Most Recent Articles In Business Features
Latest Business Features Articles
- Bernard Arnault’s Business Lessons
- Fashion Revolution Day Set for April 24
- California Retailers Brace for Water Restrictions
More Articles By
Breaking into foreign countries is forcing companies to adapt on the go, raising legal issues and gray areas at almost every turn — and causing them to worry about running afoul of the U.S. Foreign Corrupt Practices Act. Proof of this came Tuesday when lawyers for Wal-Mart Stores Inc. in a global review identified Brazil, China, India and South Africa, in addition to Mexico, as countries that represent the highest risk of corruption. According to a letter from lawmakers investigating the company, Reps. Elijah Cummings (D., Md.) and Henry Waxman (D., Calif.), Wal-Mart asked its lawyers to expand the review to a worldwide assessment of the company’s anticorruption policies.
Wal-Mart already was investigating a scandal at Wal-Mart de Mexico in which the company allegedly paid $24 million in Mexican bribes and $16 million in “donations” to local Mexican governments dating as far back as 2005. The New York Times disclosed in April that an internal inquiry by Wal-Mart into the matter had been suppressed at corporate headquarters in Arkansas.
RELATED STORY: Wal-Mart Lawyers Recommend Extending Bribery Probe >>
Corruption — which often takes the form of bribes — range from $10 to $100 paid to customs agents at foreign ports to sums over $500,000. The most common amount is $101 to $1,000, and accounts for 30 percent of bribes paid, according to bribeline.org, which did a survey of bribery in China. The second most common amount is $1,001 to $5,000. The majority of bribe demands in China are for avoiding a harm or disadvantage, rather than gaining an advantage, or for services a person or business is already entitled to. About 20 percent of the bribes were in exchange for gaining new business. “The Chinese recognize it’s not good for business — the hard part is the sheer size of country,” said one expert. “The Central Communist Party is trying to stop it.”
In Saudi Arabia, the royal family is wealthy beyond belief, but that didn’t stop it from allegedly accepting hundreds of millions of dollars worth of goods and services from BAE Systems in exchange for massive arms deals worth billions. Rolls-Royces, summer vacations and chartered 747s were said to be lavished on Prince Turki bin Nasser and his family.
Exposure to risk for any company is high, said experts. The nongovernmental organization Transparency International monitors and publicizes corporate and political corruption in international development and publishes an annual Corruption Perceptions Index, which is a comparative listing of corruption worldwide. A country or territory’s score indicates the perceived level of public sector corruption on a scale of 0 to 10, where 0 means a country is perceived as highly corrupt and 10 means that a country is perceived as very clean. A score of less than 5 is considered significantly corrupt. The countries where Wal-Mart operates include: Mexico, with a score of 3; Brazil, 3.8; Tanzania, 3; Nigeria 2.4; Zambia, 3.3; Mozambique, 2.7; Argentina, 3; Nicaragua, 2.5; Honduras, 2.6; Guatemala, 2.7; Uganda, 4.1; India, 3.1; China 3.6; South Africa, 4.1; Argentina 3; El Salvador, 3.4; Costa Rica, 4.8, and Russia, 2.4, where Wal-Mart in 2010 closed an office, and where retail experts expect Wal-Mart to reconsider opening again.
“The culture of the country a company is operating in has to be taken into account as a risk assessment for business,” said John Burbidge-King, chief executive officer of Interchange Solutions, which helps companies to mitigate corruption risks so they can do ethical business in difficult export markets. “How do you deal with employees and bring them up to the standards of the home country? Singapore is a very strict country in terms of bribery. They have a very ethical culture in Singapore. Bribery is taken very seriously and is very clearly understood. In other countries, such as Mexico, the Philippines and India, bribery is seen as doing more of a favor.”
