(Don’t Be) Too Clever by Half: Export Controls When Routing Is Not a Workaround

Reflections on what a recent semiconductor enforcement case means for value chains

A recently announced US civil penalty in an export-control case involving semiconductor manufacturing equipment has drawn attention for its nine-figure size. The important signal for boards and senior management involves how regulators are thinking about routing decisions, customer concentration, and the role of subsidiaries and contractors when sensitive end users in China and other covered countries are involved.

In this case, a major US global semiconductor equipment supplier shipped tools from the United States to an affiliate in a third country for assembly and integration; and from there to a leading Chinese foundry that already was subject to enhanced US export controls. Specifically, the shipments took place after the end user was publicly listed under US export-control measures and without the required licenses.

The outcome underscores a simple but far-reaching point: export controls follow the goods and the end user, not the route. For global corporates whose value chains run through China and other higher-risk markets, this case is less about one company and more about the structural patterns regulators are willing to challenge.

Jurisdiction by design has limits

Over the last decade, many firms have used manufacturing geography as a risk-management tool: design in one jurisdiction, manufacture core modules in another, perform final assembly in a third. In benign conditions, this can be an effective strategy for tariffs, logistics, and taxes. But the recent case shows the limits of applying the same logic to export controls.

Key themes

• Final assembly abroad does not “wash” export-control status.
  Where core functionality is designed and built in one jurisdiction, simply moving assembly or testing to a second country does not remove goods from that first jurisdiction’s rules if those goods remain subject to its export-control regulations.
• Routing through an allied country does not neutralize restrictions on a sensitive end user.
  In this enforcement case, shipments passed through a close US ally before going to a sensitive Chinese foundry. Regulators still treated the transactions as controlled exports and reexports to a restricted end user.
• Regulators look at commercial reality.
  Authorities examined who ordered the tools, where the key value was added, and who ultimately used the tools. That commercial and technical reality outweighed the formal sequence of customs clearances and intra-group transfers.

For value-chain risk management, structures primarily justified to “make it easier” to serve sensitive customers via third-country routing should now be treated as a high-risk pattern.

Customer concentration can tilt compliance decisions

The semiconductor case also illustrates how customer concentration interacts with export-control risk.

A single, strategically important customer in a sensitive jurisdiction can represent hundreds of millions of dollars of annual revenue for upstream suppliers. When that customer becomes subject to specific licensing requirements or restrictions, the economic pressure to “find a way to keep shipping” can be intense.

That pressure may lead business units and local affiliates to favor aggressive or novel interpretations of export-control rules or rely on external structures (for example, dual-build models or third-country routing) that would not otherwise pass a sober review.

From a value-chain risk perspective, “high-risk customer + high revenue dependence” should be treated as a distinct risk driver, not just a commercial fact. It is a leading indicator of where export-control, sanctions, and reputational issues will most likely emerge.

Routing decisions live with subsidiaries and third parties

The transactions in this case did not run solely through the US parent. They depended on a regional subsidiary and local manufacturing capacity in a third country.

That pattern is common:

• Local subsidiaries and regional hubs execute the decisions to reroute, relabel, or restructure flows to continue serving a sensitive end user.
• Contract manufacturers, integrators, and logistics providers may be asked to support “dual-build” arrangements in which units destined for high-risk customers are processed separately.
• Documentation for these flows may look ordinary at the transactional level while masking the combination of origin, routing, and end user that regulators care about.

For global corporates, export-control and sanctions reviews cannot stop at the parent company.

Subsidiaries and critical third parties that handle sensitive products and markets must be within scope for policy, training, monitoring, and audit, including where they are several tiers removed from the customer relationship.

Questions for third-party risk and supply chain teams

Considering this enforcement trend, boards, chief revenue officers, and supply-chain leaders should ask themselves several practical questions today:

• Do we rely on routing-based comfort?
  Where our suppliers or internal business units serve high-risk end users, do we hear justifications such as “we ship via [ally country]” or “final assembly is offshore, so it is not a US export”? If so, has that logic been formally vetted under the correct export-control regime rather than customs or tax concepts?
• Do we understand where production really begins?
  For sensitive products, do we know where core design and fabrication occur, where major subassemblies are produced, and which location’s rules truly govern export-control status? Or do we simply record where the last screw is tightened?
• How strong is our visibility into suppliers’ export-control analyses?
  For critical vendors—particularly in semiconductors, advanced manufacturing, dual-use goods, or industrial software—have we seen export-control classifications and licensing logic in writing? Do contracts require them to comply with applicable export-control regimes and disclose relevant interactions with authorities (for example, is-informed letters, license denials) where legally permissible?
• Are group structures and end users actually in our screening perimeter?
  When a counterparty is part of a broader group that includes listed entities, do our systems map that group relationship; screen parents, subsidiaries, and key affiliates; and flag indirect exposure to restricted end users? Or are we effectively only screening the named contracting entity?
• Do we have effective audit rights and escalation paths?
  For a short list of high-risk suppliers and internal units, do we have the right to review policies and sample transactions involving sensitive destinations such as China, Russia, Iran, and North Korea? Do we have clear, documented routes to escalate concerns when commercial and compliance objectives diverge?

