⚡NIMITZ TECH NEWS FLASH⚡

“The US Companies’ Technology Fueling the Russian War Machine”

Senate Committee on Homeland Security and Government Affairs; Permanent Subcommittee on Investigations Hearing

September 10, 2024 (recording linked here)

HEARING INFORMATION

Witnesses and Written Testimony (linked):

• Ms. Michelle Stout: Vice President of Global Trade Compliance and Government Affairs Analog Devices, Inc.

• Ms. Tiffany Scurry: Chief Compliance Officer Advanced Micro Devices, Inc.

• Mr. Jeff Rittener: Chief Trade Officer & General Manager of International Trade Group Intel Corporation

• Ms. Shannon Thompson: Vice President and Assistant General Counsel Texas Instruments Incorporated

Key words:

Chips, Russia, Distributors, China, Audits, Sanctions, Semiconductors, Compliance, Ukraine, Export controls, Sales, Intel, Weapons, program.

IN THEIR WORDS

OPENING STATEMENTS FROM THE SUBCOMMITTEE AND FULL COMMITTEE

• Chairman Blumenthal began by highlighting the devastating impact of Russian missiles on Ukraine, particularly noting that American-made technology, including microchips from companies like Analog Devices, Intel, and Texas Instruments, is used in these weapons. Blumenthal criticized these companies for allowing their products to reach Russia through shadowy intermediaries in countries like Armenia, Turkey, and Kazakhstan, accusing them of willful blindness and neglect. He shared accounts from his visits to Ukraine, where he witnessed the tragic effects of these weapons and repeatedly heard pleas from Ukrainian officials, including President Zelensky, to stop the flow of American technology enabling Russian attacks.

  The Chairman presented evidence that a significant percentage of components found in Russian weapons were made by American companies, despite sanctions and compliance requirements. He argued that these companies have the resources to do more but have failed to take essential steps like conducting regular audits and improving oversight of their distributors. He called on American companies to drastically improve their compliance programs, emphasizing the moral and legal responsibilities they bear in preventing their products from contributing to Russian aggression.

• Ranking Member Johnson acknowledged Chairman Blumenthal’s strong accusations against American companies but argued that the situation is more nuanced, especially within a global economy. He noted that companies like Analog Devices are not directly violating U.S. export controls; instead, the problem lies in legal exports to non-sanctioned countries such as Armenia, Kazakhstan, and Turkey, which are then diverted to Russia. He emphasized that U.S. companies are operating within the bounds of the law, and the issue reflects the complexities of global supply chains rather than corporate misconduct.

  The Ranking Member criticized the Biden-Harris administration’s sanctions and export control policies, arguing that they have been ineffective and have had unintended consequences, such as strengthening economic ties between Russia and countries like China and India. He highlighted that despite these sanctions, Russia’s economy has grown, and the country continues to produce military munitions at a lower cost compared to Western nations, indirectly fueling its war against Ukraine. Johnson argued that the failures of the sanctions regime should not be placed on U.S. manufacturers who are legally exporting their products but rather on the broader strategy that has failed to deter Russia’s aggression effectively.

WITNESS HIGHLIGHTS

• Ms. Michelle Stout emphasized that ADI views compliance with export control laws as a minimum standard and has taken additional voluntary steps, such as halting all transactions in Russia immediately after the invasion, even when some were still legally permitted. She emphasized that ADI's approach is driven by company values, seeing the diversion of their products as morally wrong.

  Ms. Stout described several proactive measures ADI has implemented, including strengthened policies, enhanced employee training, and the establishment of a dedicated gray market mitigation team focused on identifying potential red flags. She noted that ADI has denied sales to approximately 5,000 potential customers based on suspicious behavior, even when these customers were not on the Entity List. She acknowledged that while completely stopping diversion is nearly impossible due to the global nature of chip markets and persistent efforts by bad actors, ADI remains a leader in anti-diversion efforts.

• Ms. Tiffany Scurry emphasized AMD's commitment to preventing the diversion of its products for illicit purposes. She stated that AMD has no tolerance for selling to military end users in Russia, highlighting that the company ceased all sales to Russia and Belarus soon after the invasion of Ukraine. She detailed AMD's robust compliance program, which includes extensive diligence efforts, software controls, and audit processes designed to ensure that their products do not end up in the wrong hands. She noted that AMD also requires post-sale data from customers to screen transactions against sanctions lists and has enhanced its audits to further strengthen its anti-diversion efforts.

  Ms. Scurry acknowledged that the challenge of preventing diversion is complex due to sophisticated criminal actors and existing components already in circulation before the invasion. She emphasized that many components traced on the Ukrainian battlefield are often old, sometimes decades old, and highlighted that AMD’s direct sales in problematic regions have been minimal or nonexistent in recent years. To further combat diversion, AMD has launched an anti-diversion committee, centralized investigative intelligence, added new Know Your Customer resources and partnered with the federal Disruptive Technology Strike Force.

