We’re only seeing the tip of the chip-smuggling iceberg

Summary

Recent federal indictments have exposed a shadow network of data centers and smuggling operations spanning Southeast Asia, with six individuals charged over three weeks for illegally exporting billions of dollars in advanced AI chips to China. The prosecutions highlight systemic enforcement gaps: weak export control laws that don't block Chinese firms from purchasing domestically, insufficient federal funding ($122M in 2025 vs. $2.5B in a single case), and a shortage of federal agents dedicated to policing export controls. The U.S. must shift enforcement from airport customs to factory-floor due diligence and strengthen laws while maintaining investigative momentum independent of diplomatic negotiations.

Full text

Last year, Nvidia CEO Jensen Huang repeatedly denied that China was obtaining America’s most advanced chips. ‘There’s no evidence of any AI chip diversion,’ he said, dismissing such reports on another occasion as ‘tall tales.’ Federal prosecutors would beg to differ. They’ve charged six men over the past three weeks with smuggling billions of dollars’ worth of AI chips to China. The indictments, while a tactical victory, are a warning of how pervasive the problem has become, thanks both to loopholes in federal law and a failure to support existing laws with serious enforcement. Both Washington and Beijing have tried to reshape AI chip supply chains to bolster their respective national security agendas ahead of an expected trade-focused summit in May. While the United States has imposed export controls on advanced chips to cut off China’s military modernization efforts, China has pushed its firms to adopt domestically produced components to secure its self-reliance. But neither side can fully avoid the Willie Sutton rule. Why smuggle chips? Because that’s where the profit is — particularly without enough resources dedicated to enforcement. A closed Chinese market grasping for more powerful alternatives to their own products offers a prime incentive for American firms to provide components to Beijing. Smuggling has also transformed an emerging network of data center infrastructure across Southeast Asia into a source of illicit computing power for U.S. adversaries. The recent cases highlight these features in detail. In March, prosecutors charged three people connected to Super Micro Computer, an American computing firm, with smuggling an estimated $2.5 billion in chips to Chinese customers by shipping servers to the company’s offices in Taiwan and elsewhere in the region. In the meantime, the trio designed warehouses full of fake products to fool U.S. authorities. A week later, prosecutors unveiled charges against another three individuals accused of conspiring to ship advanced chips to China via business contacts in Thailand. This string of prosecutions suggests that despite some high-profile successes, smuggling remains a pervasive issue across the industry. While this is partially a problem of professed ignorance, it can also be solved with a combination of policy, personnel, and policing. The United States must strengthen controls over emerging technologies at the factory floor rather than the airport gate. While Washington has strong export control laws, these regulations are intended to prevent components from leaving the country. They do not, however, block Chinese firms from purchasing these technologies inside the country. This divergence in intentions produces difficulties for prosecution, as smugglers are often solely indicted for evading customs enforcement rather than charged with illicitly obtaining the components while still on American soil. However, Congress can close this loophole via stronger due diligence laws that require greater scrutiny of potential customers ahead of the customs enforcement process. Washington is also in an arms race with AI firms to properly fund enforcement mechanisms, a race it is currently losing. While one smuggling case alone involved $2.5 billion, federal spending on policing export controls amounted to $122 million in all of 2025. Moreover, this surge of investment in computer hardware is increasingly global in scope, magnifying the current shortage of federal agents responsible for enforcing export controls at the exact moment both allies and adversaries are seeking to purchase ever larger batches of advanced chips. Even with stronger policies and more personnel, prosecuting AI chip smuggling must also remain a policing priority for federal law enforcement. While these cases are often complex due to a range of technical and jurisdiction challenges, as well as an array of shifting export control regimes, the FBI and the Commerce Department should remain committed to tracking and disrupting these smuggling networks. It will be key for the administration to separate enforcement actions from its ongoing diplomatic exchanges with Beijing — dropping domestic prosecutions should not be used as a bargaining chip to deliver trade concessions during the President Donald Trump’s upcoming travels to Beijing. We need stronger enforcement so that the next billion-dollar smuggling case marks real progress, rather than exposing just how much slipped through. Jack Burnham is a senior research analyst at the Foundation for Defense of Democracies’ China Program, focusing on China’s military, emerging technologies, and science and technology policy. Follow Jack on X @JackBurnham802. Share Facebook LinkedIn Twitter Copy Link

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