Regulatory intelligence for US exporters

Regulators Could Mandate Location Tracking for Certain Chip Exports, Expert Says

Governments could eventually require companies to monitor their sensitive semiconductor equipment shipments by using location tracking features, which could help industry better conduct due diligence and improve government export enforcement, said Chris Miller, an expert on semiconductor technology policy and history.

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Miller, speaking during an event last week hosted by risk intelligence firm Sayari, said he thinks the U.S. and others could soon mandate GPS-like tracking on complex chip manufacturing tools, particularly as export rules become harder to enforce.

“Many companies already have some capabilities like this, but I think we're going to see governments increasingly take steps to mandate a bit more visibility into the location and the capabilities of their tools as they step up export control enforcement,” he said.

Miller, an associate professor and technology researcher at Tufts University, said location monitoring could help exporters better follow the “lifetime” of a chip tool, including “after it's sold multiple times through multiple customers.” He said sophisticated chip equipment, although difficult to smuggle, can be bought and sold multiple times to hide the true end-user, which may be in Russia.

He said he found cases in his research where “the companies who originated the machines had no idea where they were after multiple points of sale.” Those companies don’t have a large incentive to track the equipment through multiple buyers because “they often face no direct legal liability if it's been sold multiple times,” Miller said.

He also said regulators “struggle to really understand” how to enforce export licensing requirements on customers who are multiple parties removed from the original sale. “Once you've got multiple layers of distributors in Hong Kong or in China,” he said, “your regulatory tools begin to be much less impactful.”

Governments should address this by putting in place “more mandated use of GPS tracking,” which can give them “better visibility” if equipment is “being moved towards the Russian border or moved inside of China to different facilities.” Asked whether companies should use a “purchase monitoring system” -- similar to transaction monitoring systems used by banks to catch signs of terrorism financing and other financial crimes -- Miller said that idea has been “pretty widely discussed.”

Other experts have called for export controlled semiconductors to be installed with “on-chip governance mechanisms” -- physical devices built directly into the semiconductor that would only allow the chip to be used in situations that comply with export controls or the terms of an export license (see 2401080060).

Miller said companies would be open to location tracking features, because they “already want to know, actually, not only who they're selling to, but who their customers are then selling machines on to.”

He also stressed it would help U.S. enforcement agencies, adding there’s a “widespread realization” in Washington that export control enforcement has mostly been tied to U.S. companies. “But actually a lot of the violations happen in transactions between non-U.S. companies outside of the United States and China or Hong Kong in particular,” Miller said, “and that's where better visibility into onward sales of equipment would be a useful tool both for the government and also for companies.“

Miller also said he’s expecting the U.S. to tweak its export controls to restrict a broader set of chip manufacturing equipment. He said he thinks some parts of the U.S. government have been “surprised” about the ability of Chinese firms to make technological leaps in spite of the tooling export restrictions, and officials are facing a “real challenge ascertaining what types of production is happening in what types of facilities” in China.

Chip companies are facing similar challenges, Miller said, especially because certain export license requirements apply only to specific types of advanced production facilities in China. Figuring out which facilities are subject to those controls “is itself an extraordinarily nuanced and difficult question to answer,” he said.

“I think there are at least parts of the U.S. government that are disappointed with the results thus far,” Miller said. “Whether it's under the current administration or a potential new administration in 2025, I wouldn't be surprised at all if there was some expansion of the set of tools that is captured by export controls.”

He also noted that while the more advanced semiconductor companies that export “higher-end” chip products already have sophisticated compliance programs in place, many other companies don’t. He said those businesses, who may sell commodities that incorporate semiconductors, are still “in the early stages” of developing compliance and due diligence procedures.

“Many types of companies in the semiconductor industry in the past didn't see themselves as dealing in dual-use goods, and so spent, I think, substantially less time on compliance issues than they need to today, simply because there are more regulations deployed to the types of products that they sell,” Miller said. Now, they’re “in the process of building up their expertise” and promoting compliance within their companies “to something that in the past was an afterthought.”

He said companies should not be trying only to gather more information about their distribution networks, but they also need to work closer with regulators and policymakers, who are continually seeking to tweak export rules in ways that may have a major impact on businesses. These issues should also be escalated “higher up in organizations, because it's simply more of a priority,” Miller said, “and there's more downside risk than there's been in some time in getting this type of question wrong.”