifically notes that “the committee has recognized that the bill would not reach all corrupt overseas payments.”  Likewise, the relevant House Report in September 1977 also states that “the proposed law will not reach all corrupt payments overseas.”

Of note, in November 1977 (a month prior to passage of the FCPA in December 1977), Representative Robert Eckhardt  (D-TX, a Congressional leader on the foreign payments issue) stated on the House floor as follows.  “Payments to a [foreign official with ministerial or clerical duties] for instance, to complete a form that ought, in equity, to be completed, to give everybody equal treatment, to move the goods off a dock which he will not move without a tip, a mordida, I think, as they call it in the Spanish language, a facilitating payment, or a grease payment would not constitute a bribe.”

Thus, when the FCPA was passed in December 1977 it specifically excluded from the definition of “foreign official” “any employee of a foreign government or any department, agency, or instrumentality thereof whose duties are essentially ministerial or clerical.”  This was the FCPA’s original (albeit indirect) facilitating payment or grease exception. The relevant House Report states in pertinent part as follows: “… a gratuity paid to a customs official to speed the processing of a customs document would not be reached by this bill. Nor would it reach payments made to secure permits, licenses, or the expeditious performance of similar duties of an essentially ministerial or clerical nature which must be performed in any event.”

When Congress amended the FCPA in 1988 it, among other things, amended the definition of foreign official by removing this indirect facilitating payment exception from the “foreign official” definition by creating a stand-alone facilitating payment exception currently found in the statute.  The relevant House Report indicates that Congress did not seek to disturb Congress’s original intent. “The policy adopted by Congress in 1977 remains valid, in terms of both U.S. law enforcement and foreign relations considerations. Any prohibition under U.S. law against this type of petty corruption would be exceedingly difficult to enforce, not only by U.S. prosecutors but by company officials themselves. Thus while such payments should not be condoned, they may appropriately be excluded from the reach of the FCPA. U.S. enforcement resources should be devoted to activities have much greater impact on foreign policy.”

Even if a payment does not meet the FCPA’s facilitation payments exception, in order for there to be a violation of the FCPA’s anti-bribery provisions, all statutory elements must be met including the “obtain or retain business” element.

To my knowledge, the enforcement theory that payments outside the context of foreign government procurement fall under the FCPA’s anti-bribery provisions has been subjected to judicial scrutiny three times.  These three judicial decisions are summarized below.

Kay Trial Court

In 2001, David Kay and Douglas Murphy (“Defendants”), the president and vice president of Houston-based American Rice, Inc. (“ARI”), were criminally indicted.  The indictment charged FCPA anti-bribery violations and alleged that the defendants made improper payments to Haitian “foreign officials” for the purpose of reducing customs duties and sales taxes owed by ARI to the Haitian government.  The indictment, while specific as to other items, merely tracked the FCPA’s “obtain or retain business” language and did not specifically allege how the alleged payments assisted ARI in obtaining or retaining business in Haiti or what business was obtained or retained.  As stated by the court:  “In other words, the indictment recite[d] no facts that could demonstrate an actual or intended cause-and-effect nexus between reduced taxes and obtaining identified business or retaining identified business opportunities.”

In a case of first impression in the federal courts, the court granted Defendants’ motion to dismiss the indictment and held, as a matter of law based on the FCPA’s legislative history, that the alleged payments were not payments made to “obtain or retain business” and thus did not fall within the scope of the FCPA’s anti-bribery provisions.  See 200 F.Supp.2d 681 (S.D. Tex. 2002).

Mattson / Harris

A few months after the trial court decision in Kay, the Southern District of Texas again considered whether payments made outside the context of foreign government procurement fall under the FCPA’s anti-bribery provisions.  As noted in this previous post, the Mattson and Harris enforcement action (a civil enforcement action brought by the SEC) involved alleged goodwill payments to an Indonesian tax official for a reduction in a tax assessment.  The SEC claimed that the FCPA’s unambiguous language plainly encompassed the goodwill payment and the issue before the court was whether the plain language of the FCPA prohibited goodwill payments for the purpose of reducing a tax assessment.  The court noted that U.S. v. Kay  had already dismissed that case finding that the plain language of the FCPA does not prohibit goodwill payments to foreign government officials to reduce a tax obligation.  However, the SEC attempted to distinguish the trial court’s Kay ruling by arguing that in the civil enforcement context, the Court should interpret the FCPA’s language more liberally than in criminal cases.  The court rejected the SEC’s arguments and followed the trial court’s analysis in Kay that the payments at issue to the Indonesian tax official did not violate the FCPA because it did not help Mattson’s and Harris’s employer (Baker Hughes) “obtain or retain business.”  See this Memorandum and Order (Sept. 9, 2002).  As noted in this release, the SEC dropped its appeal in July 2004.

