A&O Shearman FCPA Digest | SEC v. Flowserve Corp. (D.D.C. 2008)

Source Documents

Nature of Business
Flowserve Corporation, a New York corporation, sells pumps, valves, seals, and related services to the power, oil, gas, and chemical industries. Its common stock is registered with the SEC pursuant to Section 12(b) of the Exchange Act.

Influence to be Obtained
In April 1995, the U.N. adopted Security Council Resolution 986, which permitted the government of Iraq to sell oil and to use proceeds from those sales to purchase humanitarian supplies such as food for the Iraqi people (“U.N. Oil‑for‑Food Program”). In an extensive scheme, the Iraqi government received illicit payments in the form of surcharges from oil purchasers and kickbacks, often termed “after sales service fees,” from humanitarian goods suppliers. The kickback payments were masked by inflating the contract price, usually by 10% of the contract value.

Flowserve was involved in the U.N. Oil‑for‑Food Program through two if its foreign subsidiaries: Flowserve Pompes SAS, a French subsidiary, and Flowserve B.V., a Dutch subsidiary. These two foreign subsidiaries allegedly entered into 20 contracts in which kickback payments to the Iraqi government were either made or authorized. In total, payments of $646,488 were made through two Jordanian agents with Flowserve Pompes SAS making payments totaling $604,651, and Flowserve B.V. making payments totaling $41,836. According to the SEC, Flowserve Pompes authorized an additional $173,758 in payments which were never made.

Enforcement
The SEC alleged in its complaint, filed in February 2008, that Flowserve either knew of or was reckless in not knowing of the kickback payments being made by Flowserve Pompes and Flowserve B.V., which Flowserve knew were illegal under the U.N. Oil‑for‑Food Program. The complaint further alleged that Flowserve violated the books and records provision of the FCPA by failing to properly account for these payments and that Flowserve violated the internal controls provision of the FCPA by failing to implement internal controls sufficient to prevent this type of misconduct.

Without admitting or denying the allegations contained in the SEC’s complaint, Flowserve consented to the entry of a final judgment entered March 18, 2008 enjoining it from violating the FCPA, and mandating that it disgorge $2,720,861, plus $853,364 in prejudgment interest, and pay a civil penalty of $3,000,000. In a related action, Flowserve entered into a deferred prosecution agreement with the DOJ under which it agreed to pay a penalty of $4 million.