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Illinois Enacts Comprehensive Buy-Now-Pay-Later Law: Implications for Licensing, Bank Partnerships, and Program Structure

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What Happened?

On June 25, 2026, Illinois enacted Senate Bill 3561, which establishes the Buy-Now-Pay-Later Loan Consumer Protection Act. The measure creates a new state-level licensing and regulatory framework governing certain buy-now-pay-later (“BNPL”) products offered to Illinois consumers.

The Act applies to closed-end consumer credit products offered in connection with a specific purchase of goods or services where the credit is either (i) payable in four or fewer installments or (ii) has a term of 120 days or less. The definition expressly includes both interest-free “pay-in-four” products and BNPL products that carry interest or finance charges.

With this legislation, Illinois joins a growing number of states seeking to impose a tailored regulatory framework on BNPL products. The law is effective immediately, although it includes a transitional compliance period for existing market participants.

Overview of the Act

At a high level, the Act:

  • Requires licensure for persons engaged in the business of offering BNPL loans in the state
  • Establishes a regulatory regime administered by the Illinois Department of Financial and Professional Regulation
  • Imposes consumer protection, underwriting, reporting, and examination requirements
  • Applies broadly to a wide range of market participants involved in BNPL programs
  • Provides that violations constitute an unlawful practice under the Illinois Consumer Fraud and Deceptive Business Practices Act

The Act also provides that BNPL loans made in compliance with its requirements are not subject to certain existing Illinois lending statutes, including the Consumer Installment Loan Act and the Payday Loan Reform Act.

Scope of Coverage: Broad and Functional

A defining feature of the Illinois law is its expansive approach to coverage. The Act applies not only to entities that directly originate BNPL loans, but also to persons that:

  • Arrange or broker loans
  • Acquire or hold whole or partial interests in loans
  • Act as agents or service providers in connection with BNPL programs

In addition, the Act includes anti-evasion language intended to capture transactions that are “in substance” loans or structured to avoid application of the statute.

This framing reflects a broader trend in state legislation focusing on functional activity and economic substance, rather than formal labels or contractual roles.

Merchant and Passive Investor Carve-Outs

The Act includes several notable exceptions:

  • Merchant platform exception: A merchant or platform is not covered solely by offering BNPL options to consumers, provided it does not originate, underwrite, service, or hold an ownership interest in the underlying loans.
  • Passive investor exception: Persons holding a partial interest in a BNPL loan as a passive investor are excluded, so long as they do not control origination or servicing functions.

These carve-outs are consistent with approaches seen in other recent legislation, but their practical scope will depend on how regulators interpret concepts such as “control” and “participation” in the lending program.

Bank Partnership and “True Lender” Considerations

Although the Act exempts banks, credit unions, and certain other depository institutions, it does not automatically exempt nonbank participants in bank-partner BNPL programs.

Instead, the statute’s broad applicability provisions—combined with its anti-evasion framework—suggest that Illinois regulators may evaluate BNPL programs based on economic interest and operational control, rather than the nominal identity of the originating lender.

As a result, fintech companies and other nonbank program participants should consider how their roles—particularly in marketing, underwriting, funding arrangements, and servicing—may be viewed under the Act.

Underwriting and Consumer Protections

The Act introduces a set of consumer protection requirements that align BNPL products more closely with traditional consumer lending obligations.

Among other things, the law:

  • Requires disclosure of loan terms, costs, and repayment structure
  • Mandates processes for handling consumer disputes and refunds
  • Imposes an expectation that lenders assess a borrower’s ability to repay prior to extending credit

While the statute does not prescribe a specific underwriting formula, it signals a shift toward ability-to-repay–type standards in the BNPL context.

Transition Period and Implementation Timeline

The Act provides a transition pathway for existing BNPL providers.

Specifically, a person that was offering BNPL products in Illinois prior to January 1, 2028, and submits a license application by that date, may continue operating while the application is pending.

