BIS Chip Guidance Signals Aggressive Enforcement on the Way, Law Firms Say

Wilmer Hale said it’s expecting BIS to soon “increase enforcement of AI-related exports under still-applicable authorities,” especially if the exporter has knowledge that its exports or activities would help train AI models in China or other countries of concern. A BIS official recently told industry members during a panel discussion that the agency “plans to pursue more significant penalties in cases where red flags were present or where exporters failed to conduct adequate due diligence,” the law firm said.

Gibson Dunn made similar points, saying even though the repeal of the AI diffusion rule “may appear at first to provide temporary relief” to chip companies, the government’s existing controls, due diligence warnings and its new red flag guidance “lay the groundwork for aggressive BIS enforcement.”

BIS earlier this month said it planned to replace the AI diffusion regulation with a new rule (see 2505130018), which could include changes to the diffusion rule’s tiered system of access to U.S. AI chips, Gibson Dunn said. But the firm also said any new rule is likely to keep some version of the diffusion rule’s license exceptions for countries that adopt similar AI chip-related export controls, the validated end user authorization system for data centers, “enhanced” customer diligence and reporting requirements for certain customers, and controls “on at least some proprietary” AI models.

Companies should “prepare for such features when designing compliance systems and entering into new contract arrangements for counterparties that” involve AI chips or data centers, the firm said in a client alert.

In its announcement that it would be repealing the AI diffusion rule, BIS didn’t preview plans to change pre-existing controls over advanced computing items, Akin noted, including current license requirements for shipments to most countries in the Middle East, China and other countries if their parent company is in China. The firm said the Trump administration appears to be reportedly pursuing “country-by-country negotiations” to potentially set new AI chip export controls.

Until then, companies that sell to businesses in the AI diffusion’s rule Tier 2 -- the mid-tier group of countries that would have been subject to caps on AI chips and other restrictions -- “should reassess the applicable licensing requirement following the rescission of the AI Diffusion Rule,” Akin said.

BIS also released new guidance documents to warn companies about using certain advanced Huawei and other Chinese-made chips, urge them to protect their supply chains against “diversion tactics,” and outline the types of activities involving AI chips and AI models that may trigger a license requirement. Those documents “heighten diligence expectations” for all companies exporting or providing controlled U.S. chips to China and other arms embargoed countries, Gibson Dunn said. The firm said it’s expecting the administration to “continue an aggressive approach towards China-related export controls.”

Hughes Hubbard also said it’s expecting increased enforcement. The BIS guidance may be laying the “groundwork for future enforcement,” the firm said, especially if a company has “knowledge” -- which includes “an awareness of a high probability” -- that a license was required.

The firm also said foreign infrastructure-as-a-service providers, including data center operators, should expect more due diligence questions from chip suppliers. That due diligence will likely “focus not only on suppliers’ actual knowledge but also on resolving where suppliers might otherwise be concerned that the facts and circumstances could be seen, by U.S. authorities, as presenting a ‘high probability’ of a violation” of the Export Administration Regulations, the firm said.

One BIS guidance document reminded data center operators, as well as cloud service providers, that they could be restricted by certain U.S. “catch-all” prohibitions on the use of AI chips for certain end uses and by certain end users. Akin said companies developing or exporting those advanced chips, or commodities used to train AI models, “should scrutinize whether their activities may fall within the ‘catch-all’ end use/user controls under Part 744 of the EAR, particularly if companies headquartered in China would be involved.”

Another BIS guidance document outlined new red flags, with a specific focus on cloud service providers, Gibson Dunn said. When read together, both the BIS red flag guidance and the catch-all warning are alerting “exporters of its heightened end use and end user diligence expectations, both for companies supplying the [infrastructure-as-a-service] providers with controlled ICs and for the IaaS providers themselves,” the law firm said.

Akin said the BIS guidance may be a strategy by the Trump administration to “exert leverage” over other countries during negotiations over access to advanced AI chips. And by signaling that using Huawei Ascend chips risks breaching U.S. export controls, the administration “may be seeking to compel countries to accept the U.S. Government’s security agreements to receive such integrated circuits because pivoting to Huawei-designed ICs would violate the EAR,” the firm said.

It also suggested that the guidance could be a “precursor to further action” by the government “to target Chinese hyper-scalers that have purchased and are using Huawei’s Ascend ICs. Chinese hyper-scalers that deploy Huawei Ascend ICs now appear to face greater risk of being added to BIS’s Entity List because they may be engaging in violations of EAR section 764.2(e).”