International Law

Texas-based Flowserve Corporation will pay about $10.5 million to resolve criminal and civil charges brought by the United States for illegal payments to Iraq under the U.N. Oil for Food Program. The Securities and Exchange Commission's final judgment requires Flowserve to disgorge $2,720,861, in profits, plus $853,364 in pre-judgment interest, and pay a civil penalty of $3,000,000. In a criminal action brought by the Department of Justice, the company will pay a $4,000,000 fine and enter into a three-year deferred prosecution agreement. In Holland, Flowserve's Dutch subsidiary will also pay a fine of an undisclosed amount to settle related criminal charges.

Flowserve -- which has more than 14,000 employees in 56 countries -- supplies pumps, valves and seals mainly to the power, oil and gas and chemical industries. The SEC said that during 2001 to 2003, Flowserve's French and Dutch subsidiaries entered into twenty sales contracts with Iraqi government entities through the U.N. Oil for Food Program. Under those contracts, $646,488 in kickbacks were paid and another $173,758 were authorized. Flowserve's subsidiaries funded the bribes by including in the contracts a bogus 10% after-sales service fee to a Jordanian agent. In reality, the agent provided no after-sales services but instead used the money to deposit cash into an Iraqi-controlled account at a Jordanian bank.

Flowserve's internal accounting records falsely reflected that its French and Dutch subsidiaries paid the after-sales service fee to the agent on each contract. The financial results of the subsidiaries were included in the consolidated financial statements that Flowserve filed with the SEC. As a result, the SEC charged that Flowserve "either knew or was reckless in not knowing that illicit payments were either offered or paid in connection with these transactions. . . . The company's books falsely characterized the [after-sales service fee] payments either as payments for services actually performed or as agent commissions."

The SEC said Flowserve violated Sections 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 [15 U.S.C. §§ 78m(b)(2)(A) and 78m(b)(2)(B)] by failing to keep accurate books and records and by failing to devise and maintain a system of internal accounting controls sufficient to detect and prevent the illicit payments. The DOJ charged Flowserve's French subsidiary with conspiracy to commit wire fraud and to violate the books and records provisions of the Foreign Corrupt Practices Act.

Flowserve accepted responsibility for the acts of its French and Dutch subsidiaries and agreed to cooperate with the DOJ's ongoing Oil for Food investigations. U.S. prosecutors acknowledged Flowserve?s "thorough review of the improper payments and the company?s implementation of enhanced compliance policies and procedures. . . ." On that basis, the DOJ said it agreed to defer prosecution of Flowserve's French subsidiary for three years. "If Flowserve and [its French subsidiary] abide by the terms of the agreement, the Department will dismiss the Criminal Information." The SEC also said it "considered remedial acts promptly undertaken by Flowserve and the cooperation the company afforded the Commission staff in its investigation."

Flowserve Corporation trades on the New York Stock Exchange under the symbol FLS.

View the Department of Justice's February 21, 2008 Release here.

Veiw the SEC's Litigation Release No. 20461 / February 21, 2008 here.

View the Complaint in Securities and Exchange Commission v. Flowserve Corporation, Civil Action No. 08 CV 00294 (D.D.C.) (EGS) here.

Full post as published by The FCPA Blog on February 21, 2008 (boomark / email).