A $10 Billion Bribe, or Should You Worry When Investing in Underwear?

A couple of weeks ago, business headlines worldwide lit up with stories of alleged bribery at the Wal-Mart’s Mexican subsidiary and the $10 billion market value, which was wiped off Wal-Mart’s market cap by the stock market as the result of these bribery allegations.  Although bribery scandals among major corporations are nothing new and a number of Global 500 companies have paid massive fines when their misdeeds were uncovered, Wal-Mart’s situation presents an interesting problem and should serve as caution to investors, exporters and franchisors whose primary line of international business is seemingly low risk when it comes to corruption susceptibility.   I venture to guess that when Wal-Mart’s investors made their decisions about investing in this leading global retailer of auto parts, underwear, clothing, consumer electronics, toys, etc., few of them thought of this company as potential poster child of a $10 billion corruption scandal.

Like it or not, bribery and corruption are an integral part of global business.  Yes, a lot of work has been done over the last four decades across the globe to spotlight and eliminate corruption, but it is still a massive problem and a very tempting way of doing business for many companies and individuals across the world.  The U.S., UK and a number of other countries have attempted to eliminate bribery in international business by declaring it illegal and imposing stiff fines and jail sentences on their individual and corporate citizens.  Since international bribery is difficult to uncover and prove, enforcement often times has been focused on large spectacular cases, which result in massive deterrent public relations headlines and very stiff fines.  Most of the bribery convictions and investigations have centered on what I call high risk situations where corporations, or agents acting on their behalf, paid bribes to win direct government tenders, mineral concessions or project permits.  We almost never heard of  say a hamburger restaurant chain or a network of coffee shops implicated in international bribery scandals.  Yet, the Wal-Mart example below illustrates that no business is immune to bribery and corruption in its efforts to successfully compete and meet its growth targets.

Investors, Franchisors, Business Owners, Exporters beware – any company in any line of business is potentially vulnerable to bribery and corruption overseas. Not all of them will of course become a $10 billion problem, as it did for Wal-Mart, but all have potential to wreck financial and reputational havoc.  Think of an overzealous franchisee offering bribes to city officials to get favorable spaces for his/her retail boutiques, fried chicken or indoor playground chains.  Think of your distributor paying bribes to customs agents in order to reduce the value of shipments and thus cost of duties paid on imported merchandise.  There are plenty of opportunities for the unscrupulous who look at the short-term upside that a bribe can bring and ignore the massive long-term consequences.

If any member of the Global 500 can easily cough up fines into tens or sometimes hundreds of millions of dollars, shake off the damage and slowly restore its reputation, smaller companies, whose brand most often is their biggest asset are normally not that lucky.  The risks are real and any allegation scandal that hits the press, even if it never results in fines or convictions, can cripple a smaller company, or worse put it out of business. So how does one manage this potentially explosive issue?

We always advise our Franchisor or Exporter clients, regardless of the line of business they are in, to conduct a comprehensive  FCPA compliance review, develop a customized policy for each country they operate in and COMPEL their existing and prospective franchisees or distributors to implement such policies as part of their franchise/distribution agreements.  Also, additional care must be undertaken during the relationship-building phases, especially with master franchisees, country distributors, or investment partners to observe their behavior and propensity to cutting corners and cheating.

Passive investors or shareholders must take the time to inquire with the management about the anti-corruption policies and procedures in place.  Management should supply shareholders copies of the FCPA policies and account for all potential risks.  If management refuses, or does not take the risks seriously, run. There are plenty of companies who represent terrific prospects for investment abroad and those who do not realize or take seriously the fact that even an underwear-carrying retailer is at risk for bribery and corruption scandal should not be on your shopping list anyway.

Wal-Mart’s Mexican Mess

By JUSTIN LAHART, The Wall Street Journal, April 23, 2012

Wal-Mart‘s WMT -0.49% Mexican crisis is a $10 billion problem. At least that was the stock market’s first take. Investors wiped that amount of the company’s market capitalization following allegations in the New York Times of bribery at its Wal-Mart de Mexico subsidiary.

At first glance, the 5% share price fall looks harsh given that Wal-Mart’s 69% stake in the subsidiary generated about 5% of its sales last year. The business is not about to vanish overnight. But investors are right to be cautious.

First, the international business, of which Mexico is a key part, helped Wal-Mart boost sales by an average of 5.2% annually over the last five years. The U.S. business grew only 3.2% a year. Wal-Mart’s ability to expand further in Mexico might now be affected. Hobble Wal-Mart’s international operations and it is left with a U.S. business that competes with the Internet and has become increasingly reliant on a low-margin grocery business.

Second, the allegations threaten to soak up huge amounts of management time at best. At worst, some key executives could be forced out, creating uncertainty.

Third, the company could face substantial penalties. Consider: In 2008, Siemens AGSIE.XE -1.86% agreed to pay $800 million in U.S. fines to settle bribery allegations under the Foreign Corrupt Practices Act. The Justice Department said it could have sought as much as $2.7 billion if the German industrial conglomerate hadn’t taken “extraordinary” steps to cooperate with authorities. In addition to that, lawyers’ bills can quickly mount.

