U.S. regulators approved AI chip sales to Chinese shell firms with military ties

The oversight of shell companies

Federal regulators recently approved roughly two dozen Chinese firms to purchase or handle NVIDIA H200 AI accelerators. While many of these companies are recognizable names like Baidu, BYD, and Tesla Shanghai, the list also includes several paper-thin operations. These entities appear to exist primarily on paper rather than as functional businesses.

An investigation by The New York Times revealed that some of these approved firms operate out of deserted offices. For example, reporters visited the registered Beijing address of a firm called New Matrix and found a vacant concrete shell with dangling wires. The building management had no record of the company, and there was no directory listing for the entity.

Another approved licensee, Maginfra, was found to occupy a deserted room containing only a few chairs and empty desks. Neighbors reported that no one had ever been seen entering the space. Analysts believe Maginfra may be operating as a front for Inspur, a major Chinese server vendor that the U.S. blacklisted in 2023 because it provided equipment to the People's Liberation Army.

Links to sanctioned military entities

The investigation highlights troubling connections between these approved firms and entities already sanctioned by the United States. New Matrix is primarily owned by Wise Road, a private equity group that the U.S. put on a blacklist in 2024 for its role in gathering sensitive chip assets for Beijing. Furthermore, a key founder of New Matrix chairs a state-backed group with ties to a semiconductor company on the Entity List.

Other approved recipients also show direct affiliations with the Chinese military and defense sectors. Zhejiang Yindun Cloud Technology operates inside data centers owned by a provider that services provincial defense bureaus and satellite defense networks. This suggests that the hardware could be moving into sensitive government infrastructure.

Additionally, the firm Shanghai Jiatang emerged from a state-owned telecom company that develops military-grade communications and cryptography. These connections indicate that the chips may be reaching the very military actors that U.S. export controls are designed to restrict. The oversight suggests a breakdown in the vetting process for these specific licenses.

The mechanics of the approval

The current arrangement for these chips is somewhat unusual due to recent lobbying efforts. Following pressure from NVIDIA CEO Jensen Huang, the Trump administration relaxed certain export bans late last year. This created a system where chips assembled in Taiwan are routed through the United States so the government can collect a 25 percent tariff.

Under this system, the H200 chips are not subject to a blanket ban but do require routine approval before they can be shipped out. The investigation suggests that the Commerce Department may have failed to conduct sufficient due diligence during this routine approval process. This allowed the licenses to be granted to companies that do not appear to have legitimate commercial operations.

Crucially, neither New Matrix nor Maginfra were cleared as final end users for the technology. Instead, both companies were authorized to assemble the H200 chips into AI servers for unspecified clients. This middleman status makes it harder to track exactly where the final hardware eventually ends up once it leaves the assembly point.

Consequences for trade policy

The discovery of these loopholes has sparked significant concerns regarding the integrity of U.S. export controls. Former White House National Security Council China director Liza Tobin cautioned that neither the Commerce Department nor NVIDIA seems to be performing the required vetting. This oversight could undermine the goal of preventing advanced AI capabilities from reaching the Chinese military.

The situation puts pressure on NVIDIA to address how these firms were vetted and approved. The company is scheduled to participate in a closed-door briefing on November 18 to discuss these issues. This meeting will likely serve as a critical moment for the company to explain its oversight procedures to federal regulators.

If the government does not tighten its vetting process, more shell companies could potentially exploit the current system. The administration may be forced to reconsider its stance on H200 shipments to China. This could lead to more stringent requirements for any firm seeking to handle high-end AI accelerators in the future.