Originally published on CoreProse KB-incidents
General counsel are now accountable for AI systems they did not buy, cannot fully interpret, and must defend under overlapping EU, UK, US federal, and US state regimes. Regulators in financial services, data protection, and consumer protection increasingly apply existing disclosure- and principles-based rules to AI, not waiting for bespoke AI laws. [1][5]
Classic theories—fraud, misrepresentation, negligence, breach of fiduciary duty, unfair practices—now reach opaque models and vendor-run decision engines. Vendors are embedding LLMs and agents into core workflows with limited documentation, weak auditability, and fragile security. [4][10]
For GCs, “infinite” AI risk stems from old law meeting new tech and diluted responsibility. The answer is to make AI legible: classify use cases, demand traceability, tighten contracts, and embed AI into three-lines-of-defense governance. [10][12]
💡 Goal: Not to halt AI, but to turn amorphous risk into a documented, explainable program that can withstand discovery, regulatory review, and experts.
1. Why AI Feels Like a Litigation Magnet for General Counsel
Existing regimes, not new AI law
Securities and financial regulators use Regulation Best Interest, antifraud rules, and disclosure obligations to supervise AI. [1][5]
Fraud and fiduciary-duty claims remain central; AI is a fact pattern, not a distinct legal field.
SEC’s AI conflict-of-interest proposal [1]
Would require broker-dealers and advisers to “eliminate or neutralize” conflicts from predictive analytics.
Goes beyond “disclose and manage” toward aggressive conflict control, raising overregulation concerns if read as zero-tolerance. [1]
EU AI Act: shared obligations across the chain [10]
Defines provider, deployer, distributor, importer with duties by risk tier.
A “deployer” of a third-party high-risk model (e.g., HR or credit) still shares obligations for documentation, monitoring, and incident handling—supporting joint and several liability arguments. [10]
US national framework vs. state experimentation
Federal proposals and potential executive action aim to centralize oversight and preempt divergent state rules. [7][9]
Until preemption is clear, enterprises must track obligations in states like Colorado and California plus EU AI Act and GDPR exposure. [9]
Litigation and enforcement landscape
Expect AI claims under familiar statutes, with more defendants and cross‑border hooks.
Massive penalties in algorithmic cases—such as the $1.16 billion Didi fine in China—show regulators will use headline sanctions when automated systems cause systemic harm. [2]
2. Mapping AI Use Cases to Concrete Compliance and Litigation Risks
Inventory and classification
Catalog all AI systems and classify them by risk: unacceptable, high, limited, minimal; note general‑purpose vs. agentic/ autonomous. [10]
High‑risk and agentic systems (e.g., underwriting, employment screening) trigger heightened expectations: documentation, human oversight, incident reporting. [10]
Civil-rights and fairness exposure
Public‑sector LLM guidance shows what’s coming: AI tax audit models that over‑target certain groups have led to civil‑rights investigations, class actions, and trust erosion. [2]
Similar patterns will follow in credit, insurance, pricing, and healthcare when AI skews offers or coverage. [5][6]
M&A and litigation support tools
AI now summarizes documents, flags clauses, and surfaces litigation patterns. [11]
These tools accelerate work but do not replace legal judgment; hallucinated citations have already drawn sanctions, grounding negligence or malpractice claims. [11]
Sector-specific expectations (e.g., UK financial services)
AI remains subject to existing duties: fair treatment, operational resilience, suitability, not a separate AI regime. [5][6]
An LLM chatbot nudging users into unsuitable products is classic mis‑selling, regardless of its “assistant” branding.
Embedding AI into three lines of defense [12]
Business: owns AI risk for its use cases.
Risk/compliance: independently challenge and set guardrails.
Internal audit: test adherence and report findings.
