In 2012, the New York Times reported that Walmart routinely bribed public officials in Mexico to speed its expansion into that country. Executives at Walmart’s headquarters learned of this activity in 2005, but subsequently shut down an internal investigation in spite of a wealth of evidence that illicit and illegal payments had been made. Walmart did not report these alleged violations of the Foreign Corrupt Practices Act (FCPA) until November 2011, unleashing investor lawsuits and U.S. investigations into its operations. In the wake of these revelations, at least eight of Walmart’s executives in Mexico, India and Arkansas have left the company. Internally, Walmart has responded to a Department of Justice request to improve its internal controls and compliance programs by increasing its compliance staff by more than 30 percent. To date, Walmart has spent more than $430 million on investigations and its compliance program.
The U.S. FCPA includes both anti-bribery and accounting provisions. The anti-bribery provisions make it a crime for American corporations or their subsidiaries to bribe foreign officials to obtain or retain business. The accounting provisions require U.S. and foreign public companies listed on U.S. stock exchanges or which are required to file reports with the Securities and Exchange Commission to keep accurate books and records and to maintain an adequate system of internal accounting controls. Additionally, the accounting provisions prohibit individuals and businesses from knowingly falsifying books and records or knowingly circumventing or implementing a system of internal controls.[1]
What constitutes a bribe under the FCPA? Any offer to pay, paying, promising to pay or authorizing the payment of money or anything of value to a foreign official in order to influence any act or decision of the foreign official in his or her official capacity or to secure any other improper advantage in order to obtain or retain business.[2] Examples of red flags of bribery include[3]:
- Influencing the purchasing process
- Gaining non-public information for bids
- Evading customs duties on imported goods
- Commission payments requested for carrying out normal work
- Invoices inflated in value after a contract is won
- Requests for foreign travel including family members
- Request for funds to be transferred to a third-party account or to a different country
- Exorbitant gifts such as cars, tickets to various entertainment events, etc., that are asked to be given indirectly to associated individuals
- Expense reimbursement forms and/or petty cash with insufficient documentation
- Any commission (i.e., paid to an agent) greater than 15 percent
Not only does one need to be aware of such red flags, one must also keep in mind the following:
- What resources are allocated to performing FCPA due diligence?
- What is the tone at the top like?
- How are risks examined at the vendor/agent/third-party level?
- Does the company have a well-communicated anti-corruption policy, especially when dealing with high-risk countries?
- Has the company recently merged or is it in the process of merging with a company that does business internationally?
Bribes are often mischaracterized in a company’s books and records. The accounting provision of the FCPA prohibits companies from concealing such payments and as such a company may be liable if the improper payments are inaccurately recorded. Bribes are often concealed in a company’s books and records as the following:
- Vague descriptions for payments
- Miscellaneous accounts that are used to hide improper payments
- Unrecorded accounts or transactions
- Improper payments characterized as commissions
- Improper payments characterized as consulting fees
- Improper use of travel and entertainment expense account
- Rebates/discounts
- Intercompany accounts
- Write-offs
Data analysis can and should often be used to detect bribery. Examples of testing and monitoring that can be done include the following:
- Identifying transactions that involve descriptions such as “gift,” “services rendered” or “cash.”
- Identify transactions or payments to entities and/or individuals in high-risk countries.
- Identify individuals with a specified number of round dollar or even dollar expense reimbursements above a specific amount.
- Compare invoice amounts (or amounts paid) to purchase order amounts.
- Test high-risk activities such as payments to agents and high-risk vendors or travel and entertainment expenses involving government officials.
The failure to prevent and detect bribery can result in enormous penalties, reputational damage and prison time. It’s important for an organization to have an anti-corruption risk assessment, internal controls for high-risk activities and ongoing transaction data monitoring.
Companies have an obligation to investigate potential red flags of bribery by conducting their own investigation or hiring an independent third party such as a forensic accountant. Forensic accountants can assist with conducting interviews, transactions records testing and electronic data review with the goal of identifying outliers and potential corruption red flags.
Our business environment is constantly changing and so must our due diligence processes. The consequences for not doing so for both companies and key executives are potentially severe as can be seen with the recent scandals involving Walmart, Petrobras, FIFA and HSBC Holdings Plc.
[1] A Resource Guide to the U.S. Foreign Corrupt Practices Act.
[2] A Resource Guide to the U.S. Foreign Corrupt Practices Act.
[3] See also 2013 ACFE European Fraud Conference: Corruption Risk Assessments: Red Flags for Effective Risk Analysis
