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David Barstow's explosive 7,600-word investigation of corruption at Wal-Mart (NYSE:WMT) is required reading this weekend. I'm not going to attempt to summarize the whole thing, but basically Eduardo Castro-Wright, currently Wal-Mart's vice-chairman, oversaw a culture of bribery when he was CEO of Walmex. And when a key player in that bribery scheme blew the whistle, Wal-Mart in Bentonville buried the investigation, and didn't report anything to the authorities in either Mexico or the US.

All of this looks like a slam-dunk case under Foreign Corrupt Practices Act, and I'm quite sure that multiple extremely senior heads are going to roll in the wake of this NYT exposé. As always in such cases, the crime was bad; the cover-up was worse.

One name, however, is conspicuous by its absence in Barstow's report: Banco Walmart, the huge bank which is a wholly-owned subsidiary of Walmex. It's a serious player in the Mexican banking industry - it opened its millionth account over a year ago - and thanks to a quirk of international banking-regulation protocols, it lacks a lot of the regulation that its competitors have.

Banks like Banco Walmart which are subsidiaries of foreign corporations are meant to be regulated by the bank regulators in the parent's country. But because regulators in the US have consistently refused to allow Wal-Mart to become a bank here, bank regulators in the US don't regulate Wal-Mart at all - let alone its Mexican subsidiary. (There is a Wal-Mart-branded prepaid debit card, but that's run by Green Dot, not Wal-Mart.)

Barstow's report shows that corruption is marbled throughout Wal-Mart's international operations, not only in Mexico but also in Asia, where reports of bribery were coming in to Bentonville HQ at the rate of five per month just from Asia alone. There's nothing in the NYT which suggests that Banco Walmart was doing anything suspect at all - but at the same time, all parts of Castro-Wright's empire should be under suspicion now, given the kind of illegal activity which peaked under his leadership. And Banco Walmart was one of the jewels in Castro-Wright's crown.

All US corporations are held to high standards under the FCPA, but banks are even more important, given the way in which they're regularly used by criminals for money laundering. After reading the NYT this weekend, I have no faith at all that Wal-Mart has done an effective job of ensuring that Banco Walmart is corruption-free. And given its regulatory status, I also have no faith at all that if there were corruption at the bank, its regulators would have found it.

If I were the Mexican banking authorities, then, I'd start asking some very pointed questions indeed in the wake of this news - and I might even start thinking about revoking Banco Walmart's license entirely. Certainly there's no indication at all that Wal-Mart cares about stamping out corruption in Mexico - quite the opposite. And if a foreign-owned bank is operating in your country, you want to be sure that its parent is particularly assiduous in such matters.

I've historically supported the idea that Wal-Mart should get a banking license: I think, in principle, that such a bank would provide healthy competition for existing banks, and that it would help to reduce the rolls of the unbanked. But in the wake of this news, the chances of Wal-Mart getting such a license are surely more remote than ever. And the Mexican authorities must be wondering whether US banking regulators didn't have the right idea after all.

Source: What Does The Walmex Corruption Scandal Mean For Banco Walmart?