Nvidia Under Pressure Over AI Chip Smuggling to China

U.S. officials say Nvidia is not doing enough to stop illegal smuggling of its restricted AI chips to China.

The claim, reported by Engadget, centers on due diligence, the checks a seller runs before approving a large order. Officials and industry critics say gaps in how big orders were vetted let warning signs go unnoticed. They estimate 115,000 or more restricted processors have already been diverted to China.

At the center of the criticism is a $2.5 billion sale to OBON, a Bangkok-based company. The AI servers, high-powered machines used to train and run AI models, were listed as for AI infrastructure in Thailand. U.S. officials say they were instead shipped to end users in China.

Officials argue Nvidia should have caught the mismatch. OBON lacked the 100 megawatts of data center space and power needed to host that many servers, roughly the electricity use of a small city. That gap, they say, should have triggered extra review before shipment.

Federal authorities have paired the criticism with enforcement. Greg Lui was arrested for allegedly smuggling servers holding $300 million worth of AI chips to China in violation of U.S. export laws. In connection with smuggling cases, officials released surveillance video showing a person using a red hair dryer to peel serial number stickers, the labels used to track hardware, off Nvidia server boxes.

Nvidia says it has abided by export rules and has never been accused of abetting smuggling.

The cases build on a longer record. In an action called Operation Gatekeeper, U.S. authorities said they disrupted a trafficking network and seized more than $50 million in advanced GPUs, the processors widely used for AI work, bound for China and other destinations, according to the Justice Department. Separately, prosecutors alleged a smuggling ring attempted to export at least $160 million worth of Nvidia AI chips between October 2024 and May 2025, as reported by CNBC. Three people linked with a U.S. technology supplier were later charged over an alleged plot to smuggle American AI chips to China, the BBC reported.

Investigators have also used technical tools. U.S. authorities secretly placed location tracking devices in targeted shipments of advanced chips to catch diversions to China, Reuters reported. A U.S. lawmaker planned to introduce legislation to verify the location of artificial-intelligence chips like those made by Nvidia to target smuggling, Reuters reported.

Transshipment through third countries remains a concern cited by officials. U.S. officials believe Malaysia is among a handful of countries where organized smuggling operations have worked to get U.S. chips into China. A U.S. lawmaker asked the Trump administration to help Malaysia crack down on chip smuggling, according to Reuters. Bloomberg reported in a feature titled "China Chip Smuggling Cases Expose Nvidia's Blind Spots" that Nvidia's AI chips keep making their way to China despite U.S. curbs, and that the company faces questions over those cases.

The broader context here is useful for readers who follow supply chains. Export compliance for high-value computing has often stopped at the sale to an approved distributor. That model relies on serial numbers, invoices and end-user statements to show where hardware goes. The tactics described by officials, from peeled labels to orders without power capacity to support them, break that record after the first sale.

In my view, the dispute is less about whether Nvidia violated written rules and more about where ongoing checks should sit when a product is concentrated, easy to divert and central to AI buildouts. Vendors can compare order size with power capacity without acting as law enforcement. Agencies can expand seizures and hidden tracking, but those tools scale poorly against 115,000 diverted units. Location verification would move the control point, though design and evasion tradeoffs would need careful work.

What remains workable is unglamorous. Tighter checks on very large orders, keeping serial-level tracking intact through distributors, and faster information sharing between vendors and investigators would not end diversion. They would raise its cost and narrow the channels where large groups of chips can be put together unnoticed.