Of interest is that Mattson’s lawyers, Martin Weinstein and Robert Meyer of Willkie Farr & Gallagher, were the lawyers identified in the New York Times articles who advised Wal-Mart in 2005 on an investigative work plan that was apparently rejected by Wal-Mart.

Kay Fifth Circuit Ruling

The DOJ appealed the 2002 decision of the Southern District of Texas dismissing the indictment and one issue on appeal was whether payments to “foreign officials” to obtain favorable tax and customs treatment can come within the scope of the FCPA’s anti-bribery provisions.

The Fifth Circuit, like the trial court, concluded that the FCPA’s “obtain or retain business” element was ambiguous and it thus analyzed the FCPA’s legislative history.  See 359 F.3d 738 (5th Cir. 2004).  The Fifth Circuit focused specifically on the U.S. Senate’s 1977 sponsored bill and the SEC report on which the Senate’s proposal was based.  According to the court, the SEC report “exhibited concern about a wide range of questionable payments [including those at issue in Kay] that were resulting in millions of dollars being recorded falsely in corporate books and records.”  Although the Fifth Circuit recognized that the Senate’s proposal did not expressly cover payments that seek to influence the administration of tax laws or seek a favorable tax treatment, the Senate, in the words of the court, “was mindful of bribes that influence legislative or regulatory actions, and those that maintain established business opportunities.”

In short, the Fifth Circuit was convinced that Congress intended to prohibit a range of payments wider than those that only directly influence the acquisition or retention of government contracts or similar arrangements.  The Fifth Circuit held that making payments to a “foreign official” to lower taxes and custom duties in a foreign country can provide an unfair advantage to the payer over competitors and thereby assist the payer in obtaining and retaining business.  The court concluded that there was “little difference” between these type of payments and traditional FCPA violations in which a company makes payments to a “foreign official” to influence or induce the official to award a government contract.

However, the Kay court empathically stated that not all such payments to a “foreign official” outside the context of directly securing a foreign government contract violate the FCPA; it merely held that such payments “could” violate the FCPA.  According to the court, the key question of whether Defendants’ alleged payments constituted an FCPA violation depended on whether the payments were intended to lower ARI’s costs of doing business in Haiti enough to assist ARI in obtaining or retaining business in Haiti. The court then listed several hypothetical examples of how a reduction in custom and tax liabilities could assist a company in obtaining or retaining business in a foreign country.  On the other hand, the court also recognized that “there are bound to be circumstances” in which a custom or tax reduction merely increases the profitability of an existing profitable company and thus, presumably, does not assist the payer in obtaining or retaining business.

The court specifically stated: “[I]f the government is correct that anytime operating costs are reduced the beneficiary of such advantage is assisted in getting or keeping business, the FCPA’s language that expresses the necessary element of assisting in obtaining or retaining business would be unnecessary, and thus surplusage – a conclusion that we are forbidden to reach.”

In short, the enforcement theory that payments outside the context of foreign government procurement satisfy the FCPA’s “obtain or retain business” has been subjected to judicial scrutiny three times.

The scorecard:  US – 1; Defendants – 2; or if you prefer US – .5; Defendants – 2.5 (recognizing that the 5th Circuit decision is equivocal).

Contrary to popular misperception, Kay thus does not hold that all payments to a “foreign official” outside the context of foreign government procurement fall within the FCPA’s scope.  Rather, the decision merely holds that Congress intended for the FCPA to apply broadly to payments intended to assist the payer, directly or indirectly, in obtaining or retaining business and that payments to a “foreign official”  outside the context of foreign government procurement can, under appropriate circumstances, fall within the statute. Given the facts and circumstances the Kay court found relevant, it is highly fact-dependant analysis whether a payment to a “foreign official” satisfies the “obtain or retain business” element outside of the context of foreign government procurement.

A key portion from the Kay ruling likely relevant in Wal-Mart is the following:  “there are bound to be circumstances” in which payments outside the context of foreign government procurement merely increase the profitability of an existing profitable company and thus, presumably, does not assist the payer in obtaining or retaining business.