Bribery doesn’t have to involve large amounts of money or a high frequency of acts to attract the attention and harsh penalties of regulators such as the Department of Justice and the Securities and Exchange Commission. While it has not yet been determined whether Wal-Mart violated the FCPA, the company could spend tens of millions of dollars on its internal investigation, Burbidge-King said. Then there’s the bribes themselves. “It’s not just the fine, it’s the amount paid in bribes that shareholders are losing in the profit line,” said Burbidge-King. “I’ve seen companies pay 40 percent of their profits in bribes.”
Burbidge-King said companies doing business abroad must have knowledge of local ways and customs. “There’s a perception of what is a bribe and what is not a bribe,” he said. “By employing a lot of local citizens, Wal-Mart has imported some local habits and culture into the company. Once key executives are involved, you’re actually affecting the operations of the company. There will be lots of legal costs and the Department of Justice will be demanding documentation, e-mails — it will bring the company to its electronic knees. The impact of bribery has a very serious operating effect on a company with key people being pulled away.”
Alejandro Salas, regional director for the Americas for Transparency International, said, “More than talking about regions, you find corruption anywhere that institutions are weak and countries don’t have an adequate balance between parliament and judiciary. The more concentration you have in political institutions, the more corruption there is likely to be because there are no checks and balances. Corruption is not related to poverty or the economy of a country. No country is free of corruption.”
China is one of those nations that require companies to have an encyclopedic knowledge of how to maneuver the various rules, regulations and customs. Fashion industry executives describe as a matter of course paying landlords extra funds to get prime spots in malls, or passing a large leather handbag to an official as a gift — with the bag filled with money above what is required for a permit or lease.
“Bribery is clearly an issue in China, as it is in many developing countries in Asia and other parts of the world,” said Harvey Packham, director of global forensic and dispute services at independent global professional services company and turnaround expert Alvarez & Marsal. “It would be difficult to argue that commercial bribery is not widespread in Asia. It can touch any aspect of business where there is interaction with government agencies and also local companies, including in procurement. Kickbacks, ‘facilitation payments,’ ‘commissions,’ etc., are commonly encountered in many Asian countries in both the public and private sectors.”
Commercial bribery in Asia is often not recognized as such by natives who consider the payoffs part of the ordinary course of doing businesses. “The fact is, some of these practices such as ‘facilitation payments/grease payments’ have been and sometimes still are an accepted business practice in the developing world, not just Asia,” Packham said. “In Korea, for example, lavish entertainment at karaoke bars is often considered a part of doing business.”
In China, it’s often hard to discern who legitimately works for the government and who doesn’t. So called “government officials” often solicit the bribes. “Establishing that a company is owned by the government is difficult because an ownership stake is not always required, making it difficult to know who is and who isn’t a government official in China,” Packham said.
Another major BRIC country, Brazil, has a booming middle class with strong purchasing power, a sophisticated and highly educated society, quickly expanding markets and headline events such as the World Cup in 2014 and the Olympics in 2016, that make it susceptible to corruption. “It creates conditions where you have a dramatic increase in investment and officials seeking to take advantage of that,” said Matt Ellis of Matteson Ellis Law, a boutique anticorruption law firm. “Generally what we’re seeing in Brazil is highly complex forms of bribery. You have schemes involving multiple actors and bidding processes that have been rigged and planned over years.”
Retailers and clothing manufacturers face bribery risks from customs agents at Brazilian ports such as São João da Barra, Santos and Rio de Janeiro. “Companies should train their employees on the policies, procedures and controls of compliance,” Ellis said. “For example, they should know what they can and can’t pay. In Brazil, most of the FCPA action is related to third parties. U.S. companies are liable for indirect parties. Any company doing business in Brazil should have a compliance program in place.”
Corruption is also rampant around permit issuance for new stores. “Latin America has a particularly high regulatory burden so that creates an opportunity for officials to ask for bribes to speed up the approvals and zoning processes,” Ellis said.
India is notorious for construction delays and delays in getting permits, frustrating foreign executives and Indians trying to do business in the country.
