The majority staff of the Senate Permanent Subcommittee on Investigations released a report this month highlighting compliance challenges and significant deficiencies in the U.S. semiconductor industry related to enforcing export controls in response to the war in Ukraine.
The report criticized the industry's efforts to enhance export control compliance, describing them as “abjectly lacking.” It noted that “semiconductors are among the items at highest risk for diversion.”
“Some companies have done the bare minimum required by law, conducting cursory checks on their customers while trying to wash their hands of any real responsibility for their distributors’ role in Russian diversion,” the report said, adding that “few have looked under the hood to see what they could do better.”
The subcommittee encouraged semiconductor companies to proactively implement comprehensive and multidimensional compliance programs that minimize the risk of U.S. adversaries, such as Russia and China, evading export control restrictions.
It added that the private sector is in a unique position to reduce Russian diversion because it has access to “unique data and/or firsthand evidence of the appearance of U.S.-manufactured semiconductors in Russian weapons.”
Here are three key takeaways from the report:
1. Uptick in exports to transshipment hubs
There’s been a significant increase in the exports of U.S. semiconductors to countries known to be transshipment hubs, including Turkey, Hong Kong, China, Kazakhstan, and Kyrgyzstan. The subcommittee noted that these countries are problematic because they host companies that have assisted “or potentially assisted” in diverting U.S. semiconductors to Russia.
“Entities in Hong Kong and China — which receive substantially more U.S. semiconductor imports than the other countries noted — are understood to be responsible for the vast majority of the continuing flow of semiconductors to Russia,” the report said.
2. Financial sector viewed as a model for effective compliance
The semiconductor industry is less diligent in preventing illicit transactions than the financial sector, which is subject to the Bank Secrecy Act and Anti-Money Laundering Laws (BSA/AML). These regulations require financial institutions to monitor transactions that go “through many hands” and implement risk-based customer due diligence procedures.
Highlighting an example of the financial sector’s commitment to compliance, the subcommittee cited a 2023 report from the KSE Institute, an analytical center at the Kyiv School of Economics, which detailed how semiconductor products were ending up in Russia. It noted that while financial institutions reached out to the institute to inquire about the investigation, no U.S. semiconductor company had followed suit.
Lawmakers noted that the companies investigated lacked clear visibility into the movement of their products within the supply chain. They advised semiconductor manufacturers to adopt a standard practice of conducting smaller, more frequent audits on specific parts of their programs, particularly when issues arise or regulatory changes occur.
“Regular auditing is needed to address new issues in this rapidly evolving space,” the subcommittee said in the report, adding that “semiconductor manufacturers should implement robust audit programs” similar to those recommended in BIS’ Export Control Guidelines.
The subcommittee also noted that none of the semiconductor companies investigated had records indicating they had “such an audit program in place.”
It also suggested that companies should adopt and leverage modern analytics and data analysis programs to help them quickly evaluate shipping data and prevent sales to potentially concerning entities.
The report criticized the industry's efforts to enhance export control compliance, describing them as “abjectly lacking.” It noted that “semiconductors are among the items at highest risk for diversion.”
“Some companies have done the bare minimum required by law, conducting cursory checks on their customers while trying to wash their hands of any real responsibility for their distributors’ role in Russian diversion,” the report said, adding that “few have looked under the hood to see what they could do better.”
The subcommittee encouraged semiconductor companies to proactively implement comprehensive and multidimensional compliance programs that minimize the risk of U.S. adversaries, such as Russia and China, evading export control restrictions.
It added that the private sector is in a unique position to reduce Russian diversion because it has access to “unique data and/or firsthand evidence of the appearance of U.S.-manufactured semiconductors in Russian weapons.”
Here are three key takeaways from the report:
1. Uptick in exports to transshipment hubs
There’s been a significant increase in the exports of U.S. semiconductors to countries known to be transshipment hubs, including Turkey, Hong Kong, China, Kazakhstan, and Kyrgyzstan. The subcommittee noted that these countries are problematic because they host companies that have assisted “or potentially assisted” in diverting U.S. semiconductors to Russia.
“Entities in Hong Kong and China — which receive substantially more U.S. semiconductor imports than the other countries noted — are understood to be responsible for the vast majority of the continuing flow of semiconductors to Russia,” the report said.
2. Financial sector viewed as a model for effective compliance
The semiconductor industry is less diligent in preventing illicit transactions than the financial sector, which is subject to the Bank Secrecy Act and Anti-Money Laundering Laws (BSA/AML). These regulations require financial institutions to monitor transactions that go “through many hands” and implement risk-based customer due diligence procedures.
Highlighting an example of the financial sector’s commitment to compliance, the subcommittee cited a 2023 report from the KSE Institute, an analytical center at the Kyiv School of Economics, which detailed how semiconductor products were ending up in Russia. It noted that while financial institutions reached out to the institute to inquire about the investigation, no U.S. semiconductor company had followed suit.
3. A need for increased visibility
The subcommittee recommended that companies in the chip industry implement policies to enhance visibility in their distribution chain, “including yearly audits of all their distributors’ export controls compliance.”Lawmakers noted that the companies investigated lacked clear visibility into the movement of their products within the supply chain. They advised semiconductor manufacturers to adopt a standard practice of conducting smaller, more frequent audits on specific parts of their programs, particularly when issues arise or regulatory changes occur.
“Regular auditing is needed to address new issues in this rapidly evolving space,” the subcommittee said in the report, adding that “semiconductor manufacturers should implement robust audit programs” similar to those recommended in BIS’ Export Control Guidelines.
The subcommittee also noted that none of the semiconductor companies investigated had records indicating they had “such an audit program in place.”
It also suggested that companies should adopt and leverage modern analytics and data analysis programs to help them quickly evaluate shipping data and prevent sales to potentially concerning entities.
