US venture capital firms accused of funding blacklisted Chinese AI companies

At least five U.S. venture capital firms have been accused of funding blacklisted Chinese artificial intelligence and semiconductor companies that allegedly aid the Chinese Communist Party in mainland surveillance and oppression operations, according to a new report from the House select committee on China.

GGV Capital, GSR Ventures, Qualcomm Ventures, Sequoia Capital China, and Walden International reportedly funneled more than $1.9 billion to Chinese AI companies and $1.2 billion to China’s chip supply chain, the investigation found.

“The Committee’s findings suggest that there are billions of dollars beyond those captured in this report that have flowed into PRC companies that support the PRC’s military, digital authoritarianism, and efforts to develop technological supremacy and undermine American technological leadership,” the committee wrote in the report, referring to the People’s Republic of China.

The report from the panel, which is led by Chairman Mike Gallagher, R-Wis. and ranking member Raja Krishanmoorthi, D-Ill., recommends “robust” sector-based restrictions on outbound investment in China, calling them “a national security and human rights imperative.”

The report urged Congress to codify into law the Biden administration’s executive order regulating outbound investment in semiconductors, AI, and quantum information technologies, and to implement controls on technology sectors that the U.S. designates as critical and that the Chinese government has “openly declared its intent to dominate.”

The committee also recommended passing legislation to “generally prohibit” companies from investing in Chinese firms that are under sanctions and “red flag” lists maintained by the U.S. government.

The report said that while some of the firms had divested from certain investments, others had not yet divested their investments from Chinese companies linked to human rights abuses. Some of the U.S. firms were also hesitant to cooperate with the probe because of potential repercussions from Beijing, the committee noted.

The firms told lawmakers they invested during a period of time when the U.S. government was actively encouraging American companies to do business in China, but many continued investing even after the Chinese companies were blacklisted.

Some of the Chinese AI companies with links to the VC firms have been accused of using facial recognition technology to identify Uyghur Muslims in Xinjiang, while others have reportedly enhanced deepfake technology that experts worry will help propagate misinformation on social media, the report found.

Lawmakers said that the American VC funding was the catalyst many of these tech companies needed to achieve global recognition and secure other overseas investment.

U.S. lawmakers have been debating regulations on outbound investment in companies in China and other foreign adversaries. A bipartisan effort to pass legislation last year that would have required the government to screen investments in critical sectors was derailed by House Financial Services Committee Chairman Patrick McHenry, R-N.C., who has opposed the Biden administration’s controls.