The United States spent years constructing a wall of export controlsGovernment regulations restricting the transfer of sensitive technologies, materials, or data to foreign entities for national security reasons. to keep advanced semiconductor technology out of Chinese and Russian hands. The wall has holes. A bipartisan House Select Committee investigation revealed that Chinese firms acquired $38 billion in restricted chipmaking equipment in 2024 alone, exploiting chip export loopholes that allied governments have repeatedly failed to close.[s] Equipment that should require export licenses is reaching military laboratories, missile programs, and AI research facilities with documented ties to the People’s Liberation Army.
The Southeast Asian Back Door
The mechanics are straightforward. Servers containing Nvidia AI chips ship to a warehouse in Malaysia or Singapore. Workers use heat guns to loosen adhesive on serial number stickers, peel them off, and apply them to non-functional dummy units. The real servers get repacked and forwarded to China. The dummies wait for the auditors.[s]
This transshipmentThe routing of goods through an intermediate country or facility before reaching the final destination, sometimes used to obscure the true end-user. network is not a secret. Trade analysts, think tanks, and the Commerce Department have flagged it for years. Countries including Malaysia, Singapore, Vietnam, and Thailand have historically lacked the enforcement infrastructure or political will to monitor re-exports. Malaysia commands a 13 percent share of the global semiconductor assembly, testing, and packaging market. Singapore produces approximately 20 percent of the world’s semiconductor equipment.[s] Both nations have become chokepointsCritical bottlenecks in manufacturing or supply chains where concentrated control or limited capacity creates dependencies that can disrupt entire industries. where chip export loopholes concentrate.
The numbers tell the story. Singapore accounted for 22 percent of Nvidia’s global sales in 2024, far exceeding what its domestic data center market could absorb. U.S. lawmakers called for a review of controls on shipments through third countries that “pose a high risk of diversion.”[s]
Three Cases That Show the Scale
In March 2026, federal prosecutors unsealed an indictment charging Super Micro Computer’s co-founder Yih-Shyan “Wally” Liaw and two associates with orchestrating the diversion of approximately $2.5 billion in servers to China via a front company in Southeast Asia between 2024 and 2025.[s] During a single six-week window in spring 2025, at least $510 million of hardware made the journey. When internal audits were scheduled, the defendants allegedly staged thousands of non-working server replicas at rented warehouses.
Operation Gatekeeper, a federal investigation unsealed in December 2025, exposed a smuggling ring that attempted to export at least $160 million worth of Nvidia H100 and H200 GPUs to China between October 2024 and May 2025.[s] Undercover agents witnessed suspects relabeling GPUs with branding for a phony company called “Sandkayan,” classifying the goods on export paperwork as “adapters” and “contactor controllers.”
Applied Materials, the semiconductor equipment manufacturer, paid $252 million in February 2026 to settle charges that it illegally exported ion implanters to a company on the Entity ListA US government list of foreign entities that require an export license before receiving certain controlled goods, technology, or software.. The method: ship equipment first to a subsidiary in Korea for assembly, then forward it to China without the required license. The scheme moved approximately $126 million in merchandise.[s]
Where the Chips End Up
Public procurement documents reveal that Chinese universities with direct ties to the People’s Liberation Army have acquired servers containing export-controlled Nvidia chips. The Harbin Institute of Technology, which focuses on missile, satellite, and robotics research, purchased a system with eight Nvidia A100 GPUs in July 2025. Beihang University, conducting aerospace and defense research, acquired a machine-learning workstation with four A100 chips in March 2026.[s] Both belong to the “Seven Sons of National Defense,” a designation for universities with deep ties to China’s defense industry.
The same chip export loopholes feed military production elsewhere. Despite sanctions, Russian weapons recovered on Ukrainian battlefields contain alarming quantities of U.S.-manufactured semiconductors. Texas Instruments chips appear in drones, glide bombs, precision communication systems, and Iskander missiles. Bloomberg reported that one Russian distributor handled orders for hundreds of thousands of Texas Instruments products worth roughly $6 million between January and August 2024, with nearly $4 million heading to Russian military companies.[s]
Why the Wall Has Holes
Chinese firms’ $38 billion in 2024 purchases had roots in timing gaps between allied governments. The U.S. implemented strict controls in October 2022. Dutch and Japanese enforcement did not take effect until July and September 2023, despite announcements in March 2023.[s] That window allowed Chinese companies to stockpile equipment, with import values jumping from $2.9 billion to $5 billion during comparable periods.
