$160 million export-controlled Nvidia GPUs allegedly smuggled to China

On December 8, Federal prosecutors in Texas released sealed documents revealing an investigation into a massive trafficking network that spanned the United States and the world.

The investigation, dubbed “Operation Watch” by the feds, did not focus on drug trafficking or stolen goods; Instead, it focused on a secret, underground network of suppliers allegedly involved in drug trafficking or stolen goods. Nvidiagraphics processing units or GPUs. Such chips form the backbone of the artificial intelligence race and can be used for military or civilian purposes.

The government says a secret smuggling ring is sending chips to China in violation of American national security export control laws. The smuggling organization allegedly includes agents who enter the United States illegally, fake front companies, and a secret warehouse shipping operation in New Jersey that was infiltrated by at least one undercover agent working on behalf of the U.S. government.

The findings of the federal investigation reveal a desperate struggle between the United States and China over access to cutting-edge chips that many believe will determine the fate of the global economy. They said the smuggling ring attempted to export at least $160 million worth of Nvidia H100 and H200 GPUs to China between October 2024 and May 2025.

The demand for these chips from China is huge, and the best supply is still in the United States. Although China has established its own domestic AI chip market, the region is still dependent on Nvidia’s technology.

“I think more than 60% of the leading AI models in China are currently using Nvidia hardware,” said Ray Wang, an analyst at SemiAnalytics. “Nvidia has [a] Systematic advantage extending from hardware to software. And I guess for now, if you combine [those] “The combination of the two factors is something China is still trying to catch up with.”

While they were gathering facts, the government sent an undercover agent to a warehouse in Secaucus, New Jersey. There, the individual allegedly witnessed the suspects relabeling Nvidia GPUs with a fake company branding they called “Sandkayan.” The government said shipping and export paperwork misclassified the goods as “adapters,” “adapter modules” and “contactor controllers.”

Operation Gatekeeper culminated in a dramatic scene at the New Jersey warehouse on May 28, when three trucks rented by the conspirators entered to retrieve the smuggled chips.

A user in a text chain allegedly used by the conspirators reported that, almost in real time, one of the truck drivers transporting the goods to the warehouse in New Jersey reported that police officers had arrived on the scene and were asking questions about the cargo’s destination.

The conspirators told the drivers to “just say they didn’t know anything,” according to the texts.

Five minutes later, according to prosecutors, one of the conspirators sent another message to the entire thread: “End this group chat. Delete everyone.” Shortly after that, prosecutors said, federal agents stepped in and secured high-tech equipment and prevented goods from being shipped to China.

The case comes as there have been similar arrests related to unauthorized Nvidia exports in recent months. The think tank Center for a New American Security estimates that between 10,000 and several hundred thousand artificial intelligence chips will be smuggled into China in 2024 alone.

“I think in today’s world, there are many ways to obtain Nvidia’s chips by all kinds of illegal means,” Wang said. “You can set up your data center globally, have shell companies buy Nvidia chips. And it’s very difficult for Nvidia to track and do due diligence.”

An Nvidia spokesperson told CNBC that the US government’s exports are meticulous and comprehensive.

“Even sales of older generation products on the secondary market are subject to strict scrutiny and scrutiny,” an Nvidia spokesperson said. “As millions of controlled GPUs serve businesses, homes and schools, we will continue to work with the government and our customers to ensure that second-hand trafficking does not occur.”

But on the same day federal prosecutors announced the investigation, President Donald Trump made a social media post that could undermine the entire operation.

Trump said Real Social He said the United States will now allow Nvidia’s H200 GPUs, the most powerful GPUs seized by authorities in Operation Gatekeeper, to be exported to China. Trump said these exports would be allowed as long as the United States made a 25% cut on sales. Trump added that Nvidia’s most advanced AI chips, Blackwell and Rubin GPUs, are still not allowed for export.

Operation Gatekeeper yielded results Arrest of two businessmen and criminal charges from a Houston man and his company to hijack the latest AI technology. But the president’s announcement complicated the case for U.S. prosecutors, who are trying to prove that smuggling of the same chips poses a danger to the country’s national security. The defense attorneys of the accused people immediately seized the opportunity.

“The President denied this allegation, announcing that the United States would now allow Nvidia’s H200 GPUs (the most powerful GPUs seized by authorities in this case) to be exported to China,” defense attorneys wrote in a lawsuit filed the next day.

Some experts have said they believe even Nvidia’s top-end AI chips will continue to be smuggled into China.

“I don’t believe smuggling will just stop,” Wang said. “It’s unclear to me whether the new launch of H200 chips will be enough for China’s AI demand. The computing demand we’re seeing globally is accelerating, and I believe that should be the case in China as well.”