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Federal prosecutors said on December 8 that they have found a massive smuggling ring that secretly pushed Nvidia H100 and H200 GPUs, worth $160 million, from US warehouses into China between October last year and May this year.
The operation allegedly involved fake companies, illegal border entries, and relabeling high-end GPUs to sneak them out of the country, according to the prosecutors.
The investigation, named Operation Gatekeeper, was focused on chips; not weapons, not drugs, just raw compute power. These specific Nvidia chips are central to AI development, both for civilian and military systems.
And despite Beijing’s push to build local alternatives, it’s clear China still leans heavily on Nvidia’s gear to fuel its booming AI market.
Feds planted an agent inside New Jersey warehouse to catch fake GPU exporters
In Secaucus, New Jersey, U.S. officials said they sent an undercover agent into a shady shipping operation who allegedly watched suspects put fake branding on Nvidia hardware, packaging them under the name Sandkayan.
Instead of declaring the GPUs for what they were, the group would mislabel them as random electronics like “adapters,” “adapter modules,” and “contactor controllers.”
According to the prosecutors, three trucks showed up at the warehouse on May 28, ready to move the GPUs to the next stop before they hit international waters.
But something spooked them. A message flew through a private group chat used by the smugglers: one of the truck drivers had run into police asking about the destination of the cargo.
“Just say they don’t know anything,” the group allegedly told the drivers. Then five minutes later, another message: “Dissolve this group chat. Delete everyone.” But it was too late. Federal agents stormed the site and seized the hardware before it could leave the country.
Prosecutors said this bust wasn’t a one-off. Similar cases of illegal Nvidia shipments have popped up throughout the year.
The Center for a New American Security estimated that anywhere between 10,000 and several hundred thousand AI chips were illegally funneled to China in just this past year. That includes chips from older Nvidia lines, not just the latest models.
Analysts say China’s AI still depends on Nvidia despite local chip push
Ray Wang, a chip analyst at SemiAnalysis, said China still leans on Nvidia’s platforms to train most of its advanced AI models.
“I think more than 60% of the leading AI models in China are currently using Nvidia’s hardware,” Ray said. “Nvidia have a systematic advantage ranging from hardware to software. And I think for now, if you combine those two factors together, it’s still a thing that China is trying to catch up to.”
Ray also pointed out that once the chips are out in the wild, it’s hard for the company to track them.
“In today’s world, I feel there’s so many ways that you can get your hand on Nvidia’s chips in all kinds of illegal ways,” Ray said. “You can set up your data center globally, you can have shell companies to purchase Nvidia chips. And it’s so hard for Nvidia to track and do due diligence.”
Even Nvidia admitted the government’s export laws were tight. A Nvidia spokesperson told CNBC that even secondary-market sales of older chips are subject to federal reviews. “While millions of controlled GPUs are in service at businesses, homes, and schools, we will continue to work with the government and our customers to ensure that second-hand smuggling does not occur,” the spokesperson said.
Trump’s export deal throws prosecutors’ case into chaos
On the same day prosecutors dropped the case, President Donald Trump went online and dropped something bigger. Posting on Truth Social, Trump said the U.S. would now allow exports of Nvidia’s H200 GPUs, the same ones at the center of this case, to China, so long as the U.S. government gets a 25% cut of the sales.
The most advanced GPUs in Nvidia’s lineup, like the Blackwell and Rubin chips, are still restricted. But the H200s? Fair game, under Trump’s terms.
This blew up the argument prosecutors were trying to make. If the President was greenlighting the export of the very chips the defendants allegedly smuggled, then how could the DOJ claim those same exports were a national security threat?
Defense attorneys wasted no time. In a filing the very next day, they tore into the government’s narrative. “The President gave the lie to that claim when he announced that the United States will now allow Nvidia’s H200 GPUs, the most powerful GPUs seized by authorities in this case, to be exported to China,” the filing read.
And the case isn’t over. Two businessmen have been arrested. One man from Houston has already pleaded guilty, along with his company. But experts like Ray say this won’t stop anything.
“I don’t believe the smuggling will just stop,” Ray said. “It is unclear to me that the new opening of the H200 chips will be enough for Chinese AI demand. The compute demand we are seeing globally has been accelerating, and I believe that should be the case in China as well.”
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