In August 1990, the U.N. adopted Security Council Resolution 661, which prohibited U.N. member-states from transacting business with Iraq, except for the purchase and sale of humanitarian supplies. In April 1995, the U.N. adopted Security Council Resolution 986, a limited exception to Resolution 661 which allowed Iraq to sell its oil so long as the proceeds from oil sales were used by the Iraqi government to purchase humanitarian supplies for the Iraqi people. The U.N. controlled the proceeds from all sales of Iraqi oil and approved payments to suppliers of humanitarian goods. This program became known as the Oil for Food Program. Beginning in approximately August 2000, the Iraqi government demanded that suppliers of humanitarian goods pay a kickback, usually valued at 10% of the contract price, to the Government of the Republic of Iraq in order to be awarded a contract by the government. Suppliers often caused the U.N. to unknowingly fund these improper kickbacks by including the cost of the kickbacks in the contract price.
From approximately 2001 through 2003, Flowserve Corporation's French subsidiary, Flowserve Pompes SAS, paid kickbacks to the Iraqi government in connection with certain U.N. Oil for Food contracts. Flowserve Pompes entered into fifteen contracts involving kickback payments of $604,651. Flowserve Pompes agreed to, but did not ultimately make, an additional $173,758 in improper payments under four additional contracts. The kickbacks were characterized as "after-sales service fees" ("ASSFs"), but no bona fide services were performed.
On February 21, 2008, the Department of Justice filed a one-count criminal information against Flowserve Pompes in the District of Columbia, charging Flowserve Pompes with conspiracy to falsify the books and records of Flowserve Corporation and conspiracy to commit wire fraud. At the same time, the DOJ entered into a deferred prosecution agreement with Flowserve Corporation. Under the terms of the agreement, Flowerve Corporation agreed, on behalf of itself and Flowserve Pompes, to pay a $4,000,000 monetary penalty to the U.S. Treasury and to undertake ongoing compliance obligations. In June 2011, the court granted the DOJ's motion to dismiss the criminal Information against Flowserve Pompes because Flowserve Corporation and Flowserve Pompes had abided by the terms of the deferred-prosecution agreement.
In a related action with the SEC, Flowserve Corporation agreed 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 B.V., Flowserve's Dutch subsidiary, agreed to enter into a criminal disposition with the Dutch Public Prosecutor pursuant to which it will pay a fine.
