Shadow AI: The Hidden AI Revolution in Your Workplace

Organisations worldwide are experiencing a rise in unauthorised AI adoption by employees and agents as they increasingly use artificial intelligence tools in their daily workflows without authorisation (‘Shadow AI’).

What is Shadow AI?

IBM defines shadow AI as “the unsanctioned use of any artificial intelligence (AI) tool or application by employees or end users without the formal approval or oversight of the IT department.”

One really common example is employees using ChatGPT, Gemini or other Generative AI tools without permission. (Learn more about the risks of ChatGPT and similar tools)

This concept is an extension of Shadow IT, which is the use of any technology—apps, tools, or services—without approval from the IT department.

What’s Causing The Rise of Shadow AI?

The rise of Shadow AI isn’t being driven by any malicious intent, but instead stems from a simpler issue: most organizations suffer from a lack of clear AI governance, leaving employees uncertain about approval processes and unaware of associated risks.

This governance vacuum is proving costly, with heightened regulatory scrutiny intensifying the stakes. ASIC Chair Joe Longo warns of a dangerous “governance gap” emerging as AI adoption outpaces governance frameworks in unprepared organisations due to competitive pressures. ASIC’s REP 798 report reveals that many organisations in the financial services sector are adopting AI more rapidly than their risk and governance arrangements are being updated. 

The Office of the Australian Information Commissioner (OAIC) has identified bias, discrimination, transparency issues, data breach risks, and loss of control of personal information control as key privacy concerns arising from the deployment of AI with inadequate governance arrangements. 

The Cost of Uncontrolled Innovation

Shadow AI creates significant regulatory and reputational risks, including potential breaches of privacy obligations, non-financial risk management obligations, and erosion of customer trust. The absence of adequate governance transforms innovative AI tools into hidden liabilities.

Building Your AI Governance Framework and How We Can Help

For organisations unsure of where to begin their AI governance journey, several comprehensive resources provide structured approaches:

• The Australian Institute of Company Directors has published a Director’s Guide to AI Governance which outlines eight key elements of safe and responsible AI governance.
• The US National Institute of Standards and Technology (NIST) has published a comprehensive AI Risk Management Framework and supporting playbooks with actionable guidance.
• The Commonwealth Government has also published its Voluntary AI Safety Standard which gives practical guidance to all Australian organisations on how to responsibly deploy AI.
• We outlined a host of other resources in our dedicated post covering AI Governance Resources.

Whether you lack in-house expertise or simply want to leverage proven best practices, getting support from external experts helps you sidestep costly governance missteps and build a framework that truly protects your business and customers. Our team has designed and rolled out practical, fit-for-purpose AI risk management frameworks for complex organisations, drawing on real-world deployment lessons to ensure your frameworks are both robust and actionable. 

The Regulatory Landscape Ahead (Looking Ahead)

While Australia remains in the uncertain early stages of considering whether to implement AI-specific legislation, organisations already face immediate risks from existing obligations which apply to the development and deployment of AI. Intensifying regulatory focus from the OAIC, APRA, and ASIC on the use of AI on  customer data and the adequacy of enterprise risk management systems means regulatory pressure continues escalating regardless of whether AI-specific laws are introduced.

The message is clear: proactive AI governance isn’t simply best practice. It’s essential for organisational survival in an increasingly regulated landscape.