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'Walmart' Puts Spotlight on Foreign Construction Compliance Risks

Authors: Robert A. Gallagher, R. Zachary Torres-Fowler and Anthony V. Finizio

8/16/2019
'Walmart' Puts Spotlight on Foreign Construction Compliance Risks

Reprinted with permission from the August 16, 2019 issue of The Legal Intelligencer. © 2019 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.

On June 20, the U.S. Department of Justice (DOJ) and Securities and Exchange Commission (SEC) announced the collective settlement of a longstanding investigation into U.S.-based retailer Walmart Inc. for violations of the Foreign Corrupt Practices Act (FCPA)—the U.S. anti-bribery statute that prohibits companies and individuals from bribing foreign government officials. Walmart, alongside its Brazilian subsidiary, collectively agreed to pay approximately $282 million in sanctions as a result of alleged FCPA violations associated with its operations in Mexico, Brazil, India and China.

While there are a number of nuanced issues raised by Walmart in the world of white-collar enforcement, for the construction industry, Walmart underscores the FCPA compliance risks associated with construction permitting and licensing in foreign jurisdictions.

Walmart is among the largest retailers in the United States and, since the 1990s, has actively sought to expand its operations abroad. Among the critical aspects of this effort was to ensure the company could quickly and efficiently construct retail outlets in foreign jurisdictions. During this international expansion, between approximately 2000 and 2011, the DOJ and SEC contended that Walmart violated the FCPA by failing to implement sufficient internal accounting controls aimed at detecting and preventing corrupt payments to foreign government officials.

In particular, the government alleged that Walmart’s foreign subsidiaries in Brazil, China, India and Mexico regularly utilized third-party intermediaries to procure permits and licenses despite numerous red flags and without reasonable assurances that the intermediaries would not use the funds they received from Walmart to bribe government officials. According to the DOJ and SEC, Walmart’s failure to implement appropriate internal controls allowed its foreign subsidiaries to expedite the construction and opening of certain store locations, and reap greater profits, through the use of improper payments.

Although Walmart concerns the company’s operations in four countries, the most relevant allegations concern Walmart’s alleged conduct in Brazil. In 2008, Walmart’s Brazilian subsidiary (Walmart Brazil) engaged a local Brazilian construction company to build eight Walmart stores. According to the enforcement agencies, Walmart Brazil did not, however, conduct any due diligence on the local construction company before engaging its services, even though some employees of the subsidiary were allegedly aware of the local construction company’s reputation for corruption. Later, the government claimed that Walmart Brazil elected to conduct a review of the local construction company’s practices; however, the local construction company failed a preliminary round of vendor due diligence as a result of “cases of corruption.” Notwithstanding this discovery, Walmart Brazil allegedly continued to use and pay the local construction company.

The DOJ and SEC also alleged that, beginning in December 2009, Walmart Brazil separately directed the local construction company to retain an “intermediary” to obtain operational licenses and permits. Walmart Brazil allegedly did so despite significant red flags concerning the intermediary, including evidence that the intermediary may have been a government employee, was not a business with a registered corporate form, and asked to be paid in cash after explaining that the money was for “people I have to pay.” Ultimately, according to the DOJ, Walmart Brazil paid at least $527,000 to the intermediary through the local construction company and falsely recorded the payments as construction-related expenses in its books and records. The enforcement agencies claimed that the intermediary was so effective at quickly obtaining the necessary licenses and permits that the intermediary earned the nickname “sorceress” or “genie” within Walmart Brazil.

Due to Walmart’s ineffective accounting and compliance controls, the DOJ and SEC alleged that both the local construction company and intermediary made improper payments to Brazilian government inspectors.

Takeaways for the Construction Industry

Accounting Violations

Among the FCPA’s least understood features is that, although the act of bribing a government official will violate the FCPA’s anti-bribery provisions, for publicly traded companies or any other entity with a class of securities that trades on U.S.-based exchanges, the failure to implement appropriate internal accounting controls or maintain accurate books and records will represent an independent violation of the statute.

Specifically, the “books-and-records provision” requires keeping “books, records and accounts, which, in reasonable detail, accurately and fairly reflect the transactions” of the company. Separately, the “internal controls provision” requires maintaining a system of internal accounting controls “sufficient to provide reasonable assurances” that transactions are recorded as necessary to permit accurate preparation of financial statements.

