The Daily Caller

The Daily Caller

Yankee business go home: FCPA moralism sends a punitive message

Photo of Walter Olson
Walter Olson
Senior Fellow, Cato Institute

Are you deeply shocked to learn that getting the permits to build up a huge chain of Mexican superstores almost overnight might require paying off many local officials? You can hardly be as shocked as The New York Times, which over the weekend broke a front-page investigation of how WalMex, Wal-Mart’s Mexican subsidiary, cleared the way for its legendarily successful expansion by funneling $24 million in payments through local fix-it guys called gestores — widely used by businesses in that country to facilitate business dealings with governments — and that much of that money wound up in the hands of local officials.

Making matters worse, when it learned of the payments, parent corporation Wal-Mart of Bentonville, Ark., seems to have stifled an internal investigation in hopes the whole thing would stay under the rug. Now, under the famously tough Foreign Corrupt Practices Act (FCPA), the company’s legal exposure for the cover-up may go far beyond fines premised on the bribes themselves.

It’s a big story. The controversy is likely to weaken the largest U.S. retailer for some time and perhaps slow its expansion — and the expansion of other big U.S. companies also subject to the FCPA — into developing-country markets where local corruption is routine. (In Mexico, the official “mordida” — literally, “bite” — extracted for permission to do business is something of a national institution.)

But the WalMex story is also more complicated as a legal matter than you might guess from the tone of the Times piece. Consider the law’s handling of “facilitating payments.” FCPA’s legislative authors took pains to distinguish between relatively big, national-level examples of corruption in areas like public contracting, of the sort that might rattle American foreign policy relations, and “grease payments” or baksheesh whose effect is to induce minor officials to give faster approval to requests that they are eventually supposed to approve anyway, such as the token of favor to a customs official who will not clear a perishable shipment otherwise. The law bans the former but has been understood to leave the latter lawful, even if at times such payments are reprehensible. Part of the federal government’s more aggressive approach in enforcing FCPA in recent years has been its push to apply liability to more permit-speeding and mordida-type situations.

Wal-Mart’s expansion south of the border has been widely hailed as one of the great American business success stories of the past decade, immensely beneficial to everyday Mexican consumers and to the overall modernization of that country’s economy, and not incidentally a boon to Americans on many levels, including the pension and mutual funds that invest heavily in the Arkansas company’s stock (and which were among the losers when the revelations destroyed $12 billion of its market value on Monday). But WalMex’s very success could now imperil the company’s interests, if the Department of Justice chooses to invoke something called the Alternative Fines Act, which provides that companies can be made to pay to the U.S. Treasury double the benefits obtained by specified law-breaking. After all, the benefits of WalMex’s rapid growth have been gigantic. Had it high-mindedly told the gestores and their friends to buzz off and refused to authorize a single peso’s expenditure that might wind up enriching a local official, the firm might now be puttering about with a tiny market share and insignificant presence in the world’s 13th-largest economy. Instead it’s a major asset to our economy and to Mexico’s. So maybe Bentonville should be made to pay twice its value — at least such is the act’s logic.

Why the fines should be paid to the U.S. Treasury — which was surely not the victim of the Mexican bribe-paying, if victims there were — is another story. Were the law’s aim really to coax regulated parties into disclosure and remediation, you’d expect more use of devices like amnesties and grace periods geared toward bringing past messes out from under the rug, as happens widely in the field of tax compliance.

Instead, it’s almost as if Washington wants to set up the nation’s most successful international businesses to fail.

Walter Olson is senior fellow at the Cato Institute and has written frequently on FCPA.