(Reuters) -Taiwan Semiconductor Manufacturing ( TSM ) could face a penalty of $1 billion or more to settle a U.S. export control investigation over a chip it made that ended up inside a Huawei AI processor, according to two people familiar with the matter. 

The U.S. Department of Commerce has been investigating the world's biggest contract chipmaker's work for China-based Sophgo, the sources said. The design company's TSMC-made chip matched one found in Huawei's high-end Ascend 910B artificial intelligence processor, according to the people, who requested anonymity because they were not authorized to speak publicly about the matter.

Huawei - a company at the center of China's AI chip ambitions that has been accused of sanctions busting and trade secret theft - is on a U.S. trade list that restricts it from receiving goods made with U.S. technology.      

TSMC made nearly three million chips in recent years that matched the design ordered by Sophgo and likely ended up with Huawei, according to Lennart Heim, a researcher at RAND's Technology and Security and Policy Center in Arlington, Virginia, who is tracking Chinese developments in AI.

The $1 billion-plus potential penalty comes from export control regulations allowing for a fine of up to twice the value of transactions that violate the rules, the sources said.

Because TSMC's chipmaking equipment includes U.S. technology, the company's Taiwan factories are within reach of U.S. export controls that prevent it from making chips for Huawei, or producing certain advanced chips for any customer in China without a U.S. license.

Heim said that based on the design, which is for AI applications, TSMC should not have made the chip for a company headquartered in China, especially given the risk that it could be diverted to a restricted entity like Huawei.

Shares of TSMC traded in the U.S. erased a nearly 3% gain to trade slightly lower after the news.    

Penalizing TSMC comes at a critical moment for U.S.-Taiwan relations as the two begin re-negotiating their trading relationship after Trump last week slapped a 32% levy on imports from Taipei. The tariffs exclude chips, but Trump has said his team is looking at levies on semiconductors.

In March, TSMC said at the White House that it plans to make a fresh $100 billion investment in the United States that includes building five additional chip facilities in coming years.     

Reuters could not determine how the Trump administration will proceed with TSMC or when the matter would be resolved. Top officials have said they plan to seek higher penalties for export violations.

A spokesperson for the Commerce Department declined comment. TSMC spokesperson Nina Kao said in a statement that the company is committed to complying with the law. She added that TSMC has not supplied to Huawei since mid-September 2020 and that they are cooperating with the Commerce Department.

Speaking to reporters in Taipei on Wednesday, Taiwan Economy Minister Kuo Jyh-huei said TSMC is a company that respects laws and regulations, but his ministry has not received any notification about a possible fine and he could not comment further.

No public action has been taken against TSMC. But typically, Commerce issues a "proposed charging letter" to a company it believes has engaged in prohibited conduct. The letter usually cites the dates alleged violations took place, the value, and the formula for a civil penalty, and it gives the company 30 days to respond.

MORE ENFORCEMENT

At a conference in Washington last month, U.S. Commerce Secretary Howard Lutnick spoke about the role of export control enforcement in addressing the threat from China.

"We are going to seek in this administration a dramatic increase in enforcement and fines for people who break the rules," Lutnick said. "We have had enough of people trying to make a dollar supporting the people who seek to destroy our way of life."

Jeffrey Kessler, who was confirmed in March as Under Secretary of Commerce for Industry and Security to oversee U.S. export controls, was more targeted at his Feb. 27 nomination hearing, saying that reports of TSMC chips going to Huawei was "a huge concern" and that "strong enforcement" was critical.

A 10-figure fine for export control violations would be rare. In 2023, BIS imposed a $300 million penalty on Seagate Technology Holdings as part of a settlement over its shipping over $1.1 billion worth of hard disk drives to Huawei, as first reported by Reuters.

TSMC first came under scrutiny last fall. TechInsights, a Canadian tech research firm, took apart a Huawei 910B AI accelerator and found a TSMC die, as it's also called, in the multi-chip system.

After the TechInsights finding, TSMC suspended shipments to Sophgo and, in November, as Reuters reported, the Commerce Department ordered the chipmaker to halt shipments to China of seven-nanometer or more advanced chips that could be used in AI applications.

In January, Sophgo, which in October denied any business relationship with Huawei, was placed on the same Commerce department restricted trade list as Huawei. Sophgo could not be reached for comment.

Huawei's Ascend 910B has been viewed as the most advanced mass-produced AI chip available from a Chinese company, providing an alternative to California-based industry leader Nvidia.