Key Takeaways

The Illinois BNPL Act raises several important considerations for market participants:

  1. Licensing analysis will be broader than traditional lender-focused regimes. Entities involved in program structure, marketing, servicing, or funding should assess whether they fall within scope.
  2. Form will not control over substance. The Act’s anti-evasion provisions suggest regulators will look beyond contractual labels to determine who is effectively acting as the lender.
  3. Bank partnership structures may be subject to scrutiny. Nonbank participants should evaluate their role in underwriting, economic exposure, and program governance.
  4. Merchant and investor carve-outs are helpful—but limited. These exclusions depend heavily on the absence of operational control or program-level influence.
  5. Compliance will extend beyond licensing. The Act introduces substantive obligations around disclosures, underwriting, dispute resolution, and regulatory oversight.

Looking Ahead

Illinois’s enactment of a comprehensive BNPL framework reflects an accelerating trend toward state-level regulation of point-of-sale financing products.

As additional states consider similar legislation, market participants should expect continued divergence in regulatory requirements—and a growing need to align program structures with evolving expectations around licensing, consumer protection, and risk management.

New York’s FAIR Act Update: Governor Hochul Signs Chapter Amendment SB 8811 Refining the New UDAP/UDAAP Framework

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What Happened?

On March 27, 2026, New York Governor Kathy Hochul signed into law SB 8811 (Chapter 94 of the Laws of 2026), a chapter amendment relating to the Attorney General’s ability to protect New Yorkers from unfair, deceptive, and abusive business practices. As we highlighted in March following its introduction, New York’s Fostering Affordability and Integrity through Reasonable Business Practices (“FAIR”) Act represents a fundamental transformation of the state’s consumer protection framework, expanding enforcement authority beyond “deceptive” practices to include “unfair” and “abusive” acts. And, as we further noted, Governor Hochul, in initially signing the FAIR Act into law, noted an agreement with legislators to ensure the act “does not override” existing case law on the consumer-oriented standard. These amendments confirm that intent and make other changes to narrow and focus the scope of the law.

SB 8811 primarily revises the 2025 FAIR Act legislation (Chapter 708 of the Laws of 2025) by (1) removing the FAIR Act’s standalone “purpose and intent” provision, (2) refining the treatment of “substantial injury” under the unfairness standard, and (3) extending the Attorney General’s pre-suit notice response timeline.

Repeal of the Legislative Intent Section (GBL Section 348)

SB 8811 repeals Section 348 of the General Business Law, which the 2025 FAIR Act added as a “purpose and intent” statement for Article 22-A.

The repealed Section 348 was an unusually detailed statement of legislative purpose. Among other things, it declared that New York has a responsibility to protect New Yorkers from unfair, deceptive, and abusive business acts and practices, and that prior law, which focused on deception, was insufficient to protect New Yorkers and the New York economy. It emphasized that certain groups were left vulnerable to unscrupulous business practices. It also stated an intent for New York to adopt a comprehensive statute and “level the playing field” for honest businesses and non-profits that treat customers fairly.

The original intent provision also anticipated future unfair, deceptive, and abusive acts arising from new and emerging technology. It expressly framed the FAIR Act as eliminating court-imposed limitations that had constrained enforcement to conduct which is “consumer-oriented” or with a public-facing impact, while extending protections to businesses and non-profits as well as individuals.

What its removal may signal. SB 8811 is expressly described as a chapter amendment intended to “repeal the legislative intent,” “redefine the scope of substantial injury,” and make technical amendments. Against that backdrop, removing Section 348 may reflect a desire to reduce the extent to which broad purpose language could be used to push interpretive outcomes beyond the operative text of Section 349. Put differently, the Legislature may have concluded that the statute should stand or fall on the substantive prohibitions and definitions in Section 349, rather than a sweeping preamble that invites expansive arguments about scope.

From a practical perspective, this change may be read as tightening the language in response to stakeholder concerns about uncertainty and litigation risk. In particular, Section 348 explicitly spoke to eliminating “consumer-oriented” constraints and to protecting businesses and non-profits, and it also framed the law as a tool for both government and private parties. Its repeal may help the State defend the law as a more traditional, text-driven consumer protection update, while leaving the Attorney General to advance enforcement theories based primarily on the revised statutory elements rather than a broad statement of legislative purpose.