Ultimate beneficial owner (UBO) and group mapping: export controls do not stop at a single name

This recent case involved a sensitive Chinese foundry and related entities that have been the subject of US export-control actions and policy attention for several years. Similar patterns exist in other corporate structures, such as partially state-linked entities, complex corporate families, and joint ventures that span multiple jurisdictions.

This raises three practical priorities for value-chain risk management:

1. Data: Maintain high-quality UBO and group-structure maps for the top tier of high-risk customers and suppliers. Integrate this information into screening, onboarding, and transaction-monitoring tools.
2. Change management: When a new entity list or sanctions designation hits, ensure those changes flow quickly into vendor and customer master data. Logistics, finance, sales, and compliance functions should all see the same “family view” of the counterparty.
3. Scenario planning: When one entity in a group is designated or subject to enhanced controls, assume enforcement and market practice may follow the group. Review exposures across the group, including joint ventures and key customers. Prepare for banks, insurers, and other risk-sensitive intermediaries to apply broader, groupwide restrictions in practice.

Bottom line

The recent semiconductor export-control case is about more than just one supplier or end user. It is a clear statement that US regulators will look through routing structures, third-country assembly, and intra-group transfers to the underlying reality of where goods are designed and built and who ultimately receives them.

For global corporates with meaningful exposure to China and other covered markets, this is another step toward export controls functioning as a structural value-chain constraint alongside tariffs, trade remedies, and geopolitical frictions.

The immediate opportunity is to stress-test a narrow set of high-risk suppliers, internal business units, and customer relationships against the patterns highlighted by this case; and ensure that governance, data, and contracts align with the way enforcement is now being done—not the way it used to be.

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References

Applied Materials, Inc., “Applied Materials Reaches Resolution with the U.S. Department of Commerce,” news release (February 11, 2026). https://ir.appliedmaterials.com/news-releases/news-release-details/applied-materials-reaches-resolution-us-department-commerce

Freifeld, Karen, “Exclusive: Applied Materials under US criminal probe for shipments to China’s SMIC,” Reuters (November 16, 2023). https://www.reuters.com/technology/applied-materials-under-us-criminal-probe-shipments-chinas-smic-sources-2023-11-16/

Freifeld, Karen, and Jasper Ward, “Applied Materials to pay $252 million over illegal exports to China,” Reuters (February 12, 2026). https://www.reuters.com/world/china/applied-materials-pay-252-million-resolve-illegal-chip-exports-us-says-2026-02-12/

Huneke, Mark, “$252 million BIS settlement key takeaways,” LinkedIn post (February 2026). https://www.linkedin.com/posts/mhuneke_amat-settlement-agreement-activity-7427687718962405376-6hog/

US Bureau of Industry and Security, “Applied Materials to Pay $252 Million Penalty to BIS for Illegally Exporting Semiconductor Manufacturing Equipment to China,” press release (February 11, 2026). https://www.bis.gov/press-release/applied-materials-pay-252-million-penalty-bis-illegally-exporting-semiconductor-manufacturing-equipment

US Bureau of Industry and Security, “Order relating to Applied Materials, Inc. and Applied Materials Korea; Proposed Charging Letter; ,” settlement documents (February 11, 2026). https://www.bis.gov/media/documents/2026.02.11-amat-settlement-documents-combined.pdf

US Congress, Select Committee on the Strategic Competition Between the United States and the Chinese Communist Party, “Selling the Forges of the Future: How the CCP Gets Its Key Equipment for Making Semiconductors from U.S., Dutch, and Japanese Companies” (October 2025). https://chinaselectcommittee.house.gov/sites/evo-subsites/selectcommitteeontheccp.house.gov/files/evo-media-document/selling-the-forges-of-the-future.pdf

World Tariff & Trade Letter, “Applied Materials’ $252.5 Million Export-Control Settlement” (February 12, 2026). https://www.wttlonline.com/stories/applied-materials-2525-million-export-control-settlement,14818