Treasury warns sanctions remain an option after White House alleges Chinese firm distilled Anthropic’s Fable model

The U.S. Treasury warned that sanctions and Entity List designations remain on the table for Chinese AI firms accused of intellectual property theft through model distillation. Treasury Secretary Scott Bessent posted on X that 'open source is not open season on American IP,' reiterating that covert, industrial-scale distillation crossing into IP theft would trigger penalties.

The White House’s science and technology policy chief, Michael Kratsios, accused Moonshot of conducting large-scale distillation against U.S. models, including Anthropic’s Fable. Kratsios also alleged Moonshot accessed Nvidia’s restricted GB300 servers in Thailand, which are part of Nvidia’s Blackwell generation and banned from sale to Chinese companies under U.S. export-control rules.

Model distillation is a common AI training technique where a smaller model learns from the outputs of a larger one, but it can infringe on intellectual property rights if done improperly. The technique is also widely used as a legitimate optimization method.

The allegations come as Moonshot released its open-weight model K3 last week, which has demonstrated advanced capabilities. Some experts have disputed the claim that K3 could have been developed primarily through distillation from Fable, which has only been publicly available since July 1.

The episode has intensified debate in Washington over the influx of Chinese open models and their potential national security risks. Former White House AI adviser Dean Ball, now at OpenAI, has argued for restricting or banning the use of Chinese open-weight models to preserve U.S. technological advantage.