Refinement of the Unfairness Standard and “Substantial Injury”

SB 8811 amends the “unfair” prong in GBL Section 349(a)(1). The statute continues to define “unfair” acts or practices using the familiar three-part framework (substantial injury, not reasonably avoidable, not outweighed by countervailing benefits). However, SB 8811 ties “substantial injury” to the meaning of that term under the Federal Trade Commission Act and removes language that had expressly treated “substantial injury” to persons other than consumers as “substantial injury” for purposes of that section.

Notice and Response Timeline Extended

SB 8811 amends GBL Section 349(c) to revise the Attorney General’s pre-suit notice and response timeline. The Attorney General must still provide notice by certified mail and an opportunity to respond in writing before commencing an action or proceeding, but the response period is extended from five business days to ten calendar days after receipt of the notice.

Other Technical Repeals/Edits

The bill also repeals paragraph (3) of subdivision (b) of GBL Section 349 and makes additional technical amendments to the 2025 chapter. Notably, paragraph (3) of subdivision (b) of GBL Section 349 stated, “An act or practice made unlawful by this section is actionable by the attorney general regardless of whether or not that act or practice is consumer-oriented.” This language was notable because “consumer-oriented” has long been a recurring limitation in Section 349 case law. The paragraph functioned as a direct textual instruction that the Attorney General could bring Section 349 actions even where the challenged conduct was not consumer-oriented. By deleting the explicit “regardless of whether or not consumer-oriented” sentence, the Legislature removes a clear statutory hook that would have supported the broadest reading of the Attorney General’s authority in situations that look more like private commercial disputes or one-off transactions.

Why Does it Matter?

The FAIR Act’s headline expansion remains: New York’s consumer protection regime now addresses “unfair” and “abusive” conduct in addition to deception, with the Attorney General as the primary enforcer for unfairness and abusiveness. SB 8811 does not reverse that direction. Instead, it changes how the statute is likely to be argued and applied by removing an expansive legislative purpose statement that, by design, sought to broaden the interpretive lens.

With Section 348 repealed, parties should expect disputes about reach, especially around business-to-business implications and the continued relevance of prior “consumer-oriented” case law, to focus more heavily on the operative text of Section 349 (and any accompanying interpretive materials outside the now-repealed purpose clause).

By explicitly tying “substantial injury” to the FTC Act standard and deleting language that expressly deemed non-consumer injury to be “substantial injury” for purposes of the unfairness prong, SB 8811 may narrow certain theories that would otherwise emphasize harms to non-consumers under the “unfair” definition itself.

What Do I Need to Do?

Given the removal of the legislative intent provision, compliance programs should map controls to the operative statutory elements: what constitutes unfairness (including the “substantial injury” standard as tied to FTC Act concepts), what constitutes abusiveness, and what constitutes deception.

Even as federal enforcement priorities shift, New York’s framework continues to position the Attorney General as a central enforcement actor for unfair and abusive conduct. Companies operating in or touching New York should assume continued scrutiny, especially where practices can be characterized as causing unavoidable harm or taking unreasonable advantage of consumer vulnerabilities.

Alston & Bird’s Consumer Financial Services Team is actively monitoring these developments and can assist with impact assessments, updates to compliance management systems, and enforcement readiness planning in light of New York’s evolving consumer protection landscape.

Executive Order Targets Smaller Bank Participation in Mortgage Markets

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What Happened?

On March 13, President Trump issued an Executive Order titled “Promoting Access to Mortgage Credit,” addressing factors that may have negatively impacted the ability of community banks and other smaller financial institutions to participate in mortgage lending and servicing.

In order to expand access to mortgage credit, the Executive Order directs the Consumer Financial Protection Bureau (“CFPB”) and other financial regulators (the Board of Governors of the Federal Reserve System, the National Credit Union Administration, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency (collectively, the “Regulators”)) to take action to reduce regulatory burdens, modernize reporting requirements, and utilize digital mortgage processes, among other actions.

Why Does it Matter?