Despite the equivocal nature of the Kay holding, (and the enforcement agencies overall losing record on the issue) the decision clearly energized the enforcement agencies and post-Kay there has been a significant increase in FCPA enforcement actions where the alleged improper payments involve customs duties and tax payments or are otherwise alleged to have assisted the payer in securing foreign government licenses, permits, and certifications which assisted the payer in generally doing business in a foreign country.  For a listing of many such cases, see my scholarship, “The Facade of FCPA Enforcement” – here.  None of the enforcement actions profiled therein were challenged or subjected to judicial scrutiny.

It thus remains an open question whether payments outside the context of foreign government procurement, in any particular case if subjected to judicial scrutiny, (i) would satisfy the FCPA’s “obtain or retain business” element; or (ii) are too attenuated to obtaining or retaining business (such as merely increasing the profitability of an existing profitable business) and thus, per the Kay holding, not a violation of this key FCPA anti-bribery element.

Does It Even Matter?

A logical and practical question then becomes, does it even matter?  As in most FCPA enforcement actions, the answer in any future Wal-Mart FCPA enforcement action is likely no.  At the end of the day it will not matter if Wal-Mart’s payments, if subjected to judicial scrutiny, would result in FCPA violations.

The short reason is that while Wal-Mart’s counsel can make valid and legitimate legal and factual arguments around conference room tables behind closed doors in Washington D.C., to truly challenge the DOJ in an instance of FCPA scrutiny, and to put the DOJ to its high burden of proof at trial, first requires that the company be criminally indicted, something few corporate leaders are willing to let happen.  It is simply easier, more cost-efficient, and more certain to resolve FCPA scrutiny notwithstanding aggressive (and dubious) enforcement theories or the existence of valid and legitimate defenses.  Also relevant to this issue is the existence of the “carrots” and “sticks” relevant to resolving FCPA enforcement actions.  To learn more about these “carrots” and “sticks” please read my article ”The Facade of FCPA Enforcement” – here.

To my knowledge, in the FCPA’s 35 year history, only two corporate defendants have put the DOJ to its high burden of proof in trial.  Wal-Mart will not become the third.  Even so, it is instructive to learn about the two instances in which corporate defendants have put the DOJ to its high burden of proof at trial.

The DOJ’s ultimate record?  0-2.

As noted in this prior post, in 1990, Harris Corporation (“Harris” – a publicly traded telecom provider), along with certain of its executives, were charged in a criminal indictment concerning conduct in Colombia.  In 1991, the court, after hearing the prosecution’s case, granted a defense motion for a verdict of acquittal.  The San Francisco Chronicle stated as follows. “Shortly after the government rested its case, U.S. District Judge Charles Legge of San Francisco ruled from the bench that ‘no reasonable jury’ could convict the company nor its executives on any of the five bribery-related counts for which they were indicted. Citing insufficient evidence, Legge said the government had failed to show any intent by the defendants to enter into a criminal conspiracy. Legge also said it was the first time in his six years on the federal bench that he had dismissed a criminal case at mid-trial for lack of evidence.”

As noted in this prior post, in December 2011 (after the DOJ had secured trial court jury verdicts convicting privately held Lindsey Manufacturing Company and its CEO and CFO of FCPA offenses), Judge Howard Matz (C.D. Cal). vacated the convictions and dismissed the indictment based on numerous prosecutorial misconduct issues that together added “up to an unusual and extreme picture of a prosecution gone badly awry.”  In addition to prosecutorial misconduct, Judge Matz noted the “weakness of the Government’s case” and that the “case against the Lindsey Defendants was far from compelling.”

Analyzing Wal-Mart

Monday, April 23rd, 2012

This prior post discussed the New York Times lengthy Wal-Mart investigative piece published over the weekend.

This post analyzes the likely issues and the road ahead.

The Times article is both unremarkable and remarkable at the same time.

The unremarkable portion of the Times article is that a foreign subsidiary of a multi-national company operating in a FCPA high-risk jurisdiction allegedly made payments to “foreign officials” to facilitate or grease the issuance of certain licenses or permits.  According to the Times, Wal-Mart’s subsidiary in Mexico “had taken steps to conceal [the payments] from Wal-Mart’s headquarters in Bentonville, Ark.” and Wal-Mart Mexico’s chief auditor altered reports sent to Bentonville discussing various problematic payments.  In short, there is nothing in the Times report to suggest that Wal-Mart’s board or top executives (with the exception of Eduardo Castro-Wright – discussed below in more detail) knew of or authorized the problematic payments.

