Semiconductor firms have a lot to learn from America’s banks; investing in compliance is the price of entry in a critical industry.
Earlier this week, the Trump administration narrowed export controls on advanced semiconductors ahead of US-China trade negotiations. The administration is increasingly relying on export licenses to allow American semiconductor firms to sell their products to Chinese customers, while keeping the most powerful of them out of the hands of our military adversaries. These are the chips that power the artificial intelligence research fueling China’s technological rise, as well as the advanced military equipment underpinning Russia’s invasion of Ukraine.
The US government relies on private-sector firms to implement those export controls. It’s not working. US-manufactured semiconductors have been found in Russian weapons. And China is skirting American export controls to accelerate AI research and development, with the explicit goal of enhancing its military capabilities.
American semiconductor firms are unwilling or unable to restrict the flow of semiconductors. Instead of investing in effective compliance mechanisms, these firms have consistently prioritized their bottom lines—a rational decision, given the fundamentally risky nature of the semiconductor industry.
We can’t afford to wait for semiconductor firms to catch up gradually. To create a robust regulatory environment in the semiconductor industry, both the US government and chip companies must take clear and decisive actions today and consistently over time.
Consider the financial services industry. Those companies are also heavily regulated, implementing US government regulations ranging from international sanctions to anti-money laundering. For decades, these companies have invested heavily in compliance technology. Large banks maintain teams of compliance employees, often numbering in the thousands.
The companies understand that by entering the financial services industry, they assume the responsibility to verify their customers’ identities and activities, refuse services to those engaged in criminal activity, and report certain activities to the authorities. They take these obligations seriously because they know they will face massive fines when they fail. Across the financial sector, the Securities and Exchange Commission imposed a whopping $6.4 billion in penalties in 2022. For example, TD Bank recently paid almost $2 billion in penalties because of its ineffective anti-money laundering efforts
An executive order issued earlier this year applied a similar regulatory model to potential “know your customer” obligations for certain cloud service providers.
If Trump’s new license-focused export controls are to be effective, the administration must increase the penalties for noncompliance. The Commerce Department’s Bureau of Industry and Security (BIS) needs to more aggressively enforce its regulations by sharply increasing penalties for export control violations.
BIS has been working to improve enforcement, as evidenced by this week’s news of a $95 million penalty against Cadence Design Systems for violating export controls on its chip design technology. Unfortunately, BIS lacks the people, technology, and funding to enforce these controls across the board.
The Trump administration should also use its bully pulpit, publicly naming companies that break the rules and encouraging American firms and consumers to do business elsewhere. Regulatory threats and bad publicity are the only ways to force the semiconductor industry to take export control regulations seriously and invest in compliance.
With those threats in place, American semiconductor firms must accept their obligation to comply with regulations and cooperate. They need to invest in strengthening their compliance teams and conduct proactive audits of their subsidiaries, their customers, and their customers’ customers.
Firms should elevate risk and compliance voices onto their executive leadership teams, similar to the chief risk officer role found in banks. Senior leaders need to devote their time to regular progress reviews focused on meaningful, proactive compliance with export controls and other critical regulations, thereby leading their organizations to make compliance a priority.
As the world becomes increasingly dangerous and America’s adversaries become more emboldened, we need to maintain stronger control over our supply of critical semiconductors. If Russia and China are allowed unfettered access to advanced American chips for their AI efforts and military equipment, we risk losing the military advantage and our ability to deter conflicts worldwide. The geopolitical importance of semiconductors will only increase as the world becomes more dangerous and more reliant on advanced technologies—American security depends on limiting their flow.
About the Authors: Andrew Kidd, Celine Lee, and Bruce Schneier
Andrew Kidd holds a master’s in public policy from the Harvard Kennedy School and was previously an engagement manager in the high-tech and public sector practices at McKinsey & Company.
Celine Lee holds a master’s degree in public policy from the Harvard Kennedy School. She has previously held fellowships at the United States Senate Committee on Foreign Relations and the American Institute in Taiwan (AIT).
Bruce Schneier is a security technologist and a fellow and lecturer at the Harvard Kennedy School.
Image: Goran Gjorovski / Shutterstock.com.
