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Tuesday, January 15, 2013

The Inside Story: Walmart and the shadow of corruption

Walmart is investigating its Indian joint venture for possible violations of the US anti-corruption law it is governed by. ET narrates the inside story of how things came to pass in India for the world's largest retailer

When Walmart dispatched Greta Jacobs to India in April 2011, the staff at the Bharti Walmart office in Gurgaon assumed her to be one of the usual legion of visitors from the retailer's global operations. However, the assignment Jacobs undertook over the weeks had far-reaching consequences on Walmart's India operations, including a substantial overhaul of the way it operated.

Jacobs, the Mexico City-based assistant director for compliance and legal risks for Walmart Mexico, spent the next four summer months trying to understand the functioning of the 50:50 joint venture between Walmart and Bharti Enterprises in India. She quizzed employees, suppliers and intermediaries, and did spot checks. She stayed at the Marriott Courtyard Hotel in Gurgaon, a stone's throw from Bharti Walmart's India office, and took breaks to travel to Agra, Goa and Jaipur.

A team of four Walmart executives promptly followed Jacobs. For about a week, they repeated the drill at Bharti Walmart. Both Jacobs and the subsequent team flagged one disturbing observation about Bharti Walmart's employees and the entities they dealt with: their knowledge and compliance of an American anti-corruption law that Walmart is governed by needed to be looked into.

Prominent among those entities were 24 small-to-medium 'consultants' Bharti Walmart used to obtain the licences required to operate retail stores in India. Today, several of those dealings are at the centre of a company investigation on whether money changed hands in a way that violated the US Foreign Corrupt Practices Act (FCPA), which prohibits American corporations and citizens from bribing government officials wherever they operate or reside.

This is the inside story of how things came to a pass in Walmart's fledgling Indian operations: where it is conducting a full-blown internal investigation, where it has suspended five officials while the probe is on, where it has stopped dealing with the 24 'consultants' and where it has put its expansion on hold. The India story is based on interviews with three people with direct knowledge of the situation. They asked not to be named due to the sensitivity of the matter.

ET corroborated their narration with Walmart's consultants, suppliers and vendors, who too declined to speak on record for similar reasons. This is how it all unravelled in Walmart India, which is best understood by first examining what is alleged to have happened in Walmart Mexico.

India Fallout

In April 2012, the New York Times reported that Walmart Mexico allegedly spent millions of dollars bribing local government officials to, among other things, change zoning maps, reduce environmental impact fees, secure the allegiance of neighbourhood leaders and expand faster in the lucrative country. The world's largest retailer, with revenues of $444 billion in 2012, is now facing legal action in the US and Mexico, and also shareholder lawsuits.

Mexico Mess

Mexico is Walmart's largest foreign subsidiary, accounting for about one-fifth of its 10,000 stores globally, employing 209,000 people and earning about $6.5 billion in profit in 2011. Between 2008 and 2012, Walmart Mexico doubled its store count to cross 2,000. NYT, which first reported corruption in Walmart Mexico in April 2012 , was scathing of the company's governance in a subsequent report dated December 17.

It said: "...Wal-Mart de Mexico was not the reluctant victim of a corrupt culture that insisted on bribes as the cost of doing was an aggressive and creative corrupter, offering large payoffs to get what the law otherwise prohibited..." Robert Carroll, an analyst at UBS, estimates in a report that Walmart might have to pay a fine of $4.5 billion to $9 billion if its alleged indiscretions in Mexico are proved. He cites previous regulatory actions where defaulting companies paid 1-2 per cent of their annual revenues, led by the $1.6 billion paid by Siemens.
Source : The Economic Times, 15 Jan, 2013

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