Bharti Walmart India – Internal FCPA Investigation – Part I

Walmart after the Mexico US Foreign Corrupt Practices Act investigation identified India operations as a high risk. It commenced an internal investigation with the help of KPMG India and law firm Greenberg Traurig. Recently CFO and five officers of legal team were suspended. The legal team’s job entailed procuring licenses required for stores and other real estate approvals, taxation etc. Bharti Walmart has opened 18 stores till date. Hence, the suspicion is that these officers paid bribes to get the licenses.

According to the Economic Times article, multiple government permissions are required from the government. The Retail Association of India lists 51 different approvals from 32 different agencies. Seeing the corruption index of India and the way government departments’ function, I would be very surprised if an organization manages to obtain all the relevant licenses without any grease payments. Hence, the question is how will the organizations manage to function without paying bribes?

1.      Dubious Dealings

Considering the huge operations of Bharti group, I would be very surprised if the bribes were paid without senior management approval. Most of the liaisons work has senior managers’ tacit or explicit approval. Therefore, is it right to suspend some after obtaining licenses. What happens in such a case to the license? Will the license be revoked, cancelled, or returned? If not, what is stopping the organizations from first taking the licenses by paying bribes and then doing a clean-up exercise to show their commitment to ethics?

2.      Joint Venture Liabilities

The second issue that crops up is the working of the joint venture in such circumstances.  Let us assume the investigation reveals bribes were paid. In such a situation, will Bharti group be expected to pay back the bribe money? Secondly, if the US authorities under a civil case fine Walmart for FCPA contravention, will Bharti be expected to pay the fine. Seeing the trend the fine could be huge and would wipe out profitability of the company. Moreover, US Department of Justice can pursue criminal liabilities. Then will the Indian officers be implicated for the same.

3.      Foreign Direct Investment (FDI) in Retail Industry

The government has recently allowed FDI in retail industry. The challenge is that in India, most of the retail operations operate by paying bribes at different levels. Hence, a foreign investor will not get a level playing field as the anti-corruption laws of their country bind them. The situation is serious. For instance, the next stage after obtaining licenses would require importing goods.  The FCPA strictly prohibits paying bribes to custom officers whereas in India this is a common business practice. Can an organization wait for months to get its stock cleared by the custom officers? Now the foreign investors will analyse the reward versus risk scenario of their business plans for investing in retail industry in India.

Closing Thoughts

The case opens up interesting aspects of risks of doing business in India. Corruption poses serious obstacles in doing fair business dealings. The FCPA and laws of various countries strictly prohibit paying bribes to foreign officials. The US government has followed some stringent measures against companies contravening the laws. Under such circumstances will the joint ventures between foreign investors and Indian counterparts work?  India cannot change overnight, so what is the solution? Share your thoughts with me on this.

References:

Bharti Walmart suspends CFO, legal team due to FCPA bribery probe

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16 comments on “Bharti Walmart India – Internal FCPA Investigation – Part I

  1. Nice post. The reality is even for an Indian to take his house furniture from Thane to Mumbai as he/she is shifting apartments have to give bribe to the customs officers at the checkpost. How can we expect to run any business without bribes in such countries. The pressure should be closing possibilities of the taken than the giver.

  2. I would like to share a bit of what I know. US govt faced embarrassment when it was proved that Lockheed secured airplane orders after bribing government officials. They passed a law whereby if corruption is proved, the CEO of US Corp subsidiary will be arrested when he enters the US. Soon the US corporations found it difficult to implement requiring amendments whereby, if bribes were made that did not influence decisions, such bribes were exempted, as explained with an example. If a US national (with valid VISA and travel documents) is refused entry in a country and the immigration requires a tip/bribe, such amount is permissible under the US law. The bribe was paid to avoid harassment and not intended to influence the decision of immigration as he had required VISA and valid travel documents. Let us wait for the outcome of Walmart India investigation

    • Ramamuthy,

      Agree that the FCPA differs in bribes in grease payments. However, in case of obtaining licenses it will be difficult to prove that these are grease payments and not bribes. Reason is at a practical level in most licenses the organization is asking for some exemptions and favors. Hence, it will be easy to prove corrupt intent for facilitate business.

      Sonia

      • I am reasonably certain that Walmart would have filed all required documents and completed paperwork. Once it is done, Walmart will argue that it is entitled to get licenses, permissions, etc. etc. Accordingly all the payments (regardless of the quantum) will be construed as grease payments. What we consider as bribe in our country will be treated as grease payments under US laws. No wonder, everyone will be off the hook.

      • Ramamurthy,

        In normal course I would tend to agree with you. But Walmart has suspended the CFO and legal team, so I am assuming there is something serious. On grease payments, they wouldn’t do so. What do you say?

        Secondly, grease payments are subject to size limits paid in the normal course of business. Huge amounts generally aren’t considered as grease payments.

        Sonia

      • Don’t know how they are accounted in the books. Generally all such payments are routed through suppliers who will have black money. As of now, the nature of transactions haven’t come out. Tax department will certainly ask for the names of recipients for collecting tax. Sooner or later, the names will come out through our inquisitive media. We have to wait & see.

  3. Great article Sonia, and perfectly describing the dilemma faced with doing business in India by foreign companies who are bound to FCPA, or UK Bribery act regulations. Also the dilemma from the innovation / improvement side for India / Indian companies in order to buy goods from abroad or attract foreign investment. There will not be an easy solution to my view, probably having movements and clarity from both sides to make things move…..

    • Thanks Marcel. Agree with you that it is complex problem with no easy solutions. Will take some time to resolve and government will have to take some clear initiatives to reduce the corruption level in the retail industry.

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