Analysis: How gray area of bribery law could play out in Wal-Mart

Wed Apr 25, 2012 6:06pm EDT

(Reuters) - When is a bribe not a bribe? According to U.S. law, it might not be a bribe if a company paid a little something under the table to a foreign official to encourage him to speed up a permit that he would have issued anyway.

Some legal experts are wondering whether this little-known exception to the Foreign Corrupt Practices Act could come into play in the case of Wal-Mart Stores Inc (WMT.N), which is facing allegations that executives at its Mexican subsidiary paid off officials in that country to obtain building permits - actions that allowed the company to grow quickly in the local market.

Under the law, it is illegal to bribe foreign officials to obtain business. But there is an exception for "facilitation payments," also known as grease payments made to speed up routine government actions. Wal-Mart could theoretically argue that at least some of the alleged payments fall under that exception and therefore were not illegal under U.S. law.

No charges have been brought in connection with the case.

The New York Times reported on Saturday that the retailer's own investigators found a paper trail of hundreds of payments totaling more than $24 million but that company leaders essentially shut down the probe and failed to alert U.S. or Mexican law enforcement officials.

A Wal-Mart spokesman declined to comment on a possible defense. In a statement on Tuesday, the company said it has taken several actions in the last year to investigate the matter and strengthen the company's compliance with the FCPA. [ID:nL3E8FOA2L]

While broadly prohibiting bribery abroad, the FCPA makes an exception for grease payments, which are defined as payments made to facilitate or expedite "the performance of a routine government action."

When the act was passed in 1977, Congress was aware of a variety of payments that companies were making to foreign officials. The Securities and Exchange Commission had found that more than 300 U.S. companies had made improper foreign payments involving hundreds of millions of dollars. The payments, Congress concluded, were bad for business and hurt the image of the United States abroad.

The grease payment exception nodded to the reality that even though petty corruption is objectionable, given the somewhat limited resources of law enforcement, it would not be practical to target it.

But the exception can be open to interpretation. Because the risks of going to trial for a company are great, businesses typically seek to negotiate a settlement. That leaves the task of interpreting the FCPA to prosecutors, not a judge. It is the prosecutor who decides whether the alleged wrongdoing falls under the exemption, and in recent years, prosecutors have defined the exemption narrowly, according to defense lawyers.

STRATEGY SHIFT

Recognizing this development, companies have shifted their response to FCPA inquiries, said Alexandra Wrage, president of the anti-bribery resource association TRACE International Inc. "Companies are increasingly reluctant to head into the Department of Justice using a facilitating payment exception as a defense," Wrage said.

There have been at least two cases that have addressed the kinds of payments allowed under the FCPA, according to Michael Koehler, an FCPA scholar at Butler University and author of the FCPA Professor blog.

The best-known decision about what payments are allowed under the FCPA came from the New Orleans-based 5th U.S. Circuit Court of Appeals in 2004. The opinion did not address grease payments specifically, but considered rather what is necessary to show whether payments were made to obtain business.

In the case, two former American Rice Inc executives were accused of bribing Haitian officials with tens of thousands of dollars to reduce duties and taxes on the company's rice. To carry out the scheme, the defendants allegedly instructed subordinates to generate false business records and to deliver cash in sealed envelopes to the officials.

The lower court judge dismissed the indictment, finding that as a matter of law, the payments were not targeted by the FCPA because they were not used to obtain or retain business. If a case against Wal-Mart were to be filed, the company could make the same argument.

However, the argument did not fly in the 5th Circuit, which reversed the lower court in the American Rice case. The appeals court found that under certain circumstances, the bribes could be viewed as falling within the purview of the statute. After the case was sent back to the lower court, the two executives were convicted at trial.

In a 2002 case, two former executives at Baker Hughes Inc, an oilfield services company, successfully argued that bribes they allegedly authorized did not violate the FCPA. The executives had been charged with authorizing payments to Indonesian officials to reduce a tax assessment for an Indonesian company owned by Baker Hughes. But U.S. District Judge Kenneth Hoyt in Houston concluded that the payments did not violate the FCPA because they did not help Baker Hughes "obtain or retain business."

Wal-Mart could have a "very valid legal defense," according to Koehler. He said Wal-Mart could argue that the payments under scrutiny were grease payments and did not involve obtaining or retaining business from the government. The alleged payments for building permits were arguably for services that the company would get anyway.

"The purpose of the payments was to get licenses and permits faster," said Koehler.

But others disagree. Michael Volkov, a former federal prosecutor and FCPA expert, said that alleged payments in the Wal-Mart case were clearly not allowed under the statute, because the payments were used to influence the discretion of government officials and to gain a business advantage.

Making an argument that the payments were allowed under facilitating payments exception, he said, would be "like trying to take a boulder and fit into a hole the size of a pebble."

(Reporting by Andrew Longstreth in New York; editing by Matthew Lewis)

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Comments (2)
ev700abc wrote:
Seriously, we are still talking about bribery in Mexico? You need to find something interesting to write about. Mexican bribery, it’s not a crime, it’s a way of life!

Apr 25, 2012 7:47pm EDT  --  Report as abuse
BWBean wrote:
The existence of the FCPA’s facilitation payments defense is in jeopardy. The UK Bribery Act 2010 which has been in effect for only ten months explicitly provides there is no such “defense.”

This provision was included in the Bribery Act precisely to create leverage over US (and other) companies relying on this FCPA exception. You can be certain the UK Serious Fraud Office has already opened its own investigation of Walmart.

You should be aware that the New Orleans Fifth Circuit case you refer to (US v Kay) is the only such case in the 34+ year history of the FCPA. That decision was so clearly wrong that while it is the “law” in the Fifth Circuit, it is not the correct reading of the FCPA. The judges there split 2:2, but the two on appeal prevailed over the trial court judge and the dissenter on the Fifth Circuit.

Walmart will now spend tens of millions or more investigating their operations around the world. Many lawyers will get rich because of this. And Walmart will ultimately settle because of the cover up, assuming this part of the rumored stories is arguably accurate.

BWBean MSU Law

Apr 26, 2012 12:33pm EDT  --  Report as abuse
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