The value of Wal-Mart’s stake in its Mexican subsidiary fell by $4.8 billion Monday. The extra hit to the retailer’s U.S.-listed stock is a reflection of quite how unpredictable such legal threats can be.

—Justin Lahart

Wal-Mart Shares Hit by Probe

By ANDREW ACKERMAN And AMY GUTHR  The Wall Street Journal, April 23, 2012

Wal-Mart Stores Inc. WMT -0.49% shares fell 4.7%, erasing nearly $10 billion in market value on Monday, amid concerns a bribery investigation in Mexico would undermine its overseas expansion.

Meanwhile, a pair of top House Democrats announced an investigation into allegations that Wal-Mart’s Mexican subsidiary paid bribes to speed permits for new-store openings. Shares of Wal-Mart de Mexico SAB, or Walmex, tumbled 12% Monday in Mexico.

Wal-Mart faces significant legal risks after it disclosed that it is investigating its operations in Mexico for possible violations of the U.S. law that prohibits bribery in foreign countries. Miguel Bustillo reports on Markets Hub. Photo: Reuters.

Reps. Elijah Cummings (D., Md.) and Henry Waxman (D., Calif.) are seeking an in-person meeting with company officials this week to address the allegations that employees of Walmex made a series of illicit payments to local government officials in Mexico prior to 2006.

Executives at both Wal-Mart and its Mexico unit learned of the allegations as early as 2005 but rebuked internal investigators in an attempt to prevent the matter from impeding the company’s aggressive growth strategy, according to an article published in the New York Times

Mr. Cummings and Mr. Waxman are the top Democrats, respectively, on the House Oversight and Government Reform and House Energy and Commerce committees.

Wal-Mart, which said over the weekend that it is investigating the charges, didn’t immediately comment on the investigation. As members of the minority party, the lawmakers need Republican support to hold a hearing or to subpoena Wal-Mart.

Spokesmen for Rep. Darrell Issa (R., Calif.), chairman of the House Oversight Committee, and Rep. Fred Upton (R., Mich.), chairman of the House Energy and Commerce Committee, didn’t immediately respond to requests for comment.

It is still to be seen whether there will be an official backlash against Walmex, the leading Mexican retailer. Mexican Finance Minister Jose Antonio Meade told reporters over the weekend that there isn’t sufficient information at the moment to launch an investigation, but that the government will decide how best to proceed once it has more details.

Walmex Chief Executive Scot Rank said in the company’s earnings statement Monday that “for the company, having the highest regulatory standards and an adequate environment of control is fundamental to achieve its objectives.” Mr. Rank didn’t mention the bribery probe during a conference call.

Walmex opened 95 new Mexican units among its various business formats during 2005 in what was, at the time, a record number of store additions for the company. Last year, Walmex opened 365 new outlets in Mexico; the company also runs restaurants.

Mexican financial-markets regulator CNBV had no immediate comment on whether it is considering fining Walmex for lack of disclosure.

Walmex said in a statement Monday that, while it can’t predict the full impact of the investigation, based on information currently available it doesn’t believe the issue will produce “adverse effects” for its business, financial situation, results or cash flow.

Andrew Ackerman and Amy Guthrie

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About Alexander Gordin
An international merchant banking professional with over twenty years of business operating and advisory experience in the areas of export finance, international project finance, risk mitigation and cross-border business development. Clients include foreign governments, municipalities and state enterprises as well as Fortune 500 and small/medium enterprises. Strong entrepreneurial instincts, combined with leadership and strategic skills. Transactional and negotiations experience in over thirty five countries. Author of the highly acclaimed "Fluent in Foreign Business" book and creator of the "Fluent in OPIC", "Fluent in EXIM","Fluent In Foreign Franchising", "Fluent in FCPA",and "Fluent in USTDA" seminar/webinar series. Currently developing "Fluent In ......" seminars and publications. Co-author of the Fi3 Country Business Appeal Indices. Extensive international business development and project finance transaction experience in healthcare, aerospace, ICT, conventional and alternative energy infrastructure, distribution and hospitality industries. Experience managing international public and private corporations. Co-Founded three companies abroad. Strong Emerging and Frontier Market expertise. Published and featured in numerous publications including: The Wall Street Journal, Knowledge@Wharton, NBC.com, The Chicago Tribune, Industry Week, Industry Today, Business Finance, Wharton Magazine Blog, NY Enterprise Report, Success magazine, Kyiv Post and on a number of radio and television programs including: Voice of America, CNBC, CNNfn, and Bloomberg. Frequent speaker on strategy, cross-border finance and international business development. Executive MBA from the Wharton School at the University of Pennsylvania. B.S. in Management of Information Systems from the Polytechnic Institute of NYU. Specialties Strategic Management Advisory, Export Finance, International Project Finance & Risk Management, Cross-border Negotiations, Structured Finance transactions, Senior Government and Corporate officials liason

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