|By Maureen O'Gara||
|October 10, 2012 08:00 AM EDT||
Cisco has terminated its long-standing and strategic reseller and licensing arrangement with Chinese telecommunication equipment maker ZTE because an internal investigation found ZTE has been passing banned Cisco networking gear to Iran, according to a Reuter's exclusive Monday morning.
The investigation was sparked by Reuters reports in March and April that claimed ZTE was also selling Iran millions of dollars worth of computer equipment made by a number of US companies.
The FBI is in the midst of a criminal investigation.
CEO John Chambers told Reuters 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."
The timing of the story was interesting because the US House of Representatives' Intelligence Committee released a report at the same time saying that both ZTE and Huawei, an even bigger Chinese telecom equipment maker, are security risks because of their close ties to China's rulers - who have the "means, opportunity and motive" to use them and their widgetry to their own ends - and so should be shut out of the US market.
It found that Huawei in particular has been guilty of bribery, corruption, discrimination and copyright infringement. And it's worried about US power grids; banking and finance systems; gas, oil and water systems; rail and shipping.
Committee chairman Mike Rogers said on "60 Minutes" Sunday that American firms thinking about doing business with Huawei should "find another vendor if you care about your intellectual property; if you care about your consumers' privacy and you care about the national security of the United States of America."
The Chinese companies of course deny the allegation and China is expected to retaliate.
ZTE said it "is communicating with Cisco. At the same time, ZTE is actively cooperating with the US government about the probe to Iran. We believe it will be properly addressed."
ZTE also released a copy of a letter it sent to the House committee after a hearing in September, saying that it "profoundly disagrees" with the claim it is directed or controlled by the Chinese government.
"ZTE should not be a focus of this investigation to the exclusion of the much larger Western vendors."
Huawei sent Reuters a statement saying, "Baseless suggestions otherwise or purporting that Huawei is somehow uniquely vulnerable to cyber mischief ignore technical and commercial realities, recklessly threaten American jobs and innovation, do nothing to protect national security, and should be exposed as dangerous political distractions from legitimate public-private initiatives to address what are global and industry-wide cyber challenges."
Huawei gets about 4% of its sales from the US and ZTE may get 3%, both mostly from selling handsets through Verizon, Sprint and T-Mobile USA.
The Wall Street Journal says the "damning" congressional report threatens the Chinese companies' plans to expand into developed markets. Huawei, in particular, wants to get into communication systems, data centers and other corporate technology services. The paper said the findings could prompt European governments to start their own investigations.
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