Exposure of Major Chinese-Linked Chip Smuggling Operations Shows Limits of Industry Self-Policing

China is still behind the United States in the AI race, but it is willing to pay a lot to catch up fast.

The Department of Justice (DOJ) unsealed an indictment on March 19 against Yih-Shyan Liaw, Ruei-Tsang Chang, and Ting-Wei Sun for allegedly conspiring to smuggle advanced artificial intelligence (AI) chips to Chinese customers. All three defendants were connected to Super Micro Computer, a major American computing firm co-founded by Liaw that provides servers for AI data centers, though the firm itself was not named in the indictment.

The case highlights China’s efforts to circumvent U.S. export controls on key AI components. It is also a major success by federal law enforcement to disrupt expansive smuggling networks.

Senior Executive at Server Maker Indicted in Plot To Ship Nvidia Chips to China

The indictment charges that Liaw, Chang, and Sun conspired to illicitly ship AI servers containing Nvidia chips worth $2.5 billion to Chinese customers between 2024 and 2025. These efforts allegedly escalated over the course of 2025, with the trio shipping servers worth $150 million between April and May 2025 alone, a trend that coincided with rising Chinese spending on data centers. While Liaw and Sun are currently in custody awaiting trial, Chang, a Taiwanese national, remains a fugitive from U.S. law enforcement.

According to DOJ, the defendants attempted to hide their operations by shipping servers to Taiwan and elsewhere in Southeast Asia before illicitly passing them to Chinese customers. Along with funneling servers through the firm’s Taiwan office, the defendants also allegedly staged “dummy” servers in U.S. warehouses ahead of customs inspections, including using false serial numbers to evade detection by federal authorities.

Chinese Firms Aim To Circumvent U.S. Export Controls on Key AI Components

The case highlights the pervasiveness of Chinese-linked smuggling of advanced AI components. While Nvidia has previously dismissed allegations of Chinese chip smuggling as “tall tales” and claimed there is “no evidence of any AI chip diversion,” Chinese AI leaders have been repeatedly accused of using shell firms to access advanced American chips. In November 2025, DOJ accused four individuals of running a front company in Florida that received $4 million in wire transfers from Chinese firms to purchase and illicitly export Nvidia chips. A month later, DOJ unsealed another indictment against a U.S.-based smuggling operation accused of sending $160 million worth of Nvidia chips to China between October 2024 and May 2025.

These schemes repeatedly target a significant loophole in U.S. technology controls — while U.S. firms are barred from exporting certain chips without a valid license from the Commerce Department, Chinese firms operating in the United States can freely purchase advanced U.S. chips. This loophole effectively incentivizes these types of smuggling operations by limiting prosecutions to export control violations rather than any use of the controlled technology, a gap reflected in federal charges against the three defendants for primarily customs violations.

BIS and FBI Should Strengthen Cooperation Mechanisms To Target Smuggling Operations

The alleged smuggling operation highlights both Chinese firms’ intense demand for U.S. AI components and a clear failure of industry self-policing. In response, Congress should work with the Commerce Department to close key loopholes in export control laws, including limiting Chinese firms’ access to American AI chips regardless of their location, along with stronger due diligence laws to prevent diversion.

Moreover, Congress should provide additional resources to the Bureau of Industry and Security (BIS) — which polices export controls but has reportedly suffered from personnel shortages — to increase its cooperation with the FBI and other law enforcement agencies to disrupt Chinese industrial theft.

Jack Burnham is a senior research analyst in the China Program at the Foundation for Defense of Democracies (FDD). For more analysis from Jack and FDD, please subscribe HERE. Follow Jack on X @JackBurnham802. Follow FDD on X @FDD. FDD is a Washington, DC-based, nonpartisan research institute focusing on national security and foreign policy.