Industry Insights

Uncovering illicit trade in the semiconductor industry

At least 6 of the top-20 semiconductor companies are affected by suspicious Russian imports

Western-made microelectronics are used in Russian weaponry in Ukraine. Despite imposed sanctions, such technology continues to flow into Russia. Combating parallel trade is however not the only challenge the industry is facing. Chip shortages put pressure on the industry and open the door for counterfeiters and fraudsters. Supply chain intelligence, analysis of trade data and open source intelligence help to formulate the business decisions needed to disrupt such illicit product flows.
The Russian defence industry relies on Western microelectronics for vital functions such as missile guidance. As imported substitutes for this technology are considered inadequate, the evasion of Western sanctions has become an alternative. Following the full-scale invasion of Ukraine in 2022, millions of semiconductor products from various Western brands continued to be imported into Russia, despite the sanctions.
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Although brand owners conduct due diligence, these unauthorised imports occur outside their purview. The flow of products enters the country through third-country transhipment hubs and clandestine networks, as was revealed by a joint investigation conducted by the Royal United Services Institute (RUSI), Reuters, and iStories in 2022.

Counterfeit semiconductors pose considerable threats

These trends with regard to the illicit Russian trade come at a time when the semiconductor industry is facing major brand protection challenges. The global pandemic caused supply chain disruptions, resulting in a worldwide chip shortage that opened the door for counterfeit products. Fraudsters took advantage of this situation and created fake websites, resulting in a record number of wire fraud cases being reported.

Counterfeit semiconductors pose considerable risks to both brand owners and end-users, as semiconductors are among the most critical components of products and systems. While the security risks of counterfeit chips might be obvious, other risks of counterfeit microelectronics are often underestimated. Semiconductors belong to the most critical components in electronic systems, and therefore pose serious health and safety threats. Counterfeit microelectronic components have been found that were intended to be used in medical infusion systems and braking systems for high-speed trains. Failing to prevent and detect these components can jeopardise lives and have a significant negative impact on the brand owner.

Electronics production in China poses risk of counterfeiting and parallel trade

Many large semiconductor producers are headquartered in Western countries, but a significant proportion of semiconductors is sold to electronic equipment makers in China, which poses risks of counterfeiting and parallel trade. Both the US and EU have made announcements to boost domestic chip production or relocate production.

Market share by region of company HQ

Semiconductor sales by region

Harvesting of e-waste

Because making semiconductors requires advanced technology and knowledge, counterfeit semiconductors are often made from electronic waste, which involves removing original markings from harvested components and applying new markings. This is a highly risky activity in that counterfeiters may apply markings that give them an advantage, such as those indicating a higher performance or the use of different raw materials.

Illicit supply chain - key origins and transhipment hubs

Risky origins

Beijing
Chendian
Fudan
Hong Kong
Shenzhen

Transhipment hubs

France
Hong Kong
Jebel Ali (Dubai)
Panama
Singapore
US
Vietnam

Semiconductor imports Russia - Case study by ApiraSol

Our analysis of trade data on microelectronics imported into Russia reveals that Western branded microelectronics were still being imported into Russia in late 2022 and early 2023, despite the imposed sanctions. Some of the names and addresses identified in the data match companies on sanction lists, or companies linked to the Russian defence industry.

Routes map based on 215 records of suspicious imports of Western branded semiconductors.
Period: October - December 2022
Products declared: Semiconductor HS codes, various Western semiconductor brands
Red routes involve sanctioned entities.

Trade data for October to December 2022 shows that almost 1500 records of microelectronic components were identified, using a list of Western microchip brands known to be used in Russian weaponry. These records correspond to semiconductors or related components, and at least one brand was named in the documents.
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The names of exporting and importing parties were compared to the US Bureau of Industry and Security's list of entities subject to Export Administration Regulations. Several names or addresses in the data matched, either in part or in full, with those on the list. Our investigation also found that some of the same entities were still importing Western branded microelectronics in January 2023.

While most of these microelectronic components are dual-use and not necessarily intended for military use, scrutiny is necessary as commercial front companies engaged in sanctions evasion are common in Russia.

ApiraSol also queried trade data from January 2023, and found some of the same entities to be still importing Western branded microelectronics.

Brand owners must secure their supply chains

Both the chip shortage and the war in Ukraine persist, and experts believe that the chip shortage will not improve in the near future. In addition to plans to increase domestic chip production or relocate production, Western brands face significant challenges with their supply chains, and brand protection.
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Manufacturers have expressed concerns about the imports entering Russia, and have announced measures or launched internal investigations to tackle the issue. While requirements for authorised distribution and purchase from authorised sources can be part of the solution, counterfeiting and parallel trading can be an opaque business, often involving a range of illicit network activity.
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Brand owners must take action to secure their supply chains, to increase customer trust, avoid legal issues and protect their brand. Supply chain intelligence has proven an effective method for this purpose.
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