Flowserve: The Kickback Was Built Into the Pump Price

The Flowserve FCPA case included a $3 million civil penalty payable to the Securities and Exchange Commission over kickbacks concealed in contracts for water pumps and spare parts for Iraqi oil refineries. According to the Justice Department’s February 21, 2008 announcement, Flowserve acknowledged responsibility under its criminal agreement for its subsidiary’s payments to the Iraqi government. The kickback began inside the price submitted for approval, where a sales or finance employee could see what the customer-facing contract concealed.

The Pump Contract Carried the Kickback

The criminal information and agreement described employees of Flowserve Pompes inflating pump-contract prices by approximately 10% before submitting them to the United Nations. The Justice Department said employees concealed that the prices contained a kickback to the Iraqi government. The pump sale and the concealed payment traveled together through the approval process.

In its criminal agreement, Flowserve acknowledged that between July 2002 and February 2003 employees paid approximately $604,651 in kickbacks and offered an additional $173,758. The business they sought was specific: contracts for large-scale water pumps and spare parts used in Iraqi oil refineries.

In Flowserve’s foreign-bribery case, the price presented for approval already contained money intended for the government granting the business. We see a procurement process being asked to approve the money used to corrupt it.

For someone who knows industrial sales, the price build-up is where the story becomes recognizable. A quotation, an approved contract and a payment record can show different views of the same transaction. Connecting them explains how a charge presented as part of the equipment sale became money for the customer government.

Oil for Food Money and the After-Sales Fee

The Oil for Food Program put Iraqi oil-sale proceeds in a United Nations bank account and restricted their use to approved humanitarian goods and services, including food and medicine. The Justice Department explained that the program let Iraq sell oil for humanitarian purposes within the international sanctions regime.

Beginning in 2000, the Iraqi government required companies selling humanitarian goods to its ministries to pay kickbacks to obtain contracts. The announcement says these payments were often described as an “after sales services fee.” Such payments were prohibited under the program and the sanctions then in place.

An after-sales label sounds like part of supporting a product once it reaches the customer. In the program-wide practice described by the Justice Department, that label hid a payment required to win the contract. The distinction matters to someone who knows the service work: what was the fee supposed to buy, who received it, and how did it enter the contract price?

Flowserve’s criminal agreement connected the payments to refinery equipment sales, while the information described hiding them from the United Nations. That puts the inflated-contract kickback inside the program’s purchasing process. Money restricted to approved purchases was being used to carry a concealed payment back to the government awarding the business.

The Subsidiary’s Books and the Parent’s Agreement

The Justice Department filed the criminal information against Flowserve Pompes SAS, the subsidiary. It charged a conspiracy to commit wire fraud and violate the Foreign Corrupt Practices Act’s books-and-records provisions. The agreement filed alongside it was with Flowserve Corporation, which acknowledged responsibility for its subsidiary’s actions.

The Criminal Division’s Fraud Section and the FBI’s Washington Field Office investigated Flowserve. The Justice Department also credited the SEC’s Enforcement Division for assistance in its Oil for Food investigations.

What Flowserve Agreed to Pay the SEC

Flowserve agreed to pay the Securities and Exchange Commission a civil penalty and return profits from the contracts carrying kickbacks. The kickback bought the order, and the settlement reached the profits from that business, too.

When a Pricing Decision Creates the Payment Fund

Microsoft Hungary shows a related pricing problem from the other direction. In its 2019 administrative order, the SEC found that employees used false justifications to obtain discounts and that excess discounts generated funds for improper payments through local partners and other third parties. Money described as a customer discount became money available to intermediaries.

The order also described employees keeping track of an inflated vendor margin. The agency’s sentence puts the supposedly hidden money inside an ordinary business record:

Flowserve acknowledged kickbacks funded by inflated prices in its criminal agreement, while the SEC found that Microsoft Hungary’s discounts failed to reach government customers. The shared question is what the pricing decision funded. A price approval or margin spreadsheet can connect the business explanation to the money set aside for improper payments.

What an Insider Would Recognize

A pump-sales employee may know how the quote changed before approval. A finance employee may know who authorized the payment and which account recorded it. An agent may know what the government customer demanded before granting the contract. Those views connect the price, the decision and the beneficiary.

Our work on payment-flow evidence brings those views together. For a transaction like this, we examine the commercial reason for each charge, the contract sent for approval, the payment authorization and the transfer. A service description can then be compared with the work the supplier or agent actually performed.

That comparison reaches beyond whether somebody signed a form. The industry records that matter include an intermediary’s engagement, qualifications, invoices and deliverables, alongside accounting entries and internal questions about the transaction. We work with the insider who can explain what those records meant in the business, including why an apparently ordinary price change mattered to winning the order.

The 2019 working paper Do Corporate Whistleblower Laws Deter Accounting Fraud?, hosted by MIT Sloan, found lower estimated accounting-fraud risk at firms exposed to state whistleblower laws through state pension-fund investment. Its smaller internal-audit sample offered little evidence that increased spending on internal auditing explained the effect. That finding gives us another reason to value what a person inside the transaction can explain.

Whistleblower Rewards Depend on the Case

The SEC whistleblower reward program can pay eligible whistleblowers a combined 10% to 30% of the money collected in qualifying cases. Our experts assess the transactions and the contribution your information can make, then bring in foreign bribery whistleblower lawyers with the experience the case needs.

For false claims on U.S. government money, a whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers. We work through which program fits the conduct with you.

You Know Why the Price Changed

If you saw a pump contract, service fee or agent payment change to satisfy a government customer, speak with our whistleblower experts about what the price really paid for. We connect your knowledge of the sale to the payments and approvals, bring in foreign bribery whistleblower lawyers who understand industrial equipment contracts, and stay beside you to build your strongest whistleblower case.