Demystifying the Rise of Compliance Risks in Artificial Intelligence

March 27, 2024
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Governments and organizations are gradually realizing the potential dangers associated with the implementation of artificial intelligence. As individuals continue to incorporate AI tools into their daily operations, various risks are emerging. These risks range from the exposure of intellectual property due to AI note-taking to more complex challenges like relying on AI-powered underwriting decision engines. Surprisingly, only 9% of businesses believe they have the necessary capabilities to manage AI-related risks. In response to these concerns, regulatory measures such as the EU Artificial Intelligence Act and President Biden's Executive Order on the Safe, Secure, and Trustworthy Development and Use of Artificial Intelligence have been introduced in order to address these issues. This highlights the pressing need for businesses to not only understand the risks associated with AI, including disinformation and compliance issues, but also to actively implement strategies to mitigate these emerging threats. If your company has not yet begun considering how AI tools may impact its risk profile, this article will provide valuable insights to bring you up to speed.

AI Compliance Risks 101

Understanding the compliance risks associated with artificial intelligence (AI) is crucial for organizations to navigate the evolving landscape of technology regulation. Here, we break down these risks into key categories for clarity:

  • Data Privacy and Security Risks: AI systems process vast amounts of data, including sensitive personal information, leading to potential data protection challenges and security vulnerabilities that can remain undetected 5. Unauthorized access and use of customer data, along with the challenge of ensuring customer consent before data collection, underscore the importance of robust cybersecurity practices 2.
  • Bias and Decision-Making Risks: The inherent flaws of AI, such as error and bias due to the data it's trained on, can result in biased decision-making. This not only affects the accuracy of research and investment recommendations but also raises ethical concerns regarding discrimination against certain groups 6. The complexity and opacity of AI systems further complicate compliance with laws and regulations, making accountability difficult 6.
  • Regulatory and Legal Compliance Risks: Organizations face a dynamic regulatory environment with laws such as the EU AI Act, which imposes significant fines for non-compliance. The act emphasizes the need for AI systems to meet quality criteria for high-risk AI systems and mandates accurate and comprehensive documentation 7. Additionally, failure to manage AI risks adequately can expose companies to reputational damage, enforcement actions, and liability issues 3.

These categories highlight the multifaceted nature of AI compliance risks, underscoring the necessity for businesses to adopt strategic measures for risk mitigation and ensure alignment with ethical standards and legal requirements.

Key Compliance Considerations for Businesses Evaluating AI Tools

Businesses that utilize artificial intelligence (AI) encounter numerous compliance obstacles that require a proactive and knowledgeable approach to prevent potential problems. Prior to implementing an AI tool within your company, it is crucial to assess how this tool will affect your risk position and have a means of verifying that it does not expose your organization to unnecessary and unmonitored risks. Some of the main challenges include:

  • Data Protection and Privacy: Ensure that AI systems comply with data protection laws. This includes safeguarding sensitive customer information and adhering to privacy regulations 1. Before you deploy AI tools in your business, run the company through your Third-Party Risk Management Program to get a good understanding of their data protection and privacy controls. 
  • Bias and Discrimination: AI tools must be scrutinized for biases that could lead to discrimination in hiring, customer service, lending decisions, and more. This involves confirming the AI vendor has implemented policies that define acceptable use and conducts regular audits to ensure their technology remains aligned with ethical standards.
  • Cybersecurity and Fraud Prevention: AI's role in cybersecurity is dual-edged; while it can significantly enhance an organization's defense mechanisms against cyber threats and fraud, it also necessitates continuous monitoring and updating to mitigate risks effectively. Vendor's should be able to evidence to you that they have automated security patching and have tools in place to detect behavioral anomalies.

By addressing these key risk areas, organizations can not only safeguard against legal and reputational risks but also harness the full potential of AI in a responsible and ethical manner.

Strategies to Mitigate AI Compliance Risks

To effectively address the risks associated with AI compliance, businesses need to adopt a comprehensive approach that combines technological solutions and organizational strategies. Below are some key strategies to consider:

  • Proactive Risk Management: Stay updated on risk management frameworks. NIST's AI Risk Management Framework is a great place to start. Develop risk models and utilize data analysis to identify patterns that can guide recommendations for risk mitigation.
  • Regulatory Compliance and Cybersecurity: Stay informed about regulatory changes, this could be as simple as following the right people or agencies on LinkedIn, or as involved as joining industry groups focused on keeping track of regulatory movement. Whatever your chosen approach is, make sure it actually works, meaning if you are not being made aware of regulatory changes until the mandated date for compliance has already passed, you should think about changing your strategy.
  • Organizational Behavior: Involve compliance, legal, risk, and technology experts early in the AI development or integration process to ensure risk are caught early and mitigation efforts can be deployed without disrupting momentum. Implement standard practices such as documenting models and conducting independent reviews to effectively catalog and prioritize AI risks.
  • Establish clear policies and procedures: Develop a comprehensive compliance program that includes clear policies and procedures. Train personnel on AI compliance requirements to ensure adherence to relevant laws and regulations.

By adopting these strategies, businesses can better mitigate the risks associated with AI compliance. It is crucial to stay proactive, maintain regulatory compliance, and implement robust organizational measures to ensure the responsible and ethical use of AI technology.

The Future of AI Compliance

Looking ahead to the future of AI, there are several significant trends and innovations that will reshape how businesses handle and address risks connected to artificial intelligence. We firmly believe that AI regulation, both at the national and state level in the US, will be just as extensive as privacy regulation. There will be increased focus on AI systems used to control access to vital economic pillars like credit, insurance, and housing.

Given the current volatility in the fintech market, largely due to noncompliance challenges, there is a notable shift in attention among builders as they start to establish their presence in the AI field. It is crucial for industry players to learn from the lessons of the past 24 months and view compliance and risk management as essential components rather than optional add-ons. This mindset benefits not only the builders but also the buyers and investors. If you are looking to get a handle on your use of AI risk management, please don't hesitate to reach out to us.