U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 20461 / February 21, 2008
Securities and Exchange Commission v. Flowserve Corporation, Civil Action No. 08 CV 00294 (D.D.C.) (EGS)
SEC Files Settled Books and Records and Internal Controls Charges Against Flowserve Corporation For Improper Payments to Iraq Under the U.N. Oil for Food Program — Company Agrees to Pay Over $6.5 Million in Civil Penalties, Disgorgement of Profits, and Prejudgment Interest
The Securities and Exchange Commission today filed Foreign Corrupt Practices Act books and records and internal controls charges against Flowserve Corporation ("Flowserve") in the U.S. District Court for the District of Columbia. Flowserve is a Texas-based manufacturer of pumps, valves, seals, and related automation and services to the power, oil, gas, and chemical industries. The Commission's complaint alleges that from 2001 through 2003, two of Flowserve's subsidiaries entered into a total of twenty contracts in which $646,488 in kickback payments were made and another $173,758 were authorized in connection with sales of industrial equipment to Iraqi government entities under the U.N. Oil for Food Program (the "Program"). The kickbacks were characterized as "after-sales service fees" ("ASSFs"), but no bona fide services were performed. The Program was intended to provide humanitarian relief for the Iraqi population, which faced severe hardship under international trade sanctions. The Program allowed the Iraqi government to purchase humanitarian goods through a U.N. escrow account. The kickbacks paid by Flowserve's subsidiaries diverted funds out of the escrow account and into an Iraqi slush fund. The contracts submitted to the U.N. did not disclose that the illicit payments were included in the inflated contract prices.
According to the Commission's Complaint:
A French Flowserve subsidiary, Flowserve Pompes, entered into fifteen Program contracts involving kickback payments of $604,651. Flowserve Pompes agreed to, but did not ultimately make, an additional $173,758 in improper ASSF payments under four additional contracts. Delivery under these four contracts had not been completed by the time of the U.S. invasion of Iraq in March 2003. Senior officials at Flowserve Pompes, including the subsidiary's President, developed two different false cover stories to conceal the ASSF kickback payments. The company's internal accounting records falsely indicated that Flowserve Pompes paid a Jordanian agent a ten percent fee on each contract to cover the cost of installing and commissioning the equipment. In reality, the agent provided no such services. The contract documents that Flowserve Pompes sent to the U.N. for approval painted a different, but equally false, picture. These documents omitted any reference to after sales services or related installation fees. Instead, to cover the cost of the illicit ASSF payments, the company's U.N. contracts inflated the unit price of each piece of equipment without disclosing the price increases, or the reason for them, to the U.N. Flowserve Pompes also signed a side letter to the Iraqi ministry to pay the ten percent, and failed to disclose the letter to the U.N. Knowing that the kickback payments had to be received before the goods would be allowed across the border, Flowserve Pompes paid its agent immediately. The agent then made the kickback payment by depositing cash into an Iraqi-controlled account in Jordan.
Flowserve's Dutch subsidiary, Flowserve B.V., entered into one contract involving an ASSF kickback payment of $41,836. The contract was for the supply of water pump spare parts to the Iraqi government-owned South Gas Company. In August 2001, officials of Flowserve B.V. met with the company's agent and were advised that the agent would have to pay a ten percent kickback on the transaction on Flowserve B.V.'s behalf, for which the agent would need reimbursement. Flowserve B.V.'s controller chose to conceal the payment by increasing the cost of the purchase order by ten percent and passing the difference back to the agent. In September 2001, Flowserve B.V. agreed to pay a supplemental commission — euphemistically labeled a "special project discount" — to the agent to cover the amount of the kickback. Upon receiving its supplemental commission payment, the agent paid the ten percent kickback to the South Gas Company on Flowserve B.V.'s behalf.
Flowserve either knew or was reckless in not knowing that illicit payments were either offered or paid in connection with these transactions. Flowserve failed to maintain an adequate system of internal controls to detect and prevent the payments. Flowserve's accounting for these transactions failed properly to record the nature of the company's payments. The company's books falsely characterized the ASSF payments either as payments for services actually performed or as agent commissions.
Flowserve, without admitting or denying the allegations in the Commission's complaint, consented to the entry of a final judgment permanently enjoining it from future violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934, ordering it to disgorge $2,720,861, in profits, plus $853,364 in pre-judgment interest, and to pay a civil penalty of $3,000,000. Flowserve will also pay a $4,000,000 fine pursuant to a deferred prosecution agreement with the U.S. Department of Justice, Fraud Section. Flowserve B.V. will enter into a criminal disposition with the Dutch Public Prosecutor pursuant to which it will pay a fine.
The Commission considered remedial acts promptly undertaken by Flowserve and the cooperation the company afforded the Commission staff in its investigation. The Commission acknowledges the assistance of the Department of Justice, Fraud Section and the United Nations Independent Inquiry Committee.