Wal-Mart's storm could have hit here

  • Article by: ANN GRAHAM
  • Updated: April 29, 2012 - 6:53 PM

The ethically challenged company had great ambitions to be a big banker.

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Wal-Mart stands accused of a major bribery scheme that cuts to the core of the way this international giant does business in Mexico -- and demonstrates how little U.S. regulators and investors know about the company.

The New York Times broke the news last weekend about a systematic plan involving more than $24 million in bribes allegedly paid to Mexican officials to expedite the expansion of Wal-Mart stores into Mexico. Wal-Mart de Mexico is now the largest private employer in that country, which is now home to 20 percent of Wal-Mart's stores worldwide.

But there's a problem: In 2005, senior Wal-Mart officials learned of the bribery scheme and covered up Wal-Mart's subsequent internal investigations, hiding likely violations of Mexican law and the U.S. Foreign Corrupt Practices from U.S. and Mexican government agencies as well as from Wal-Mart investors. The U.S. Justice Department and Securities and Exchange Commission are now investigating Wal-Mart.

A cover-up always makes things worse. Heads are rolling. If the allegations are proved, the Justice Department will likely assess large fines against the company and individuals will go to jail.

Beyond providing governance and ethics lessons about a shocking corporate scandal, this Wal-Mart story illustrates why combining commerce and banking -- an ambition of Wal-Mart's -- is such a bad idea.

There are special functions we need banks to perform: receiving insured deposits and making loans while serving as the highly regulated transmitter of monetary policy. The policy decisions that make Wal-Mart profitable are not congruent with the objectives of banking as we know it in the United States.

Once a corporate conglomerate includes an insured financial institution in the United States, it gains access to the safety net of federal deposit insurance and loans at the Federal Reserve "window."

A U.S. bank charter raises "too big to fail" issues and potential taxpayer bailouts. Would we really want to protect Wal-Mart in that way? Further, the scandal highlights once again how global corporations' wrongdoing in other countries can jeopardize their U.S. business profitability and reputations.

From 1999 to 2007 (the years of the Mexican bribery scheme), Wal-Mart actively pursued the possibility of an FDIC-insured U.S. financial institution charter, first in Oklahoma, then in California, and finally in Utah.

As U.S. bank regulators (the FDIC, in particular) delayed and sent negative signals about the company's likelihood of obtaining such a charter, Wal-Mart withdrew its application in 2007 and accelerated its banking expansion in Mexico, developing an extensive banking network there by placing bank branches in its stores.

What if Wal-Mart's phenomenal growth in the banking sector had occurred in the United States? Even without a bank charter, Wal-Mart has not given up on a U.S. financial-services presence; it offers prepaid debit cards and check-cashing services through "money centers" in many of its U.S. stores.

Wal-Mart recognizes the profit potential in providing banking services to a captive market of relatively unsophisticated, cash-strapped, low- to moderate-income shoppers. At a minimum, the competitive advantage Wal-Mart can achieve through combining its banking and commercial locations, operations and marketing could be a real threat to more traditional U.S. banks, especially community banks.

The most significant threat is the difficulty of effective examination and regulation of global financial entities that combine banking and commerce. Let us pose some hypothetical questions to illustrate some ways in which the United States dodged a bullet in not granting Wal-Mart a bank charter:

If Wal-Mart now had a major banking presence in both the United States and Mexico, what would be the impact of this bribery scandal on the U.S. side of its banking operations? Could corporate problems in Mexico bleed off bank capital, leaving U.S. taxpayers at risk? Could the Mexican operation also have money-laundering issues that would spill over the border? If U.S. banking officials had acceded to Wal-Mart's push for a U.S. bank charter, would U.S. bank regulators have been able to detect the fraud and financial risk occurring in Mexico?

Finally, if Wal-Mart executives failed to disclose that they knew or should have known about the Mexican bribes at the same time Wal-Mart was applying for a U.S. bank charter, what else was concealed from U.S. regulators by this large, complex, international conglomerate?

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Ann Graham is a law professor and director of the Business Law Institute at Hamline University.

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