NEW YORK, April 24 (Reuters) - If allegations are true that the Mexican unit of Wal-Mart Stores Inc engaged in extensive bribery, the company would likely be vulnerable to prosecution under the U.S. Foreign Corrupt Practices Act.

Under the law, it is illegal to bribe foreign officials to obtain business. But there is an exception for "facilitation payments," also known as grease payments made to speed up routine government actions. Wal-Mart could theoretically argue that at least some of the alleged payments fall under that exception and therefore weren't illegal under U.S. law.

No charges have been brought in connection with the case, which involves payments allegedly made by Wal-Mart's Mexican subsidiary to Mexican officials to obtain building permits -- actions that allowed the company to grow quickly. The New York Times reported on Saturday that the retailer's own investigators found a paper trail of hundreds of payments totaling more than $24 million but that company leaders essentially shut down the probe and failed to alert U.S. or Mexican law enforcement officials.

A Wal-Mart spokesman declined to comment on a possible defense. In a statement on Tuesday, the company said it has taken several actions in the last year to investigate the matter and strengthen the company's compliance with the FCPA.

While broadly prohibiting bribery abroad, the FCPA makes an exception for grease payments, which are defined as payments made to facilitate or expedite "the performance of a routine government action."

When the act was passed in 1977, Congress was aware of a variety of payments that companies were making to foreign officials. The Securities and Exchange Commission had found that more than 300 U.S. companies had made improper foreign payments involving hundreds of millions of dollars. The payments, Congress concluded, were bad for business and hurt the U.S.'s image abroad.

The grease payment exception nodded to the reality that even though such petty payments are objectionable, given law enforcement's resources, it would not be practical to target them.

But the exception can be open to interpretation. Because the risks of going to trial for a company are great, businesses typically seek to negotiate a settlement. That leaves the task of interpreting the FCPA to prosecutors, not a judge. It is the prosecutor who decides whether or not the alleged wrong-doing doesn't fall under the exemption, and in recent years, prosecutors have defined the exemption narrowly, according to defense lawyers.

Recognizing this development, companies have shifted their response to FCPA inquiries, said Alexandra Wrage, president of the anti-bribery resource association TRACE International Inc. "Companies are increasingly reluctant to head into the Department of Justice using a facilitating payment exception as a defense," Wrage said.

There have been at least two cases, which have addressed the kinds of payments allowed under the FCPA, according to Michael Koehler, an FCPA scholar at Butler University and author of the FCPA Professor blog.

The leading decision about what payments are allowed under the FCPA came from the New Orleans-based 5th U.S. Circuit Court of Appeals in 2004. In that case, two former American Rice Inc executives were accused of bribing Haitian officials with tens of thousands of dollars to reduce duties and taxes on the company's rice. To carry out the scheme, the defendants allegedly instructed subordinates to generate false business records and to deliver cash in sealed envelopes to the officials.

The lower court judge dismissed the indictment, finding that as a matter of law, the payments were not targeted by the FCPA because they not used to obtain or retain business. If a case against Wal-Mart were to be filed, the company could make the same argument.

However, the argument didn't fly in the 5th Circuit, which reversed the lower court in the American Rice case. The appeals court found that under certain circumstances, the bribes could be viewed as falling within the pervue of the statute. After the case was sent back to the lower court, the two executives were convicted at trial.

Wal-Mart could have a "very valid legal defense," according to Koehler. He said Wal-Mart could argue that the payments under scrutiny were not those targeted by the FCPA since they did not involve obtaining or retaining business from the government. The alleged payments for building permits were arguably for services that the company would get any way.

"The purpose of the payments was to get licenses and permits faster," said Koehler.

But others disagree. Michael Volkov, a former federal prosecutor and FCPA expert, said that alleged payments in the Wal-Mart case were clearly not allowed under the statute, because the payments were used to influence the discretion of government officials and to gain a business advantage.

Making an argument that the payments were allowed under the facilitating payments exception, he said, "would be like trying to fit Rosie O'Donnell's foot inside Cinderella's slipper."

(Reporting by Andrew Longstreth)

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