3. Demanding Engineering-Grade Traceability and Security from AI Systems
Decision lineage and tamper‑evident logs [3]
For agents and decision engines, require logs of:
Inputs and prompts
Tool/API calls and external data
Intermediate reasoning or scores
Final outputs and actions
This is the AI equivalent of a stack trace—essential for incident reconstruction, assigning responsibility, and defending against speculation. [3]
Example: mortgage‑approval agent [3]
Should log application data, credit-score lookups, intermediate risk tiers, policies consulted, and final terms.
Without this, disputes devolve into blame‑shifting, and liability falls on the party “who should have known” the system could misfire. [3]
Security expectations for LLMs and agents [4]
- Core threats: prompt injection, data exfiltration, model abuse, jailbreaking.
OWASP’s LLM checklist emphasizes:
AI-specific threat modeling and adversarial testing
Controls against prompt injection and data leakage
Monitoring and guardrails before production release [4]
EU and government AI governance practices [2][10]
“Security by design”: adversarial robustness tests, pen‑tests for model endpoints, monitoring for drift and abuse. [10]
Continuous validation for bias and accuracy, with detailed records of development, updates, and mitigation steps. [2]
GC action items to require from engineering
Structured, queryable logs (e.g., OpenTelemetry + JSON) for prompts, tools, and outputs. [3]
Formal threat modeling and AI red‑teaming before go‑live. [4][10]
Model cards stating limitations, error rates, and oversight responsibilities. [2][10]
Incident‑response runbooks for complaints involving AI behavior. [4]
Strong traceability and testing help show that duties of care were met under technology‑neutral UK and US regimes. [5][7]
4. Controlling AI Risk in Your Vendor and Partner Ecosystem
Hidden AI in the stack
Around 78% of enterprises use AI in at least one function. [8]
Risk often arises from vendors embedding AI into SaaS or managed services—sometimes via “silent” feature releases. [8]
Illustrative scenario
A financial‑services firm adopted a CRM plugin; an unnoticed LLM summarization feature began ingesting client notes into an external model.
This created sudden exposure around data protection, confidentiality, and cross‑border transfers.
Contractual levers
AI use disclosure:
- Vendors must specify where and how AI is used, including embedded features and third‑party models. [8][10]
Data use restrictions:
- Ban training of general‑purpose or external models on customer data without explicit, documented consent. [8][9]
Role and obligation allocation (EU AI Act):
- Define whether the vendor is a provider, deployer, or both, and assign compliance tasks and documentation responsibilities accordingly. [10]
Liability allocation:
- Push responsibility for biased outputs, faulty recommendations, or misuse of client data onto the vendor where they control the AI. [8][12]
Clause pattern to consider [8][9][10][12]
AI Use Schedule: inventory of AI components and sub‑processors used in delivering the service. [8]
Data Use Restrictions: no model training or profiling beyond defined purposes without separate agreement. [8][9]
Oversight and Audit Rights: access to AI documentation, testing evidence, and third‑party assessments. [10][12]
Indemnity and Caps: specific indemnity for AI‑driven regulatory penalties and third‑party claims, with tailored caps (not buried in generic limits). [8]
With federal frameworks seeking “minimally burdensome” national standards, vendors may argue they only owe the lightest compliance baseline. [7][9] Robust contract language is the counterbalance.
5. Building a Defensible AI Compliance and Litigation Strategy
Make AI governance look familiar
Assign an accountable AI owner; define policies, committees, and escalation paths. [10][12]
Integrate AI into existing risk, privacy, and security frameworks instead of running it as a side experiment.
Core pillars from government LLM guidance [2][10]
Structured risk assessments with clear categorization.
Privacy‑by‑design and data‑minimization documentation. [2]
Continuous bias, robustness, and accuracy testing, with stored reports describing datasets, methods, and mitigations. [2][10]
A living AI risk register linking systems to owners, controls, and residual risk.
Disclosure and antifraud focus
In financial advising, scholarship suggests enhanced disclosure and tough antifraud enforcement are more effective than blanket bans or rigid conflict‑elimination mandates. [1]
Across sectors, emphasize clear, understandable AI disclosures over opaque technical assurances.