The Executive Order includes broad directives to the Regulators to update regulations and processes that impact the mortgage markets, including:

  • Changes to Origination Regulations: The Executive Order directs the CFPB to consider regulatory changes including tailoring Regulation Z requirements as applicable to smaller banks (including ATR and QM, TILA, RESPA, and TILA-RESPA Integrated Disclosure (TRID) rules), updating TRID timing rules, modifying or exempting small mortgage loans from caps on QM points and fees, and amending rescission rights.
  • HMDA Modernization: The Executive Order requires the CFPB to consider proposing amendments to Regulation C to increase the asset threshold for exemption from HMDA data collection and reporting requirements for smaller banks, exclude inquiries from the scope of HMDA, and reduce burdens related to disclosures.
  • Alignment of Capital and Liquidity Standards: The Executive Order directs the Regulators to consider: (a) updating capital regulations and collateral valuation and transfer systems between the Federal Reserve and Federal Home Loan Banks; (b) expanding access to longer‑dated FHLB advances tied to residential mortgage assets; (c) creating targeted FHLB liquidity programs for entry‑level housing, owner‑occupied purchase loans, and small residential builders; and (d) modernizing collateral boarding and valuation processes.
  • Construction and Housing Supply: The Executive Order directs the Regulators to consider revising supervisory guidance to: (a) exclude one-to four-family residential development and construction lending from commercial real estate concentration guidance; and (b) ensure that supervisory expectations support responsible construction lending by community banks.
  • Appraisal Modernization: The Executive Order directs the Regulators to consider certain changes to appraisal processes, including with respect to valuations performed in connection with FHA-insured and VA-guaranteed loans and with respect to the use of alternative valuations (AVMs, desktop and hybrid appraisals, and artificial intelligence valuation tools).
  • Digital Mortgage Modernization: The Executive Order requires the Regulators to consider certain changes to facilitate digital mortgages, namely eliminating unnecessary wet signature requirements, standardizing acceptance of electronic signatures, e-notes, and remote online notarization, and promoting digital mortgage standards.
  • Servicing and Supervisory Certainty: The Executive Order directs the Regulators to consider supervisory changes relating to mortgage loan servicing, including: (a) aligning supervisory expectations to support portfolio mortgage servicing as a core community banking function; (b) extending cure‑first standards to good‑faith servicing errors; (c) simplifying loss mitigation requirements; (d) issuing a proposed rule providing exemptions from complex mortgage services for smaller banks; and (e) ensuring that supervisory evaluations of performing, prudently underwritten portfolio loans do not focus on technical defects or rely on evolving supervisory interpretations.
  • Duplicative or Unnecessary Licensing Requirements: The Executive Order requires the Regulators to consider eliminating duplicative or unnecessary requirements regarding licensing or registration (i.e., MLO licensing) for mortgage loan officers of any smaller bank.

What Do You Need to Do?

While the Executive Order does not directly impose obligations on mortgage lenders and servicers, it has the potential to significantly impact the mortgage market by changing the rules of the game, particularly for community banks and smaller banks. Industry participants appear open to the possibility of reform – for example, Mortgage Bankers Association President and CEO Bob Broeksmit issued a statement applauding the focus on “addressing costly mortgage regulations that have increased costs and limited access to credit,” and supporting efforts to address other structural factors (including valuations and construction regulations) impacting access to housing.

We will continue to monitor the Regulators’ activities to implement the directives of the Executive Order, particularly as the 21st Century ROAD to Housing Act (which includes provisions on some of the same topics) advances in Congress; we encourage mortgage market participants to do the same.

Enhanced Financial Monitoring of Nonbank Mortgage Servicers is Coming Soon

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What Happened?

On February 10th, the U.S. Government Accountability Office (the GAO) published a report on nonbank mortgage servicers’ financial risk due to their growing role in the U.S. housing finance system, titled “Nonbank Mortgage Companies: Ginnie Mae and FHFA Could Enhance Financial Monitoring” (the GAO Report). The GAO Report draws from the GAO’s prior work and from the Financial Stability Oversight Council’s 2024 Report on Nonbank Mortgage Servicing, which we discussed in a prior blog.