Another loophole involves older equipment. Chinese chipmakers have learned to enhance deep ultraviolet immersion lithographyA chip manufacturing technique that projects ultraviolet light through a liquid medium to etch finer circuit patterns onto silicon wafers, enabling advanced chip production. (DUVi) tools using a process called multipatterningA semiconductor manufacturing technique that uses multiple lithography steps to create features smaller than what a single exposure can achieve. to produce chips that approach cutting-edge performance. ASML, the leading DUVi manufacturer, sold 70 percent of its DUVi systems to Chinese entities in 2024.[s] These machines require specialized maintenance only ASML can provide, potentially extending their lifespan to 30 years, continuing to produce advanced chips well beyond any realistic enforcement timeline.
Recent Responses
Under pressure from Washington, Malaysia now requires exporters of high-performance AI chips of U.S. origin to obtain strategic trade permits before shipping to China.[s] The government formed a task force to tighten regulations around its data center sector. Trade Minister Zafrul Aziz acknowledged the difficulty: “Enforcement might sound easy, but it’s not.”[s]
In August 2025, the Bureau of Industry and Security closed the Validated End-UserA US export control designation allowing pre-approved foreign companies to receive certain US-origin goods without needing a separate export license per shipment. loophole that had allowed foreign semiconductor manufacturers to export U.S.-origin goods to China license-free. No U.S.-owned fab had this privilege; now no foreign-owned fab does either.[s]
The Center for a New American Security estimates that between 10,000 and several hundred thousand AI chips were smuggled to China in 2024 alone.[s] A Financial Times investigation estimated China secured roughly $1 billion in advanced AI processors in the three months following the last major tightening of U.S. export controls.[s] The controls are enforced primarily at the point of sale, relying on declared end use and downstream compliance by every intermediary. When the incentive to lie is measured in billions of dollars, chip export loopholes persist.
The architecture of U.S. semiconductor export controlsGovernment regulations restricting the transfer of sensitive technologies, materials, or data to foreign entities for national security reasons. rests on three pillars: the Entity ListA US government list of foreign entities that require an export license before receiving certain controlled goods, technology, or software., the Military End-User (MEU) list, and the Foreign Direct Product Rule (FDPR). All three have proven inadequate. A bipartisan House Select Committee investigation documented that Chinese firms acquired $38 billion in restricted chipmaking equipment in 2024, a 66 percent increase from 2022, exploiting chip export loopholes that allied coordination failures left open.[s] Five major suppliers, Applied Materials, Lam Research, KLA, ASML, and Tokyo Electron, saw Chinese purchases account for 39 percent of combined revenues.
The TransshipmentThe routing of goods through an intermediate country or facility before reaching the final destination, sometimes used to obscure the true end-user. Architecture
Export controls enforced at the point of sale collapse when intermediary jurisdictions fail to monitor re-exports. Federal prosecutors have documented the precise mechanics. In the Super Micro case, surveillance footage cited in a March 2026 indictment showed workers using heat guns to loosen adhesive on serial number stickers, transferring them to non-functional dummy servers while the real hardware shipped to China.[s] The scheme allegedly diverted approximately $2.5 billion in servers via Southeast Asian front companies between 2024 and 2025.
