Wal-Mart Scandal Highlights Gray Areas in Whistleblower Laws

At the center of the bombshell New York Times story on the alleged bribery scheme that fueled the expansion of Wal-Mart Stores Inc. throughout Mexico is the account of Sergio Cicero Zapata. An in-house lawyer in Wal-Mart de Mexico’s real estate unit, he’s the one who told both Wal-Mart international general counsel Maritza Munich and the Times that the company doled out millions of dollars in payments to Mexican public officials.

Cicero’s very public whistleblowing—and what we know of him so far—defies pat categorization. He was a Mexican in-house lawyer who went to the U.S. media with a story that implicated him in the alleged wrongdoing at one of the world’s largest companies. We don’t know for sure if he ever told any government authorities on either side of the border about what happened. But his story shines a light on the gray areas of U.S. law when it comes to how whistleblower provisions apply to foreigners, particularly in an era of heightened enforcement of the Foreign Corrupt Practices Act.

Does the Dodd-Frank law’s whistleblower provision apply to foreigners? “Given cases like Wal-Mart, it’s clearly a big question,” says Matteson Ellis, founder of the anticorruption boutique firm Matteson Ellis Law in Washington, D.C., “because the whole thrust of the Foreign Corrupt Practices Act is international, and if the focus is foreign bribery, you would think that foreign whistleblowers will be implicated at some point.”

Last year, the U.S. Securities and Exchange Commission, which shares responsibility for FCPA enforcement with the U.S. Department of Justice, implemented final rules on whistleblower incentives and protections. Qualifying whistleblowers, whose information leads to a successful enforcement action worth $1 million or more, can lay claim to a monetary award.

According to the SEC’s first update to Congress on the program [PDF], 10 percent of complaints came from overseas.

Whether or not foreigners are eligible to get part of the bounty for whistleblowing remains to be seen. Neither the Dodd-Frank law, nor SEC rules explicitly state that foreigners can qualify as eligible whistleblowers. But neither do the law or the rules explicitly exclude foreigners either, says attorney Amy Conway-Hatcher, head of Kaye Scholer’s white collar litigation and internal investigations practice in Washington, D.C. “It’s not clear how these [provisions] are going to apply to foreign whistleblowers.”

The same goes for protections against retaliation. “Protections do exist, but whether they exist for foreigners or not is just not clear,” says Ellis. “The law does not speak to that specific issue.” As the Wall Street Journal’s Corruption Currents wrote recently, the “process for foreign whistleblowers to report allegations is about to be tested” in case involving General Electric and a local employee in Angola.

Some have looked to the Sarbanes-Oxley Act for guidance on this issue. “That is only so helpful,” says Ellis. “What the courts have decided under Sarbanes-Oxley is that protections do not extend to foreigners.” But because SOX deals with internal company regulations and the FCPA centers on behavior that occurs outside U.S. borders, Ellis says there are many who believe that SOX shouldn’t be used as guidance on these questions.

In Mexico, whistleblower protections are practically non-existent, experts say.

A report released last year by Transparency International found Mexico’s whistleblower protections to be “inadequate”:

. . . although there have been some changes in recent years, there is still no proper whistle-blower protection system in Mexico. Many companies do not have codes of conduct or protect internal whistle-blowers. Both the Ministry of Public Administration and the Ministry for Public Security have included strategies and actions to develop better whistle-blower protection programs in their plans of action for the current administration (2006-2012). However, the efforts have not yet materialized into anything concrete.

One possible step forward is a bill that Mexico’s President Felipe Calderón proposed to the legislature last year, says attorney Juan Carlos Partida, an attorney who specializes in anticorruption work at the firm Rubio Villegas & Asociados in Mexico City. That bill outlines whistleblower protections for individuals who accuse public officials of corruption, and is currently being considered by the Mexican Senate.

But the lack of whistleblower provisions in Mexico is problematic, and prevents individuals from coming forward about corruption, Partida believes. “It is important to have whistleblower laws in order to have more cases brought before the authorities.”

There’s also a major trust deficit to contend with in Mexico, says attorney Luis Ortiz, co-founder of the firm Ortiz de la Concha in Mexico City, and who leads the anticorruption committee in Mexico’s National Corporate Counsel Association. He can empathize with someone who would choose to go to U.S. authorities rather than Mexican authorities, particularly with information pertaining to the FCPA. “I would think twice about taking it to the Mexican authorities, instead of taking it to the United States,” says Ortiz. “I’m not sure we trust our police—and by police, I mean the entire system.”

Companies shouldn’t underestimate the “powerful combination” that foreign nationals can bring to both an internal and government investigation, says Barb Dawson, who co-chairs the commercial litigation and international practice groups at Snell & Wilmer in Phoenix.

When someone from another culture comes forward with information “they can be extraordinarily significant in an investigation in the U.S., because they can often bridge the cultures,” Dawson says. “If they understand the ethical expectations here, and the standards, as well as the cultural norms and possible practices elsewhere, they can be very critical to an investigation. And for that same reason, they should not be taken for granted within the company when the company is doing its investigation.”

That advice calls to mind the last lines of the Times report, recounting how Wal-Mart’s internal investigation of Cicero’s complaints was shelved:

No one told Mr. Cicero. All he knew was that after months of e-mails, phone calls and meetings, Wal-Mart’s interest seemed to suddenly fade. His phone calls and e-mails went unanswered.

“I thought nobody cares about this,” he said. “So I left it behind.”