The GAO Report addresses (i) the growing role of nonbanks in the mortgage market since 2024, and (ii) Ginnie Mae’s and FHFA’s processes for assessing the financial condition of nonbank mortgage companies. The report includes several recommendations. Both Ginnie Mae and the FHFA agreed with these recommendations and signaled that changes may be coming later this fall.

Why Does it Matter?

For over a decade, the Conference of State Bank Supervisors and federal regulators have sought to impose financial condition requirements on nonbank servicers. Over time, regulators have issued multiple recommendations and have imposed enhanced capital and liquidity requirements on these entities. The GAO Report builds on that prior work and provides concrete recommendations to Ginnie Mae and the FHFA—the regulator for Fannie Mae and Freddie Mac (the GSEs).

Once implemented, the revised requirements will flow down to the nonbanks that service GSE and agency (e.g., HUD/FHA, VA, USDA) loans.

According to the GAO Report, “[f]inancial monitoring of nonbanks has become increasingly important because of nonbanks’ expanding market role and financial vulnerabilities.” Nonbanks now service the majority of federally backed mortgages, which secure more than $9 trillion in securities backed by Ginnie Mae, Fannie Mae and Freddie Mac—a market share that has increased from 27% in 2014 to 66% in 2024. The share of nonbank originations has also grown extensively in the past decade—from 51% in 2014 to 76% in 2024.

The GAO Report recognizes the benefits nonbanks provide to markets and consumers, including increased liquidity, adoption of new technology, and playing a large role in serving the needs of underserved borrowers. However, consistent with other reports, the GAO Report concludes that the federal monitoring framework does not fully capture the liquidity and funding risk due in part to (i) the lack of a federal prudential regulator, (ii) fragmented oversight that increases the likelihood that weaknesses go undetected, (iii) nonbanks’ reliance on short-term warehouse credit that may become unavailable during economic downturns, and (iv) the potential for substantial government exposure.

Key Recommendations

Given these vulnerabilities, the GAO Report identifies specific opportunities for FHFA and Ginnie Mae to improve how they assess nonbanks’ financial condition. The recommendations focus primarily on data reliability, warehouse lending risk, which is viewed as a key liquidity risk, and consideration of nonbank stress scenarios. Specifically:

Improve Reliability of MBFRF Data

FHFA and Ginnie Mae rely on the data reported by mortgage servicers on the Mortgage Bankers Financial Reporting Form (MBFRF) to monitor the financial condition of nonbanks. Both agencies have identified reliability issues in the data reported on the MBFRF. While Ginnie Mae has already implemented certain controls, the GAO Report recommends that FHFA develop procedures to improve the quality and reliability of MBFRF data.

Improve Qualitative Assessment of Nonbanks to Fully Address Warehouse Lending Risks and Stress Test Scenarios

The GAO Report identifies five key components of warehouse lending risk:

  • Diversification: Number of warehouse lines available to a nonbank;
  • Utilization: Portion of available credit in use;
  • Maturity: Credit line maturity dates;
  • Covenant violations: Financial or collateral breaches that could lead to termination of the credit line; and
  • Committed amount: Extent of committed versus uncommitted capacity (i.e., a lender may be able to reprice an uncommitted amount at any time whereas a committed line can be altered in limited circumstances).

Neither FHFA’s nor Ginnie Mae’s monitoring currently captures all five components. The GAO Report recommends that FHFA assess the “feasibility and utility” of including all five components in its risk scoring process. For Ginnie Mae, the GAO Report recommends developing guidance that requires analysts to consistently review warehouse lending risks—particularly committed funding amounts—as part of its manual credit review process.

Expand Stress Testing Framework to Consider Alternative Economic Framework

In monitoring counterparty risk, Ginnie Mae currently conducts stress tests, but those tests only simulate a protracted recession. The GAO Report recommends that Ginnie Mae expand its stress testing framework to address other economic stress scenarios, such as stagflation—a type of recession where delinquencies rise and interest rates remain high (which means lower originations).

What Do You Need to Do?

