The US tried to wall off its most advanced AI chips from rival powers. The chips kept finding doors.
A recent court case has again alleged that brokers used encrypted messages, front companies, and third-country intermediaries to move restricted Nvidia hardware and other US technology toward banned markets despite export controls. The case exposes growing cracks in Washington’s attempt to contain the spread of advanced US technologies to China and Russia.
According to a Fortune report, brokers are allegedly rerouting shipments through go-between countries, allowing high-end semiconductors from the US to quietly bypass restrictions. Officials say these chips and technology support military AI systems used by Russia in the war with Ukraine, surveillance infrastructure, cyber operations, and broader geopolitical competition between the US, China, and Russia.
How restricted AI chips allegedly reached China
Court filings from a recent case centered on Matthew Kelly, Stanley Yi Zheng, and Tommy Shad English, who prosecutors say were discussing moving banned Nvidia GPUs to China via front companies. Encrypted messages show Zheng cautioning Kelly against explicitly mentioning China in their texts, warning that it could draw the US government’s attention to potential embargo violations.
The conversations form part of a wider network tied to smuggling and export-control violations, though formal charges against the trio will be decided by June.
However, this particular case is just another example of mounting enforcement pressure from the Bureau of Industry and Security (BIS). Over the past year, the BIS has expanded its crackdowns on export-control violations, announcing nearly $420 million in combined penalties and forfeitures related to technology smuggling.
Among the most prominent actions from the BIS was a $252 million penalty against Applied Materials for routing semiconductor equipment to China using a Korean subsidiary. Another was from Cadence Design Systems. The company pleaded guilty and agreed to pay $95 million in fines.
Another notable crackdown was in a Florida case involving Hon Ning “Matthew” Ho and Cham “Tony” Li. The pair, along with two others, used a sham company to smuggle 400 Nvidia A100 chips into China through Malaysia and Thailand.
In another major case, the biggest to date, Supermicro cofounder Yih-Shyan “Wally” Liaw was arrested in March for masterminding a $2.5 billion shipment of servers to China via a shell company in Southeast Asia.
Although Liaw pleaded not guilty, investigations into the matter continue with Supermicro saying it received another subpoena from the SEC.
Beyond the alleged violations that have persisted because the industry is “lucrative,” according to Kelly’s WeChat conversations, US officials fear the act could have wider implications for security and AI.
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Why advanced chips are a security concern
According to a Ukrainian analysis cited by the US Senate, 72% of 2,797 foreign components found in Russian weapons had US origins. Highly lethal weapons like the Kh-101 missiles were among those noted in the analysis.
Beyond Russia, the US export controls are also shaped by concerns over China, where access to advanced chips has become a strategic issue. Although the US has permitted some Nvidia chips into China, including its H200 recently, some of its restricted technology has consistently flowed into China through black-market channels.
In China, these chips are used for a variety of purposes: military research, AI infrastructure, and routine products. Of all of these potential use cases, the US has consistently said it doesn’t want its technology used in Chinese military operations.
Quoting Greg Thomas, chief executive of ChainSentry, Fortune writes:
“Semiconductors are the building blocks of global power in the 21st century. When an adversary or a competitor faces us on a battlefield or on the other side of a market, they need to bring their own game, not ours.”
China has, however, “consistently opposed the US practice of overstretching the concept of national security and export control,” saying that “such conduct constitutes a grave violation of market economic laws and principles of fair competition.”
Why export controls remain hard to enforce
The investigations and BIS crackdowns indicate a broader enforcement dilemma, in which the global appetite for advanced US technology has sustained diversion networks that remain difficult to fully disrupt.
The cases also suggest Washington’s export-control strategy is entering a harder phase. Restricting advanced AI chips is one challenge; tracking them through shell companies, subsidiaries, brokers, and third-country routes is another.
For now, the question is whether those rules can keep pace with a global market where the most restricted chips are also among the most valuable.
Also read: Apple and Intel reportedly reached an early chip manufacturing agreement that could reshape Apple’s supply chain and boost Intel’s foundry ambitions.Â
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