Cisco Systems, Inc. (NASDAQ:CSCO) cut its business partnership with ZTE Corp. (SHE:000063), after its internal investigation regarding allegations that the Chinese telecommunications manufacturer sold Cisco-branded networking equipment to Iran, despite sanctions imposed by the United States government.

cisco logo

The leading global networking company started investigating the allegations, after Reuters published stories documenting how ZTE managed to sell prohibited networking equipment from Cisco, to the largest telecommunications company in Iran. . The report uncovered a sales equipment contract between ZTE Corporation (SHE:000063) and Telecommunication Co of Iran (TCI) dated July 2011, which includes several Cisco switches.  ZTE allegedly attempted to destroy documents related to its transaction with the Iranian firm.

Several U.S. government agencies launched investigations following the allegations, including the Federal Bureau of Investigation (FBI), the Department of Commerce, and the House of Representatives Intelligence Committee.

According to the Cisco Systems, Inc. (NASDAQ:CSCO) chief executive officer, John Chambers, the company “doesn’t tolerate direct or indirect” business dealings with countries sanctioned by the United States government, such as Iran. According to him, “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.” Chambers did not provide details regarding the result of the company’s internal investigation regarding the issue.

On the other hand, ZTE Corporation (SHE:000063) spokesperson, Dai Shu, expressed the company’s concern regarding Cisco’s decision. He said, “ZTE is highly concerned with the matter, and is communicating with Cisco Systems, Inc. (NASDAQ:CSCO). 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.”

Cisco Systems, Inc. (NASDAQ:CSCO) established sales partnership with ZTE Corporation (SHE:000063) in order to increase competitiveness against Huawei Technology Company Ltd. Co Ltd (SHE:002502), the world’s second largest telecommunications equipment manufacturer. Cisco provided licenses to ZTE, to produce networking equipment locally, to have a wide range of Cisco-branded equipment that are cost competitive with Huawei products. ZTE was “reasonably successful” in reselling Cisco equipment in China, but its plan to develop joint projects to sell in Africa failed,  according to a former Cisco executive.

In a separate report, the United States House of Representatives Intelligence Committee reported that ZTE and Huawei pose security threat to the United States, due to Chinese state influence. The Congressional Intelligence Committee recommended that both Chinese telecommunications companies should be prevented from doing business with the United States. The report suggested the possibility that Chinese authorities might use the ZTE Corporation (SHE:000063) and Huawei technologies in gathering intelligence, intercepting high-level communications, and shutting down network systems during national emergency.

The Chinese government, Huawei Technology Co Ltd (SHE:002502) and ZTE Corporation (SHE:000063) rejected the allegations of Congressional Intelligence Committee.