By unremarkable I do not mean to suggest that such payments will not attract DOJ and SEC scrutiny under the FCPA’s anti-bribery provisions.  They surely will, even if Congress likely intended to exclude such payments from the FCPA’s reach and even if the only case law of precedent on the issue is muddled.  (Both issues were discussed in the prior post).

Even if the Mexican payments do not meet the elements of an FCPA anti-bribery violation, the enforcement agencies are likely to assert that such payments violate of the FCPA books and records and internal control provisions.  For instance, the Times article suggests that the Mexican payments were routed through Mexican gestores who were told to submit invoices full of secret code words.  The enforcement agencies frequently take the position that payments recorded on a subsidiary’s books and records become the parent company issuer’s problem on the theory that such subsidiary books and records are consolidated with the issuers for purposes of financial reporting.

The enforcement agencies also expect that a parent company implement effective internal controls throughout its organization, including foreign subsidiaries.  On this issue, one of the most significant issues is likely to be, as the Times article details, that in 2003 Wal-Mart engaged Kroll Inc. on an apparent unrelated issue in which Kroll concluded that Wal-Mart Mexico “executives had failed to enforce their own anticorruption policies, [and] ignored certain internal audits that raised red flags.”  According to the Times article, “Wal-Mart then asked Kroll to evaluate Wal-Mart de Mexico’s internal audit and antifraud units” and that “Kroll wrote another report that branded the units ‘ineffective.’”

An issue the enforcement agencies are likely to explore is how Wal-Mart reacted to the 2003 Kroll audit and if it didn’t react why not?  The same general issue is present in Avon’s current FCPA scrutiny.  As noted in this February Wall Street Journal article, a grand jury is probing how certain U.S. executives reacted to a 2005 internal audit by the company that concluded Avon employees in China may have been bribing officials in violation of the FCPA.  As in Avon, an issue in the Wal-Mart matter, including as to individual executives who may not have participated in or authorized any Mexican payments, will likely be willful blindness as to the Mexican audit.

The remarkable aspects of the Times investigation include the conduct (or lack thereof) of Wal-Mart and its top executives upon learning of problematic conduct in its Mexican subsidiary.  Even in 2005 and continuing today, most business leaders, audit committees, and boards tend to overreact to FCPA issues and often reflexibly launch broad internal investigations.

However, the payment issues at Wal-Mart Mexico apparently resulted in exactly the opposite at Wal-Mart’s corporate headquarters.  Wal-Mart’s conduct will not be viewed favorably by the enforcement agencies.

For instance, under the DOJ’s Principles of Federal Prosecution of Business Organizations (here) a factor the DOJ will consider in arriving at its enforcement decision include ”the corporation’s timely and voluntary disclosure of wrongdoing and its willingness to cooperate in the investigation of its agents.”  While the FCPA does not contain any affirmative disclosure obligation, most companies the size and stature of Wal-Mart tend to disclose conduct that could implicate the FCPA, particularly given the SEC’s position that all payments in violation of the FCPA are qualitatively material, even if not quantitatively material.

Lacking such a voluntarly disclosure, a company should, at the very least, thoroughly investigate the alleged wrongdoing and implement effective remedial measures, including by disciplining and terminating culpable employees.  Once again, the Principles of Prosecution state that ”the corporation’s remedial actions, including any efforts to implement an effective corporate compliance program or to improve an existing one, to replace responsible management, to discipline or terminate wrongdoers, to pay restitution, and to cooperate with the relevant government agencies” is a factor the DOJ will consider in arriving at its enforcement decision.  As to this factor, the relevant comment in the Principles of Prosecution states as follows.  “In determining whether or not to prosecute a corporation, the government may consider whether the corporation has taken meaningful remedial measures. A corporation’s response to misconduct says much about its willingness to ensure that such misconduct does not recur. Thus, corporations that fully recognize the seriousness of their misconduct and accept responsibility for it should be taking steps to implement the personnel, operational, and organizational changes necessary to establish an awareness among employees that criminal conduct will not be tolerated. Among the factors prosecutors should consider and weigh are whether the corporation appropriately disciplined wrongdoers, once those employees are identified by the corporation as culpable for the misconduct.”

