04/26/2012 04:33 pm ET Updated Apr 26, 2012

Bribery Law Loophole Leads To Confusion And Abuse, Lawyers Say

A loophole in a U.S. anti-bribery law, the same law that Walmart's Mexico subsidiary reportedly violated again and again, actually allows companies to offer bribes.

Under the Foreign Corrupt Practices Act, bribing foreign officials to win business is illegal, but the law makes an exception for what are known as "facilitating payments" -- essentially, small-dollar bribes to low-level functionaries to speed visa processing, for example, or to secure police protection. While this exception does not permit the type of widespread, systematic bribery in which Walmart allegedly engaged, according to a blockbuster report in The New York Times, lawyers say it is ripe for misinterpretation and even abuse.

"This is the most contentious area in terms of anti-corruption compliance," said Greg Paw, a white collar criminal defense lawyer at the firm Pepper Hamilton who routinely advises on corruption investigations. "It's hard to draw the line."

The Foreign Corrupt Practices Act was passed in 1977 as part of a series of reforms following the Watergate scandal. For most of its history, it received little attention and produced few prosecutions. But that has changed during the past decade. Since 2008, the Department of Justice has secured more than $3 billion in fines from 32 companies investigated under the law. As The Huffington Post reported Monday, most of these cases are resolved through closed-door deals not open to judicial review, and formal criminal charges are rarely brought against the companies.

Now, with allegations that Walmart's Mexican subsidiary spread around $24 million in payments to local officials as part of its ultimately successful quest to dominate the market, the anti-bribery law is in the spotlight as never before. So, too, are the grease payments, as they are known in the business community.

The law permits a "facilitating or expediting payment" to a foreign official in order to secure a "routine governmental action." A partial list of these approved payments, as described by the law, include money paid to obtain permits or other official documents, to process governmental papers such as visas and work orders, or to receive police protection.

Lawyers who specialize in corporate bribery cases said that the exception is typically interpreted as permitting one-time payments to low-level government functionaries. But rather than making life easier for businesses operating abroad, the exception has proved a headache for companies operating in countries where corruption is endemic.

The exception has also put the United States, once the international leader in anti-bribery laws, somewhat behind most other Western democracies, which chose not to permit bribes of any size when they passed their more recent statutes. The Organization for Economic Cooperation and Development, a 30-country group that promotes economic stability, has called for a prohibition on all "corrosive" facilitating payments.

Businesses that participated in an OECD discussion on bribery, according to a 2010 report, "were of the opinion that the scope of the exception for facilitation payments is unclear, particularly what kinds of decision-making are discretionary and nondiscretionary."

Companies that make these types of payments are required under U.S. law to record them. But bribes at any level are often illegal in the countries where the companies operate. This discrepancy creates "a strong inducement ... to conceal or falsify the true purpose of such payments," wrote Jon Jordan, a Securities and Exchange Commission lawyer who works on bribery cases, in an article written for the University of Pennsylvania Journal of Business Law last year.

Moreover, company officials in the field often have to make a quick decision about whether the easiest route to resolve a problem is to pay up, or to refuse and potentially find the company at a competitive disadvantage, said Paw, the Pepper Hamilton lawyer.

Paw said clients call him "all the time" to weigh in on whether a modest payment is legal. The issue is particularly pernicious in Latin America, he noted, where customs officials often demand bribes in order to release products into the market.

His advice, Paw said, is almost always the same: Don't pay.

"You establish over time that you just don't make these payments," he said. Not paying a bribe might cause some headaches, he added, "but that's better than being on the front page of The New York Times."

In response to that New York Times article, which also included assertions that senior Walmart executives at corporate headquarters in Bentonville, Ark., swept an internal investigation under the rug, the retailer said it is "taking a deep look at our policies and procedures in every country in which we operate."

"In the last year, we have taken a number of specific, concrete actions to investigate this matter and strengthen our global FCPA compliance processes and procedures around the world and in Bentonville and Mexico," the company said in a statement.

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