Semiconductor Industry is Committed to Combatting Illicit Chip Diversion

Friday, Jan 06, 2023, 12:30pm

by Semiconductor Industry Association

As the devastating war in Ukraine continues, the U.S. semiconductor industry remains committed to fully complying with all export control regulations issued by the U.S. and allied partner nations to impede Russian aggression. The U.S. government and its partners have targeted the Russian defense industry’s reliance on imported microelectronics by issuing new sanctions and export controls to prevent advanced semiconductors from contributing to weapons production. As a result, U.S. exports of semiconductors to Russia have plunged by more than 90%, according to the U.S. government.

According to recent media reports, however, some Western semiconductors have still been found in battlefield weapons systems used by Russia, including drones manufactured by Iran. To be clear, SIA members do not support or condone the use of their products in Russian weapons systems or any other application their products were not designed or licensed for. These reports are concerning and bring to light the broad range of challenges in preventing the illicit purchase and counterfeiting of semiconductors.

Semiconductor companies take very seriously their responsibility to have robust and comprehensive compliance programs, which include conducting due diligence, auditing, and supply-chain tracing to identify and remove bad actors from their supply chains. However, these efforts alone cannot prevent intentional product diversion, counterfeiting, and misuse. There are several challenges inherent in controlling this type of technology, and many are outside the scope of the original chip producer. These include dual-use issues, the longevity of chips’ use phase, traceability problems, counterfeiting, and the complexity of global electronics supply chains.

The ubiquity of chips in a range of consumer products makes controlling these items an issue of magnitude. Most weapons systems are designed with chips that have a multitude of civilian uses, the same that can be found in cars, laptops, and home appliances. According to the World Semiconductor Trade Statistics (WSTS) organization, in 2021, the global semiconductor industry shipped 1.15 trillion chips. Bad actors desiring to acquire small volumes of chips for unapproved and illegal military use can purchase consumer products via standard retailing sites. Some of the chips that have been found in captured drones cost only a few dollars and are small enough that they can be easily hidden.

Though sanctions are a valuable tool in this effort, they are not a silver bullet. Russian manufacturers have been free to buy—and potentially stockpile—chips for years prior to any sanctions being imposed. For example, Russian production of cars has fallen by 75% from last year, which could indicate that advanced semiconductors originally intended for civilian vehicles and not subject to any export restrictions are being repurposed for military use. Because chips are designed to have long lives for commercial performance, this extends the window of necessary controls even further. Compounding this issue is the large and booming trade in recycled electronics. An analysis of Iranian drones recovered in Ukraine found that 11% of components were manufactured in 2012, with some components dating all the way back to 2005, meaning they could have been repackaged and resold many times all over the world before ending up on the battlefield.

Another pathway to illicit diversion is through the “gray market,” where chips are diverted outside of authorized distribution channels into the hands of dealers, brokers, or the open market. Many of these second- and third-hand resellers are not publicly traded companies, and some operate from jurisdictions where there are laxer local controls and regulations, creating a ripe environment for clandestine procurement networks to operate. Also, a related challenge is preventing counterfeiting. Some lower-end chips that have been found in these weapons were, upon analysis, identified as being produced illegitimately by counterfeiters and re-marked as genuine.

Additionally, law enforcement must contend with state-sponsored illicit procurement schemes operated by adversaries like Iran and North Korea, which have decades of experience building sanctions-evasion networks. Recent indictments have provided a glimpse into how Russian intelligence services direct operations to evade technology bans, using vast networks of complex shell companies and covert agents to smuggle chips across borders and conceal the identity of their end-users. Semiconductor companies are not always equipped to locate and shut down these complex operations on their own.

Efforts by governments, the media, and non-profits to identify illegal semiconductor usage are helpful in aiding industry efforts to crack down on illicit diversion and counterfeiting of chips. But bad actors have multiple access points to semiconductors outside the reach of sanctions, manufacturers’ compliance programs, or other oversight mechanisms. While recognizing these challenges, the U.S. semiconductor industry is deeply committed to working with the U.S. and allied governments to address the illicit diversion of semiconductors and disrupt Russia’s and Iran’s access to controlled technologies.

SIA global policy associate Matthew Wayland contributed to this article