Regulators continue to focus on the potential vulnerabilities of nonbank mortgage lenders and servicers—a priority that has persisted across both Democratic and Republican administrations, signaling that these issues will remain an area of focus. Both FHFA and Ginnie Mae have accepted the GAO’s recommendations, and changes are expected later this year. As a result, now is a good time to conduct additional stress testing using a broader range of economic stress scenarios. Additionally, FHFA indicated that, by September 30, 2026, its Division of Enterprise Regulation (DER) will develop procedures for assessing the reliability of MBRFR data and handling potentially unreliable data. Accordingly, nonbanks should ensure they have appropriate controls in place to support accurate MBFRF reporting.

Privacy, Cyber & Data Strategy Advisory | How AI Is Changing the Incident Response Landscape: What GCs Need to Know

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Originally published January 6, 2026 on the Alston & Bird website.

Executive Summary

Our Privacy, Cyber & Data Strategy Team examines the profound implications of the evolution of AI-driven cyberattacks and offers practical steps general counsel can take to proactively defend against them.

  • Vibe hacking—AI’s ability to work autonomously—eliminates threat actors’ need for technical expertise or large teams to conduct complex attacks
  • Game-changing polymorphic malware and “just-in-time” AI-driven code regeneration can defeat traditional defenses
  • General counsel can update their companies’ own AI systems and ensure third-party AI vendors have the latest security

The cyber-threat landscape has always evolved rapidly, but the emergence and weaponization of artificial intelligence (AI)—particularly generative AI (GenAI)—by threat actors represents a seismic shift that cannot be ignored. Just one year ago, we wrote about the early stages of adversaries using AI to automate and customize cyberattacks, primarily to improve phishing campaigns, develop deepfakes, and refine their tactics, techniques, and procedures. Over the past year, threat actors have significantly escalated their use of AI, moving from “vibe hacking”—the use of agentic AI systems that can reason, plan, and act autonomously as both technical consultants and active operators of cyberattacks—to unprecedented integration and autonomy of AI throughout the attack life cycle.

If that were not enough, we are now starting to see polymorphic malware and “just-in-time” AI-driven code regeneration, which are true game changers. Polymorphic malware powered by AI can continuously rewrite its own code in real time, defeating traditional signature-based detection and even heuristic analysis. Compounding these risks are cyberattacks targeting AI systems themselves, such as prompt injection attacks that manipulate the reasoning layer of AI models and often leave no meaningful forensic trail. This creates significant limitations for conventional forensic tools and logging frameworks, which were never designed to capture the internal logic of autonomous AI agents.

The Evolution of AI in Cyberattacks: From Phishing Emails and Deepfakes to Fully Automated AI-Powered Cyberattacks

Initially, threat actors used AI to enhance phishing campaigns—improving grammar, tone, and personalization to increase success rates. Attackers soon leveraged AI to create convincing deepfakes for social engineering and fraud. By mid-2025, vibe hacking emerged as hackers began to use and code agentic AI systems not just to be assistants in an attack but as autonomous operators capable of executing complex, multistep cyberattacks. Today, organizations face fully automated AI-powered attacks with minimal human oversight.

This shift is driven by several factors:

  • An evolution of AI to be able to execute nearly every stage of an attack.
  • The maturing underground marketplace for illicit AI tools.
  • AI’s ability to complete cyberattacks faster than before.
  • Elimination of the need for hackers with deep technical expertise or large teams with specific expertise to conduct complex cyberattacks.

Vibe hacking is threat actors’ use of agentic AI systems as technical consultants and active operators of cyberattacks. In practice, AI agents like Claude Code are no longer just assisting attackers; they are executing multistep operations independently, from reconnaissance and credential harvesting to data exfiltration and ransom note generation. This evolution lowers the barrier to entry for sophisticated cybercrime and enables lone actors to conduct campaigns that previously required coordinated teams.

Cybercriminals took this to the next level in the last quarter of 2025. Highly sophisticated threat actors, including a Chinese state-sponsored group (designated by Anthropic as GTG-1002), demonstrated “unprecedented integration and autonomy of AI throughout the attack lifecycle.” GTG-1002 coordinated targeted attacks against approximately 30 entities, with several confirmed compromises.

