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IRAQ: GE Settles Iraq Kickback Case for $23 Million

by David M. KatzCFO Magazine
July 27th, 2010

General Electric has agreed to pay $23.4 million to settle Securities and Exchange Commission charges that it violated Foreign Corrupt Practices Act accounting and internal-controls provisions.

Through those violations, GE enabled four of its subsidiaries to bribe Iraqi government officials "to obtain valuable contracts under the UN Oil for Food Program," according to the SEC complaint.

The SEC charged that two GE subsidiaries along with two other subsidiaries of public companies that have since been acquired by GE made $3.6 million in illegal kickback payments in the form of cash, computer equipment, medical supplies, and services to the Iraqi Health Ministry or the Iraqi Oil Ministry. GE settled the case without admitting or denying guilt. An attorney for the company could not be reached at press time.

The GE affair is part of a larger investigation of conduct relating to the Oil for Food Program, according to Cheryl Scarboro, chief of the SEC's Foreign Corrupt Practices Act Unit. "It is the 15th matter that we've brought in connection with the Oil for Food Program," she tells CFO. "It illustrates a targeted approach in a particular area or sector that we'll continue to take in the FCPA Unit."

Run by Iraqi government ministries, the kickback scheme lasted from about 2000 to 2003, according to the SEC complaint, which was filed in the U.S. District Court for the District of Columbia. Two GE subsidiaries, Marquette-Hellige and OEC-Medical Systems (Europa), paid about $2.04 million in kickbacks to the Iraqi government under the Oil for Food Program. Ionics Italba and Nycomed Imaging, subsidiaries of two other companies during the scheme, together paid out about $1.55 million in cash kickbacks.

Besides GE, Amersham and Ionics, the parent companies of Nycomed Imaging and Ionics Italba, respectively, were also charged in the case. Acquired by GE in 2004, Amersham is now known as GE Healthcare, and Ionics, acquired in 2005, is known as GE Ionics. Corporate acquisitions "do not provide GE immunity from FCPA enforcement of the other two subsidiaries involved," said Scarboro in an SEC press release. GE Ionics and GE Healthcare are successors to the liabilities of Ionics and Amersham, according to the commission's complaint.

In its complaint, the SEC charged that GE, Ionics, and Amersham each failed to make sure that their subsidiaries devised and maintained sufficient internal accounting controls "to provide reasonable assurances" that payments were made under management's authorization and were "recorded as necessary to maintain accountability for the companies' assets."

The commission charged that the four GE subsidiaries paid kickbacks to Iraqi government ministries through third-party agents in the form of "aftersales service fees" (ASSFs) on sales of products to Iraq. "All four subsidiaries knew that such kickbacks were prohibited by the Oil for Food Program and U.S. and international trade sanctions on Iraq," according to the complaint.

Participating in a total of 18 contracts involving ASSFs, the GE subsidiaries earned profits of about $18 million as a result of their illegal kickbacks, the SEC charged.

Intended to provide humanitarian relief to Iraqis during the economic sanctions that followed the first Iraq war, the Oil for Food Program enabled the Iraqi government to sell oil to buy food, health-care supplies, and other needed goods. The program required, however, that all purchases be made through a UN-controlled escrow account.

The kickbacks that the GE subsidiaries paid for their Oil for Food contracts "had the effect of diverting funds out of the escrow account and, with respect to the cash kickbacks paid by Ionics Italba and Nycomed, into an Iraqi slush fund," according to the SEC. "Corruption was rampant within the Program."



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