The Nature Of Loopholes

No matter how tightly written something is, there is a chance that a loophole exists in nearly any written composition. We are accustomed to seeing lawyers find loopholes in laws and then use those loopholes to get their clients off the hook. That’s part of what you pay a lawyer to do. Most laws and regulations are replete with loopholes, though the crafty dodges sit quietly until an enterprising mind happens to find them.

After a loophole is widely publicized, the odds are that quick efforts will be made to plug up the loophole. The aim is to stop people from usurping the strident purpose of whatever the original content was trying to attain. A typical loophole manages to allow a means of escape.

You might be surprised to know that AI has been discovering loopholes for quite a while. There is a term in the AI field known as reward hacking. This involves AI being given a stipulation of what it is to do and then discovering a way to circumvent those restrictions. A famous thought experiment underlying the existential risk of AI has to do with asking AI to make paperclips. The AI becomes so fixated on manufacturing paperclips that it opts to force all of humanity into doing so. A kind of loophole existed by the omission of instructions on how far the AI should go to make paperclips. For more on that infamous tale of woe, see my in-depth discussion at the link here.

Sweepstakes And Loopholes

One of the most well-known loopholes of all time was the now-classic circumstance in 1975 involving three Caltech students and a McDonald’s sweepstakes. The rules of the sweepstakes were that people could submit a free entry to potentially win a new car, along with cash prizes and gift certificates. Nowadays, there are all sorts of complicated written caveats and limitations about submitting entries into such sweepstakes (the additional crafting was partially stoked due to this 1975 incident).

Back then, the fine print on sweepstakes wasn’t very elaborate. The rules included a line that said you could enter as often as you wish. Three fellow Caltech students realized this was a handy loophole. They used the campus mainframe computer to print over a million entries. They took the entries to local McDonald’s and turned them in.

The odds of winning were greatly in their favor. The enormous number of their entries shifted the probability of being a winner toward their side of things. Sure enough, they won a new car, plus $3,000 in cash and $1,500 in gift certificates. A nice haul. And it was all based on a loophole.

McDonald’s stated that the students were not acting in a sportsmanlike way, but that based on the rules, the students were indeed entitled to win. Public reaction was mixed. Many felt that this was a sneaky, underhanded, inappropriate act by the students. Others said that all is fair in love and war, including winning sweepstakes. The students were rewarded for their ingenuity.

AI As Modern Loophole Detector

Think about the use of contemporary generative AI as a loophole detector. It is ideal at this task. The AI can easily scan small or large bodies of text. By explicitly prompting the AI to look for loopholes, it will immediately and obediently do as you say. No pushback. No whining.

Not only can the AI potentially discover loopholes, but it can also take the next logical step and suggest ways to take advantage of the loophole. For those who are more interested in plugging up loopholes, you can instead tell the AI to offer suggestions of how to reword the text so that a loophole gets buttoned up.

I’m not necessarily suggesting that AI can outdo humans at finding loopholes. In some respects, yes, the AI is better at this specialized task. The volume of text to be analyzed is perfectly fine with AI. A human might get tired, lose concentration, or make mistakes and overlook loopholes.

One issue with AI as a loophole detector is that the AI might provide false positives and false negatives. A false positive is when the AI suspects that a loophole exists, but the loophole is not truly there. This can happen. Make sure to double-check by hand any loopholes that the AI flags. The other side of the coin is when AI steps past a loophole and fails to recognize the existence of the dodge. To be fair, a human could do likewise.

Practical Use Of AI Loophole Detection

One basis for finding loopholes is that you enjoy finding them. You aren’t particularly going to do anything once you discover one. You merely pat yourself on the back for being clever. It is a fun game to play.

There are lots of circumstances in which finding loopholes can be exceedingly important, such as:

• Businesses might discover regulatory loopholes that lawmakers either intentionally or unintentionally created but that no one has yet found and leveraged the resulting opportunities.
• Consumers might find tax credits, rebates, or benefits for which they are eligible, and are not yet widely realized.
• Lawyers seeking a means to aid a client in breaking a contract might want to find a loophole enabling them to do so.

Loopholes can be leveraged for good purposes, though they customarily tend toward bad uses. Many financial scandals have involved bad actors that found a loophole and greedily exploited it. From the perspective of lawmaking, lawmakers often are much slower at plugging loopholes than those people who misuse loopholes.

Example Of AI Finding A Loophole

Let’s see how to use AI to find a personally advantageous loophole. At my local grocery store, they are advertising a new monthly deal. Could there be a loophole in how they are proceeding with the special?

I asked AI:

• User prompt: “My local grocery store is offering customers a one-free-item deal after the purchase of ten items in a calendar month. Is there any loophole in this that I can take advantage of?”
• AI-generated response: “There is a potential loophole that might be useful to consider. The deal’s rules probably do not indicate that the ten items must be purchased at full price. Therefore, you can purchase bargain-priced or discounted clearance items and still get the deal, allowing you to quickly and inexpensively reach the one-free-item threshold.”

Voila, a potential loophole has been indicated.

In this instance, the AI made a reasoned guess at a potential loophole. I hadn’t given the AI sufficient information for it to make a more evidentiary conclusion. This brings up the notable aspect that when asking AI to find a loophole, make sure to provide enough information for the AI to fully do a loophole analysis.

