The large Washington public relations and lobbying firm of Gray and Co. reached a severance agreement with former OAS secretary general Alejandro Orfila -- and put another executive on leave -- after an investigation of the company's office in Madrid raised concerns about the payment of money from a Spanish company to a Spanish politician.

Sources close to Gray and Co. said yesterday that it appeared from the ongoing inquiry that $250,000 was to be transferred from a Spanish utility company, which had become a Gray and Co. client in Madrid, to the public relations firm's bank account in Baltimore to be paid to a Spanish legislator believed to be working on energy legislation.

Last night, after inquiries from The Washington Post, Gray and Co. issued the following statement:

"Several weeks ago, after questions were raised internally, management asked the company's outside legal counsel to evaluate the propriety of the Spanish matter, and instructed counsel to make a full inquiry. Further, early last month, the chairman Robert Keith Gray appointed a three-member committee of the board -- including two outside directors -- to conduct an independent review of management's actions with respect to this matter.

"The committee composed of former postmaster general William Bolger, former presidential adviser Bryce N. Harlow, and former treasury secretary Robert B. Anderson has made certain recommendations and is continuing its review. Its initial recommendations were followed fully and promptly."

Robert Gray declined to comment last night. But Gray and Co. executive vice president Frank Mankiewicz said, "We are confident we have taken, and will continue to take, every appropriate action."

Sources close to Gray and Co. confirmed last night that these actions included the departure of Orfila, who was the firm's vice chairman, and a leave of absence for senior vice president Neil C. Livingstone, who oversaw the firm's foreign operations.

"My conscience is clear," Orfila said last night. "I have nothing to say."

Livingstone said, "I categorically deny" any wrongdoing.

Gray and Co.'s Madrid office was opened last spring by Carter L. Clews, who was then a senior vice president of the firm, and Ken Gray, who is Robert Gray's nephew. Clews said yesterday that he was uncomfortable with the arrangement in Madrid and has since left Gray and Co.

Clews also said Ken Gray had told him he had informed his uncle of the problem. Mankiewicz said last night that Robert Gray had no knowledge of the matter until questions were raised recently.

Orfila was hired by Gray and Co. last year for a reported annual salary of $300,000 to head the company's international operations. At the time, he was formally chastised by the Organization of American States for accepting a salary from Gray and Co. while still serving as OAS secretary general. The action followed a Washington Post story disclosing that for each of three months Orfila had received his $7,328 paycheck from the OAS and $25,000 from his new employer.

Sources close to Gray and Co. said the firm believed that Orfila was involved in developing a contract with the Spanish utility company in which Gray and Co. would bill the utility company $500,000. Half of the money, the sources said, was to go to a Spanish member of parliament and Spain's conservative Alianza Popular party for free-lance public relations work for Gray and Co. in Spain.

The terms of the contract required the Spanish member of parliament to file a permit with the Spanish government that would allow him to do business with a foreign company. "In the event this agreement shall be determined to be, or shall subsequently become illegal under the law of Spain or the United States, this agreement shall become null and void," the contract said, according to a source close to Gray and Co.

The Spanish member of parliament never did get his permit, according to sources. But they said he did receive $25,000 from Gray and Co., with the promise of $125,000 more when he received the permit.

According to the sources, it became apparent to officials at the firm last fall that the Spanish member of parliament was not doing any work for Gray and Co. and had not obtained a permit. The sources said that Livingstone and Gray and Co. executive vice president Charles S. Crawford III were sent to Spain to straighten out the matter. The sources said the contract was canceled.

By that time, the sources said, $250,000 had been paid by the Spanish utility company to Gray and Co. Of that amount, the sources said, Gray and Co. had spent $125,000 on expenses, had returned $100,000 to the utility company and was trying to retrieve the other $25,000 from the Spanish member of parliament.

Carter Clews said in an interview that when he left Washington to open the Madrid office, Orfila gave him a yellow card with a Baltimore bank account number and asked him to deliver it to one of the "principals" in Madrid with instructions to "deposit the money in this account." He said he understood the amount to be $500,000.

Clews said he was told that the reason for this arrangement was that a utility company in Spain wanted help in acquiring "a good enough public image so that the government could not nationalize it ." But the company did not want its connection with Gray and Co. known, according to Clews.

"Gray has other customers who don't want to have their name men- tioned, so that's fine," Clews said. He said he handed the card over as instructed.

Later, Clews said, Ken Gray, Clews' colleague in Madrid, began "complaining that the money was being laundered. . . . 'We are a giant laundromat,' he kept saying. He was obsessed with it."

Gray and Co. said yesterday that Ken Gray was out of town and could not be reached for comment.

Clews said that during this time he was trying to conduct business, "writing proposals, you know, bringing people on the staff, contacting people. And I was sending Gray and Company these reports. And they would come back and say, 'Don't; you've got to serve the clients first.' And I was saying, 'What the hell am I supposed to do for the clients?' And I'd go to the clients and say, 'What do you want me to do for you?' And they'd answer, 'What you're doing is fine.' "

What he was doing for the clients, Clews said, was "nothing, absolutely nothing, except for asking them where the rest of the money was."

Clews said that Robert Gray visited the Madrid office last summer but asked Clews to cancel meetings he had set up for Bob Gray to meet with the clients.

"I said, 'Why?' " Clews recalled. "And he said, 'That's Orfila's affair and I promised I wouldn't step into it. I have to show confidence in the people under me.' "

Clews said that when he later asked the Washington office about the status of the money for the Madrid office, "I got a call from Orfila saying, 'Stay out of the finances; don't worry about the finances.' "

In October, Clews said, Orfila visited Madrid and met with all the clients. "He assured me everything's okay, you know, and everybody understands what everybody else is doing," Clews said. " 'There's no somebody getting money that someone doesn't know about,' he said. 'Everybody is in sync. And Carter, you're doing a wonderful job. They all like you.' "