Red Flags Rising

• Open One Eye, Close One Eye

  Mike & Brent break down the investigative report by the Editor-in-Chief of Gamers Nexus, Steve Burke, and his colleagues into GPU smuggling into China, which was recently featured on the ChinaTalk podcast with Jordan Schneider.Mike & Brent discuss the context for the report (00:51), its key takeaways (03:14), what it means and what it doesn’t mean for U.S. design companies and anyone subject to U.S. export laws (05:47), and why the “high probability” standard provides a path forward for companies facing reports such as this (12:30).They conclude with another installment of Brent Carlson’s ever-popular “Managing Up” (16:03).Steve Burke & Gamers Nexus’ report can currently be found here: https://rumble.com/v6xro9o--the-nvidia-ai-gpu-black-market-smuggling-corruption-and-global-scandal-.html?utm_source=substack&utm_medium=emailMore about Gamers Nexus: https://gamersnexus.net/Check out Jordan Schneider’s ChinaTalk episode on the report here: https://podcasts.apple.com/us/podcast/nvidia-gpu-black-market-smuggling/id1289062927?i=1000723081399More about Brent: https://www.linkedin.com/in/brent-carlson-41ba692/More about Mike: https://www.linkedin.com/in/mhuneke/Everything you ever wanted to know about the “high probability” standard: https://www.hugheshubbard.com/fresh-looks

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• Grab the Carrots, Avoid the Sticks, and Get Ready for More Transparency

  Mike and Brent pick up the discussion from Episode 25 with some further thoughts on the proposed revenue-sharing arrangement between the U.S. government and certain exporters, including what should be anticipated from the U.S. government in terms of increased transparency (01:36), give their take on the Maintaining American Superiority by Improving Export Controls Transparency Act signed into law by the President, including both what it does do and what it doesn’t do (10:27), and provide their takes on the long-running media speculation about a so-called “50% rule” that would extend the Entity List maintained by the U.S. Bureau of Industry & Security (BIS) automatically to subsidiaries or affiliates owned 50% or more by a listed entity (18:53), including questions that the debate raises about what due diligence is being done now on subsidiaries and affiliates of listed entities, and important distinctions between U.S. economic sanctions—from where the 50% rule concept is being borrowed—and U.S. export controls that suggest the rule is better suited for the former than the latter.They conclude with another installment of Brent Carlson’s “Managing Up” (26:25).More about Brent: https://www.linkedin.com/in/brent-carlson-41ba692/More about Mike: https://www.linkedin.com/in/mhuneke/Everything you ever wanted to know about the “high probability” standard: https://www.hugheshubbard.com/fresh-looks

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• Deals, More Deals, and Protective Backstops

  Mike & Brent dive into the latest geopolitical developments surrounding technology exports and the interplay between leading tech companies and the U.S. Administration.Specifically, they discuss the latest news regarding U.S. conditions for licensing the export of Nvidia’s H20 chip to China (00:38), the impact of the deal on trade negotiations between the U.S. and the People’s Republic of China (and vice-versa) (04:59), the difficult position companies generally are in regarding export controls due diligence and the multiple potential meanings and consequences regarding public officials’ statements around export controls (16:01), the latest news regarding Intel’s CEO’s interactions with the U.S. Administration and how they illustrate vividly the “whipsaw” effect companies and executives face as geopolitical winds swirl (20:09), the relevance of the “pretend mistake” tactic in dealmaking—or, as Mike referred to it in the context of U.S. export controls, the “revoked forgiveness” tactic (22:40), and, practically speaking, how companies can best anchor themselves amidst the geopolitical storm by designing and implementing a “high probability protocol” to best anticipate core trends in U.S. export controls enforcement and serve as an important compliance backstop (25:36).They then conclude with another installment of Brent Carlson’s “Managing Up” (26:59).More about Brent: https://www.linkedin.com/in/brent-carlson-41ba692/More about Mike: https://www.linkedin.com/in/mhuneke/Everything you ever wanted to know about the “high probability” standard: www.hugheshubbard.com/fresh-looks

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• Preventing Diversion Starts Close to Home

