Walmart’s Bribery Scandal Shows Legal, Reputational Risks in India
By Dezan Shira & Associates
Posted: 12th November 2015 12:39The Wall Street Journal recently reported that Walmart personnel paid bribes amounting to several million U.S. Dollars to support operations in India. The report stated that Walmart personnel made small payments between US $5 and US $200 to low-level government officials. According to the report, the bribes were made to obtain real estate permits and facilitate the movement of goods through customs. The report emerged from a U.S. government-led Foreign Corrupt Practices Act (FCPA) investigation against Walmart in Mexico.
The bribery report comes in the wake of the company’s aggressive Indian market expansion. Walmart, which is the world’s largest company by revenue, operates 21 Best Price Modern Wholesale stores in nine states across India. Last year, Walmart announced its plans to open 50 more stores in India. Following the reports of Walmart personnel engaging in bribery, those expansion plans may become more complicated.
Bribery and corruption scandals pose legal and reputational risks to corporations. Walmart is not likely to have encouraged bribery within its ranks; however, it is possible that some Walmart personnel and third-party service providers in India felt comfortable bribing. The Walmart story highlights the importance of due diligence, strategic audits and human resource training for multi-national corporations in India.
Multinational companies must manage compliance with legislation – such as the FCPA or UK Bribery Act – that aim to deter business entities from making illegal payments to government officials, regardless of their location. Companies and organizations from nations with strict anti-corruption and bribery laws are liable for engaging in bribery in India. However, penalties are often contingent on the level of profit that accrued because of the crime. Consequently, even if the bribery charges on Walmart are proven, the company may avoid a hefty fine because its India operations are not profitable. The deterrence aspects of these anti-corruption laws can sometimes be diluted.
Companies must also track legal changes in India due to the rapid pace of regulatory reform, and the increasing penalties for non-compliance. Since 2013, the federal government has sought to explore reforms designed to deal with bribery and corruption. One such reform, the Prevention of Corruption (Amendment) Bill, 2013, seeks to establish bribery by a commercial organization in India as a substantive offense. The bill aims to establish criminal liability for companies indulging in corruption, and compliance regimes to help monitor for illegal activity. Although the bill has not been enacted into law as of yet, the bill highlights changing attitudes towards corporate bribery in India, and the shape of laws to come.
The Indian market is currently witnessing a great change. Political parties and media houses have followed the public in becoming more hostile towards corruption in the private sector. The change comes in the wake of several high-profile political and corporate frauds, particularly the Vodafone Telecom scam exposed in 2013, when the public learned that the government sold telecommunication bandwidth to some companies at lower than market-determined rates. Federal and state governments, as well as autonomous bodies such as the Central Vigilance Commission, now scrutinize companies a lot more vigorously than in the past.
Companies associated with corruption and bribery scandals may find it difficult to expand operations in the country. This is primarily because the government and watchdog agencies maintain tighter scrutiny on companies with a bad track record. For example, analysts have noted that since the Vodafone scandal, the company has found it difficult to obtain local clearances from municipal departments to establish offices in Tier-II cities. The story highlights the kind of impact that corruption scandals can have on companies. In addition, once a company is known to pay bribes, the company becomes more susceptible to predatory bureaucrats and service providers seeking bribes. The process is cyclical.
Diligence is Mission Critical
Walmart’s arrival in India split the political discourse over foreign direct investment (FDI) in the retail sector. Given the kind of political landscape that Walmart had to traverse, it seems poor management on Walmart’s part to be caught paying small bribes for innocuous business permits and clearances. According to a report in 2013, Walmart spent around US $1.5 million on lobbying and brand building in India. The scale of investment shows the company had plans to expand, but Walmart’s activity in India will now become subject to any political fallout over bit-part bribes to mid-level bureaucrats.
The Walmart story highlights the key risks faced by multinational companies in India. Corruption and bureaucracy are key challenges for many business operations in India. A recent survey by the Indo-German Chamber of Commerce (IGCC), a Dezan Shira & Associates partner, underlines this assumption: 58 percent of respondents considered bureaucracy as a main obstacle to doing business in the country, while 45 percent of respondents regarded corruption as a major obstacle.
International Business Advisory Manager Adam Pitman notes that companies in India should be prepared for a slow pace of business that is conducive to bribery. Pitman says that “companies that properly prepare documents required for business permits and licenses, and plan for long processing times, greatly reduce their exposure to bureaucratic delays or pressure. While the government is making progress on mechanisms that reduce touch points with private businesses, diligence should remain at the forefront of any expansion in India”.
In addition to planning for delays to government applications, businesses in India should engage in other forms of diligence that can reduce the potential for exposure to corruption. Before establishing business relationships with new partners, companies should conduct a basic due diligence investigation to assess their new partner’s reliability. After a company has established itself in India, periodic regulatory monitoring and strategic audits, as well as human resource training for personnel, can help create a culture of compliance. While corruption is a risk in India, corruption is a risk that can be managed through diligence.
Since its establishment in 1992, Dezan Shira & Associates has been guiding foreign clients through Asia’s complex regulatory environment and assisting them with all aspects of legal, accounting, tax, internal control, HR, payroll and audit matters. As a full-service consultancy with operational offices across China, Hong Kong, India and emerging ASEAN, we are your reliable partner for business expansion in this region and beyond.
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