Wal-Mart and Payoffs in Mexico: Bribery or Extortion?
Jim Prevor’s Perishable Pundit, April 24, 2012
The New York Times came out with a front page article titled, Vast Mexico Bribery Case Hushed Up by Wal-Mart After Top Level Struggle. The article claims are specific, pointed and explosive:
In September 2005, a senior Wal-Mart lawyer received an alarming e-mail from a former executive at the company’s largest foreign subsidiary, Wal-Mart de Mexico. In the e-mail and follow-up conversations, the former executive described how Wal-Mart de Mexico had orchestrated a campaign of bribery to win market dominance. In its rush to build stores, he said, the company had paid bribes to obtain permits in virtually every corner of the country.
The former executive gave names, dates and bribe amounts. He knew so much, he explained, because for years he had been the lawyer in charge of obtaining construction permits for Wal-Mart de Mexico.
Wal-Mart dispatched investigators to Mexico City, and within days they unearthed evidence of widespread bribery. They found a paper trail of hundreds of suspect payments totaling more than $24 million. They also found documents showing that Wal-Mart de Mexico’s top executives not only knew about the payments, but had taken steps to conceal them from Wal-Mart’s headquarters in Bentonville, Ark. In a confidential report to his superiors, Wal-Mart’s lead investigator, a former F.B.I. special agent, summed up their initial findings this way: “There is reasonable suspicion to believe that Mexican and USA laws have been violated.”
The lead investigator recommended that Wal-Mart expand the investigation.
Instead, an examination by The New York Times found, Wal-Mart’s leaders shut it down.
Neither American nor Mexican law enforcement officials were notified. None of Wal-Mart de Mexico’s leaders were disciplined. Indeed, its chief executive, Eduardo Castro-Wright, identified by the former executive as the driving force behind years of bribery, was promoted to vice chairman of Wal-Mart in 2008. Until this article, the allegations and Wal-Mart’s investigation had never been publicly disclosed.
But The Times’s examination uncovered a prolonged struggle at the highest levels of Wal-Mart, a struggle that pitted the company’s much publicized commitment to the highest moral and ethical standards against its relentless pursuit of growth.
The specific allegations are that Wal-Mart’s Mexican subsidiary paid “fixers,” or as they are known in Mexico, “gestores” (prounced hes-TORE-ehs), to facilitate the granting of permits and other approvals necessary to build out Wal-Mart’s real estate network.
The use of gestores is common, and legal, in Mexico. The article makes reference to Mexicans hiring them to wait on lengthy lines to renew driver’s licenses and other such things. Put in a positive light, the job of the gestores is to know the system and the people and make things happen.
The allegation in this case is that the gestores, with Wal-Mart’s knowledge, went beyond friendly facilitation and paid bribes to officials to secure the needed permits.
In addition, Wal-Mart made substantial “donations” and “contributions” directly to various governmental agencies to facilitate permits being issued.
The payment to the gestores is shocking news only to those who have never had to do business in cultures where bribery is endemic — including Mexico. The payments direct to governments are shocking only to those who have never tried to develop real estate — even in the United States.
We can start with the caveat that in the US, we have the Foreign Corrupt Practices Act and that this precludes the paying of bribes. Under our system of government, this is the pronounced will of the people, and Wal-Mart and everyone else is obligated to follow the rules. Payments to government officials in Mexico are illegal under Mexican law — so making such payments carries risks, regardless of cultural norms.
In this case, the story goes on to allege that although the Mexican subsidiary tried to keep everything from Bentonville, when an unhappy former employee spoke out and the story reached Bentonville, top Wal-Mart executives did not respond with alacrity, trying to stop the behavior, did not arrange for an independent investigation, and did not report the matter to the authorities — this despite the specific recommendations of Wal-Mart’s internal legal team.
As is often the case, the cover-up is worse than the crime and if this report is all true, Wal-Mart may pay heavily for the failure of its top executives to act to ensure that the law was followed. Some of its executives may go to jail.
Now it is possible that nobody was actually bribed. Indeed, the basic defense that Wal-Mart de Mexico’s internal report came up with is that the gestore payments were all a scam. There are complicated allegations that the payments were made so certain employees could get a cut. Even if this is not true, it is possible that Wal-Mart dramatically overpaid these gestores because it assumed they would need to pay bribes, when, in actuality, they just bought their friends a cup of coffee to facilitate things.
Assuming, though, that the executives at Wal-Mart de Mexico knew what they were doing, the real policy question is whether criminalizing this kind of behavior actually makes sense.
It is important to note that these allegations — even if 100% true — do not imply that Wal-Mart paid bribes to persuade government officials to do illegal things. In other words, Wal-Mart didn’t try to get Mexico to block other retailers from opening stores or to conduct disruptive raids on competitors or deny competitors import permits.
The purpose of the payments was to facilitate the granting of permits to build stores and support facilities.
These payments may be illegal, and trying to hide them can result in misstating financials and raise other serious issues. Still, it would have been desirable if the Times had at least asked the question as to why Wal-Mart would spend millions and millions of dollars “facilitating” something that is supposedly available without such facilitation. Surely Wal-Mart as a corporation would rather not pay out these sums, and its people would rather avoid the risks inherent in bribery and cover-ups.
The answer, of course, is that government officials have it in their power to delay or reject permit requests. Mexico does not have a reliable and quick system for overturning such actions. In effect, said or unsaid, these bureaucrats and politicians are extorting money from Wal-Mart and many others. They are saying that they will prevent Wal-Mart from doing perfectly legal activities if Wal-Mart doesn’t ante up.
We experienced this first hand. Years ago, we used to export a fair amount of Mexican watermelons to Scandinavia. At the time there was a deal whereby Scandinavia allowed the duty-free import of watermelons provided one had a certificate — called a Generalized System of Preferences or GSP certificate — that established officially that the melons were grown in Mexico.
Although theoretically the certificate should have been easy to get — it just attested to origin — the reality was quite different. Some growers, despite valiant efforts, could never seem to get the certificates. Other growers seemed to have blank certificates in their desk drawer.
We never knew why, but we drew logical inferences from the situation.
If we really make companies, Wal-Mart and others, follow the rules for dealing with the Lawn & Garden Club when dealing in places that have very different expectations, we are unlikely to improve those places. We may, however, make American companies forfeit the business as others, better able to accommodate cultural expectations, get the business. Is that really what we are looking to accomplish?