  Mike and Brent break down the key takeaways from an affidavit by a Bureau of Industry & Security Special Agent in Los Angeles, which was unsealed on August 5, 2025, and is a masterclass in how BIS is identifying and analyzing “red flags” indicating potential export controls violations.Mike and Brent discuss the basics of the case (00:58), the value of the detailed affidavit prepared by the BIS Special Agent in support of the arrests (02:19), the value of the case to those making broader strategic decisions for companies in illustrating the competitive advantages—and ability to maximize the benefits of America’s AI Action Plan—through effective export controls compliance (03:00), the most-relevant details of the allegations (04:20), the dangers of doing business with “fly-by-night” operations of any type (05:45), how these allegations underscore the importance of dynamic risk assessments, i.e., those that focus on changes in customers or orders around significant changes to U.S. export controls (06:14), what the affidavit signals for corporate enforcement (07:21), what we can learn about diversion risks from Brent’s studies of the Qing dynasty and frozen meats (07:40), what seized text messages revealed about the smugglers’ view of the current U.S. Administration (08:57), what the affidavit indicates that trade compliance teams realistically, at the front end, could or should have known (10:31), how to respond to BIS requests for information or outreach visits (13:58), Mike’s leaky dishwasher analogy for diversion (and why you need to fix both) (14:15), how the affidavit shows that BIS agents are applying a high probability mindset in their investigations (18:27), how not to “kick the hornet’s nest” when BIS visits or requests information (20:29), the expectations of U.S. regulators generally that companies that become aware of potential violations, whether or not they voluntarily disclose anything, at least do a “root cause” analysis and consider whether compliance program enhancements are necessary (22:17), and the relevance of General Prohibition 10 and the several inchoate provisions under 15 C.F.R. § 764.2 (23:10).They then conclude with the ever-popular segment, Brent Carlson’s “Managing Up” (26:03).Edvard Pettersson’s article, with a link to the BIS Special Agent’s affidavit, “Chinese nationals charged with illegal exports of Nvidia chips” (Courthouse News, Aug. 5, 2025): https://www.courthousenews.com/chinese-nationals-charged-with-illegal-exports-of-nvidia-chips/The DOJ press release: https://www.justice.gov/opa/pr/two-chinese-nationals-arrested-complaint-alleging-they-illegally-shipped-china-sensitiveMore about Brent: https://www.linkedin.com/in/brent-carlson-41ba692/More about Mike: https://www.linkedin.com/in/mhuneke/Everything you ever wanted to know about the “high probability” standard: www.hugheshubbard.com/fresh-looks

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• $140M "High Probability" Enforcement Action

  Mike and Brent breakdown the $140 million corporate resolution announced on Monday, July 28, 2025, by the U.S. Department of Commerce’s Bureau of Industry & Security (BIS) and the U.S. Department of Justice’s National Security Division (NSD). Of this amount, $95 million was imposed by BIS alone, which is the largest stand-alone BIS penalty since April 2023.Mike and Brent discuss the geopolitical context (00:39), how the resolution responds to December 2024 criticism from the then-majority staff of the U.S. Senate’s Permanent Subcommittee on Investigations (01:58), why this is “where the juice is” for future BIS and NSD enforcement (03:05), how the settlement underscores that sustained compliance with national security-driven regulations requires a substance-over-form approach (04:45), the relevant facts related to the resolving company’s China subsidiary and customers (06:36), the relevant facts related to the parent company (08:59), why a letter of assurance and end-use/end-user certifications were not sufficient to respond to the “red flags” identified (10:38), how U.S. parent companies should be thinking holistically about export controls risk and strategies for mitigating that risk, including in responding to BIS outreach visits or queries to hopefully avoid administrative subpoenas or, worse, referrals to criminal authorities (12:37), the signals BIS and NSD expect companies subject to U.S. export controls to perceive from the public documents (16:37), the significance of BIS’s reference to General Prohibition 10 and to attempted violations of U.S. export controls (16:37), and the key takeaways for legal and trade compliance professionals (19:09).Mike and Brent then conclude with the still-back-by-popular-demand segment, Brent Carlson’s “Managing Up” (19:52).The BIS Press Release, with links to the settlement documents: https://www.bis.gov/press-release/cadence-design-systems-pay-95-million-penalty-bis-unauthorized-exports-chinese-entities-tied-developmentThe NSD Press Release, with links to the corporate guilty plea and criminal information: https://www.justice.gov/opa/pr/cadence-design-systems-agrees-plead-guilty-and-pay-over-140-million-unlawfully-exportingFor everything you ever wanted to know about the “high probability” standard, check out Mike & Brent’s “Fresh Looks” series at www.hugheshubbard.com/fresh-looksMore about Brent: https://www.linkedin.com/in/brent-carlson-41ba692/More about Mike: https://www.linkedin.com/in/mhuneke/

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