Technology

AI Washing: Navigating The Legal Maze In The Age Of Smart Tech

By understanding AI washing and taking proactive measures, in-house corporate lawyers can safeguard their companies against legal pitfalls while championing ethical AI practices that enhance corporate integrity and innovation.

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maze-g9714478f9_1920In the rapidly evolving world of technology and artificial intelligence (AI), the phenomenon of “AI washing” has emerged as a crucial concern, especially in light of recent regulatory actions by the SEC. On March 18, 2024, the SEC took a decisive step against this practice by announcing, through videos on YouTube and tweets, regulatory actions against two investment advisers for making false or misleading claims about their use of AI technology. 

This move underscores a broader commitment to scrutinizing AI’s role in the financial sector, drawing parallels with the commission’s prior focus on “greenwashing” in the environmental space.

For in-house corporate lawyers, particularly those in industries leveraging AI, understanding AI washing and its implications is not just crucial — it’s a professional imperative. Here’s why this matters and what can be done about it.

Why It Matters To In-House Corporate Lawyers

  1. Regulatory radar. The SEC’s crackdown signals a growing scrutiny of AI within the financial sector. As AI’s transformative potential becomes more integrated into corporate operations, the accuracy of AI-related communications is paramount. In-house lawyers are on the front lines, ensuring these communications are accurate and compliant with evolving regulatory standards.
  2. Misrepresentation risks. AI washing can lead to allegations of fraud due to misrepresentation. It’s the responsibility of in-house lawyers to mitigate these risks by ensuring the company’s claims about AI are substantiated, reflecting a reality that can stand up to regulatory and public scrutiny.
  3. Investor relations. Misleading claims about AI capabilities can erode investor trust and damage corporate reputation. In-house lawyers play a crucial role in preserving integrity and transparency in AI-related disclosures, maintaining the delicate balance between innovation promotion and factual accuracy.

Actionable Steps for In-House Corporate Lawyers

  1. Rigorous review processes. Establish and enforce rigorous review protocols for all AI-related communications. This includes public statements, investor relations communications, and marketing materials, ensuring all claims are backed by evidence and aligned with actual capabilities.
  2. Cross-functional collaboration. Promote a culture of collaboration between legal, technical, and marketing teams. Such synergy ensures that AI-related representations are not only legally sound but also technically accurate, fostering a unified corporate stance on AI’s role and capabilities.
  3. Regulatory vigilance. Keep abreast of regulatory developments concerning AI. The SEC’s recent press release and collaborative alerts with FINRA and NASAA underscore the importance of regulatory compliance in AI representations. In-house lawyers must interpret these developments and guide their companies accordingly.
  4. Educational initiatives. Lead educational initiatives on the legal implications of AI washing and the critical nature of accurate AI disclosure. Training sessions for staff can demystify the complexities surrounding AI representations, minimizing the risk of unintentional misstatements.
  5. Ethical AI framework. Advocate for creating an ethical AI framework that outlines the company’s commitment to responsible AI use. Such a policy guides internal practices and signals to investors and regulators a serious commitment to ethical AI development and application.

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In light of the SEC’s actions and Gary Gensler’s remarks on AI’s transformative impact, it’s clear that the era of AI demands a nuanced approach to legal oversight and corporate governance. By understanding AI washing and taking proactive measures, in-house corporate lawyers can safeguard their companies against legal pitfalls while championing ethical AI practices that enhance corporate integrity and innovation.

Moreover, in navigating these challenges, resources like FINRA’s insights on AI and investment fraud can offer valuable perspectives, underscoring the multifaceted nature of AI’s impact on corporate and legal practices. As AI continues to redefine the corporate landscape, in-house lawyers are indispensable in ensuring that this powerful technology enhances rather than compromises corporate integrity and public trust.

Olga MackOlga V. Mack is a Fellow at CodeX, The Stanford Center for Legal Informatics, and a Generative AI Editor at law.MIT. Olga embraces legal innovation and had dedicated her career to improving and shaping the future of law. She is convinced that the legal profession will emerge even stronger, more resilient, and more inclusive than before by embracing technology. Olga is also an award-winning general counsel, operations professional, startup advisor, public speaker, adjunct professor, and entrepreneur. She authored Get on Board: Earning Your Ticket to a Corporate Board Seat, Fundamentals of Smart Contract Security, and  Blockchain Value: Transforming Business Models, Society, and Communities. She is working on three books: Visual IQ for Lawyers (ABA 2024), The Rise of Product Lawyers: An Analytical Framework to Systematically Advise Your Clients Throughout the Product Lifecycle (Globe Law and Business 2024), and Legal Operations in the Age of AI and Data (Globe Law and Business 2024). You can follow Olga on LinkedIn and Twitter @olgavmack.

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