• Mr. Jeff Rittener emphasized Intel’s strong condemnation of Russia’s war against Ukraine and affirmed the company's commitment to complying with all applicable sanctions and export laws. He noted that Intel’s compliance efforts exceed government standards and involve ongoing evaluations and enhancements to reduce risks.

  Mr. Rittener explained that Intel primarily sells its products to large manufacturers and vetted distributors, who are required to adhere to strict compliance standards, including regular audits and contractual obligations to follow export laws. He acknowledged that despite their rigorous controls, bad actors may still attempt to circumvent regulations, and Intel remains vigilant in investigating any concerns and taking necessary actions, including terminating customer relationships when needed. Rittener emphasized the importance of continued collaboration between industry, NGOs, and government to comprehensively address the challenges of diversion and ensure compliance.

• Ms. Shannon Thompson emphasized that TI halted sales to Russia and Belarus in February 2022, prior to being required by law, and that any shipments of TI products into Russia are unauthorized. Thompson stated that TI strongly opposes the use of its chips in Russian military equipment and described the deep personal and corporate commitment to combating diversion efforts. She highlighted TI’s significant shift toward direct sales, which now account for 75% of its revenue, to better control its supply chain.

  Ms. Thompson detailed TI’s extensive compliance efforts, which include actively monitoring sales and shipments, screening customers and orders at multiple points, and investigating evidence of diversion. She noted that TI screens over 4 million orders annually and cancels thousands that pose credible concerns. She acknowledged the challenges facing the industry, including the widespread use of semiconductors, their long shelf life, and the ease with which basic chips can be repurposed for military applications.

SUMMARY OF Q and A

• Chairman Blumenthal asked Mr. Rittener if Intel conducts annual audits of its export compliance program, including sales to distributors and customers. Mr. Rittener confirmed that Intel conducts several audits annually as part of its ethics and compliance oversight program, and they regularly audit their distributors, aiming to complete 100 audits this year. When asked if the audits were completed and if the results could be shared with the committee, he stated that the audits were ongoing but would follow upon receiving the results. The Chairman pressed on whether Intel could conduct audits more frequently, to which Mr. Rittener responded that he would discuss the feasibility with his team.
  Chairman Blumenthal then asked Ms. Thompson if Texas Instruments (TI) performs regular audits of compliance with export controls for both distributors and customers. Ms. Thompson explained that TI conducts audits based on a risk-based approach rather than on a set schedule. When asked if TI would commit to conducting these audits quarterly, he agreed to commit to distributor audits but was less specific about audits of all sales. The Chairman further questioned whether TI would require distributors to conduct their own audits and share the results, to which Ms. Thompson responded that she would take the suggestion under advisement.
  Finally, the Chairman asked Mr. Rittener if Intel requires distributors to conduct audits of their sales. Mr. Rittener explained that Intel requires distributors to provide sales-out reports that detail every customer they sell to, and Intel audits these reports regularly. The Chairman emphasized the need for third-party assessments of sales and compliance with export controls for both companies' internal sales and their distributors, urging more rigorous and frequent audits.

• Ranking Member Johnson asked the witnesses about the complexity and age of the chips found in Russian weaponry, highlighting that not all chips are equally advanced and questioning how these older chips ended up in the pipeline. He asked if external auditors include export controls in their audits, suggesting that compliance with these controls would impact business risks. He emphasized the difficulties in ensuring 100% compliance and asked the witnesses to describe the challenges they face in preventing chip diversion.

  Ms. Stout explained that the chips found on the battlefield are often dual-use items not subject to export controls and are typically low-end products. She confirmed that the chips seen in Russian military equipment are not advanced and often predate the sanctions.

  Ms. Scurry added that the chips identified by groups like the Conflict Armament Research Group are usually very old, often between 5 to 15 years old, and sometimes over 20 years old. She stated that AMD has not seen any parts recovered on the battlefield that were manufactured post-sanctions.
  Mr. Rittener agreed with the other witnesses, noting that Intel chips found in Russian weaponry are typically older, dating five to ten years back. He emphasized that the distribution ecosystem is complex, with products often being resold multiple times, making it difficult to control where chips ultimately end up. He confirmed that Intel’s audits have not found any direct connection between current sales and diversion to Russia.

  Ms. Thompson described the presence of bad actors who exploit the multi-stage sales and resales typical in the industry, using false documents to redistribute components. She noted that TI’s chips are basic components often used in both everyday and military applications, making them easy to repurpose.
  The Ranking Member asked if the committee staff had shown any components to the witnesses and inquired whether they had been able to trace them back to their origin. Ms. Scurry confirmed that while AMD receives such requests from groups like CAR and journalists, they have not found any newly manufactured chips linked to Russia, only older chips that predate the sanctions.

