Chip Smuggling Scandal: US Justice Department Targets Two Chinese Nationals Over Nvidia Hardware
Chip Smuggling Scandal: The U.S. Justice Department announced Monday the custody of two Chinese nationals for their alleged involvement in a sophisticated scheme to smuggle high-end Nvidia (NVDA.O) H100 and H200 chips into China, circumventing U.S. export controls. This development comes as President Donald Trump approved the export of the H200 chips to Beijing. The detained individuals are Fanyue Gong, 43, a Chinese citizen residing in New York, and Benlin Yuan, 58, a Canadian citizen from China. Prosecutors allege that both men independently collaborated with employees of a Hong Kong-based logistics firm and a China-based AI technology company to execute the operation.
Circumventing Controls: The Straw Purchaser Method
Court documents reveal the alleged methods used to acquire the highly restricted semiconductor chips. Prosecutors claim that Gong and his co-conspirators utilized straw purchasers and various intermediaries to obtain the chips. They reportedly falsified documentation, asserting that the powerful chips were destined for U.S. customers or clients in third countries such such as Taiwan and Thailand. The chips were initially shipped to several U.S. warehouses, where individuals allegedly removed the genuine Nvidia labels and replaced them with the labels of what prosecutors believe to be a fictitious company before preparing them for export.
The Mislabelling Operation and Inspection
The criminal complaints detail a meticulously organized process of deceit. In a separate filing, prosecutors accused Yuan of playing a key logistical role, helping to recruit and organize individuals tasked with inspecting the mislabeled chips on behalf of the Hong Kong logistics company. Yuan allegedly gave specific instructions to inspectors, directing them not to reveal that the ultimate destination of the goods was China. Furthermore, prosecutors claim Yuan orchestrated discussions to formulate a cover story his company could employ to secure the release of chips and other equipment that had been seized by federal authorities, highlighting the clandestine nature of the operation which is estimated to have been ongoing since at least November 2023.
Precedent Set: Earlier Guilty Pleas in the Case
The Justice Department highlighted that the recent arrests are part of a broader ongoing investigation. They noted that another individual, Alan Hao Hsu, 43, along with his company, had already pleaded guilty in October to charges related to smuggling and unlawful export activities within the same network. Court documents indicate that Hsu and his company received over $50 million in wire transfers originating from China to finance the scheme. The operation successfully exported and attempted to export at least $160 million worth of export-controlled Nvidia chips, illustrating the significant financial scale of the alleged smuggling ring.
“Operation Gatekeeper”: Threat to National Security
Nicholas J. Ganjei, the U.S. attorney for the Southern District of Texas, released a strong statement regarding the enforcement action. He emphasized that “Operation Gatekeeper has exposed a sophisticated smuggling network that threatens our Nation’s security by funneling cutting-edge AI technology to those who would use it against American interests.” A spokesperson for Nvidia confirmed that the sale of their older generation products on the secondary market is “subject to strict security and review,” adding that they will continue to work with the government to ensure that “second-hand smuggling” does not occur. The Chinese Embassy spokesperson in Washington noted that the Chinese government requires its citizens abroad to adhere strictly to local laws.
Regulatory Environment: US Export Controls
The context of these arrests lies in the stringent export controls implemented by the U.S. government. These controls were initially enacted in 2022 to cut off China’s access to certain advanced semiconductor chips, regardless of where they were manufactured, provided U.S. equipment was used in their production. This regulatory framework was further expanded by the Trump administration in September 2023, which widened the restricted export list to automatically include subsidiaries that are owned 50% or more by any company already on the list. These regulations underscore the heightened scrutiny and enforcement surrounding the global trade of advanced AI and high-performance computing hardware.