US closes loophole that allowed Chinese-owned subsidiaries located outside China to buy AI chips — report claims that hundreds of thousands of advanced AI chips have been acquired through BIS blind spot – Charm

The U.S. Bureau of Industry and Security, the federal agency in charge of enforcing export controls, just released updated guidance that prevents Chinese-owned subsidiaries from purchasing advanced AI chips, such as Nvidia GB200 and AMD MI350x chips. According to the South China Morning Post (SCMP), some Chinese AI firms used subsidiaries based in another country, like Malaysia, to purchase these chips legally. It’s unknown how many servers were shipped in this manner, but one source told the SCMP that it’s probably in the range of hundreds of thousands.

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The document says, “that a license is required to export advanced computing items to entities headquartered in Country Group D:5 or Macau or with an ultimate parent company headquartered in Country Group D:5 or Macau — even if the entities themselves are located outside Country Group D:5 or Macau.” With this loophole closed,

Former State Department official Chris McGuire said on X, “This is a HUGE problem.” That’s because even though the U.S. has prevented its most advanced chips from going to China, the loophole meant that those China-based firms could just set up entities in friendlier countries and then use them to purchase the AI chips they need and run them remotely. This is far more convenient than the reported technique of smuggling suitcases full of storage drives and then renting AI servers to train models, and it could also explain the massive 366% increase in AI chip shipments that Malaysia saw when law enforcement started stamping down on chip smuggling last year.

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NEW: BIS just issued guidance stating that licenses are required for advanced AI chip exports to China-headquartered firms located outside of China (e.g. a Tencent subsidy in Malaysia). The reason they had to issue this statement is BIS’ non-enforcement of certain export controls… pic.twitter.com/qtrubV3exwMay 31, 2026

What’s worse, though, is that the same loophole also allows these subsidiaries to purchase advanced AI chips from TSMC. While there is a rule that requires TSMC to do enhanced due diligence on AI chip orders, McGuire says that the latest BIS announcement does not clarify if it is enforcing this. This means that Chinese companies could use this route to purchase manufacturing capacity from TSMC (although the company is reportedly sold out for its most advanced processes through 2028).

All this confusion came after the Commerce Department said that it would not enforce the Biden-era AI diffusion rules. Even though Washington issued sweeping new export regulations, it seemed that this was a blind spot that the regulators missed out on, and it took more than a year for the authorities to patch the problem.