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Wal-Mart Bribery Issues in Mexico Intensify

Allegations of bribery in Mexico continue in an increasingly hot spotlight.

The exterior of a Wal-Mart store in Mexico City, Mexico.

Next year could be shaping up as a tough one for Wal-Mart Stores Inc.

The $443 billion retail giant is fighting scandals on several fronts. Allegations of bribery in Mexico continue in an increasingly hot spotlight. The company has also been associated with the Bangladesh factory fire that killed 112 garment workers, although the retailer said a supplier subcontracted work to the factory without its authorization. Wal-Mart has also been facing protests and rallies by employees. The company said the United Food and Commercial Workers International Union is responsible for organizing the actions and filed an unfair labor charge with the National Labor Relations Board to stop what it said are unlawful efforts to disrupt its business.

One of the most potentially damaging issues Wal-Mart faces is the ongoing investigation in global markets, with Mexico taking center stage. An exhaustive front-page story in Tuesday’s New York Times — spread over three full pages inside — detailed how Wal-Mart used payoffs to get what it wanted in Teotihuacán.

Attorneys specializing in the Foreign Corporate Practices Act said there’s likely to be a “fall guy” for this scandal, either in the international division or at the corporate level. “The prosecutors recognize that companies are artificial creatures and operate through people,” said Kevin Abikoff, a partner at Hughes Hubbard & Reed. “How high up did this go? Was there encouragement within the international group or was it rogue employees? As they dig into the details, it’s not impossible that particular individuals will be found to be engaged in egregious conduct. This is very serious.”

“Today’s story really drilled down into the specifics of the actual bribery allegations,” said Tom Fox, an attorney specializing in the Foreign Corruption Practices Act, ethics and compliance. “It’s a level of detail we have not seen before.”

“In 2005 and 2006, there was not a strong internal culture of compliance at Wal-Mart,” said Matt Ellis, founder of Matteson Ellis Law. “Enforcement officials at the Department of Justice and the Securities and Exchange Commission are very clear that programs have to be implemented to have an effect. No one was paying attention at Wal-Mart. Or worse, when there was inkling of wrongdoing, it was ignored and squashed. At that time, there was little or no internal ethics culture.”

A sense of urgency and aggressiveness is pervasive in other areas of Wal-Mart’s business. The retailer has complained about the pace of foreign development, and there can be a lot of bureaucracy in high-risk countries. But its impatience can also be seen in its approach to opening new stores in the U.S. Wal-Mart has funded ballot initiatives to change regulations that are unfavorable and when it comes to manufacturing, it’s mantra is fast and cheap.

“A lot of it is the competitive marketplace,” said Ellis. “Wal-Mart’s strategy in Mexico was to be the large big-box retailer and build stores quicker than anyone else. One strategy was to pay bribes to give Wal-Mart better advantage,” Ellis contended. “That expanded to include India and Brazil, where a similar strategy could have been implemented.”

“There’s a fine line between justifiable aggressive business practices and conduct that’s so aggressive that it strays across the line,” Abikoff said. “The core issue is the tone at the top. If the government believes the conduct is a direct result of the tone at the top set by senior management, it will be more inclined to harsh sanctions. Any system of compliance can be circumvented by a rogue employee. Where it’s rampant, it’s highly suggestive of a system that’s fundamentally flawed.”

Wal-Mart will now likely have to deal with its tarnished reputation. “This has been a very tough year for them,” said Daniel Diermeier, a professor of international business and markets at Northwestern’s Kellogg School of Management. “It seems like there has to be some housecleaning. From a point of leadership and the board, this is not anything that’s good for the brand and the reputation of the company. It’s reignited anti-Wal-Mart sentiment.”

The investigation, according to Fox, could take another year or two before moving on to the negotiation stage. All in all, the case could take four to five years to settle. “It’s the size, nature and complexity of the company,” he said. “Wal-Mart is polarizing,” he added. “You love ’em or hate ’em.”