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. 

The New York Times broke the news this weekend about a systematic plan involving more than $24 Million in illegal 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 Mexico and 20% of Wal-Mart’s stores worldwide are now located in Mexico. 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 Act from U.S. and Mexican government agencies as well as Wal-Mart investors. 

The U.S. Justice Department and the SEC 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 is such a bad idea. It highlights once again how global corporations' wrongdoing in other countries can jeopardize their U.S. business profitability and reputations, because of interconnectedness on a grand scale.

There are special  functions we need banks to perform:  receiving insured deposits and making loans within a community, 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 U.S. Once a corporate conglomerate includes an insured financial institution in the U.S., that enterprise gains access to the safety-net of federal deposit insurance and loans at the Federal Reserve window.  A U.S. bank charter opens the door to too-big-to-fail issues and potential taxpayer bailouts. Would we really want to protect Wal-Mart in that way? 

From 1999 to 2007 (the same period of time covered by 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 the U.S. bank regulators (FDIC, in particular) delayed and sent negative signals about the likelihood of obtaining a U.S. bank charter, Wal-Mart withdrew its application in 2007 and accelerated its banking expansion in Mexico.

But for the delay resulting from the change in FDIC Chairmanship in 2006, Wal-Mart might very well have obtained an FDIC-insured industrial loan company charter. Instead, Wal-Mart moved on to develop an extensive banking network in Mexico by placing bank branches in its retail stores. 

What if Wal-Mart’s phenomenal growth in the banking sector had occurred in the U.S.?  Even without a bank charter, Wal-Mart has not given up on a U.S. financial services presence; it offers pre-paid 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 banking industry has focused on this competitive threat. 

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 U.S. dodged a bullet in not granting Wal-Mart a bank charter:

  • If Wal-Mart now had a major banking presence in both the U.S. and Mexico, what would be the impact of this Mexican bribery scandal on the U.S. side of this conglomerate's 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 this fraud and financial risk occurring in Mexico?
  • 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?

Ann Graham is a professor of law and director of Business Law Institute at Hamline University School of Law, St. Paul, Minn.