Wal-Mart Stores Inc. (NYSE:WMT) has been accused of hampering an internal investigation into bribery at its Mexican subsidiary, which could lead to years of closer regulatory scrutiny and eventually cost some executives their jobs.
The New York Times reported on Saturday that in September 2005, a senior Wal-Mart lawyer received an email from Sergio Cicero Zapata, a former executive at Wal-Mart de Mexico, the company’s largest foreign unit, describing how the subsidiary had paid bribes in order to obtain the necessary permits to build stores in the country.
In response, Wal-Mart (NYSE:WMT) sent investigators to Mexico City, where they discovered a paper trail of hundreds of suspect payments totaling more than $24 million. However, the company’s leaders shut down the investigation and did not notify law enforcement officials in either the U.S. or Mexico, according to the Times.
If the allegations prove true, they could lead to a time-consuming global probe, significant financial penalties paid to U.S. authorities, and the departure of some executives.
Wal-Mart (NYSE:WMT) could remove some of those involved in the alleged bribery to make it easier to reach an out-of-court settlement with the U.S. Department of Justice concerning possible breaches of the Foreign Corrupt Practices Act, which forbids the payment of bribes to foreign government officials.
Wal-Mart (NYSE:WMT) claims it disclosed the probe to the DOJ and the Securities and Exchange Commission, but according to the Times, the disclosure came only after they had informed Wal-Mart of the investigation, years after the bribes were said to have first come to management’s attention. Neither the DOJ nor the SEC have publicly commented on the matter.
According to the Times, current CEO Mike Duke and former CEO Lee Scott, who still sits on Wal-Mart’s board, were among the senior executives allegedly aware of the bribery. Duke was put in charge of Wal-Mart’s international division in 2005. Former Wal-Mart de Mexico CEO Eduardo Castro-Wright was identified in the Times article as the driving force behind the bribery.
Castro-Wright became CEO of Wal-Mart de Mexico in 2003, was named CEO of Walmart U.S. in 2005, became a vice chairman in 2008, and led Wal-Mart’s e-comerce business from 2010 until January of this year. He is set to retire on July 1, the company announced last September, in order to spend more time with his family.
On Sunday, the day following the Times report, Wal-Mart spokesman David Tovar said Duke had instructed the company to conduct a worldwide FCPA compliance review in March 2011. The company declined to make Duke or any other executives available for comment, and said the investigation is ongoing.
If allegations hold true, the company’s corporate structure may help protect against some outside pressure from shareholder activists looking for drastic changes in the executive suite. The family of Wal-Mart founder Sam Walton owns nearly 50 percent of outstanding shares, and Sam Walton’s eldest son, S. Robson Walton is chairman. His younger brother, Jim, is also on the board.
Still, the investigation could take years, especially if regulators have cause to believe such problems were not confined to Mexico. Wal-Mart has major operations in the U.K., Brazil, China, Japan, and Canada, and is also seeking to expand in emerging markets like India and parts of Africa.
Wal-Mart (NYSE:WMT) shares tumbled 4.6 percent in morning trading on Monday, the first day of trading since news of the scandal broke over the weekend.