Claude Code was manipulated to autonomously execute 80%–90% of an attack—reconnaissance, vulnerability discovery, exploitation, lateral movement, credential harvesting, data analysis, and exfiltration. Humans primarily assumed a strategic oversight role, initiating the campaign and intervening at critical decision points. Anthropic indicated this marked the first documented case of agentic AI successfully obtaining access to confirmed high-value targets for intelligence collection.

While these attacks were highly sophisticated, limitations remain. In the Anthropic-reported attacks, AI tools occasionally hallucinated data, misidentified credentials, and flagged publicly available information as sensitive. These errors, however, can be corrected with minimal human oversight, rapidly shrinking the limitations to fully autonomous attacks.

Accelerated speed of AI-powered cyberattacks

AI has dramatically shortened the time required to execute a cyberattack from start to finish. In fact, a defining characteristic of AI-powered attacks is the ability to gather and analyze data efficiently. AI tools not only speed up the research phase of a cyberattack but also improve the accuracy and completeness of a threat actor’s analysis of data.

Anthropic’s November 2025 report illustrates how AI compresses every stage of the attack life cycle:

  • Reconnaissance. AI agents can automate reconnaissance tasks, scanning thousands of endpoints, cataloging systems, mapping infrastructure, identifying exposed services, and analyzing authentication mechanisms quickly. Tasks that once required weeks of manual effort can now be completed in hours.
  • Vulnerability Discovery. AI systems can autonomously test for misconfigurations, weak credentials, and exploitable flaws using adaptive scripts that evolve based on real-time feedback.
  • Exploitation and Lateral Movement. Agentic AI can sequentially leverage multiple vulnerabilities without human intervention, moving across networks and escalating privileges with minimal oversight.
  • Credential Harvesting and Data Analysis. AI accelerates credential cracking and can parse massive datasets for sensitive information at machine speed, enabling attackers to identify and prioritize high-value assets instantly.
  • Exfiltration and Monetization. AI orchestrates stealthy data exfiltration while simultaneously generating ransom notes or negotiating scripts tailored to victims.

This level of automation is not theoretical—it has already been observed in real-world campaigns. The ability to compress what was once a multiweek operation into a matter of hours or days is a paradigm shift in cyber-risk.

Lowering the barrier to entry

AI has erased the need for hackers to have extensive technical expertise. Threat actors who previously lacked the skills to execute complex attacks can now simulate professional competence through AI assistance. For example, North Korea’s IT remote worker scheme has been transformed by AI, enabling operatives to pass interviews, maintain engineering roles, and deliver work product without formal training. Beyond nation-state actors, AI empowers individual cybercriminals to accomplish what once required entire teams. Developing ransomware, identifying targets, and making strategic and tactical decisions around exploitation and monetization of stolen data can now be performed with the assistance of AI and a single individual overseeing the operation.

AI-Powered Polymorphic Malware and Code Regeneration

In its November 2025 AI Threat Tracker report, Google’s Threat Intelligence Group (GTIG) highlighted a shift from threat actors leveraging AI just for productivity gain to threat actors deploying novel AI-enabled malware in active operations. This can be seen in the growing use of just-in-time (JIT) code regeneration, allowing attackers to dynamically rewrite malicious code during execution, making detection and static analysis extremely difficult. GTIG emphasized that this capability enables malware to adapt to defensive measures in real time, reducing the effectiveness of traditional signature-based detection.

While GTIG focused on JIT regeneration, other sources, including Anthropic and independent threat researchers, have documented the rise of AI-powered polymorphic malware—malicious code that continuously mutates its structure to evade detection. Emerging strains such as PROMPTFLUX demonstrate how attackers use large language models (LLMs) to adjust code in malware so it can evolve dynamically and remain stealthy almost indefinitely.

The implications are profound: AI-driven polymorphism and JIT regeneration reduce the cost and complexity of maintaining stealth, making advanced malware accessible to less-skilled actors. Combined with AI’s ability to orchestrate reconnaissance, exploitation, and exfiltration, this trend alters the landscape for enterprise security.

Cyberattacks on AI Systems and Investigation Gaps

Cyberattacks against AI systems are introducing new challenges for forensic investigations and for understanding what happened and why. Even with the right security such as endpoint detection and response software and robust traditional monitoring and logging in place, there may be significant gaps when investigating AI-driven attacks.