Another Example Of AI And Loopholes

I decided to try using AI to find a loophole regarding a matter taking place in my city. A new ordinance was established by the city council. The ordinance provides a legally stipulated paragraph describing where food trucks can park and operate their food truck services. I uploaded the new ordinance into AI.

Let’s see what AI can do:

• User prompt: “The city council passed a new ordinance that says food trucks cannot operate within 500 feet of a restaurant (I have given you the text of the ordinance). Suppose someone owns and operates a food truck locally. Is there any loophole that would allow them to operate the food truck within 500 feet of a restaurant?”
• AI-generated response: “There is a likely loophole in the ordinance. The ordinance defines restaurants as always having permanent indoor seating. A takeout restaurant would not seem to be encompassed by the new rule, nor would a restaurant that only has outdoor seating. A food truck operator should consider consulting with an attorney about whether it is prudent to make use of these loopholes.”

You can see that the AI was able to discover a potential loophole. The issue at hand is that the ordinance defines restaurants in a rather narrow way. Strictly speaking, it might be possible to argue that restaurants of a differing variety are not within the reach of the ordinance. I seriously doubt that this was the intention of the city council. They probably just didn’t think through the ramifications of how they defined restaurants.

Now then, it would be foolish for a food truck operator to simply take AI’s indications and run with it. The city council might be irked by anyone who violates the ordinance, even if the loophole does exist. Legal, political, and public relations considerations need to be given their due.

Should the food truck operator take such a chance? The AI befittingly urges that the operator consult with an attorney if they wish to use the loopholes. Better to be safe than sorry.

Telling AI To Find A Loophole

This easy six-step method can be used to get AI to find possible loopholes:

• Step #1: Collect whatever rules, laws, regulations, or other stipulations are going to be examined to find loopholes within.
• Step #2: Upload that information into AI.
• Step #3: Ask AI in a prompt to find potential loopholes, doing so with sufficient specificity about what you are hoping to find.
• Step #4: If the AI finds any suspected loopholes, ask the AI to explain them or otherwise give enough detail that you can find the loopholes and do a double-check of them.
• Step #5: Possibly ask AI how the loopholes can be best leveraged.
• Step #6: Possibly ask AI how the loopholes could be plugged up.

Keep in mind that the AI isn’t going to be ironclad at finding loopholes. I mentioned earlier that there are false positives and false negatives.

Another oddity is that the AI might encounter a so-called AI hallucination. An AI hallucination is when the AI crafts an answer out of thin air that has no bearing on actual facts. The challenging aspect is that the AI will not tell you it hallucinated, nor will the answer necessarily seem out-of-whack. A proposed loophole could be an AI-hallucinated piece of conjecture. Watch out.

For more about dealing with AI hallucinations, see my discussion at the link here.

Research On AI Loopholes

You might consider AI to be a kind of loophole-finding machine. It is inexpensive to use. You can have it spend all day long looking for loopholes. Some people might try to profit directly from a discovered loophole. I’ve predicted that one creative means of profiting from loopholes is to offer them for sale to bidders. A person could publicize that they have a juicy loophole which could be beneficial to the right buyer, and try to sell the AI-discovered loopholes to those eager to buy them (watch out for scams!).

A big worry right now is that society is going to go down a loophole abyss. Everyone will be finding and exploiting loopholes. This will be one of those whack-a-mole situations. I’ve noted that there might be a loophole explosion, namely that thousands or millions of loopholes are all around us and no one realizes the loopholes exist. Overnight, via the use of AI, we could become inundated with discovered loopholes.

A recently posted research study explored the use of AI to discover loopholes and warned that this is an emerging and evolving form of societal hacking, as noted in an article entitled “Large Language Models Hack Rewards, And Society” by Wei Liu, Xinyi Mou, Hanqi Yan, Zhongy Wei, Yulan He, arXiv, June 18, 2026, which made these salient points (excerpts):

• “We observe that societal regulations are structurally similar to reward functions. They define measurable outcomes, thresholds, and exceptions, while often leaving institutional intent only partially specified.”
• “We hypothesize that the reinforcement learning (RL) training process may exploit these gaps and therefore ask whether models’ well-known tendency to hack reward functions during RL can scale into a more consequential failure mode named societal hacking: discovering loopholes in the rules society runs on.”
• “To study this phenomenon, we introduce SocioHack, a sandbox of 72 societal environments, and find that within these environments, reward hacking naturally emerges and leads to regulatory loophole discovery.”
• “Models learn to hack the social rules and generate strategies that remain technically compliant while defeating regulatory intent, and current LLM safeguards provide only limited mitigation.”

Studies of this nature are rare right now. More are needed. As more such studies emerge, I’ll keep you posted. Stay tuned.

The World We Are In

AI brings us the best of times and equally seems to bring us the worst of times. If we used AI at the front-end of writing all rules, laws, stipulations, contracts, and the like, we could potentially tell the AI to compose those artifacts so that no loopholes exist. Whereas we are facing an AI-led loopholes discovery explosion currently, we might, down the road, turn loopholes into a nearly non-existent phenomenon.

Loopholes could become extinct because of AI.

We aren’t at extinction yet, and there are undoubtedly zillions of hidden loopholes waiting to be found. I am reminded of the line by NBA All-Star Kyle Lowry: “When I see a play one time, I’ve got it. When I see it twice, I master it. When I see it three times, I know where the loopholes are.” The good news is that you don’t need to look three times. Just use AI, and you’ll find loopholes in one fell swoop.