AI washing is becoming rife, and investors are urged to be on high alert for investment fraud scams.
In January this year, the Securities and Exchange Commission (SEC) Office of Investor Education and Advocacy, the North American Securities Administrators Association (NASAA) and the Financial Industry Regulatory Authority (FINRA) issued an Investor Alert to highlight the rise in investment scams exploiting artificial intelligence (AI) and emerging technologies.
These entities warn that fraudsters are leveraging AI’s popularity and complexity to perpetrate scams, urging individual investors to remain vigilant.
Two days ago on March 18, the SEC settled charges against investment advisers, Delphia (USA) Inc. and Global Predictions Inc., for making false and misleading statements about their purported use of artificial intelligence (AI).
While the companies agreed to settle the SEC’s charges and pay $400,000 (A$612,000) in total civil penalties, neither company admitted nor denied the SEC’s findings.
Delphia has claimed that it used AI in its investment process. Global Predictions went a step further, stating it was the “first regulated AI financial advisor” and used “AI-driven forecasts”.
In its findings, the SEC chair Gary Gensler stated, “We find that Delphia and Global Predictions marketed to their clients and prospective clients that they were using AI in certain ways when, in fact, they were not.
"We’ve seen time and again that when new technologies come along, they can create buzz from investors as well as false claims by those purporting to use those new technologies.
"Investment advisers should not mislead the public by saying they are using an AI model when they are not. Such AI washing hurts investors.”
Director of the SEC’s Division of Enforcement Gurbir S Grewal said, “As today’s enforcement actions make clear to the investment industry — if you claim to use AI in your investment processes, you need to ensure that your representations are not false or misleading. And public issuers making claims about their AI adoption must also remain vigilant about similar misstatements that may be material to individuals’ investing decisions.”
Rising popularity
The use of artificial intelligence and technology as investment tools has gained enormous momentum.
Approximately 40% of S&P 500 companies mentioned tech in their latest earnings report.
However, it seems companies are fudging numbers.
A study of 2,830 European start-ups by London-based MMC Ventures found 40% of those that claimed to be ‘AI start-ups’ had barely any AI at all.
According to The Wall Street Journal, one company (which recently raised nearly $30 million from AI-focused VC funds), may hardly have any AI capabilities or expertise.
PwC made the salient point recently that companies should ensure they are responsible. It stated: "Responsible AI means that all your stakeholders — customers, employees or communities — can be confident that your AI really is doing what it’s supposed to, in a way that benefits them."
Investors should take heed: make sure you are dealing with responsible AI.
Six ways to avoid AI washing
The SEC has warned investors to be vigilant and recommends the following:
1. Beware of unregistered investment platforms using AI claims
Many unregistered and unlicensed platforms boast of AI capabilities with unrealistic promises.
Investors should verify the registration status of these entities and remain sceptical of guarantees of high returns with little to no risk.
2. Verify investment professional and platform credentials
Utilise tools like the SEC’s Check Out Your Investment Professional search tool and the Canadian Securities Administrators’ National Registration Search to confirm the registration and disciplinary history of investment professionals and platforms.
In Australia, ASIC Connect has professional registers and a managed investment scheme register. The Australian Government has a financial advisers register.
3. Exercise caution with AI-focused company investments
While investing in AI-driven companies may seem attractive, investors should be wary of high-pressure sales tactics and promises of guaranteed returns, which are often signs of investment scams.
4. Guard against 'Deepfake' scams and impersonation
AI technologies, including deepfake audio and video, are increasingly used in scams.
Investors should independently verify the authenticity of communications and be cautious of AI-generated information, which may be misleading or false.
5. Do not solely rely on AI for investment decisions
AI-generated information might be based on inaccurate or misleading data. Investors are advised to cross-verify information and consult with registered investment professionals before making decisions.
To protect against fraud, investors are encouraged to review multiple sources of information, question AI-generated claims and report any suspected securities fraud to the SEC, FINRA or local regulators.