Wal-Mart CEO Mike Duke at risk in bribery allegations

April 24, 2012, 2:52 AM UTC

Wal-Mart CEO Michael Duke

FORTUNE — No top executive of a major U.S. company has ever been charged in connection with U.S.’s Foreign Corrupt Practices Act bribery law. Wal-Mart’s (WMT) CEO Michael Duke could be the first.

Lawyers and FCPA experts say that Duke and other top Wal-Mart officials may have violated the law when they allegedly signed off on a flawed investigation of widespread bribery at the company’s Mexican division. Also potentially damaging for Duke is that it took years for Wal-Mart officials to tell shareholders and government regulators about the potential misdeeds, long after he and other top executives allegedly knew about the reported bribes. According to an article in the New York Times this weekend, Duke found out about the alleged bribes in 2005, but company officials only reportedly informed law enforcement officials about the potential abuses in December, which was after the Times says it told the world’s largest retailer the paper was looking into the matter.

The Department of Justice is reportedly conducting a criminal probe of the Wal-Mart bribery allegations. The Securities and Exchange Commission is investigating as well. On Monday afternoon, Democrats in the House of Representatives said they too would investigate the allegations of bribery by the retailer.

The potential charges against Wal-Mart come at a time when the Justice Department is getting more aggressive in charging top executives in bribery cases. In December, the government charged eight former Siemens officials, including a former member of the German industrial company’s central executive committee, in connection with bribery charges at that company. That was the first time a board member of a large global corporation was charged with a FCPA violation. Many FCPA violations at large companies are settled without naming individuals. In the past five years, the government has brought more FCPA cases against individuals, but those have only had mixed success.

“Wal-Mart is facing potentially huge penalties,” says Jeffrey Kaplan, a FCPA expert at law firm Kaplan & Walker. “It’s harder to say for executives. Corporate officials are required to do something when they find out about bribery, but not that much.”

Wal-Mart would be far from the only large company ensnared by bribery charges under FPCA in the past decade. The law has been around since the 1970s, but officials, aided by Sarbanes Oxley and international treaties, started more aggressively bringing cases under the act about a decade ago. Since then the Department of Justice and the Securities and Exchange Commission have brought about a dozen cases a year alleging bribery. A number have involved large companies. Last year, DOJ officials said they had more than 150 open investigations involving the Foreign Corrupt Practices Act.

Surprisingly, while FCPA makes foreign bribery punishable in the U.S., for a long time there was no requirement that companies and their officials report the misdeeds, even after they found out about them. And that’s why, despite the law, bribery went mostly unchecked for decades even after FCPA was on the books. That changed, at least for public companies, after the passage of Sarbanes Oxley in 2002. Under that law CEOs and CFOs must certify that their companies’ financial filings are correct. Bribes, because they have to hidden, are generally an indicator that at least something in a company’s books has been faked. So under Sarbanes Oxley it’s effectively a violation of securities law not to disclose knowledge of potential bribes.

“You still don’t have to tell law enforcement officials, but you do have to change the language in your financial filings and any deviation from the normal boiler plate usually gets noticed,” says Philip Urofsky, a partner at law firm Shearman & Sterling.

The result has been a flood of FCPA cases. The vast majority of cases brought against large public companies under the act are self-reported by companies either trying to minimize fines or shift blame to low-level employees. That doesn’t appear to be what happened at Wal-Mart. Duke was the head of the company’s international operations when the allegations of bribery came to light at the company. Nonetheless, when he became CEO in early 2009, Duke attested to the fact that the financial statements were accurate, and that all instances of possible fraud had been disclosed. Former CEO Lee Scott appears to have known about the concerns about bribes and signed off on financial statements as well. The company didn’t disclose to shareholders it was investigating a potential violation of FCPA until late last year.

What’s more, while companies are not required to report evidence that their employees bribed foreign officials, they are required to have controls in place to detect bribes and fairly investigate and document the matters when they occur. That doesn’t seem to be what happened at Wal-Mart. According to the Times, after Duke and other company officials found out about the potential bribes they eventually assigned the internal investigation of the matter to an executive who was alleged to have been complicit in the bribery scheme. Unsurprisingly, the official found little evidence of wrong-doing. If the investigation was indeed a sham, then that would be a violation of the FCPA as well.

“If the theory is that Wal-Mart executives created a make-believe investigation, then that would support bringing a case against them,” says Kaplan.