The transshipment geography is concentrated. Malaysia commands 13 percent of global semiconductor assembly, testing, and packaging. Singapore produces 20 percent of the world’s semiconductor equipment.[s] Singapore accounted for 22 percent of Nvidia’s global sales in 2024, a proportion inexplicable by domestic consumption. Nvidia stated that customers used Singapore to “centralize invoicing while our products are almost always shipped elsewhere.”[s]
These chip export loopholes are structural features, not aberrations. The Congressional Research Service notes that while BIS expanded the FDPR in 2020 to subject any firm to U.S. export controls when using U.S. technology to produce chips, enforcement depends on declared end use and intermediary compliance.[s]
Enforcement Actions and Their Limits
The Bureau of Industry and Security has escalated penalties. Applied Materials paid $252 million in February 2026, the second-highest penalty BIS has ever imposed, for illegally exporting ion implanters to an Entity List company via a Korean subsidiary.[s] Criminal penalties under the Export Administration Regulations can reach 20 years imprisonment and $1 million per violation; administrative penalties can reach $300,000 per violation or twice the transaction value.[s]
Operation Gatekeeper, unsealed December 2025, documented a ring that attempted to export $160 million in Nvidia H100 and H200 GPUs to China over eight months. Investigators watched suspects relabel GPUs as “adapters” and “contactor controllers.”[s] The Center for a New American Security estimates 10,000 to several hundred thousand AI chips were smuggled to China in 2024 alone.
These cases illustrate the scale differential between enforcement capacity and evasion incentives. On the same day that federal prosecutors announced the Operation Gatekeeper investigation, the Trump administration announced that H200 GPUs would be permitted for export to China with a 25 percent cut to the U.S. government, scrambling the prosecutorial logic. Defense attorneys immediately argued in a court filing that the President “gave the lie” to claims that smuggling the same chips endangered national security.[s]
Military End-User Violations
The MEU list requires licenses for exports of dual-useGoods, technologies, or knowledge with both legitimate civilian applications and potential military uses, typically subject to export controls and international oversight. items to entities posing risks of technology transfer for military use.[s] Documented violations demonstrate the list’s porous enforcement. The Harbin Institute of Technology, which conducts missile, satellite, and robotics research for the PLA, acquired a Super Micro system with eight Nvidia A100 GPUs in July 2025. Beihang University, conducting aerospace and defense research, acquired four A100 chips in March 2026.[s] Both are “Seven Sons of National Defense” universities with documented ties to China’s Ministry of Industry and Information Technology.
The same chip export loopholes supply Russian military production. RUSI analysis indicates that third-country transshipment hubs and clandestine networks operated by Russia’s special services have secured access to Western microelectronics despite sanctions.[s] Texas Instruments chips appear in drones, glide bombs, and Iskander missiles recovered on Ukrainian battlefields. A Russian distributor handled $6 million in Texas Instruments orders between January and August 2024, with $4 million destined for military companies.[s]
The Allied Coordination Gap
Chinese firms’ $38 billion in 2024 purchases had roots in earlier implementation timing failures. U.S. controls took effect October 2022. Dutch enforcement began July 2023; Japanese enforcement began September 2023.[s] That window enabled stockpiling: Chinese imports surged from $2.9 billion to $5 billion during comparable periods.
A separate loophole involves unrestricted equipment. Chinese chipmakers now apply multipatterningA semiconductor manufacturing technique that uses multiple lithography steps to create features smaller than what a single exposure can achieve. to deep ultraviolet immersion lithographyA chip manufacturing technique that projects ultraviolet light through a liquid medium to etch finer circuit patterns onto silicon wafers, enabling advanced chip production. (DUVi) tools to produce chips approaching cutting-edge specifications. ASML sold 70 percent of its DUVi systems to Chinese entities in 2024.[s] ASML’s specialized maintenance extends machine lifespans to 30 years, compounding long-term production capacity. The House Select Committee has called for a country-wide DUVi ban and increased allied coordination.
Regulatory Responses
BIS closed the Validated End-UserA US export control designation allowing pre-approved foreign companies to receive certain US-origin goods without needing a separate export license per shipment. loophole in August 2025, eliminating license-free exports that foreign fabs in China had enjoyed while U.S. fabs could not.[s] Malaysia imposed strategic trade permit requirements for U.S.-origin AI chips destined for China.[s] Singapore arrested nine individuals in March 2025, three of whom were charged with misrepresenting the final destination of U.S.-manufactured servers.[s]
BIS received a budget increase for fiscal year 2026 with bipartisan support and earmarked semiconductor enforcement funding. Congress has sought control over export licensing, frustrated by executive branch inconsistency. The fundamental architecture remains unchanged: controls enforced at the point of sale, dependent on declared end use, policed by compliance teams that can be defeated with a hair dryer and a rented warehouse. The chip export loopholes reflect a system designed for a scale of economic incentive it cannot contain.