• Sen. Hassan asked each witness if their companies track country-specific sales data for both direct sales and those made through distributors. Ms. Stout confirmed that they track sales and have established additional controls for high-risk countries. Ms. Scurry stated that AMD tracks sales by country and region, particularly in regions identified as high-risk for diversion. Mr. Rittener affirmed that Intel tracks sales and noted that they do not conduct business in specific high-risk countries such as Armenia, Belarus, and Georgia, and Ms. Thompson mentioned that while TI tracks direct sales and relies on distributor data for compliance, further specifics would need to be confirmed.
  Sen. Hassan inquired about how each company identifies abnormal or questionable demand that triggers increased due diligence to prevent chips from reaching restricted nations like Russia or China. Ms. Stout stated that their gray market mitigation team focuses on identifying red flags and monitoring sales patterns. Ms. Scurry explained that AMD uses technology and a risk-based approach to screen for red flags before making sales. Mr. Rittener noted that Intel relies on sales-out reports and investigates any suspicious activity. Ms. Thompson detailed TI’s multi-layered approach, including screening against multiple databases, working with NGOs, and applying heightened screening for certain customers and parts.
  Sen. Hassan asked Mr. Rittener about how Intel ensures compliance for high-end AI chips to prevent adversaries from misusing the technology. Mr. Rittener explained that Intel distinguishes between standard AI chips and more sensitive accelerator products, which are now subject to export controls following recent rule changes. He confirmed that Intel no longer ships these advanced AI chips to China in compliance with the new export rules.

• Sen. Marshall questioned whether companies could stop selling chips to China, given its involvement in the diversion of components. Ms. Stout acknowledged the legitimate business in China but expressed concern over diversion risks. Ms. Scurry emphasized that AMD complies with U.S. export controls and only sells licensed products to China. Mr. Rittener clarified that Intel does not have manufacturing facilities in China, while Ms. Thompson confirmed that TI does have facilities there.

  Sen. Marshall then asked how each company monitors third-party distributors in China. Mr. Rittener stated that Intel vets and monitors authorized distributors and reinvests proceeds from China into U.S. technological development. Ms. Thompson explained that TI has significantly reduced its reliance on global distributors, with most of its revenue now coming from direct sales, and its remaining distributors are subject to strict export controls. Ms. Scurry detailed that AMD collects and screens onward sales data from distributors weekly to ensure compliance.

  Sen. Marshall confronted Mr. Rittener with reports that $351 million worth of Intel components were imported into Russia in 2023, questioning whether this indicated a failure of sanctions. Mr. Rittener reiterated that Intel stopped sales to Russia in February 2022 and suggested that these components were sourced from unaffiliated third parties. He emphasized the need for collaboration between industry, government, and NGOs to strengthen compliance programs and better identify suspicious activities. Sen. Marshall expressed frustration at the perceived inadequacy of these efforts, criticizing the ongoing sales to China despite its role in the diversion of chips used in Russian weaponry.

• Sen. Hawley questioned Mr. Jeff Rittener about the company's significant investments in China, particularly in Chinese artificial intelligence and semiconductor startups, despite receiving billions in U.S. government funds to compete with Beijing. Mr. Rittener explained that proceeds from their investments in China are reinvested into the U.S. to support technological leadership. Sen. Hawley pressed on the ethical implications of investing in China and criticized Intel for continuing these investments while receiving U.S. support, questioning how this benefits the United States, and challenged Mr. Rittener on Intel’s stance regarding forced labor in China, specifically the exploitation of Uyghur Muslims. Mr. Rittener repeatedly stated he was not an expert and refrained from directly condemning the Chinese government’s actions, leading Sen. Hawley to express disbelief and frustration. Sen. Hawley highlighted that Intel had previously issued and then retracted a statement against sourcing from the Xinjiang region, accusing the company of failing to take a clear moral stand against forced labor. Mr. Rittener eventually stated he personally believed forced labor is wrong but did not assert that Intel was associated with it.

  Sen. Hawley also addressed Intel’s recent announcement of laying off 15,000 workers, questioning how many of these were American jobs and criticizing the company for awarding its CEO a substantial pay increase during this period of layoffs. Mr. Rittener responded that the layoffs were part of efforts to address economic challenges and operate efficiently but could not provide specifics about the impact on American workers or justify the CEO’s pay raise. Sen. Hawley concluded by expressing strong disapproval of Intel’s actions, emphasizing that American jobs and national security should be prioritized, and condemning Intel’s perceived complicity in unethical practices in China.

