The subject of the probe is whether UMC, the world's second-biggest silicon foundry, has spent $1 billion building a 200mm wafer facility in Suzhou through a company called He Jian Technology Co., which is widely believed to have links with UMC, according to media reports. In the beginning of this year, UMC started the construction of the plant, expecting to reach mass production in 2003, said the reports.

Taiwan last week eased long-time restrictions, allowing foundries such as UMC and its closest rival Taiwan Semiconductor Manufacturing Co. to build fabs on the mainland to tap the huge demand of the Chinese market. With the reports indicating UMC had violated the rule before the ban was lifted, the government is looking into the situation.

"We're very, very concerned about this," said R. L. Chen, a deputy vice minister of Taiwan's Economic Affairs. "If we gather enough evidence that proves UMC has had investments on the mainland, we'll punish them by law." The worst case could be UMC being fined between $28,500 to $142,800 each time the government asks the company to completely withdraw its investments in China, he said.

The top manager of He Jian is J. H. Shyu, a 15-year veteran of UMC who stayed with the foundry company through last month, the reports said, adding that British Virgin Islands-registered He Jian is controlled by holding company Invest League, in which a UMC board member is the head.

Hsinchu-based UMC denied the reports. In a statement, the company said that it "has no investments in Ho Jian. It is personal freedom for a former employee to establish a business. Our company has no right to interfere or stop the employee."

The company also said it recently canceled a planned sale of some 8-inch wafer manufacturing equipment, as the semiconductor industry has recovered from a slump that lasted for more than a year.

UMC has built the fab in the Suzhou industrial zone, in part because its administration offered to lease a huge piece of land to UMC for free and halve the 15% corporate tax for the first 10 years of operation, added the reports.

Taiwan's premier Yu Shyi-kun announced last week that three 200 mm fabs will be allowed to be built in China before 2005.