Juniper Networks: Discounts for Vacations, Approval After the Trip

Juniper agreed to pay $11,745,018 to settle the Juniper Networks FCPA case over Securities and Exchange Commission allegations that diverted sales discounts and misleading travel agendas concealed improper customer entertainment in Russia and China. The August 29, 2019 settlement order describes a business problem that sales, finance and marketing employees would recognize: headquarters approved one explanation while, the agency alleged, local employees used the money for something else. In Russia, the alleged funding sat outside Juniper’s books. In China, the agency said approvals regularly arrived after the events they were supposed to control.

What the SEC Settlement Covered

The SEC resolved allegations against Juniper Networks under the Foreign Corrupt Practices Act’s recordkeeping and internal accounting controls provisions. Its case against the company concerned the accuracy of expenses and the approval processes for additional discounts and travel.

The civil penalty of $6,500,000 exceeded the $4,000,000 Juniper agreed to surrender from the conduct. That larger penalty came even after the Securities and Exchange Commission credited the company for cooperating with its investigation.

For an insider, the importance of books and records and internal accounting controls is concrete. A discount approval, an event agenda and the expense ultimately recorded can describe different uses of the same money. The SEC alleged that Juniper’s controls failed to prevent or detect off-book accounts, unauthorized trips, false agendas and approvals granted afterward.

The Network Sale Ran Through a Channel Partner

Juniper sold networking equipment and services, including routers, switches and security firewalls for telecommunications networks. The order describes sales through channel partners that supplied technical expertise, system integration, maintenance and servicing to the end customer.

Juniper sold to those partners at a discount from the end customer’s price. The partner kept part of that discount as its profit margin and resold the products and services. That pricing arrangement matters because an additional discount can leave more money with the intermediary without reducing what the customer pays.

The supplier’s price, the approved discount, the final customer price and the retained margin tell different parts of the transaction. A sales employee may know why headquarters approved a price reduction, while a channel partner knows what the customer actually paid. In the Russian allegations, the gap between those accounts supplied the money for customer trips.

Russia’s Discounts Became a Travel Fund

The Securities and Exchange Commission alleged that sales employees in the Russian office of Juniper subsidiary JNN Development Corp. falsely presented additional discounts as necessary to meet competition. From 2008 through 2013, according to the order, employees secretly agreed with channel partners to retain those discounts instead of passing them to customers. The partners held the resulting money in off-book accounts called common funds.

The alleged diversion of distributor discounts did more than change a price. The agency said employees structured the transactions to keep the funds off Juniper’s books so that local staff and partners could direct the money without proper internal approval. A discount request became a way to create a spending account beyond the approval process.

According to the order, some of that money paid for customer travel, including trips for foreign officials, that was predominantly recreational and had little or no business purpose. The agency described trips to Italy, Portugal and U.S. cities where there were no Juniper facilities, relevant conferences or other legitimate business reasons for the visits. Activities included sightseeing, amusement parks and national park excursions. Some trips also paid for meals and entertainment for customers’ family members.

The business purpose appeared more clearly in the internal requests than in the itinerary. The order recounts an employee seeking approval for a five-day international sightseeing trip to meet a senior manager of a state-owned customer and accelerate second-quarter bookings. Another employee sought a seven-day leisure trip to the United States on the explanation that Juniper would otherwise lose customer sales. The agency’s account connected the entertainment to the sales decision employees wanted.

Management Knew, but the Funds Continued

A member of senior management learned about the off-book accounts and improperly obtained discounts in late 2009, according to the Securities and Exchange Commission. Juniper instructed employees to stop, but the agency alleged that the practices continued through 2013 because the corrective response was ineffective. Employees sometimes switched from corporate email to personal communication devices, and the order quotes one warning:

Management said stop. The answer, according to the agency, included keeping it out of corporate email. We see a change in how employees communicated, not an end to the spending. A person who saw the instruction and the next discount request could connect the warning to what the business continued to approve.

China Had One Agenda for Approval and Another Reality

The China allegations involved Juniper Networks R&D Ltd., based in Hong Kong, and Juniper Networks Shanghai Ltd., based in China. The Securities and Exchange Commission said local employees paid for excessive domestic travel and entertainment for customers, including foreign officials, from 2009 through 2013. Marketing employees allegedly sent misleading agendas that understated the entertainment to Juniper’s legal department to obtain approval.

The same agenda could serve another audience. In some instances, according to the order, employees also supplied the misleading version to customer invitees so they could obtain permission from their own organizations to attend. The allegedly false account of the event therefore crossed the sale: it supported approval inside both the supplier and the customer.

Juniper’s policy required advance review, but marketing staff sometimes skipped that step, according to the order. The agency alleged that legal staff responsible for hospitality in the Asia-Pacific region regularly approved events that had already happened. We would call that paperwork catching up with the trip. The employee who knew the actual trip could see something an approved agenda concealed.

The Same Discount Problem Appeared at Microsoft

Microsoft Hungary provides a close comparison for the channel-pricing problem. In its separate order against Microsoft Corporation, the Securities and Exchange Commission alleged that employees supplied false justifications for discounts and that excess discounts generated funds for improper payments through resellers and other third parties. The agency said Microsoft lacked sufficient procedures to determine whether the requests were legitimate and whether approved discounts reached the customers.

That comparison explains why the customer’s final price belongs beside the manufacturer’s approval. In the agency’s accounts of both companies’ discounts, the stated reason for reducing the supplier’s price diverged from what happened to the money. A channel employee’s knowledge of the resale can reveal the difference between a customer concession and funds retained for another purpose.

What an Insider Can Connect

The useful payment trail joins the commercial explanation to the customer benefit and the accounting treatment. Sales and channel staff may know the discount request and the customer’s price. Marketing or travel staff may know the actual itinerary, the invitees and when approval arrived. Finance, compliance and audit staff may see how the expense was recorded and how management responded when someone questioned it. We work with insiders to connect the part they know to the decisions and records elsewhere in the business.

We assess how inside knowledge of overseas sales and false company records can support a case for SEC whistleblower awards. When the conduct involves fraud against the U.S. government, we also consider a different law. A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers.

You Know Where the Discount Went

If the customer never received the discount, or the trip bore little resemblance to the approved agenda, talk with our whistleblower experts about what you saw. We build the case around that knowledge and bring in FCPA whistleblower lawyers who understand cross-border technology sales, channel partners and accounting controls. We stay with you from the first conversation, working toward your strongest FCPA whistleblower case.