Wal-Mart on Thursday reported that its investigation into violations of a federal antibribery law had extended beyond Mexico to China, India and Brazil, some of the retailer's most important international markets.
The disclosure, made in a regulatory filing, suggests Wal-Mart has uncovered evidence into potential violations of the Foreign Corrupt Practices Act, as the fallout continues from a bribery scheme involving the opening of stores in Mexico that was the subject of a New York Times investigation in April.
The announcement underscores the degree to which Wal-Mart recognizes that corruption may have infected its international operations, and reflects a growing alarm among the company's internal investigators. People with knowledge of the matter described how a relatively routine compliance audit rapidly transformed into a full-blown investigation late last year - involving hundreds of lawyers and three former federal prosecutors - when the company learned that The Times was examining problems with its operations in Mexico.
A person with direct knowledge of the company's internal investigation cautioned that Thursday's disclosure did not mean Wal-Mart had concluded it had paid bribes in China, India and Brazil. But it did indicate that the company had found enough evidence to justify concern about its business practices in the three countries - concerns that go beyond initial inquiries and that are serious enough that shareholders needed to be told.Wal-Mart issued a statement confirming the new disclosures, and said it would be inappropriate to comment further on the new allegations until it had concluded the investigations.
The Justice Department and the Securities and Exchange Commission, with Wal-Mart's cooperation, are also looking into the company's compliance with the anti-bribery law.
The Times reported in April that seven years ago, Wal-Mart had found credible evidence that its Mexican subsidiary had paid bribes in its effort to build more stores, a violation of the corrupt practices act, and that an internal investigation had been suppressed by executives at the company's Arkansas headquarters.
Wal-Mart has so far spent $35 million on a compliance program that began in spring 2011, and has more than 300 outside lawyers and accountants working on it, the company said. It has spent $99 million in nine months on the current investigation.
Consequences of the expanding investigation could include slower expansion overseas and the identification of even more problems. The company said in the filing Thursday that new inquiries had begun in countries "including but not limited to" China, India and Brazil.
While the disclosure did not specify the nature of the possible bribery problems in the three countries, it "clearly will cause more scrutiny on every real estate project being considered, and one would think at the minimum it will slow down the process as more controls need to be passed through," said Colin McGranahan, an analyst with Sanford C. Bernstein.
International growth is critical to Wal-Mart, the world's largest retailer, and Brazil, India, China and Mexico together make up the largest portion of the company's foreign locations.
Wal-Mart's international division had been on a growth binge, though that has been slowing lately. In third-quarter results reported Thursday, the company said international sales rose 2.4 percent to $33.2 billion, making up about 29 percent of the company's overall sales.
More than half of Wal-Mart's 10,524 stores are international. Mexico has 2,230 stores. Brazil has 534, China, 384.
C. Douglas McMillon, chief executive of Walmart International, said in June that he did not expect the investigation to
hinder international growth. "Only time will tell," he said.
Wal-Mart's expanding investigation began in spring 2011 as a relatively routine audit of how well its foreign subsidiaries were complying with its anti-corruption policies. The review was initiated by Jeffrey J. Gearhart, Wal-Mart's general counsel, who had seen news reports about how Tyson Foods had been charged with relatively minor violations of the Foreign Corrupt Practices Act. He decided it made sense to test Wal-Mart's internal defenses against corruption.
The audit began in Mexico, China and Brazil, the countries Wal-Mart executives considered the most likely source of problems. Wal-Mart hired the accounting firm KPMG and the law firm Greenberg Traurig to conduct the audit. The firms conducted interviews and spot checks of record systems to check whether Wal-Mart's subsidiaries were carrying out required compliance procedures.
For example, Wal-Mart's anti-corruption policy requires background checks on all third-party agents - lawyers, lobbyists - who represent the company before government agencies. The firms checked whether background checks were in fact being done. By July 2011, the firms had identified significant weaknesses in all three subsidiaries.
"It was clear they were not executing," a Wal-Mart official with knowledge of the audits said.
The problems were enough to persuade Wal-Mart to expand the audit to all 26 of its foreign subsidiaries. This work began in autumn 2011. The outside firms dispatched "compliance teams" of lawyers and accountants all over the world. The teams attributed many of the problems they identified to a lack of training.
Senior Wal-Mart executives were concerned by the findings, but not overly alarmed. The audit was uncovering the kinds of problems and oversights that plague many global corporations.
But in late 2011, Wal-Mart learned that The Times was examining Wal-Mart's response in 2005 to serious and specific accusations of widespread bribery by Wal-Mart de Mexico, the company's largest foreign subsidiary.
In October 2005, a former lawyer for Wal-Mart de Mexico had spent hours telling company investigators how Wal-Mart de Mexico's leadership had orchestrated a vast campaign of bribery to accelerate expansion. Hundreds of bribes, he said, were paid to obtain construction permits and other licenses needed to open new stores. The lawyer's accusations were especially powerful because he had been in charge of getting permits for Wal-Mart de Mexico's new stores.
Wal-Mart rapidly escalated its internal investigation. It hired new outside lawyers, this time from the firm Jones Day. They began to investigate whether top executives had quashed the company's investigation into the lawyer's claims. In December 2011, Wal-Mart sent Jones Day lawyers to Mexico to interview the lawyer and other crucial players. The company began to look into other specific accusations of wrongdoing, both in Mexico and it its other subsidiaries.
It effectively created two lines of inquiry - the first being the global compliance review begun by Greenberg Traurig and KPMG. The second was the internal inquiry into specific accusations of bribery and corruption.
Some changes at Wal-Mart have already resulted. General counsels for each country used to report in to the chief executives of that country - which could create conflicts of interest if the chief executive was involved in corruption - and now they report to the general counsel of Walmart International. The company recently hired several compliance executives, and a vice president for global investigations who had previously worked at the FBI. It has also changed its protocol on investigations, including asking international subsidiaries to alert the global ethics office in Bentonville, Ark., before any inquiry into wrongdoing begins.
The new disclosure by Wal-Mart on Thursday "does support their effort to be transparent," said Matthew J. Feeley, a lawyer with Buchanan Ingersoll & Rooney who focuses on foreign bribery cases. In cases like these, a company will regularly update the SEC and the Justice Department with "very detailed presentations about the results of the internal investigation" in the hope of receiving lesser punishment from the agencies.
Though the government issued new compliance guidelines for the anti-bribery law on Wednesday, largely aimed at lawyers handling such cases, the Wal-Mart disclosure was not a result of those new guidelines. It was included in the company's third-quarter earnings announcement.
It was not clear Thursday whether authorities in China, India and Brazil were conducting investigations of their own into Wal-Mart's practices, as the authorities in Mexico have done in response to the bribery accusations in that country.
Last month, Indian regulators started looking into whether Wal-Mart violated an Indian foreign-investment rule known as FDI. The company's India spokesman, Arti Singh, said that Thursday's disclosure was "unrelated" to the Indian action.
© 2012, The New York Times News Service