As Richard Nixon discovered all too well, a cover-up can quickly create more legal troubles than the initial misdeed.

Reeling from charges of corruption at its prized Mexican subsidiary, Wal-Mart (WMT) finds itself embroiled in a much thornier situation today than if it had been more forthcoming when the alleged crimes were first discovered.

While disclosing the potential bribes would’ve likely led to a fine from U.S. authorities, the seven-year lag and alleged cover-up could leave Wal-Mart with far stiffer penalties on top of a painful public relations black eye and an open-ended distraction.

“If it’s something that patently should be disclosed and they don’t disclose it, history has shown that the financial impact is a lot worse,” said Paul Pelletier, a former federal prosecutor at the Department of Justice who supervised the agency’s Foreign Corrupt Practices Act unit.

Signed into law in 1977 in the wake of the Watergate scandal that brought down Nixon, the FCPA prohibits U.S. companies and their subsidiaries from bribing foreign officials.

Corruption Charges Slam Wal-Mart

Wal-Mart is in the hot seat this week, with its shares retreating almost 5% in just two days, after The New York Times reported that top execs attempted to conceal a “campaign of bribery” at Wal-Mart de Mexico that was designed to accelerate its rapid expansion.

Even though Wal-Mart’s own investigators discovered suspect payments totaling more than $24 million, the blue-chip company’s home office appeared to sweep the matter under the rug, the paper reported.

Alexandra Wrage, president of the global anti-bribery nonprofit TRACE International, said she was “stunned” to read about the widespread nature of the alleged bribery.

“When you see a bribery scheme, with very few exceptions, it is limited to a few isolated employees who were confident they could get away with it, worked hard to cover their tracks and knew they were operating against corporate policy,” said Wrage. “If the allegations are true, the level of communication about this back to headquarters is extraordinary.”

For its part, Wal-Mart is in full damage control mode this week. The world’s largest retailer said it launched an “aggressive investigation” six months ago and is “committed to getting to the bottom of this matter.”

“We will not tolerate noncompliance with FCPA anywhere or at any level of the company,” David Tovar, a Wal-Mart spokesman, said in a statement. Tovar also said Wal-Mart has created a FCPA compliance officer position.

Lack of Disclosure Looms

Wal-Mart’s immediate legal headaches are clearly worse today because it reportedly didn’t fully investigate and disclose the bribery allegations when they emerged in 2005.

That’s because U.S. officials, especially at the DOJ, have made it clear they will give companies “meaningful cooperation credit” if they self-report, investigate and cooperate in FCPA violations.

“Wal-Mart really missed an opportunity here, where they could have self-reported and probably gotten a much better resolution with the enforcement officials,” Thomas Gorman, a partner at Dorsey Whitney and a former senior counsel at the Securities and Exchange Commission’s enforcement division.

Gorman believes evidence of an actual cover-up by Wal-Mart executives could also lead to tougher sanctions.

If the charges laid out by the Times stick, Wal-Mart is likely to be hit with hefty fines, at the very least.

Depending on the amount of bribes paid and the level of profits associated with the malfeasance, “fines can be astronomical,” said Pelletier, who is currently a lawyer at the law firm Mintz Levin.

A number of well-known companies have been stuck with pricey fines in recent years, including Siemens (SI), which settled FCPA charges in 2008 by paying a fine of nearly $450 million. 

Jail Time, Reputation Damage Possible

The SEC can also seek disgorgement of profits obtained through bribery schemes, Pelletier said.

There’s little doubt Wal-Mart de Mexico, which enjoyed enormous growth last decade, significantly padded the bottom line of the parent company.

If criminal charges are filed, Wal-Mart execs could end up going to prison, potentially for over a decade. Gorman said the DOJ has made it a priority to focus on individuals involved in bribery schemes.

The DOJ has scored a number of FCPA wins over the past several years, including in a case accusing Haiti’s state-owned telecom company of bribing Miami businesses. One of the defendants in that case, Joel Esquenazi , was sentenced to a record-setting 15 years in prison last year after being convicted of FCPA violations and other offenses. 

Besides jail time and huge fines, Wal-Mart also faces the prospect of serious damage being done to its brand. A PR blow is especially painful to a consumer-related company like Wal-Mart that is subject to potential boycotts.

“This is a company that has always tried to put out an image of doing ethical business and this is straight up allegations of corruption,” said Gorman.

Meanwhile, there appears to be a good chance the bribery scandal will create a costly diversion for Wal-Mart management, several of whom were named in the Times story. Execs normally in charge of operations and growing profits may now be sidetracked by internal investigations and talks with regulators.

“It is a huge distraction from running the company. You have the specter of all of this hanging over the heads of a lot of the senior executives who are wondering if they’re going to be implicated,” said Gorman.

To Disclose or Not to Disclose

All of this raises the question of why Wal-Mart didn't disclose the issues earlier on.

“It’s a very complicated and judgment-laden decision,” said Wrage.

When making this decision, legal observers said companies must weigh a slew of factors, including the magnitude and duration of the malfeasance and whether it reaches the materiality level that requires disclosure under Sarbanes-Oxley .

Gorman said that more and more companies, especially in the post-Sarbanes-Oxley world, are “doing the right thing” and disclosing potential FCPA violations.

On the other hand, Wrage said, “In the great majority of situations, companies choose not to disclose.”

However, she added, “well-governed companies” that don’t disclose the potential violations still “investigate and put remedial measures in place to make sure the corruption ends.” 

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