For many businesses, operational efficiency and great customer service go hand in hand. That’s why more organizations are turning to artificial intelligence (AI) chatbots. From answering customer questions to troubleshooting tech issues, these tools offer real advantages—speed, scalability, and 24/7 availability. They can even help with sales by recommending products, engaging prospects, and identifying qualified leads.
But while AI chatbots can be powerful, they also bring new risks. If not carefully managed, they may provide incorrect or biased information, sometimes with serious consequences. In fact, chatbots have been known to generate completely fabricated advice in sensitive areas like health care or finance. And when they collect or process personal data, privacy concerns can quickly come into play.
In this article, we’ll look at the risks of AI chatbots, why businesses need to be cautious, and what steps you can take to protect your organization.
Understanding Misrepresentations and “Hallucinations”
When discussing chatbot mistakes, two primary issues tend to arise: misrepresentations and hallucinations.
- Misrepresentations are when a chatbot gives out false or misleading information—like an incorrect policy detail or product description. These errors can happen if the chatbot is working with outdated data or isn’t programmed to handle certain customer requests properly.
- Hallucinations happen when a chatbot creates responses that sound convincing but are entirely made up. Because generative AI tools predict what words should come next instead of fact-checking against reliable sources, they sometimes “fill in the blanks” with inaccurate information.
These errors aren’t just inconvenient—they can have real-world consequences. Take the recent case of Air Canada, which was held liable after its chatbot gave a grieving passenger the wrong information about bereavement fares. The misinformation led to a court ruling against the airline, highlighting just how risky chatbot mistakes can be for businesses.
The Risks for Businesses
If chatbots aren’t properly monitored, businesses may face:
- Loss of trust – Customers expect accurate information. If they’re misled, it can harm your reputation and loyalty.
- Legal exposure – Companies can be held responsible for what their chatbots say, especially in regulated industries like health, finance, or law.
- Financial costs – Errors can lead to refunds, compensation, legal fees, or regulatory fines.
- Regulatory issues – Privacy breaches or misleading interactions may draw attention from regulators such as the Office of the Privacy Commissioner of Canada.
- Data security risks – Chatbots handle sensitive details and, if compromised, could open the door to breaches or fraud.
- Reputation attacks – Bad actors may try to manipulate chatbots into spreading false or harmful information.
Practical Steps to Reduce Risk
The good news? Businesses can still benefit from AI chatbots while reducing risks by putting smart safeguards in place:
- Monitor regularly – Test your chatbot often to catch errors before they cause harm.
- Keep human oversight – Make sure there’s a clear process for escalating complex or sensitive cases to a real person.
- Be transparent – Use disclaimers so customers know they’re talking to AI, not an expert.
- Limit authority – Don’t let chatbots make big decisions (like financial transactions) without safeguards.
- Use quality data – Train your chatbot with accurate, up-to-date, and diverse information.
- Prioritize privacy – Collect only what you need, protect it securely, and give users control of their data.
- Plan for incidents – Have a response plan ready in case the chatbot goes off track or is exploited.
- Stay alert to disinformation – Watch for attempts to misuse or manipulate your chatbot.
Why Being Proactive Matters
Chatbots can be an incredible asset for businesses—but only if used responsibly. By putting proper checks in place, you’ll protect your customers, safeguard your reputation, and avoid unnecessary legal or financial headaches. More importantly, you’ll set your organization up to use AI in a way that builds trust and supports long-term growth.
AI chatbots aren’t going anywhere, and for many businesses, they’re already delivering real value. But like any tool, they come with responsibilities. With the right safeguards and human oversight, organizations can confidently embrace this technology while minimizing risks.
If you’d like guidance on protecting your business from AI-related risks, our team is here to help. Contact us today to learn more.