Using AI in deals and disputes [11]
Define when human review is mandatory for AI‑assisted outputs.
Set sampling or secondary‑check standards for AI summaries in due diligence and discovery.
Require teams to document verification steps before relying on AI in transactions or pleadings. [11]
Cross-functional operating model [2][4][12]
Technology/data: design and operate AI systems, maintain documentation.
Cybersecurity/privacy: run AI threat modeling, access control, and data‑protection measures. [4][2]
Risk/compliance/legal: define use boundaries, vet high‑risk deployments, review disclosures, and challenge models. [12]
Internal audit: test compliance with AI policies and report independently to the board. [12]
As national frameworks centralize AI oversight and aim at preemption, organizations that can show charters, minutes, risk registers, and test reports aligned to these expectations will be better positioned in negotiations and enforcement. [7][9]
Conclusion: From Infinite Anxiety to Bounded, Defensible Risk
AI does not create a separate legal universe; it magnifies existing duties around disclosure, fairness, security, and governance while widening the circle of responsible actors across providers, deployers, and vendors. [1][10]
General counsel who insist on risk classification, engineering‑grade traceability, security‑by‑design, strong vendor controls, and a disciplined three‑lines‑of‑defense model can transform vague AI anxiety into a program that looks responsible and recognizable to regulators and courts. [2][4][12]
Next steps: partner with engineering, risk, and procurement to inventory all material AI systems, map risk categories and supply chains, and identify gaps in audit trails, vendor clauses, and oversight thresholds. Close those gaps now, before regulators or plaintiffs define your AI risk program for you.
Sources & References (10)
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Abstract
As artificial intelligence increasingly reshapes financial advising, the SEC has proposed new rules requiring broker-dealers and investment advisers to eliminate or neutral...- 2Checklist for LLM Compliance in Government Deploying AI in government? Compliance isn’t optional. Missteps can lead to fines reaching $38.5M under global regulations like the EU AI Act - or worse, erode public trust. This checklist ensures you...
3A Guide to Compliance and Governance for AI Agents Audit trails for AI agents are chronological records that document every step of an agent's decision-making process, from initial input to final action.
Consider a mortgage approval agent: the audit ...4OWASP's LLM AI Security & Governance Checklist: 13 action items for your team John P. Mello Jr., Freelance technology writer.
Artificial intelligence is developing at a dizzying pace. And if it's dizzying for people in the field, it's even more so for those outside it, especia...- 5UK Financial Services Regulators’ Approach to Artificial Intelligence in 2026 | Global Policy Watch Artificial intelligence (“AI”) continues to reshape the UK financial services landscape in 2026, with consumers increasingly relying on AI-driven tools for financial guidance and firms deploying more ...
6UK Financial Services Regulators’ Approach to Artificial Intelligence in 2026 | Inside Global Tech Artificial intelligence (“AI”) continues to reshape the UK financial services landscape in 2026, with consumers increasingly relying on AI-driven tools for financial guidance and firms deploying more ...
7White House AI Framework Proposes Industry-Friendly Legislation | Lawfare On March 20, the White House released a “comprehensive” national framework for artificial intelligence (AI), three months after calling for legislative recommendations on the technology in an executiv...
8Your vendor’s AI is your risk: 4 clauses that could save you from hidden liability Your vendor’s AI could be your next headache. Protect yourself with clauses that demand transparency, control your data and assign real accountability.
78% of organizations report using AI in at leas...92026 AI Laws Update: Key Regulations and Practical Guidance Gunderson Dettmer
European Union, USA February 5 2026
This client alert provides a high-level overview of key AI laws enacted or taking effect in 2026. With President Trump’s December 2025 Executive...10AI Risk & Governance Checklist # AI Risk & Governance Checklist
- Risk Identification & Classification
- Determine if the AI falls under unacceptable, high, limited, or minimal risk categories
- Check if it qualifies as **ge... Generated by CoreProse in 6m 4s
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