Wal-Mart shares plunge after Mexico corruption allegations

Wal-Mart, the world's largest retailer, built its business in Mexico on the back of systemic corruption that went right to the very top of the company, while executives at head office in the US covered up the scandal, according to explosive claims that wiped $10bn from the firm's value yesterday.

The company, the pioneer of big-box retailing and parent company of the UK's Asda, has been plunged into a legal morass that could take many years and several hundreds of millions of dollars to fix, and could even send one of its most senior executives to jail in the US.

The revelations cast a pall over the career of Eduardo Castro-Wright, who was feted as a business genius for the speed with which he built the Mexico business, and who was promoted over and over until he reached his current post as vice-chairman of the whole of Wal-Mart.

The scandal also blows a hole in the retailer's efforts to rehabilitate its reputation after years of attacks on its ethics. Panicking shareholders sent its stock plunging almost five per cent, and US lawyers threatened executives with lawsuits for hiding so much important information from investors.

The US authorities, which have strict punishments for foreign corruption, have launched an investigation into the extent of the bribery and into who knew about the cover-up.

Wal-Mart's Mexican subsidiary showered money on officials, high and low, to grease planning permissions as it worked to turn the country into its second-biggest profit centre after the US, it was claimed by a former employee who arranged the handover of envelopes of cash. The payments, he said, were sanctioned directly by Mr Castro-Wright, and hidden in the accounts by underlings who labelled them as legal fees.

When the employee took his claims to head office in 2005, executives overruled the investigators they had assigned to examine his allegations and left it to the bosses in Mexico to quietly bury the issue – and that might have been the end of it, except that the whistleblower dramatically went public over the weekend in the pages of a US newspaper.

"What is remarkable is the conduct, or rather the non-conduct, of Wal-Mart's executive leadership on learning of these payments," said Mike Koehler, a law professor at Butler University and an expert on the US Foreign Corrupt Practices Act.

According to The New York Times, it was only after the newspaper began looking into the issue last year that the company went to the Department of Justice and confessed that it may have broken the Foreign Corrupt Practice Act. A single paragraph in a regulatory filing made the DoJ investigation public, and it did not reveal that the allegations were in its vital Mexican business.

The FCPA permits the US to levy fines for corrupt payments by American companies, wherever in the world they were made, and individuals who break the Act can be sent to jail for up to five years.

Wal-Mart said it was committed to getting to the bottom of what happened in Mexico, and last week it relieved its chief legal officer in the country of his duties. Mr Castro-Wright, who is due to retire this year, was not available for comment.