Wal-Mart executives recently awoke to a corporate nightmare: a page one New York Times headline blaring, “Vast Mexico Bribery Case Hushed Up By Wal-Mart.” The article noted that a former executive of the company reported that its largest foreign subsidiary, Wal-Mart de Mexico, had “orchestrated a campaign of bribery” and “had paid bribes in virtually every corner of the country.” The Times also reported that when the internal investigation launched by the company in 2005 yielded evidence supporting the executive’s claims, “Wal-Mart’s leaders shut it down.” Whether or not these allegations prove to be true, the damage has been done for Wal-Mart, which has already taken a major reputational hit and seen a drop in its stock value.

The U.S. Department of Justice and the Securities and Exchange Commission are investigating, and Wal-Mart Stores Inc. has hired outside counsel to assist with its own investigation, but the question remains: What could in-house counsel at Wal-Mart could have done to prevent this ugly scenario?

There is no one-size-fits-all anticorruption response to allegations of bribery, but there are essential steps that in-house counsel should always take after receiving reports of potential Foreign Corrupt Practices Act violations. It is imperative that in-house counsel respond to allegations promptly and thoroughly, which involves (but is not limited to) conducting an internal investigation. The internal investigation should be proportionate to the allegations and should expand (or contract) as additional facts are obtained. The best practice would have in-house counsel working with independent and experienced outside counsel and, where necessary, an independent audit team.

The investigation must be comprehensive and candid, to permit company counsel to make informed decisions. And the investigation should not be undertaken only as a means to show that the company “checked the boxes” in its response to allegations of wrongdoing. Armed with the facts, in-house counsel will be in a better position to determine the company’s options, make the most of them, and—if a voluntary disclosure is ultimately made—convince prosecutors that the company is being forthright. It is also key that this type of investigation be conducted by outside counsel, to ensure independence and protect applicable privileges.

Initially, Wal-Mart did the prudent thing by hiring experienced outside counsel in response to the bribery allegations. It engaged Willkie Farr & Gallagher, who proposed a robust investigation to be undertaken by outside counsel. But Wal-Mart made a potentially grave error when it ultimately rejected the firm’s advice in favor of conducting its own in-house investigation. Had Wal-Mart agreed to outside counsel’s plan, the corporation may not have found itself in such a compromising position today. A decision to handle the matter internally is generally imprudent, as it deprives the investigation of independent judgment, as was the case here. As we have seen in some of the largest FCPA settlements—including Siemens ($800 million); KBR ($579 million); Alcatel-Lucent ($137 million); and Magyar Telekom ($95 million)—senior executives were directly involved in the illegal conduct.

When the investigation is complete, in-house counsel—in consultation with outside counsel—must determine whether any violations have occurred and if so, weigh the costs and benefits of voluntary disclosure to the government. Although the trend has been away from self-reporting, non-disclosure is always risky.

A number of factors should be evaluated when deciding whether to make a voluntary disclosure. First, the internal investigation may reveal conduct that was unethical but not necessarily illegal. Many of the payments made by Wal-Mart in Mexico were made to speed up the issuance of permits and might be considered “facilitating payments,” which are not illegal under the FCPA. But while such information may tend to sway in-house counsel in the direction of non-disclosure, it is not only the physical exchange of something of value that should be of concern. The FCPA also contains a “books and records” provision, and unless the facilitating payments were accurately and fairly accounted for on its books, Wal-Mart still may have violated the FCPA.

Finally, conduct that may not violate the FCPA might violate local laws of the country in which the conduct occurred. For example, the same facilitating payments that may be an exception for U.S. law enforcement under the FCPA are illegal in Mexico. Therefore, it is important to be aware that prosecutors in foreign countries may decide to bring criminal charges, and prosecutors may share information across borders—such as in the Siemens investigation—when deciding whether to notify U.S. or foreign authorities. Reporting decisions must be made on the advice and findings of experienced outside counsel.

Whether or not a corporation decides to disclose, in-house counsel should ensure that the wrongdoers are disciplined and/or terminated. Because Wal-Mart did not disclose and then promoted those who may have been breaking laws, it will be impossible for the company to mitigate any sanction by arguing that as a “good corporate citizen” it investigated alleged violations of the law, took remedial action, and reported to the authorities.

Rolling the dice and not reporting FCPA violations in the face of clear evidence will save a company from later prosecution only if it refrains from subsequent violations, and from aiding or abetting such conduct for a five-year period. In house-counsel who hope to run out the FCPA’s five-year statute of limitations will be unpleasantly surprised to find that their defense will fail if prosecutors uncover evidence of a cover-up, or that other countries with longer statutes of limitations are prepared to levy criminal charges. Statutes of limitations notwithstanding, there is no guarantee that individuals who are aware of the conduct will keep quiet—and Dodd-Frank whistleblower incentives make reporting an attractive and potentially profitable option.

In the current enforcement climate where DOJ and the SEC have promised to aggressively enforce the FCPA—a warning borne out by the recent increase in prosecutions and fines under the statute—in-house counsel should also factor in the stature of their company in deciding whether or not to disclose. As the largest corporation in the world, Wal-Mart is an attractive target for any prosecutor.

The majority of companies who have paid out the largest FCPA settlements did not self-disclose. While self-disclosure opens a company to negative public relations attention and may affect stock prices in the short term, the ultimate financial, criminal, and reputational penalties after improper conduct is exposed years later can be much more devastating.

In-house counsel routinely receive many unpleasant messages, but one of the worst has to be that your company has engaged in a “campaign of bribery” orchestrated by top management. Retaining outside counsel and conducting a candid, in-depth internal investigation will put in-house counsel and the company in the best position to minimize the damage. When deciding whether to self-report, in-house counsel should rely on outside counsel to uncover and thoroughly examine all the facts, as well as potential fallout from a high-risk decision not to disclose, as the cover-up can ultimately be worse than the initial crime.

Mark Tuohey and Paul Enzinna are partners, and Lauren Curry is a senior associate in Brown Rudnick’s white collar defense and government investigations practice group in Washington, D.C.

See also: “Will Wal-Mart Regret Not Disclosing Its Bribery Investigation Sooner?”, CorpCounsel, April 2012.