China-Linked AI Chip Smuggling Network: Many Red Flags

Federal prosecutors charged two men and unsealed additional allegations detailing a sophisticated scheme to illicitly acquire and export advanced Nvidia AI processors to China and Hong Kong, in violation of U.S. export-control laws.

The actions—part of “Operation Gatekeeper”—follow the seizure of more than $50 million in GPUs and guilty pleas by a Houston businessman and his company.

U.S. Attorney Nicholas Ganjei said the network “threatens our Nation’s security by funneling cutting-edge AI technology to those who would use it against American interests,” noting that the chips at issue are “the building blocks of AI superiority.”

According to the newly unsealed criminal complaint against Fanyue “Tom” Gong, co-conspirators covertly purchased restricted Nvidia H100 and H200 processors through intermediaries while concealing that the products were destined for the People’s Republic of China.

Prosecutors allege the group used straw purchasers and U.S.-based warehouses to break the chain of custody before disguising the hardware for export. The complaint states that workers “removed Nvidia labels and re-labelled the GPUs with the name ‘SANDKYAN’—a fake company” to obscure their origin and classification. It further alleges the conspirators “misclassified the goods as generic computer parts” on export filings.

Prosecutors say the renamed hardware was then routed through Hong Kong–based logistics partners and ultimately shipped to China in violation of U.S. export-control regulations.

The complaint describes coordinated efforts to avoid detection, including direction to warehouse personnel to conceal the true end-users and to prepare fraudulent shipping documents.

A separate complaint charges Benlin Yuan, CEO of the U.S. subsidiary of a Beijing-based IT company, with recruiting individuals to inspect mislabeled GPUs and to support efforts to retrieve detained shipments. Prosecutors allege Yuan participated in discussions about providing false statements to U.S. authorities regarding the “ultimate customer of the goods.”

The case expands on earlier charges against Alan Hao Hsu, who pleaded guilty Oct. 10 to smuggling and unlawful export activities. Hsu admitted he and others attempted to export at least $160 million in restricted Nvidia GPUs between October 2024 and May 2025, receiving more than $50 million in China-originating wire transfers to finance the scheme.

"More export controls lessons"

Michael Huneke of Morgan Lewis, writing shortly after the announcement, called the complaint “more export controls lessons” for compliance teams and emphasized that open-source information amplifies the risk indicators.

Huneke observed that the defendant’s New York technology company—“incorporated on November 2, 2022, just weeks after significant, new export controls were announced on Oct. 7”—shared “a basement address in Brooklyn with a 24-hour massage parlor” that was later ransacked. Such details, he noted, are “red flags” squarely aligned with U.S. government diversion guidance.

He emphasized the pivotal role of frontline reporting:

“Thanks to an employee at a U.S. logistics company speaking up, the U.S. government was able to place an undercover agent in the warehouse to witness the unpacking and false labeling of controlled GPUs.”

Huneke also highlighted transaction-based indicators:

“At least $60 million in chips were purchased by a company in Houston with ‘Global LLC’ in its name and a place of business at a residential address… these would be red flags indicating a risk of diversion under multiple U.S. government guidance documents.”

Additional anomalies cited in his analysis included a point-of-contact using a co-working space in Colorado as the listed business address for shipments tied to an overseas technology company.

Huneke cautioned that exporters cannot conduct deep investigations on every order, but stressed that robust screening protocols are essential:

“For those with an enhanced due diligence process… all of the above would have called for further due diligence. This is another example of why it’s important for exporters to have a ‘high probability’ protocol… to make and defend risk-based due diligence decisions.”

Assistant Attorney General for National Security John Eisenberg said the conduct targeted “advanced computer chips that make modern AI possible,” adding that the Justice Department will “vigorously enforce our export-control laws and protect this edge.”

Hsu faces up to 10 years in prison at sentencing. Gong faces up to 10 years for conspiracy to smuggle goods; Yuan faces up to 20 years for conspiracy to violate the Export Control Reform Act.