Analysis: In Wal-Mart probe, a "black box" of possible fines
(Reuters) - Wal-Mart Stores Inc (WMT.N) may not find the math easy when it tries to assess the potential criminal liabilities from an alleged bribery scandal and possible cover-up at its Mexican unit.
Whether a potential settlement with U.S. authorities involves several hundreds of millions of dollars of penalties, or even billions, will likely depend on how many allegedly improper payments are eventually discovered and the extent of the alleged financial gain.
The formula used by prosecutors in crafting proposed penalties can also include subjective factors, such as how much the retailer cooperates with authorities and whether executives engaged in a wide-ranging scheme to hide the behavior from authorities.
Wal-Mart is under investigation over allegations its Mexican unit paid $24 million in bribes to accelerate its Latin American growth. The outcome of any potential government case will likely hinge on whether U.S. investigators - and Wal-Mart itself - uncover more alleged bribery around the world, as well as how aggressively prosecutors apply the provisions of U.S. anti-corruption law.
Wal-Mart, the world's largest retailer, has said it is cooperating the with authorities investigating the allegations, which surfaced in a New York Times report on Saturday.
The company has not been charged with wrongdoing and it declined to comment on any potential legal liability.
On Tuesday, it announced it created a new global position to oversee its compliance with the U.S. Foreign Corrupt Practices Act, a law that forbids bribes to foreign officials.
While it is impossible to predict an exact dollar figure, 10 law professors and lawyers with experience prosecuting and defending against corporate bribery cases told Reuters that, if the allegations are true, Wal-Mart would almost certainly face steep fines.
The Justice Department can use subjective factors to determine whether to increase or decrease a penalty, including whether a company cooperated with the authorities, promptly fixed the problems and how high up the executive ladder the bad conduct went.
A Justice Department spokeswoman declined to comment on the Wal-Mart situation, as well as how the agency determines proposed penalties in FCPA cases.
Much could hinge on how Wal-Mart executives responded to the bribery allegations. The Times said that, in 2005, some senior executives failed to report the bribes and even tried to cover them up. The newspaper also said current Wal-Mart Chief Executive Mike Duke and former CEO Lee Scott, who now sits on the company's board, were among senior executives allegedly aware of the situation.
Large companies typically settle government allegations that they violated the FCPA, rather than risk defeat at trial. They can also face private action by shareholders, who can accuse directors and officers of breaching their duties or claim the stock price fell after allegations surfaced.
While the government typically assigns a company a "culpability score" that can translate into a specific penalty, when it comes to negotiating a settlement "it's in the Justice Department's complete discretion to pick a number," said Mike Koehler, a professor at Butler University who runs the website FCPA Professor.
Wal-Mart has hired investigators to determine whether there were bribes in other places where it operates, such as China.
The company could face several hundreds of millions of dollars in penalties over alleged misconduct in Mexico, said Joseph Hoffmann, a professor at Indiana University's Maurer School of Law. If widespread problems are uncovered, "then of course you could get into the billion dollar range" for possible penalties, he said.
A U.S. case against Germany's Siemens AG could provide a guide for how a potential Wal-Mart case would play out. The engineering conglomerate paid $800 million to U.S. authorities in 2008, the single largest U.S. fine to date involving FCPA violations. Siemens also paid another $800 million to German authorities.
Siemens pleaded guilty in U.S. court to paying officials in Argentina, Bangladesh and Venezuela to gain lucrative government contracts. As with Siemens, the alleged conduct at Wal-Mart showed a pattern of corrupt behavior, rather than a series of incidents isolated to a handful of rogue employees, according to legal experts.
If the allegations involving the retailer prove to be true, "it looks like Wal-Mart Mexico was proceeding on a policy of paying people off; that's what Siemens did too," says Paul Enzinna, a lawyer at law firm Brown Rudnick in Washington, DC.
The Siemens case, however, involved much more money: the improper payments totaled some $1.8 billion. Siemens could have been fined as much as $2.7 billion under U.S. sentencing guidelines, but authorities agreed to a lower figure because the company helped with the investigation. That case has rolled on. Eight former executives were charged in December for their alleged roles in the scheme.
Siemens paid about 1.6 percent of its sales in global fines. If that percentage was applied to Wal-Mart, the Arkansas-based retailer could be on the hook for about $4.5 billion, UBS stock analyst Robert Carroll said in a research note on Wednesday.
However, legal experts say company sales are just one factor that would go into a possible fine.
"It's a little bit of a black box," said Amy Conway-Hatcher, a partner at law firm Kaye Scholer in Washington.
U.S. authorities in recent years have escalated their attack on foreign bribery. Other big settlements were a $400 million pact with British military contractor BAE Systems Plc and a $185 million settlement with German luxury car maker Daimler, both in 2010.
Overall though, with dozens of settlements over the last several years, the average U.S. fine in foreign bribery cases is less than $25 million, according to a report by law firm Shearman & Sterling in January.
If the Justice Department pursues a case against Wal-Mart, it could rely on two provisions of the FCPA. It could bring charges of violating the statute's anti-bribery provisions, the most common charge leveled against companies. The government can fine a company up to $2 million per violation of that provision.
While the New York Times reported that Wal-Mart's Mexican unit was suspected of making some 441 improper payments, experts said that, if charges were brought, the company would likely negotiate an overall settlement instead of having to pay for each alleged violation.
Also under the FCPA, prosecutors could seek to bring charges that Wal-Mart violated provisions of the act centering on failure to keep adequate records. Siemens was the first company to plead guilty to violating that provision. That carries a potential fine of $25 million per violation.
Under another federal law, the Alternative Fines Act, prosecutors can ratchet up the punishment, allowing them to dock companies for twice the financial gain reaped from the alleged bribery.
If prosecutors determine that Wal-Mart paid bribes to get permits for earlier store openings in Mexico, it may be difficult to calculate the monetary gain, experts said.
In the most recent FCPA cases, companies have paid fines below the recommended guidelines, said Butler University's Koehler.
Given Wal-Mart's alleged misconduct and the potential precedent of such a high-profile case, however, "the DOJ would be hard-pressed to go below the range," he added.
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