India represents equal challenges in terms of corruption. According to Gibson Dunn, a survey of all Indians with contact with government agencies found that 45 percent paid bribes to members of the judiciary, 64 percent paid bribes to members of the police, 61 percent paid bribes to get registry and permit services, and 62 percent paid bribes to officials in connection with buying, selling or renting land. According to law firm Pepper Hamilton, the most frequent bribe requests come from police, customs, tax, water and land record officials.
Companies doing business in India would do well to learn the local etiquette, referring to men as “Mr.” and women as “Miss” and never refusing any food and drink that’s offered. Causes of corruption include cumbersome administrative procedures, lack of punishment for offenders, and the social acceptance of bribery, nepotism and favoritism. With the Indian economy predicted to outgrow that of China by 2050, according to Gibson Dunn, the country will attract more foreign investment. The economy is expected to grow 7 percent in 2012.
Then there is Mexico, where companies from Wal-Mart to Levi Strauss & Co. have done business for decades. “The development culture in Mexico is based on a culture of bureaucracy,” said Patrick Fox, president of Saint Consulting Group. “This is a country where anyone who wants to build is going to have to pay people off. If you want to expand in countries where everything is done with bribes and back-scratching, the only way to do that is to cut through the bureaucracy with payoffs,” Fox said. “Wal-Mart undertook an aggressive expansion effort in Mexico. Wal-Mart’s entire business model is predicated on growth. If it can’t grow, it can’t maintain its stock price. Sam Walton used to go up in his helicopter and look for open spaces where he could build stores. Open spaces don’t exist [in the U.S.] anymore. Wal-Mart has no choice but to make it [international] work.”
Patrick Kelkar, a partner in James Mintz Group Inc., an investigative services firm that gathers hidden business facts for corporations, said, “Companies handle [corruption] in different ways. It depends on the level of transparency of the company. Mostly, the problem is getting companies to take the law seriously and spend the resources and take the time to comply with the law and look at who they’re doing business with.”
Wal-Mart’s cheap and fast culture, which applies relentless pressure on vendors to deliver products at ever-lower prices and Wall Street’s relentless drive for faster growth, could influence employees to cross the line. “Where does an aggressive culture to make the bottom line and increase profits become a culture that passively encourages corruption or inappropriate bookkeeping and fraudulent statements?” asked Kevin Abikoff, a partner at Hubbard & Hubbard who specializes in anticorruption investigations, due diligence and counseling. “It’s a fine line. We all want to invest in companies that are aggressive in cost cutting, but you have to be aggressive within the law.”
Mexico represents a success story for Wal-Mart International. Its first international operation in 1991, Mexico today is one of the retailer’s largest global markets with 2,088 doors and sales of just more than 379 billion pesos, or $29 billion, last year. Wal-Mart operates more than 5,600 retail units outside the U.S. In fiscal year 2012, Wal-Mart International’s net sales exceeded $125 billion.
While Wal-Mart claims it doesn’t fully know what happened in Mexico, Salas of Transparency International, said the Wal-Mart case shows the weakening of cultural and political institutions. “Most of what we’ve seen in terms of accusations of corruption have been related to mid- or lower-level public servants in Mexican municipalities,” he said. “They regulate the use of the land. It’s not done at the federal level of government, but by some middle level public servants. Wal-Mart de Mexico was promoting this in a very systemic way. It was kind of a way of doing business, no matter where they were operating.”
The Mexican government has begun investigations into the retailer’s dealings with local officials.
The scope of the damage to Wal-Mart will depend on whether the investigation determines that the alleged corruption was an isolated incident by a rogue employee, or a systematic failure of a corrupt culture or a culture that didn’t have the proper controls in place, Abikoff said. “Something off happened in Mexico,” he said. “People didn’t pay enough attention to it at the outset when it should have been looked at and taken seriously.”