NEW DELHI–Wal-Mart Stores Inc.’s disclosure Thursday that India is among the countries where it is conducting inquiries into possible violations of the U.S. Foreign Corrupt Practices Act comes at a sensitive time for the U.S. retailer. Its planned expansion in India is already a controversial issue.
Wal-Mart operates a wholesale joint-venture in India with Bharti Enterprises Ltd. and has said it plans to open retail stores within two years, following the government’s September decision to relax foreign investment regulations in the sector to permit supermarkets.
But there’s still intense political opposition to allowing in foreign retailers. Critics fear they will snatch business away from the country’s 12 million small-time shopkeepers.
Legal experts say Wal-Mart’s internal probe of possible corrupt activities in India could give those opponents more ammunition to try to slow down or derail the entry of foreign companies, potentially compromising the market entry plans of Wal-Mart and other international supermarkets.
“The retail debate is still heated – there isn’t a political consensus on it,” said C. Raj Kumar, dean of the Jindal Global Law School outside New Delhi and author of a book called Corruption and Human Rights in India. “Clearly, this kind of information coming into the public domain won’t go unnoticed.”
In a statement emailed by Wal-Mart India spokeswoman Arti Singh in response to written questions, the company said it takes “very seriously” compliance with the FCPA, a U.S. law that bars American firms from bribing foreign government officials to obtain or retain business. “We will not tolerate noncompliance anywhere or at any level of the company. Our expectation is that each and every one of our associates will adhere not only to the letter of the law, but also to the highest standards of personal integrity,” the statement said.
Wal-Mart declined to comment on the nature of the India inquiry, the specific allegations being probed, or whether Wal-Mart had notified anyone in the Indian government about the inquiry prior to the government’s recent decision to change its foreign investment policies in September.
“As these matters are currently under review, it would be inappropriate for us to comment further on the specific allegations until we have concluded the investigations,” the statement said.
Ms. Singh said the India inquiry Wal-Mart disclosed on Thursday is unrelated to allegations by a member of Parliament that Wal-Mart improperly funneled money into supermarkets in India even while regulations only allowed investments in wholesale businesses. The Finance Ministry’s enforcement wing has been asked to investigate those claims. Wal-Mart has said it complies with India’s foreign investment rules.
The Wal-Mart statement also said the company remains excited about growing its business “in one of the world’s most vibrant economies” and praised the Indian government’s decision to allow 51% foreign direct investment in supermarkets as “an important first step for the Government of India to further open this sector and strengthen the Indian economy. We are committed to complying with all laws and regulations and are in the process of implementing a number of specific, concrete actions to strengthen our compliance program in India.”
In its disclosure Thursday in a regulatory filing, Wal-Mart said internal inquiries or investigations regarding allegations of potential FCPA violations had begun in countries including, but not limited to, Brazil, China and India. The company was already probing allegations of corruption in its Mexican unit and said it is cooperating with Mexican authorities in their investigations. Wal-Mart is also under investigation by the U.S. Justice Department and the Securities and Exchange Commission.
Anand Dayal, a New Delhi-based lawyer who is chairman of the anti-corruption committee of the American Chamber of Commerce in India, said many U.S. firms struggle with how to deal with India’s endemic corruption. It’s a huge legal risk, he says, and a barrier to entering the market.
“To be able to get business and keep it and fulfill your contractual obligations becomes a big challenge if you’re operating in an environment as corrupt as India,” Mr. Dayal told India Real Time.
Under the FCPA, companies can be liable even if bribes are paid by intermediaries such as consultants or venture partners, assuming the company demonstrated “willful blindness” to the illegal activity, Mr. Dayal said.
“If you buried your head in the sand, then you’re still liable for the conduct of the intermediary,” he said. “You have a certain duty to investigate – if you fail to do that, you’re on the hook.”
Mr. Dayal said Wal-Mart may be required under Indian law to disclose to local authorities if its inquiry winds up uncovering actual wrongdoing such as bribery by its officials or partners. That, he said, “could be very damaging in terms of their ability to enter the market.”
In its regulatory disclosure, Wal-Mart said it can’t predict the impact of corruption investigations in various countries or related shareholder lawsuits: “Although the Company does not presently believe that these matters will have a material adverse effect on its business, given the inherent uncertainties in such situations, the Company can provide no assurance that these matters will not be material to its business in the future.”