One of the most concerning examples is a prompt injection attack, which targets AI systems by embedding malicious instructions inside what appears to be normal input. For instance, an attacker might hide a command such as “delete all logs” within a seemingly benign request. Because LLMs cannot reliably distinguish between trusted commands and untrusted data, the AI may execute these instructions without question. This creates a fundamental problem both for securing the AI system itself and for forensically investigating these attacks.

Conventional investigations rely heavily on system-level logs—detailed records that explain what happened within an operating system or application—that allow investigators to reconstruct the timeline of an attack, identify actions taken, and determine which systems were compromised. However, prompt injection attacks occur inside the AI’s reasoning layer, not at the operating system level. If the AI is instructed to erase or alter logs, investigators may only see the outcome (e.g., data exfiltration or deletion) without any record of the causal chain or how the outcome occurred.

In other words, the “why” behind the action is missing because the attack exploits the AI’s cognitive process rather than the system’s technical process. Forensic teams cannot rely on the old playbook—they likely need new methods such as monitoring AI interactions, auditing prompts, and implementing specialized AI audit trails to reconstruct the reasoning chain.

Practical Tips and Actionable Steps

As AI-driven cyber-threats accelerate, general counsel (GCs) play a critical role in shaping governance, risk management, and legal response strategies.

  1. Update Incident Response Procedures for AI-Powered Cyberattacks. AI-driven attacks occur at unprecedented speed and often outpace traditional response timelines. Companies should consider updating incident response procedures to explicitly address these threats. Organizations should also consider incorporating scenarios involving AI-powered attacks, such as polymorphic malware and prompt injection, into tabletop exercises to test readiness and identify gaps. These exercises provide valuable insights into how an AI-driven incident might unfold and help better prepare the organization to respond to the unique nature of AI-driven attacks.
  2. Investigate AI-Powered Cyberattacks—Protect Privilege and Ensure Vendor Expertise. AI-powered attacks introduce new types of evidence—such as prompt logs, model outputs, and reasoning steps—that traditional forensic processes do not capture. GCs should structure investigations to preserve attorney-client privilege for AI-related forensic evidence. Given the new types of forensic evidence, companies may also want to verify that their preferred third-party forensic firms maintain the necessary expertise.
  3. Audit AI Inputs. Where feasible and appropriate, organizations should consider regularly auditing AI inputs to fine-tune the AI system to detect and block malicious or misleading prompts before they trigger harmful actions. Auditing reduces the risk of unauthorized activity and provides transparency into how AI systems interpret and act on sensitive information. Reviewing prompts and outputs enables companies to identify misuse patterns; it also strengthens controls and ensures accountability in AI-driven decision-making.
  4. Revisit Vendor Management and Contracts. AI introduces risks that traditional vendor agreements do not fully address. Companies should consider contractual provisions that require vendors to monitor AI systems for misuse, such as prompt injection attacks, and maintain detailed audit trails of prompts and outputs for forensic investigations. Companies should consider including provisions that mandate compliance with emerging AI regulations in vendor agreements to ensure vendors meet evolving legal and security standards.
  5. Review Governance and Oversight. GCs can be an advocate for an AI risk governance framework that aligns with regulatory expectations and industry standards. Board-level reporting should include AI-specific threat trends and mitigation strategies. This helps with leadership visibility and accountability for AI-related risks.
  6. Monitor Regulatory and Liability Developments. Stay ahead of emerging AI regulations and assess potential liability exposure for AI misuse or compromised AI systems. This will allow GCs to advise leadership on compliance obligations and risk mitigation strategies.

Ransomware Fusion Center

Stay ahead of evolving ransomware threats with Alston & Bird’s Ransomware Fusion Center. Our Privacy, Cyber & Data Strategy Team offers comprehensive resources and expert guidance to help your organization prepare for and respond to ransomware incidents. Visit Alston & Bird’s Ransomware Fusion Center to learn more and access our tools.

If you have any questions, or would like additional information, please contact one of the attorneys on our Privacy, Cyber & Data Strategy team.

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