Textron Inc: The Kickback Was Built Into the Price

In the Textron Inc FCPA case, Textron agreed to an $800,000 Securities and Exchange Commission civil penalty over allegations that its French subsidiaries hid Oil for Food kickbacks in inflated contracts and recorded them as commissions. The equipment was real. The services supposedly justifying the fees were another matter: the SEC alleged that nobody performed them. For someone who knew the contract price, the consultant or the work on the ground, that difference was visible inside the business.

Textron was a Rhode Island-based industrial equipment company whose subsidiaries sold pumps, gears and other equipment to Iraqi ministries. The Commission brought its Foreign Corrupt Practices Act accounting case on August 23, 2007. Its account of the complaint alleged that two French subsidiaries authorized and made approximately $650,539 in kickbacks from approximately 2001 through 2003. The money allegedly traveled through third parties to Iraqi-controlled accounts, while the contracts presented to the United Nations concealed what the inflated price included.

The Contracts Were Inflated Before United Nations Approval

The SEC alleged that David Brown Guinard Pumps and David Brown Transmissions France inflated their Oil for Food contract prices by 10% to cover secret after-sales service fees. The increase allegedly went into the price submitted for United Nations approval. The side arrangement explaining the increase stayed out.

For David Brown Guinard Pumps, the Securities and Exchange Commission described three contracts and undisclosed side letters with Iraq. Management allegedly approved approximately $83,000 in fees to pass through a Lebanese consultant. When goods under one contract were held at the Iraqi border, the consultant supplied bank records showing a payment into a Lebanese account in an Iraqi individual’s name for the ministry’s benefit. The border delay brought the bank record into the commercial file.

For David Brown Transmissions France, the Commission described ten contracts and approximately $567,000 in fees approved for payment through a Jordanian consultant. The export sales manager’s internal memorandum recorded approval from French management to include the fee in the contract price. The release also reproduced the manager’s instruction about keeping a written agreement quiet:

That is a revealing instruction in an equipment sale. According to the Commission’s account, management approved the fee while the sales manager sought to avoid a written agreement with the customer. We see the problem in that pairing: the people approving the price allegedly knew about the payment that the approval paperwork concealed from the United Nations.

Oil for Food Money Was Supposed to Buy Humanitarian Supplies

The Oil for Food Program allowed Iraq to sell oil to fund humanitarian purchases under international sanctions. As the Justice Department explained, oil-sale proceeds went into a United Nations bank account and could fund only approved humanitarian goods and services, including food and medicine.

The Justice Department described Iraqi demands for kickbacks as a condition of winning ministry contracts, often dressed up as after-sales service fees. The Securities and Exchange Commission alleged that Textron’s subsidiaries bypassed the program’s escrow account when paying the kickbacks and sent the money through third parties instead. The alleged arrangement used the humanitarian purchasing price to cover a payment kept outside the program’s approved transaction. The service label gave that payment an ordinary commercial explanation.

In the Commission’s account, a ministry bought equipment, a French subsidiary negotiated the sale, a consultant handled the side payment, and finance recorded the expense. Those roles produced different pieces of the same payment trail. The person who knew why the price increased could explain something a ledger entry labeled commission would conceal.

Commissions on the Books, No Services Behind Them

In Textron’s case, the Securities and Exchange Commission alleged that the subsidiaries recorded Iraqi after-sales service fees as commissions in twelve transactions. Outside Iraq, the alleged improper payments appeared as commissions and consultation fees.

The books and internal accounting controls allegations reached beyond the choice of expense account. The Commission said both French subsidiaries failed to sign consultant agreements even though Textron required them, and subsidiary managers failed to report known violations to higher management. It also alleged that Textron relied on managers to handle compliance without adequately checking their work despite knowing about corruption problems in the region. A requirement on paper had become a matter of faith.

A 2017 Journal of Forensic & Investigative Accounting paper, A Teaching Case Using the Elements of the Foreign Corrupt Practices Act, connects overseas sales decisions with the accounting records they produce. Its teaching scenario places payments to government officials under a testing-cost description and describes the sales team’s use of agents and management’s approval of inflated payments. That is a useful accounting lens for Textron: the commercial purpose, the authorization and the recorded description need to tell the same story. The Commission alleged that they did not.

The same absence of actual services appears in Magyar Telekom. Under its deferred prosecution agreement, the company admitted using six false success-fee contracts for which no valuable work was performed. For an insider, the shared question is what the consultant actually delivered in exchange for the payment. A service description can be specific enough for accounting while concealing the reason the business paid.

The Justice Department Agreement and SEC Settlement

The Justice Department’s announcement described Textron’s acknowledgment of responsibility under its non-prosecution agreement for improper payments by French subsidiaries’ employees and agents. The Securities and Exchange Commission brought the separate civil accounting case.

The Justice Department’s Fraud Section and the FBI investigated the conduct, with assistance from the Securities and Exchange Commission’s enforcement staff. Both agencies credited Textron’s self-reporting, remedial work and cooperation.

Under the civil settlement announced by the Securities and Exchange Commission, Textron agreed to return $2,284,579 in profits, in addition to the civil penalty. The Commission attributed $1,936,926 in profits to the Oil for Food contracts involving illicit fees. We see the imbalance: even the alleged profits from that part of the business exceeded the civil penalty. The settlement also required measures concerning Textron’s FCPA compliance program.

The Service-Fee Pattern Extended Beyond Iraq

The Securities and Exchange Commission alleged that Textron’s David Brown subsidiaries made $114,995 in improper payments to secure thirty-six contracts outside Iraq from 2001 to 2005. Its account identified the United Arab Emirates, Bangladesh, Indonesia, Egypt and India. The recurring allegation was payment to obtain business without the services that supposedly explained the expense.

The Indonesia transaction shows why the amount paid to a representative and the amount traced onward deserve separate attention. The Commission alleged that a representative received $149,000 for after-sales services and passed $10,000 to a procurement official at government-owned Pertamina to sponsor a golf tournament. The release described very little documentation of what the representative did with the remainder. For someone reviewing that expense, the promised service and the evidence of performance would be central to understanding the payment.

What an Insider Could See in the Contracts and Accounts

A bid-team employee may know when a price changed and who approved it. A subsidiary finance employee may know the consultant, payment instruction and expense account. Textron’s case brings those views together: the contract submitted for approval, the separate arrangement with the customer, the management authorization, the consultant’s bank record and the accounting description. We connect those parts with you to understand what the payment bought and who knew its purpose.

Knowledge of the work matters as much as familiarity with the accounts. If you knew that a consultant performed no after-sales service, you could explain why an otherwise ordinary-looking commission entry deserved attention. If your role involved reviewing subsidiary controls, you might know whether required agreements existed or whether managers passed concerns upward. Those are concrete business facts around which our whistleblower experts can assess a case.

Whistleblower rewards follow the law behind the claim. A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers. Foreign-bribery cases have separate whistleblower award programs, which we assess with you in light of the payments and records you know.

You Know What the Fee Was For

If you saw a contract price increased to cover a hidden payment, or a consultant paid for work nobody performed, speak to one of our Whistleblower Experts about what the fee really paid for. We build your strongest foreign-bribery whistleblower case around your knowledge of the transaction, bring in FCPA whistleblower lawyers who understand subsidiary accounting and overseas payments, and stay beside you throughout the case.