Data Obfuscation Through Latent Space Projection for Privacy-Preserving AI Governance: Case Studies in Medical Diagnosis and Finance Fraud Detection

Background: The increasing integration of artificial intelligence (AI) systems into critical societal sectors has created an urgent demand for robust privacy-preserving methods. Traditional approaches such as differential privacy and homomorphic encryption often struggle to maintain an effective balance between protecting sensitive information and preserving data utility for AI applications. This challenge has become particularly acute as organizations must comply with evolving AI governance frameworks while maintaining the effectiveness of their AI systems. Objective: This paper aims to introduce and validate data obfuscation through latent space projection (LSP), a novel privacy-preserving technique designed to enhance AI governance and ensure responsible AI compliance. The primary goal is to develop a method that can effectively protect sensitive data while maintaining essential features necessary for AI model training and inference, thereby addressing the limitations of existing privacy-preserving approaches. Methods: We developed LSP using a combination of advanced machine learning techniques, specifically leveraging autoencoder architectures and adversarial training. The method projects sensitive data into a lower-dimensional latent space, where it separates sensitive from nonsensitive information. This separation enables precise control over privacy-utility trade-offs. We validated LSP through comprehensive experiments on benchmark datasets and implemented 2 real-world case studies: a health care application focusing on cancer diagnosis and a financial services application analyzing fraud detection. Results: LSP demonstrated superior performance across multiple evaluation metrics. In image classification tasks, the method achieved 98.7% accuracy while maintaining strong privacy protection, providing 97.3% effectiveness against sensitive attribute inference attacks. This performance significantly exceeded that of traditional anonymization and privacy-preserving methods. The real-world case studies further validated LSP's effectiveness, showing robust performance in both health care and financial applications. Additionally, LSP demonstrated strong alignment with global AI governance frameworks, including the General Data Protection Regulation, the California Consumer Privacy Act, and the Health Insurance Portability and Accountability Act. Conclusions: LSP represents a significant advancement in privacy-preserving AI, offering a promising approach to developing AI systems that respect individual privacy while delivering valuable insights. By embedding privacy protection directly within the machine learning pipeline, LSP contributes to key principles of fairness, transparency, and accountability. Future research directions include developing theoretical privacy guarantees, exploring integration with federated learning systems, and enhancing latent space interpretability. These developments position LSP as a crucial tool for advancing ethical AI practices and ensuring responsible technology deployment in privacy-sensitive domains.

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