US preparing crackdown on China's alleged AI intellectual property theft via distillation attacks

The US is preparing to crack down on China's allegedly "industrial-scale theft of American artificial intelligence labs' intellectual property," the Financial Times reported Thursday. Since the launch of DeepSeek—a Chinese model that OpenAI claimed was trained using outputs from its models—other AI firms have accused global rivals of using a method called distillation to steal their IP. In January, Google claimed that "commercially motivated" actors not limited to China attempted to clone its Gemini AI chatbot by promoting the model more than 100,000 times in bids to train cheaper copycats. The next month, Anthropic accused Chinese firms DeepSeek, Moonshot, and MiniMax of using the same tactic to generate "over 16 million exchanges with Claude through approximately 24,000 fraudulent accounts." Also in February, OpenAI confirmed that most attacks it saw originated from China. For the US, these distillation attacks supposedly threaten to help China quickly catch up in the AI race. In a memo that FT reviewed, the director of the White House Office of Science and Technology Policy, Michael Kratsios, warned that "the US government has information indicating that foreign entities, principally based in China, are engaged in deliberate, industrial-scale campaigns to distill US frontier AI systems." According to Kratsios, Chinese campaigns were "leveraging tens of thousands of proxy accounts to evade detection and using jailbreaking techniques to expose proprietary information." His memo said that US firms would soon gain access to government information to help them combat the apparent attacks. So far, AI firms have alleged that such attacks violate their terms of service, but Congress may update laws soon to further equip US companies fighting the alleged fraud. Kratsios confirmed in his memo that the US is exploring measures "to hold foreign actors accountable for industrial-scale distillation campaigns." Congress has already received some marching orders, but it remains unclear how fast lawmakers will act. In an April report, the House's Select Committee on China advised that Congress "should direct the Commerce Department's Bureau of Industry and Security (BIS) and the Department of Justice (DOJ)" to "treat model extraction as industrial espionage" and "impose penalties severe enough to deter Beijing's theft of American innovation." Specifically, the committee recommended that the State Department assess whether the distillation attacks violate laws like the Economic Espionage Act and the Computer Fraud and Abuse Act. They also want "adversarial distillation" clearly defined and officially categorized as a controlled technology transfer, which would make it easier to restrict fraudulent Chinese access to models. If such steps were taken, the US could prosecute bad actors and impose heavy financial penalties that might dissuade Chinese firms from treating "serious violations as a tolerable cost of doing business," the committee's report said. China slams accusations as "pure slander" Kratsios' memo threatening a crackdown comes ahead of Donald Trump's highly anticipated meeting with China's president Xi Jinping next month. Trump has claimed that the meeting will be "special" and "much will be accomplished." However, at least one analyst told the South China Morning Post that the war in Iran means that Trump has "lost almost all his bargaining chips" at a time when the US and China are seeking to stabilize a trade relationship that has been tense since Trump took office. China seems unlikely to tolerate Kratsios' allegations. Liu Pengyu, a spokesperson for the Chinese embassy in Washington, DC, told FT that the White House accusations were "pure slander." "China has always been committed to promoting scientific and technological progress through cooperation and healthy competition," Pengyu said. "China attaches great importance to the protection of intellectual property rights." Whether Trump will side with AI firms that want to see China cut off from their models and sanctioned for distillation attacks has yet to be seen. Trump has, in the past, been accused of making big concessions to China on export control matters that experts have claimed threaten US national security and the economy, as US firms claim the distillation attacks do. Some of Trump's concessions may need to be reversed to fight the alleged "industrial espionage." Chris McGuire, a technology security expert at the Council on Foreign Relations, told FT that "Chinese AI firms are relying on distillation attacks to offset deficits in AI computing power and illicitly reproduce the core capabilities of US models." To stop them, the US may need to tighten export controls that Trump loosened, such as allowing Nvidia chip sales to China so long as the US gets a 25 percent cut. That bizarre deal made "no sense" to experts who warned that Trump's odd move could have opened the door for China to demand access to America's most advanced AI chips.