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In the Middle East, Israel and Iran are engaged in what could be the most consequential conflict in the region since the wars in Afghanistan and Iraq. CFR’s experts continue to cover all aspects of the evolving conflict on CFR.org. While the situation evolves, including the potential for direct U.S. involvement, it is worth touching on another recent development in the region which could have far-reaching consequences: the diffusion of cutting-edge U.S. artificial intelligence (AI) technology to leading Gulf powers.
The defining feature of President Donald Trump’s foreign policy is his willingness to question and, in many cases, reject the prevailing consensus on matters ranging from European security to trade. His approach to AI policy is no exception. Less than six months into his second term, Trump is set to fundamentally rewrite the United States’ international AI strategy in ways that could influence the balance of global power for decades to come.
In February, at the Artificial Intelligence Action Summit in Paris, Vice President JD Vance delivered a rousing speech at the Grand Palais, and made it clear that the Trump administration planned to abandon the Biden administration’s safety-centric approach to AI governance in favor of a laissez-faire regulatory regime. “The AI future is not going to be won by hand-wringing about safety,” Vance said. “It will be won by building—from reliable power plants to the manufacturing facilities that can produce the chips of the future.” And as Trump’s AI czar David Sacks put it, “Washington wants to control things, the bureaucracy wants to control things. That’s not a winning formula for technology development. We’ve got to let the private sector cook.”
The accelerationist thrust of Vance and Sacks’s remarks is manifesting on a global scale. Last month, during Trump’s tour of the Middle East, the United States announced a series of deals to permit the United Arab Emirates (UAE) and Saudi Arabia to import huge quantities (potentially over one million units) of advanced AI chips to be housed in massive new data centers that will serve U.S. and Gulf AI firms that are training and operating cutting-edge models. These imports were made possible by the Trump administration’s decision to scrap a Biden administration executive order that capped chip exports to geopolitical swing states in the Gulf and beyond, and which represents the most significant proliferation of AI capabilities outside the United States and China to date.
The recipe for building and operating cutting-edge AI models has a few key raw ingredients: training data, algorithms (the governing logic of AI models like ChatGPT), advanced chips like Graphics Processing Units (GPUs) or Tensor Processing Units (TPUs)—and massive, power-hungry data centers filled with advanced chips.
Today, the United States maintains a monopoly of only one of these inputs: advanced semiconductors, and more specifically, the design of advanced semiconductors—a field in which U.S. tech giants like Nvidia and AMD, remain far ahead of their global competitors. To weaponize this chokepoint, the first Trump administration and the Biden administration placed a series of ever-stricter export controls on the sale of advanced U.S.-designed AI chips to countries of concern, including China.
The semiconductor export control regime culminated in the final days of the Biden administration with the rollout of the Framework for Artificial Intelligence Diffusion, more commonly known as the AI diffusion rule—a comprehensive global framework for limiting the proliferation of advanced semiconductors. The rule sorted the world into three camps. Tier 1 countries, including core U.S. allies such as Australia, Japan, and the United Kingdom, were exempt from restrictions, whereas tier 3 countries, such as Russia, China, and Iran, were subject to the extremely stringent controls. The core controversy of the diffusion rule stemmed from the tier 2 bucket, which included some 150 countries including India, Mexico, Israel, Switzerland, Saudi Arabia, and the United Arab Emirates. Many tier 2 states, particularly Gulf powers with deep economic and military ties to the United States, were furious.
The rule wasn’t just a matter of how many chips could be imported and by whom. It refashioned how the United States could steer the distribution of computing resources, including the regulation and real-time monitoring of their deployment abroad and the terms by which the technologies can be shared with third parties. Proponents of the restrictions pointed to the need to limit geopolitical swing states’ access to leading AI capabilities and to prevent Chinese, Russian, and other adversarial actors from accessing powerful AI chips by contracting cloud service providers in these swing states.
However, critics of the rule, including leading AI model developers and cloud service providers, claimed that the constraints would stifle U.S. innovation and incentivize tier 2 countries to adopt Chinese AI infrastructure. Moreover, critics argued that with domestic capital expenditures on AI development and infrastructure running into the hundreds of billions of dollars in 2025 alone, fresh capital and scale-up opportunities in the Gulf and beyond represented the most viable option for expanding the U.S. AI ecosystem.
