The US government has threatened sanctions against Chinese AI model developers accused of carrying out “industrial-scale” distillation programs targeting American AI models.
Anthropic and OpenAI have both accused Chinese companies of improperly distilling their frontier models, arguing that the practice has helped Chinese developers narrow the performance gap while reducing development costs.
The most recent accusation of industrial-scale distillation was directed at Moonshot AI, which received widespread praise for its Kimi K3 model. White House science and technology policy chief Michael Kratsios alleged on Wednesday that Moonshot had distilled Anthropic’s Fable model and had also accessed servers equipped with Nvidia GB300 chips, which would represent another violation of US export control rules.
Treasury Secretary Scott Bessent followed up a few hours later with a warning that sanctions are on the table for companies found to be improperly distilling AI models. “Open source is not open season on American IP,” Bessent said on X. “When industrial-scale distillation attacks cross the line into IP theft, sanctions and Entity List designations will be on the table.”
Distillation increasingly becoming a dirty word
Model distillation is a common training technique in the AI industry, in which smaller models learn from the outputs of much larger foundation models. This can help AI developers reduce the overall cost of training and running a model.
Distillation itself is widely used across the AI industry, although companies disagree over when learning from another model’s outputs crosses into intellectual property infringement.
However, the two leading US AI developers, Anthropic and OpenAI, have become increasingly antagonistic toward the technique. Both are spending huge amounts building and training their models, only to see competitors launch models with comparable performance weeks later and at much cheaper cost per token.
While both companies have been pressing the Trump administration to do more to counter the practice, a wide range of technology leaders have signed an open letter arguing that access to Chinese AI models is benefiting the wider industry by lowering operating costs and providing a broader range of AI services.
Moonshot has not said whether it distilled Fable, although it cited only Fable and GPT-5.6 as outperforming its own Kimi K3 model in overall capability. OpenAI President Greg Brockman said in a recent interview that the model was “impressive” and that he was not aware of whether it had distilled GPT.
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US and China tightening export restrictions
If sanctions are imposed, businesses could face fewer choices among frontier AI models while governments tighten restrictions on cross-border AI deployment.
The situation is becoming increasingly critical, as Anthropic’s Mythos model is being deployed by several US departments and agencies to help prevent cybercrime and cyberattacks. The National Security Agency is reportedly using the model for offensive cyber planning.
The White House has tightened export rules covering frontier AI models, banning Anthropic’s Fable from export and requiring OpenAI and Google to initially release frontier and cyber models in preview to selected partners before making them more widely available. This has led other countries and multinational institutions to look into sovereign AI services, which are not beholden to the American or Chinese government.
On the other side of the Pacific, the Chinese government is also considering restricting the export of its frontier AI models. Chinese open-source and open-weight models have attracted significant attention from businesses around the world over the past few months, largely because of their lower costs compared with frontier models developed by OpenAI and Anthropic.
As Washington and Beijing tighten controls over advanced AI technologies, businesses may face a more fragmented AI market with fewer cross-border model choices and greater compliance challenges. Whether sanctions are ultimately imposed, the dispute signals that AI competition is increasingly being shaped by geopolitics as much as technological innovation.
Related News: A recent study found that more than one in eight Android apps marketed to U.S. military personnel contained Chinese or Russian third-party SDKs.