BIS Repeals AI Diffusion Rule While Issuing New Chip Guidance, Penalty Warnings

The Bureau of Industry and Security officially announced this week that it plans to rescind the Biden administration’s AI diffusion export control rule and issue a “replacement rule in the future.” The agency also issued new guidance about how using Huawei Ascend chips and other Chinese chips likely violates U.S. export controls, published recommendations for companies to protect their supply chains against “diversion tactics,” and outlined the types of activities involving AI chips and AI models that may trigger a license requirement.

BIS warned that companies violating those controls could face “substantial criminal and administrative penalties.”

The announcement and guidance come days after a BIS spokesperson said the agency planned to revoke the AI diffusion rule (see 2505070039). BIS plans to soon publish a formal rescission notice for the AI diffusion rule in the Federal Register, the agency said, and Undersecretary Jeffrey Kessler has “instructed BIS enforcement officials not to enforce the” rule.

The rule, which was scheduled to take effect May 15, would have “stifled American innovation and saddled companies with burdensome new regulatory requirements,” BIS said. It would also have “undermined U.S. diplomatic relations with dozens of countries by downgrading them to second-tier status.”

The EU and other trading partners have criticized the restrictions, saying they would place unfair limits on some nations listed in Tier 2, the mid-tier group of countries subject to caps on AI chips and other restrictions (see 2502200051).

Kessler said the Trump administration “will pursue a bold, inclusive strategy to American AI technology with trusted foreign countries around the world, while keeping the technology out of the hands of our adversaries. At the same time, we reject the Biden Administration’s attempt to impose its own ill-conceived and counterproductive AI policies on the American people.”

BIS didn’t release more details about what the replacement rule will entail and didn’t give an estimated release date.

The agency did, however, release new guidance documents outlining red flags that could signal a customer is trying to evade U.S. chip controls and a warning that using Chinese-made advanced-computing chips, including specific Huawei Ascend chips, carries a high risk of violating export restrictions.

One document says that chips that have been developed or produced by companies located in, headquartered in, or whose parent company is headquartered in a Country Group D:5 nation or Macau -- including China -- may “implicate” General Prohibition 10 of the Export Administration Regulations. That prohibition places restrictions on exporters and others if they have knowledge that a violation of the EAR has occurred, is about to occur or is intended to occur.

BIS specifically pointed to chips “meeting the parameters for control” under Export Control Classification Number 3A090, including specific Huawei Ascend chips, which were “likely developed or produced in violation of U.S. export controls.” The document includes a list of Huawei chips “subject to the presumption” that they’re restricted by General Prohibition 10: Huawei Ascend 910B, Huawei Ascend 910C and Huawei Ascend 910D.

BIS said the list isn’t exhaustive, and it may add to it.

“Engaging in GP10 activities, including use of” Chinese-made 3A090 chips “without BIS authorization, could result in substantial criminal and administrative penalties,” the agency said.

Companies should know that there is a “high probability” that a BIS license was required during the design and production of those Chinese chips, including for certain shipments of design files from the Chinese chip designer to the fabrication facility, shipments from the fab to the Chinese designer or seller, or if certain Entity Listed parties are parties to the transactions, BIS said.

The agency said it’s “notifying all persons and companies in the United States and abroad that engaging in GP10 activities, including use of [People’s Republic of China] 3A090 [integrated circuits], such as those listed above, without requisite authorization from BIS could result in BIS enforcement actions which could include substantial criminal and administrative penalties, up to and including imprisonment, fines, loss of export privileges, or other restrictions.”

A company should first confirm with its supplier that they have a license before taking “any action with respect to a PRC 3A090 IC for which it has not received authorization from BIS,” the agency said. “BIS will not pursue enforcement actions against parties that obtain a PRC 3A090 IC solely for the purpose of technical analysis or evaluation (such as destructive testing) to determine the technical capabilities of an individual IC.”

BIS also issued guidance about the types of export controls that may apply to advanced chips used to train AI models and types of activities that may trigger a license requirement under the catch-all controls of part 744 of the EAR when there is “knowledge” that the AI model will be used for a weapon of mass destruction end user or foreign military-intelligence end user. That could include certain exports of advanced chips to foreign cloud service providers when the exporter knows the provider will use the chips to train AI models for parties headquartered in D:5 countries or Macau.

Companies that don’t obtain a BIS license to carry out that transaction, and other example transactions listed by BIS in the guidance, “may be subject to potential civil or criminal enforcement action if a violation of the EAR occurs,” the agency said. It also said foreign entities “acting contrary to U.S. national security and foreign policy interests,” including by training AI models to support weapons or military-intelligence end-uses for D:5 countries or Macau, “may be added to the Entity List, even where no violation of the EAR occurs.”

Another document lists red flags that could signal a customer is trying to illegally divert U.S.-export controlled chips to China. Some red flags include:

• The customer never received exports of advanced chips or related equipment before October 2022, when BIS published its first in a series of export control rules to restrict shipments of advanced chips to China.
• The customer received exports of advanced chips before October 2022 but “saw a significant increase in exports thereafter.”
• A customer has a residential address and provides no other location where the advanced chips will be used. BIS said this red flag applies only where the amount of advanced chips being bought is “inconsistent with its individual/personal use.”
• Parties to transactions listed as ultimate consignees or listed in the “consign to” field don’t “typically engage in business consistent with requiring a large quantity” of advanced computing chips.
• The reported end user is listed as a legal office, a virtual office, a shipping and receiving company, or another location that’s “not a unique storefront for that organization.”
• The data center receiving the chips can’t confirm it has the infrastructure -- such as the cooling capacity or physical space needed to run servers containing advanced chips -- to operate them or commodities containing the chips.
• The cloud service provider customer can’t confirm the users of its services aren’t headquartered in China, “whether or not such customer is located inside or outside of China and Macau operate the” advanced chips advanced computing ICs and/or commodities that contain such ICs.

The guidance also includes a list of “due diligence actions” that BIS said companies should take for new customers or cloud service providers, especially if they’re located outside of Country Group A:1, the group of close U.S. trading partners that make up the multilateral Wassenaar Arrangement, excluding Malta, Russia and Ukraine. Companies should:

• Evaluate the customer’s date of incorporation, ownership structure and end user and end use of the item.
• Notify potential customers that the items are subject to the EAR and would require a license if sent to certain countries, including in Country Group D:1, D:4, or D:5.
• Seek an end-user certification with “detailed information on all proposed transaction parties,” such as the end user and the intended end use. The customer should also certify that it won’t send the chip for restricted military-intelligence end uses or end users, or for the development of weapons of mass destruction.
• Request a written attestation from the data center that says the end user is “authorized to operate at its location” and “has the infrastructure to operate the type of server containing advanced ICs being exported.” Suppliers should carry out on-site visits at the data center, “or alternatively, utilize independent third-party certified auditors to confirm attestations."
• Evaluate data centers to determine whether they have the infrastructure to operate servers containing advanced chips greater than 10 megawatts. BIS said data centers at or above this threshold “merit additional scrutiny” because they may be able to provide large amounts of advanced chips for training AI models “for or on behalf of parties headquartered in countries of concern.”

BIS also notified industry about certain activities that may trigger a license requirement under the catch-all controls of part 744 of the EAR when there is “knowledge” that an AI model will be used for certain weapons end uses and end users or a military intelligence end use or end user. Parties that don’t first obtain a license before carrying out those activities may face civil or criminal penalties if an EAR violation occurs, the agency said.