Risk & Compliance

Flowserve Pumps Out $10.5M in Iraqi Kickback Settlement

The company, one of several caught up in Iraq's Oil for Food scandal, comes to terms with Justice Department.
Sarah JohnsonFebruary 21, 2008

Flowserve Corp. has agreed to pay $10.5 million to settle charges that its subsidiaries participated in a kickback scheme with the Iraqi government between 2001 and 2003.

The maker of pumps and valves will pay a $4 million penalty to the Department of Justice, which charged it with conspiracy to commit wire fraud, and with violations of the books and records provisions of the Foreign Corrupt Practices Act. In addition, Flowserve will pay the Securities and Exchange Commission a fine, profit disgorgement, and interest totaling $6.5 million to resolve similar FCPA and internal control charges.

The Dallas-based manufacturer’s French and Dutch units allegedly succumbed to the same pressure that ensnared several other companies in the United Nations’ now defunct Oil for Food program. Chevron, Ingersoll-Rand Co., and York International are some of the companies that have made similar settlements with the SEC and DOJ.

Before the U.S. invaded Iraq five years ago, the U.N. ran the Oil for Food program with the aim of providing humanitarian aid to the international-trade-starved Iraqis. The money flowed from companies through U.N. escrow accounts. However, some of the funds meant for humanitarian needs went into an Iraqi slush fund, collected from what the SEC called illicit payments that were tagged onto inflated contract prices.

According to U.S. regulators, Iraqi ministries demanded that its contractors tack on a 10 percent fee to all humanitarian goods purchased under the U.N. program. In total, the U.S. government estimates, the Iraqi government collected more than $1 billion from these extra payments.

In Flowserve’s case, its French subsidiary, Flowserve Pompes, and its Dutch subsidiary, Flowserve B.V., entered into 20 questionable contracts for the sales of industrial equipment to Iraqi government entities. According to the SEC’s complaint filed on Thursday, those contracts included $646,488 completed kickback payments and $173,759 for transactions that had been authorized but not completed before the war began in 2003.

To cover up the 10 percent kickback agreements added to each contract, Flowserve Pompes recorded the fees as an “after-sales service fee” in its internal accounting books as if it would have been used to cover the expense of installing equipment. In truth, there was no such service provided. Flowserve B.V.’s controller allegedly concealed one kickback payment by hiking the cost of a purchase order and passing the differences to a third-party agent.

In addition to faulting Flowserve for not properly accounting for these transactions, the SEC also said the company did not have an adequate system of internal controls. As part of its three-year deferred prosecution agreement with the DOJ, Flowserve has agreed to help the government in its ongoing investigation of the Oil for Food program. It has also acknowledged its subsidiaries’ responsibility in the scheme.

“We fully cooperated with the SEC and DOJ in their investigations of this matter,” said Lewis Kling, Flowserve’s president and CEO. “We are pleased to now be able to put this matter before us.”

Flowserve has had brushes with federal investigators in the past. In 2006, the SEC dropped its inquiry of the company following a two-year look into why it had restated its financial results for fiscal years 2000 to 2002 and nine months of 2003. In 2005, it gained notoriety as the first company to be accused of a Regulation Fair Disclosure violation for an earnings reaffirmation. The company later settled the SEC’s charges by paying a $350,000 penalty.