This hypothesis is about to be tested in real time. In May, the Trump administration killed the diffusion rule, days before it would have been set into motion, in part to facilitate the export of these cutting-edge chips abroad to the Gulf powers. This represents a fundamental pivot for AI policy, but potentially also in the logic of U.S. grand strategy vis-à-vis China. The most recent era of great power competition, the Cold War, was fundamentally bipolar and the United States leaned heavily on the principle of non-proliferation, particularly in the nuclear domain, to limit the possibility of new entrants. We are now playing by a new set of rules where the diffusion of U.S. technology—and an effort to box out Chinese technology—is of paramount importance.
Perhaps maintaining and expanding the United States’ global market share in key AI chokepoint technologies will deny China the scale it needs to outcompete the United States—but it also introduces the risk of U.S. chips falling into the wrong hands via transhipment, smuggling, and other means, or being co-opted by authoritarian regimes for malign purposes.
Such risks are not illusory: there is already ample evidence of Chinese firms using shell entities to access leading-edge U.S. chips through cloud service providers in Southeast Asia. And Chinese firms, including Huawei, were important vendors for leading Gulf AI firms, including the UAE’s G-42, until the U.S. government forced the firm to divest its Chinese hardware as a condition for receiving a strategic investment from Microsoft in 2024.
In the United States, the ability to build new data centers is severely constrained by complex permitting processes and limited capacity to bring new power to the grid. What the Gulf countries lack in terms of semiconductor prowess and AI talent, they make up for with abundant capital, energy, and accommodating regulations. The Gulf countries are well-positioned for massive AI infrastructure buildouts. The question is simply, using whose technology—American or Chinese—and on what terms?
In Saudi Arabia and the UAE, it will be American technology for now. The question remains whether the diffusion of the most powerful dual-use technologies of our day will bind foreign users to the United States and what impact it will have on the global balance of power.
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Commentary: The Future of Global Efforts to Combat Illicit Financial Flows
By Edwin Truman
Although I have written extensively on illicit financial flows (IFFs) in the past, and I coauthored a book that remains a standard analysis of the topic from an economist’s perspective, these papers underscore how much global and national policies to combat these flows have changed over the past decade.
Mapping Global Governance to Combat Illicit Financial Flows
The emphasis in Miles Kahler’s paper on fragmented governance is justified. As Kahler points out, correctly in my view, there are multiple actors (public and private) in this space with multiple objectives, including relatively recently added objectives, such as inequality (linked to tax issues) and human rights. These agenda items were present earlier, but they have received more attention in recent years, especially from nongovernmental organizations. The issue of unintended negative consequences associated with these efforts is also real and significant.
The great unknown, which receives little attention in the papers, is the posture of the Donald J. Trump administration toward combating IFFs. What are U.S. priorities? Will the U.S. government continue to exercise leadership in this area? Some experts have argued that the developing world, in particular Africa, is already highly critical of U.S. leadership in this area, or at least, the degree of attention given to the agenda items of concern to them. One suspects that this disillusionment is likely to increase. The failure to build a global consensus on priorities is likely to deepen.
Measuring Illicit Financial Flows
Maya Forstater, in her paper, is properly skeptical about the various methods used to estimate money laundering and terrorism financing. There is no simple mapping between the amount of dollars involved, even if they can be measured accurately, and the social costs associated with the IFFs that one is trying to evaluate. In some areas, such as bank robbery, mapping financial flows is a reasonably good indicator of social harm: the bigger the heist, the bigger the problem. In other areas, such as hostage taking, measurement of the ransom demanded bears little relationship to the seriousness of a particular operation; it only indicates an estimate of the victim’s capacity to pay.
I agree with Forstater’s six recommendations, especially her recommendation that, if one measures, one should disaggregate the IFFs. At best, measurement of the volume of money crossing borders is an indicator of social harm, more useful for some predicate (underlying) crimes and essentially meaningless in others.
One must avoid, as Forstater does, an implicit assumption that all international financial flows are illicit. This view disregards the benefits of cross-border flows. A consensus definition of what is meant by illicit financial flows, then, is necessary if collective progress is to be made in addressing the predicate crimes and associated social harms.
Evaluation Strategies
I agree with the central argument of Michael G. Findley’s paper: careful testing of strategies against illicit flows is important, and tests should be conducted at a level disaggregated by country and standard. He is also correct in pointing out that the adoption of standards, such as the Financial Action Task Force’s Forty Recommendations, is not equivalent to compliance with and enforcement of those standards. Prosecutions are a weak proxy for enforcement, but the lack of them is at least indicative of a weak compliance system.
