After heavy battles against the Tatmadaw (Myanmar Armed Forces) between 1993 and 1995, tensions grew between the Shan nationalist field officers and the Chinese leaders.

[6] On 7 July 1995, an internal dispute broke out within the Mong Tai Army, and 8,000 fighters under the command of Colonel Yod Kan and Dae Wain retreated into the village of Hsipaw, where they built a new base.

However, the soldiers claimed that the drug profits went only to Khun Sa, and that civilian casualties were the highest in fighting between the Mong Tai Army and government forces because of a lack of leadership.

According to the State Law and Order Restoration Council (SLORC), the terms of the surrender stipulated that in return for ending his insurgency and surrendering his weaponry, Khun Sa would be allowed to live under close government supervision in Yangon (Rangoon), where he would be allowed to engage indirectly, through third-party investors, in legitimate business operations and he would not be prosecuted for his trafficking activities or be extradited to the US.

[8] Khun Sa was not only pardoned by the government, but received the title of "honored elder", and was allowed to live out the remainder of his life in Yangon, where he died in 2007.