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Cisco cuts ties to China's ZTE after Iran probe

LONDON--Cisco Systems Inc. has ended a longstanding sales partnership with ZTE Corp. after an internal investigation into allegations that the Chinese telecommunications equipment maker sold Cisco networking gear to Iran.

Cisco's probe followed stories by Reuters in March and April that documented how the Shenzhen, China-based ZTE had sold banned computer equipment from Cisco and other U.S. companies to Iran's largest telecom firm. ZTE also agreed last year to ship millions of dollars worth of additional U.S. tech products, including Cisco switches, to a unit of the consortium that controls the telecom firm.

The stories sparked internal probes by the companies involved, as well as investigations by the U.S. Commerce Department, a congressional committee, and the Federal Bureau of Investigation. ZTE's general counsel at its Texas-based subsidiary alleged that the parent company plotted a cover-up, including possibly shredding documents, after the first Reuters story broke. The FBI has launched a criminal probe into the allegations.

The U.S. House of Representatives' Intelligence Committee said in a draft of a report to be released Monday that ZTE and fellow Chinese telecom equipment maker Huawei Technologies Co. Ltd. should be shut out of the U.S. market because potential Chinese state influence on them poses a security threat. Both companies deny the allegation.

David Dai Shu, a ZTE spokesman, said of Cisco's decision to cut ties: “ZTE is highly concerned with the matter and is communicating with Cisco. At the same time, ZTE is actively cooperating with the U.S. government about the probe to Iran. We believe it will be properly addressed.”

In a recent interview, John Chambers, Cisco's chief executive, declined to discuss the results of the company's investigation of ZTE's sales to Iran. But he said Cisco doesn't “tolerate any direct or indirect” sales of its equipment to embargoed countries such as Iran. “And when that occurs, we step up and deal with it very firmly. So I think you can assume that you will not see that happen again.”

Cisco and ZTE partnered for the past seven years in a relationship that was at times rocky, according to a former Cisco executive with knowledge of the matter.

ZTE described the initial partnership as an effort to develop business opportunities in China and Asia Pacific, excluding Japan.

The partnership expanded about five years ago when Cisco began viewing ZTE as a means to combat Huawei, the world's second-biggest maker of telecoms equipment by revenue after Sweden's Ericsson. Huawei had been beating out Cisco in emerging markets by offering significantly cheaper products.

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