I welcome research strategies that measure performance by impact and reach conclusions via comparisons. Only in this way can strategies against the predicate crimes, which should be the primary focus of efforts to combat IFFs, be refined. There exists a false tension between keeping money out of the financial system and following that money toward its source, and the predicate crime and its perpetrators.
Policy Innovations
Jodi Vittori, Erica Westenberg, and Yaya J. Fanusie advance useful proposals for policy innovations that would improve the effectiveness of global efforts to combat IFFs. Vittori’s policy recommendations with respect to closing U.S. money laundering loopholes are music to my ears, especially tightening up substantially on beneficial ownership (a tall political order) but also expanding due diligence to a broader set of actors.
Erica Westenberg argues that higher standards of disclosure of beneficial ownerships in the extractive sector represent a positive step if they are properly managed. Transparency in beneficial ownership would certainly contribute to the goals of the Extractive Industries Transparency Initiative (EITI), which is designed to improve good governance in the oil, gas, and minerals sectors. Nevertheless, EITI may have had less success than was anticipated. Perhaps, the reason for that, as Westenberg suggests, is that transparency is only a starting point. Verification and associated due diligence are necessary as well.
Yaya J. Fanusie’s paper usefully distinguishes between the above-ground and underground cryptocurrency systems and argues that an aggressive policy focus on the former tends to increase the use of the latter. The implicit question is whether we have this trade-off right.
When it comes to international activity on the cryptocurrency threats in the above-ground system, he is right that there is no global regulatory regime in this area even though there is talk and more talk, by the Group of Twenty, for example. Fanusie is also right that an incomplete global regulatory regime will drive business to jurisdictions with weaker regimes and/or enforcement. My own view, on which I have written with Daniel Heller, is that with respect to the above-ground cryptocurrency systems, it is crucial to enforce know-your-customer (KYC) and similar rules and regulations on exchanges. We are a long way from establishing above-ground cryptocurrencies as an alternative to legal tender regimes. Therefore, controlling or monitoring the exchanges is the correct focus until we know more.
Underground systems are by construction outside anti–money laundering and combating the financing of terrorism (AML/CFT) regimes. Some of the implications of tightening regulation and disclosure requirements are similar in terms of unintended, collateral damage to the de-risking produced by the AML/CFT regimes. Here, the issue is one of scale. Scaling up cryptocurrency systems requires a substantial degree of trust in the system. For the moment, lack of trust is a constraint. I agree with Fanusie, however, that we will need new tools and fresh thinking in this area. It is not enough to say, as a governor of the Reserve Bank of India once said to me, “there is no money laundering in India because it is illegal.”
Conclusion
IFFs move via a shadow financial system that the rich countries targeting those IFFs created. These rich countries are also a source of problems in their ambivalence toward information exchange. The Barack Obama administration was more open to international information exchange than previous administrations. I expect reversion to greater reluctance under the Donald J. Trump administration. Other countries, including major financial centers such as the United Kingdom, are moving forward. The United Kingdom has created a public registry of beneficial owners and has sought to upgrade participation in the AML/CFT by its overseas territories.
The role of the International Monetary Fund (IMF)—and implicitly that of the World Bank—in combating IFFs has evolved from the days when we had to drag the IMF into participating, just as we earlier had to drag in the bank supervisors. In the latter connection, I am amused that the argument that AML/CFT activities are essential to preserving the integrity of the financial system is now widely invoked as dogma. Not so long ago, when I made the argument, my coauthor, Peter Reuter, declared that he was less than convinced.
Qualified optimism seemed to be the predominant sentiment in the papers, an optimism that extended to future opportunities for international cooperation. This is probably the best posture regarding efforts to combat IFFs: pragmatic optimism. Uncertainty about the Trump administration’s attitudes, however, may impede progress over the next several years. Despite this large question mark, we can reasonably hope for further gains, even as this area becomes more crowded sometimes with well-intentioned actors’ conflicting objectives.
It is important to recognize incremental progress, especially if the signs are muted. I am reminded of a phone call in 2005 from Stuart Eizenstat, with whom I had worked on AML issues when he was deputy secretary of the U.S. Department of the Treasury. After seeing on the front page of the New York Times that the governor of a Nigerian state had been arrested in London for money laundering, he said, “We are making no progress.” I replied, “Stu, when stories like this appear on the front page of the New York Times, that is progress.”