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What do Walmart’s Foreign Corrupt Practices Act issues mean to the rest of us?

May 01, 2012

How corrupt foreign tax practices can impact all aspects of your business.

Walmart has received some unwanted press since a recent article in The New York Times reported allegations of bribery within Walmart’s subsidiary operation in Mexico. The allegations date back to 2005, when it came to management’s attention that the Mexican subsidiary may have been bribing local officials to obtain competitive advantages in building new stores (including, but not limited to, obtaining permits and zoning changes). After an internal investigation, it is alleged that management was not able to corroborate the allegations that were brought forward and concluded their internal investigation with no repercussions for any of those involved. It wasn’t until December 2011 that Walmart disclosed to the authorities that it was investigating its compliance with the Foreign Corrupt Practices Act (FCPA), which covers illegal payments made by American companies.

There are a host of issues raised here, many of which go well beyond routine compliance and reporting issues. Whenever a company has operations in foreign countries it has to ensure compliance with all applicable laws and regulations, both domestic and foreign, including the FCPA. The FCPA, in short, prohibits the payment (or promise of payment) of money or anything of value to a foreign official for influencing that person’s action to obtain business. The FCPA also addresses the accounting issues (mainly for publicly traded and other registered companies) related to making these payments, requiring companies to keep books and records that accurately reflect all of the transactions of the company and that appropriate accountability can be established. Depending on what section of the FCPA is violated, significant fines and potentially incarceration for individuals involved could result.

The FCPA expands beyond the direct actions of the company itself and also covers service providers and other third party consultants (including, but not limited to, sales representative, consultants, and distributors). In addition to ensuring your company is in compliance, you have to hold your vendors to the same standards. This can pose significant challenges for those choosing to operate abroad, and can certainly result in some significant due diligence issues if you are looking to eventually sell your company to a private equity firm or other strategic investor.

This case also highlights some issues related to the internal control environment and how the structuring of your control systems can impact the value of that critical internal function. One of the key elements of an effective internal control environment is what I like to call the “tone at the top”. Senior management plays a critical role in any control environment and their perceived propensity to accept risks generally impacts the entire organization. Companies that are experiencing periods of extreme growth may not dedicate (or consciously decide) to ignore how that growth is being achieved in order to please investors and other stakeholders. This can obviously have a significant impact if any improprieties, and related financial consequences, are publicized.

Now that your year-end financial statements are now complete and your tax returns have been filed (or properly extended), it’s a good time to take a fresh look at your internal control policies and procedures, and, if doing business abroad, your compliance with the FCPA. If you have any questions as you evaluate these systems, please contact me.

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