On this issue, another remarkable aspect of the Times investigation is how Eduardo Castro-Wright (at the critical time period the CEO of Wal-Mart Mexico) was known by others at Wal-Mart to be involved in the Mexican payments, but was nevertheless continuously thereafter promoted by Wal-Mart.  For instance, as noted in this January 7, 2005 release, Wal-Mart announced that “Eduardo Castro-Wright, currently president and chief executive officer of Wal-Mart Mexico, will become executive vice president and chief operating officer of the Wal-Mart Stores Division in the United States.”  In the release, Wal-Mart President and CEO Mike Duke stated as follows.  “Eduardo is a proven leader who has helped Wal-Mart Mexico achieve outstanding results. His experience, perspective and management skills will be a valuable addition to our division here in the United States.”  In this June 2010 release, the company announced that “Vice Chairman Eduardo Castro-Wright has been appointed President and CEO of and Global Sourcing.”  Wal-Mart President and CEO Mike Duke stated as follows.  “Eduardo has made extraordinary contributions to Walmart U.S. over the past five years, and many contributions are still to come.  He is a visionary thinker who has strengthened our overall business and built a foundation that positions us well for the future.”

As to other Wal-Mart executives, while there is no suggestion at this point that they knew of or authorized the Mexican conduct while it was occurring, their conduct since learning of the misconduct is likely to attract regulatory scrutiny.  Such scrutiny is likely to include certification issues under Sarbanes-Oxley (SOX) as well as other executive statements to the market since 2005 when they became aware of the payments at issue.   You can bet that the SEC in particular will be analyzing every SEC filing, specifically the Management Discussion & Analysis section, and all other statements to the market since 2005 by executives regarding Wal-Mart Mexico.

As to SOX certification issues, as noted in this prior post, in 2011 the SEC charged Paul Jennings, the former CEO and CFO of Innospec.  Jennings was charged in connection with the payments, but also charged with violating Exchange Act Rule 13b2-2 by making false statements to accountants and violating Exchange Act Rule 13a-14 by signing false personal certifications required by SOX that were attached to annual and quarterly Innospec public filings.  As to these charges, the SEC alleged as follows.  “From 2004 to February 2009, Jennings signed annual certifications that were provided to auditors where he falsely stated that he complied with Innospec’s Code of Ethics incorporating the company’s Foreign Corrupt Practices Act policy, and that he was unaware of any violations of the Code of Ethics by anyone else. [...]  Jennings also signed annual and quarterly personal certifications pursuant to SOX in which Jennings made false certifications concerning the company’s books and records and internal controls. Jennings also signed false management certifications to Innospec’s auditors indicating that the books and records were accurate and that Innospec had appropriate internal controls.”  Then SEC FCPA Unit Chief, Cheryl Scarboro stated as follows:  “we will vigorously hold accountable those who approve such bribery and who sign false SOX certifications and other documents to cover up the wrongdoing.”

Also perhaps relevant is the 2009 SEC FCPA enforcement action against Nature’s Sunshine Products (“NSP”) including its executives Douglas Faggioli (President and Chief Executive Officer of NSP and a member of its board of directors during the relevant time period) and Craig Huff (the company’s CFO).  The SEC complaint did not allege that these executives knew of or participated in the improper payments at issue, but the SEC nevertheless charged the executives on a control person theory of liability.  The complaint charged that Faggioli and Huff, as “control persons” of NSP, violated the FCPA’s books and records and internal control provisions and generally alleged that both Faggioli and Huff had “supervisory responsibilities” over NSP’s senior management and policies, yet as “control persons,” “failed to make and keep books, records, and accounts, which in reasonable detail, accurately and fairly reflected the transactions of NSP” and failed to devise and maintain an adequate system of internal accounting controls.

Not only will the DOJ and SEC likely be examining the conduct of Wal-Mart executives, but so too will plaintiff law firms representing shareholders who will likely scour Wal-Mart’s SEC filings and other statements to the market in bringing derivative claims alleging breach of fiduciary duty and potential Section 10(b) claims based on material omissions concerning Wal-Mart Mexico.  On this score, shareholders are likely to allege, among other things, that Wal-Mart’s officers and directors demonstrated conscious disregard for fiduciary duties by failing to act diligently in the face of known facts suggesting a duty to act.

Whether remarkable or unremarkable, the information revealed in the Times article is likely to be a long and costly exercise for Wal-Mart and certain of its executives.  Wal-Mart’s statement over the weekend indicated that it already is conducting a world-wide review of its operations and such “where else” investigations frequently uncover additional problematic conduct.  Among other things, the enforcement agencies are likely to take a keen interest in how Wal-Mart obtained foreign licenses or permits in other FCPA high-risk jurisdictions around the world.  This world-wide review will take time and for this reason FCPA scrutiny of the type that Wal-Mart is currently under is likely to last 2-4 years.