You probably don’t know this, but right now someone in your business is copying customer data into ChatGPT. Or pasting internal documents into Gemini. Or uploading your company’s financial information to some AI tool you’ve never heard of.

They’re not being malicious. They’re trying to do their job faster. Write that email. Analyse that spreadsheet. Draft that proposal. And AI tools are incredibly good at helping with all of that.

But here’s the problem: you have no idea it’s happening.

Shadow AI is Shadow IT on Steroids

Remember when employees started using Dropbox before IT approved it? That was shadow IT. Staff found tools that made their work easier and just started using them.

Shadow AI is the same thing, but the risks are much higher. When someone uploads a file to an unapproved file sharing service, that’s concerning. When they paste proprietary information into an AI chat interface, you’ve potentially just given your confidential data to a third party with terms of service you’ve never read.

The Australian Cyber Security Centre’s guidance on securing artificial intelligence systems makes it clear: organisations need to know what AI tools are being used and how data is being processed.

What Actually Happens to That Data?

Most free AI tools need your data to improve their models. That clause in the terms of service? The one nobody reads? It often says something like “we may use your inputs to train and improve our services.”

Translation: the customer email you just pasted in might be used to train the AI. Which means it could theoretically show up in someone else’s response.

Some paid enterprise AI services promise not to train on your data. That’s great. But are your staff using the enterprise version with your company account? Or are they using their personal free account?

You probably don’t know.

It’s Not Just ChatGPT

The problem isn’t limited to one or two big names. There are hundreds of AI tools now. Code completion tools. Image generators. Document analysers. Meeting transcription services. Writing assistants.

Each one has different terms of service. Different data handling practices. Different security standards. Different data residency policies.

Your staff might be using five different AI tools. They definitely haven’t read the terms of service for any of them. They probably haven’t thought about whether company data should be going into them.

What This Means for Australian SMBs

If you’re subject to any kind of data protection requirements, this is a compliance problem. If you handle customer information, health records, financial data, or anything else sensitive, you need to know where that data is going.

For businesses covered by Australian privacy laws, you’re responsible for how third parties handle personal information you provide to them. “My staff pasted it into an AI tool I didn’t know about” isn’t going to fly as an excuse.

And if you experience a data breach because company information was inappropriately shared with an AI service? You’ll need to notify affected individuals and the Office of the Australian Information Commissioner. That’s not a conversation you want to have.

So What Do You Actually Do About It?

First, don’t panic. And definitely don’t send out an angry email banning all AI tools. That won’t stop the behaviour. It’ll just push it further underground.

Here’s a practical approach:

Start with a conversation. Ask your team what tools they’re using. Make it clear you’re not angry, you’re trying to understand what’s helpful so you can support it properly.

Assess the real risks. Not all AI usage is equally risky. Someone using AI to help write a job posting? Probably fine. Someone pasting customer credit card details into a chat interface? Definitely not fine.

Create simple guidelines. Don’t make this complicated. Your policy can be three bullet points: what types of information should never go into AI tools, which approved tools people can use, and who to ask if they’re unsure.

Provide approved alternatives. If people are using AI tools because they’re useful, give them safe options. Enterprise versions of major AI tools with proper data protection agreements are relatively affordable. The cost is much less than the risk.

Make it easy to do the right thing. If your approved AI tool requires three forms and two weeks of waiting, people will keep using the free version. Set up access quickly.

This Isn’t Going Away

AI tools aren’t a fad. They’re increasingly essential to how people work. Trying to ban them entirely is like trying to ban email in 1995.

The question isn’t whether your staff will use AI tools. They already are. The question is whether you’ll manage that usage proactively or deal with the consequences reactively.

Shadow AI is happening in your business right now. The sooner you address it, the better.

Start by asking what’s already being used. Then make a plan to support the useful stuff safely. It’s not complicated, but it does require actually doing something about it.

Because pretending it’s not happening isn’t a security strategy.