A major article from the New York Times Sunday accuses Walmart of substantial bribery activities in Mexico in the early and mid-2000s, but the real danger for the world’s largest retailer and some of its current executives may be alleged cover-up activities.

Many believe the allegations – released by the Times after months of investigation by its reporters and published under the headline of “Vast Mexican Bribery Case Hushed-Up by Walmart after Top-Level Struggle," could have a powerful negative impact on the company, or at least some of its most senior executive.

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At the heart of the report is the allegation that Walmart was using bribes as it entered the Mexicanmarket to hurry along the permit process all over the country in order to rapidly construct hundreds of new stores.

The Times further says that in 2005, a lawyer working for Walmart Mexico had detailed to Walmart corporate executives in Bentonville, AR, where and how these payments to officials were made – and the lawyer said he knew because he was personally in charge of obtaining the needed construction permits.

After having email and phone conversations with the lawyer, “Walmart dispatched investigators to Mexico City, and within days they unearthed evidence of widespread bribery,” the Times article says. “They found a paper trail of hundreds of suspect payments totaling more than $24 million. They also found documents showing that Walmart de Mexico’s top executives not only knew about the payments, but had taken steps to conceal them from Walmart’s headquarters.”

The lead investigator soon told company executives that there reasonable suspicion to believe that Mexican and USA laws have been violated recommended that Walmart expand the investigation.

“Instead, an examination by The New York Times found, Walmart’s leaders shut it down,” the paper reports.

“Neither American nor Mexican law enforcement officials were notified. None of Walmart de Mexico’s leaders were disciplined. Indeed, its chief executive, Eduardo Castro-Wright, identified by the former executive as the driving force behind years of bribery, was promoted to vice chairman of Walmart in 2008,” the article continues. “Until this article, the allegations and Walmart’s investigation had never been publicly disclosed.”

The Times further says its investigation discovered a prolonged struggle at the highest levels of Walmart between the company’s very public commitments to the highest moral and ethical standards against its relentless pursuit of growth

The struggle went all the way to the top. The Times says Lee Scott, CEO at the time, and notable for leading Walmart’s aggressive charge into Sustainability, is said to have criticized initial investigators for being overly aggressive in their research. A short time later, Walmart’s top lawyer arranged to ship the internal investigators’ files on the case to Mexico City, and transferred primary responsibility for the investigation to the general counsel of Walmart de Mexico, even though the same general counsel was alleged to have authorized bribes!

And perhaps not surprisingly, that same general counsel a short time later issued his own report exonerating Walmart executives in Mexico.

“The wisdom of assigning any investigative role to management of the business unit being investigated escapes me,” Maritza Munich, then general counsel of Walmart International, wrote in an e-mail to top Walmart executives at the time.

Other Walmart executives were in the know. Michael Duke, successor to Scott as CEO and then in charge of Walmart International, received an email on the matter from a company lawyer with detailed information about the investigation, the Times says.

That the article is surfacing now, so many years after the initial issues were raised, appears to come from a former Walmart executive in Mexico, Sergio Cicero Zapata, coming forward with allegations to the Times. Cicero was in the real estate department with the company. That action triggered the Times to launch a major investigation of the allegations on its own.

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The Times said that in 2005, Cicero had detailed the bribery practices to company lawyer Munich, and then repeated then to the Times in recent months. His account implicated another current senior Walmart executive, Eduardo Castro-Wright, then in charge of Walmart Mexico, and later Michael Duke’s primary rival for the CEO job after Scott retired. Castro-Wright has previously announced he will retire from the company this summer.

Cicero says use of the bribes soared after Castro-Wright took over as head of Mexican operations in 2002. The strategy, Cicero says, was to build hundreds of new stores so fast that competitors would not have time to react. The bribes got zoning maps change, and environmental objections eliminated. Permits that typically took months to process magically materialized in days.

As a result, Walmart was able to populate stores in Mexico far faster than the normal process would take others, leading today to 2000 Walmart stores in Mexico and a dominant market position today.

Investigation Protocol Ordered Changed by Lee Scott

After the initial allegations, Walmart put Joseph Lewis, a former FBI agent in charge in internal investigations, to look into what had happened. However, his tough and relentless approach soon angered many executives in the company, especially in Mexico.

“It’s a Mexican issue; it’s better to let it be a Mexican response,” one former Walmart employee told the Times was the general mindset many company executives were operating under at the time.

Soon, CEO Scott ordered a change in the “protocol” for internal investigations that left business units more in charge of addressing issues in their own divisions. Most of the investigative work on the bribery allegations was taken away from Lewis and given to a Mexican official that had been implicated in the practices, according to the Times.

In just a few weeks, that official produced a report from Mexico saying the charges were inaccurate.

“That conclusion, his report explained, was largely based on the denials of his fellow executives. Not one “mentioned having ordered or given bribes to government authorities,” he wrote,” said the Times. The official’s report neglected to mention his own implication in the allegations.

Walmart Mexico officials also then tried to implicate Cicero himself, saying he had been siphoning off most of the funds and payments that appeared to be questionable.

And that pretty much ended matters, until the Times article this week.

What Could Happen from Here?

“If these allegations are true, it is not a reflection of who we are or what we stand for,” said Walmart spokesman, David Tovar on the company’s web site. “We are deeply concerned by these allegations and are working aggressively to determine what happened.”

In a column on The Atlantic magazine web site, Ben Heineman Jr., a senior fellow at Harvard Law School and expert on corporate governance, says that any of the following could happen as a result of the allegations:

• Investigation of criminal or civil violations in Mexico by the Justice Department or the Securities and Exchange Commission under the U.S. Foreign Corrupt Practices Act (FCPA), which prohibits bribery of foreign officials and falsification of records. This investigation could expand to Walmart activities in other countries.

• Investigation by Mexican authorities of allegedly widespread Walmart bribes and other irregularities. Such an inquiry will have to overcome political hurdles because so many officials may have been involved, and because Walmart is one of Mexico's largest employers (it has more than 200,000 Mexican employees).

• A new, robust internal investigation by Walmart (according to the article, it started a new inquiry in December after learning of the Times' reporting, but its scope is unclear). It is hard to imagine, after this story, that the Walmart board of directors can avoid appointing an outside law firm and other forensic experts to examine what happened both with respect to underlying bribery/falsification of records and to rustication of the inquiry back to Mexico.

Additionally, it is possible that the SEC could get involved under the Sarbanes-Oxley legislation and requirements relative to financial reporting. If this happens, Walmart CEO Duke loses almost all control of what happens from there and the SEC will only work with the company’s audit committee of the board of directors, according to Jim Cramer on CNBC this morning.

The full Times article is here, though how long it will remain open to non-subscribers is not clear: Vast Mexican Bribery Case Hushed-Up by Walmart after Top-Level Struggle.

Walmart stock was down 5% Monday at midday on the story, though the broader markets were also down sharply.

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