As exhibited in Walmart, enforcement agencies increasingly utilize these provisions to establish FCPA liability when they suspect—but may not be able to prove—that a company made an illicit payment. Despite the summary assertion that certain Walmart intermediaries bribed government inspectors, the DOJ and SEC declined to make the case that Walmart violated the anti-bribery provisions. Instead, the DOJ and SEC elected to accuse Walmart and Walmart Brazil of violating the FCPA’s books-and-records and internal controls provisions.

In its plea agreement, Walmart Brazil conceded that it “knowingly and willfully falsified and caused to be falsified certain Walmart books, records, and accounts” so that the records did not “accurately and fairly reflect the transactions and dispositions of Walmart’s assets.” Separately, the DOJ and SEC emphasized that the company’s inadequate compliance protocols and culture enabled the alleged improper payments to take place. In both instances, conclusive evidence of a bribe was not necessary to establish FCPA liability.

For publicly traded owners and contractors operating abroad, where the chief focus is building a project, the scope of the FCPA’s prohibitions may be misunderstood. While the DOJ and SEC do not commonly pursue FCPA enforcement actions when they do not believe bribery is afoot, owners and contractors must appreciate that the DOJ and SEC do not need proof of a quid pro quo transaction to enforce the statute.

Permitting, Inspection, Licensing Risks

The charges against Walmart are also significant to the construction industry because they underscore the risks associated with construction inspection, licensing and permitting processes in foreign jurisdictions and the need for international contractors to implement FCPA compliance programs to limit their exposure.

As nearly any contractor will recognize, permitting and licensing are critical milestones in most project timelines. However, as Walmart demonstrates, the temptation to accelerate the permitting and licensing process by way of improper payments to government officials can lead to significant FCPA penalties. Moreover, as other FCPA cases have demonstrated, foreign permitting and licensing procedures are ripe for abuse in certain jurisdictions where unscrupulous government officials can effectively hold companies hostage in exchange for kickbacks or bribes.

Recognizing that companies could be held hostage by low-level government officials, the FCPA maintains a limited exception for “facilitating or expediting payments” made in furtherance of routine governmental action. Under this exception, if a payment is required for a government official to perform a nondiscretionary act, such as visa processing, police protection, mail service, etc., the payment may not give rise to FCPA liability. However, this is a narrow exception that is, practically speaking, never utilized.

For one, it is only an exception to the FCPA’s anti-bribery provisions. Thus, in cases like Walmart, where the violations stemmed from the FCPA’s books-and-records and internal controls provisions, the facilitation payment exception is inapplicable. Moreover, the exception will not apply to actions that are at the discretion of a government official. So, for example, paying a government inspector to ignore the fact that a company does not have a valid permit is not deemed a facilitating or expediting payment under the statute.

As a result, while construction personnel may be tempted to make small payments to expedite permitting and ensure projects remain on time and under budget, doing so can give rise to FCPA liability and reliance on the FCPA’s facilitation payment exception may give firms a false sense of security. Accordingly, very few companies are willing to take their chances by relying on the facilitation payment exception and, instead, depend on robust compliance programs as their strongest defense.

Third-Party Risks

Finally, Walmart is a reminder that companies can be held liable for violating the FCPA even if the alleged misconduct was committed by a third party and that companies cannot remain willfully blind to the risks posed by certain intermediaries.

Indeed, the concept of “willful blindness” is precisely why the DOJ and SEC emphasized Walmart’s lack of accounting controls and the numerous red flags raised by the local construction company and intermediary. According to the enforcement agencies, Walmart had no ground to claim ignorance to the activities of these third parties because the company was aware of significant red flags and culpable for failing to implement controls sufficient to detect and prevent these improper activities and payments.

For owners or contractors operating abroad, where third-party suppliers, subcontractors and other entities are commonplace, the failure to adequately conduct due diligence into these entities could spell disaster. Parties operating in the construction sector outside the United States must, therefore, remain vigilant that their local partners comply with the FCPA.

Conclusion

Since the 2000s, the FCPA has become one of the most significant regulatory statutes for U.S. and foreign companies. Given the simultaneous growth of international construction contracting, firms with multinational operations are well-advised to keep abreast of developments in this field.

The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.

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