• Chairman Blumenthal questioned Ms. Stout about the company's commitment to regular compliance audits of export controls, including audits of sales to distributors and requiring distributors to conduct their own audits. Ms. Stout stated that Analog Devices is investing in its internal audit team and committed to auditing all distributors but acknowledged that not all were currently audited quarterly. The Chairman then asked Ms. Scurry if AMD would commit to regular quarterly audits of compliance programs and sales, noting the company’s lack of recent audits since Russia’s invasion. Ms. Scurry indicated that AMD plans a full audit in 2025 and would need to consult with her team about more frequent audits.

  The Chairman pressed Ms. Scurry about whether AMD had sent a team to Ukraine to inspect chips found in Russian weapons, as he had done. Ms. Scurry responded that AMD had not sent a team but had received numerous trace requests from conflict armament research groups, which they responded to by researching and providing data on the parts. The Chairman expressed concern that AMD had not directly inspected the parts and urged them to take more proactive steps.

  He also questioned Ms. Stout on whether Analog Devices had responded to trace requests, noting that the committee’s information suggested they had not. Ms. Stout stated that they were meeting soon to address these requests. The Chairman similarly asked Ms. Thompson about the company’s response to over 100 trace requests, and Ms. Thompson explained that Texas Instruments had been working actively with CAR since February, noting confidentiality issues but committing to ongoing cooperation.

  The Chairman concluded by urging all companies to increase their efforts in compliance and traceability, expressing skepticism about claims that Russian and Iranian weapons were being made with old chips. He emphasized the need for more direct actions and inspections to validate the age and origin of components found in battlefield weapons. Mr. Rittener confirmed that Intel was actively engaged with NGOs to respond to trace requests and was working to upgrade their traceability programs.

• Ranking Member Johnson asked each company whether they had received trace requests and if they had responded before the Subcommittee’s involvement. Ms. Stout acknowledged that they had not prioritized these requests until after the Subcommittee’s February hearing, despite their close cooperation with the U.S. government. When asked why they had delayed responding, Ms. Stout mentioned plans to meet with CAR to improve collaboration. Ms. Scurry stated that AMD had been responding to trace requests since 2022 and confirmed that no chips found had been manufactured after the Russian invasion. Mr. Rittener admitted that Intel did not engage with trace requests until after the Subcommittee began its investigation, citing initial difficulties with understanding the requests within their sales model. He confirmed that Intel had not found any modern chips in response to the trace requests. Ms. Thompson noted that while TI had always welcomed information from outside sources, active engagement with trace reports began more recently, and their traced chips were predominantly older.

  The Ranking Member expressed disappointment that the companies were not proactive in responding to trace requests before the Subcommittee's involvement but acknowledged the challenges of enforcing sanctions. He emphasized that, as public companies dealing with technology exports, they need to be vigilant about compliance with export controls to prevent technology from benefiting adversaries. He advised the companies to continue complying with trace requests and to identify and address any instances of modern products being diverted. The Ranking Member cautioned against imposing rigid audit schedules that may not be effective and noted the complex nature of the task facing these companies.

• Chairman Blumenthal asked each company if they would commit to reviewing documents provided by Ukrainian authorities, which detailed modern chips found in Russian weapons. He requested that they send teams to Ukraine to conduct firsthand inspections rather than relying solely on trace requests. Ms. Stout and Ms. Thompson stated they would take the requests back to their teams for consideration. Ms. Scurry mentioned that AMD was actively working on sending representatives to inspect the devices, and Mr. Rittener committed to reviewing the information and would take the request to send a team to Ukraine back to his team.

  The Chairman highlighted the Bureau of Industry and Security’s (BIS) offer to review and improve compliance programs on a voluntary basis, noting that only four semiconductor companies had taken advantage of this opportunity since the start of the Ukraine war, and none of the companies present had participated. Ms. Thompson explained that Texas Instruments has ongoing discussions with BIS and would consider the Chairman’s recommendation for a review. Mr. Rittener agreed to commit to a review if the details were clear. Ms. Scurry stated that AMD would consider submitting their full compliance program for review. Ms. Stout indicated that Analog Devices was unaware of the service but would now engage with BIS.

  The Chairman urged the companies to proactively take more steps beyond responding to trace requests. He stressed the importance of conducting regular audits and taking direct action to prevent chips from ending up in the hands of adversaries such as Russia, Iran, and North Korea. He emphasized that the current actions were not enough and that additional measures were needed to ensure compliance and accountability. The Chairman concluded by expressing his hope that the companies would follow through on their commitments and work collaboratively with the Subcommittee to address these critical issues, emphasizing the broader implications for U.S. national security.

SPECIAL TOPICS

ADD TO THE NIMITZ NETWORK

Know someone else who would enjoy our updates? Feel free to forward them this email and have them subscribe here.