It is remarkable how much we rely on trust to navigate our world. We trust that the person driving the bus is capable and licensed to drive, that the waiter taking our credit card does not use it later to pay for a new Xbox, that the men and women entrusted with our children at school will not only keep them safe and out of trouble but also shape them into flourishing human beings. When this trust is broken, it leaves us questioning the universe.

Tragically, predators take advantage of trust to swindle their marks out of their hard-earned gains. Last week, several Ukrainian officials were fired or resigned on account of suspected corruption. Acting minister for regional development Vasyl Lozynsky has been accused of accepting $400,000 in bribes, while another was criticized for spending more than double market price for food in supplying Ukraine’s troops. Ukraine has a history of corruption, despite recent efforts to combat graft; the nation was ranked as the second-most-corrupt in Europe, beating only Russia. These developments have hindered the Ukrainian war effort by eroding trust with both the Ukrainian people (who have donated a significant amount of personal funds to their war effort) and the international community.

In this sense, Ukraine serves as the latest in a long line of cautionary tales stretching back to the beginning of history. Whether through incompetence or malice, bad actors always abuse systems of trust.

But how do we prevent this? If it is human nature to trust, must we tear down the virtue of honesty for our security? Thankfully, the answer is no – but we must be wise about how we trust.

While there is much to say about trust in personal relationships, I want to focus this article on professional trust, as the rules are simpler. There are several lessons we must take from the scandals of recent years. The first of these comes from the collapse of the German payments company Wirecard in 2020. A recent article from the Financial Times notes that the auditing firm Ernst & Young was on the verge of discovering Wirecard’s fraudulent account in 2016 when the account trustee disclosed that they held no money for Wirecard despite the company’s balance sheet listing a 150M euro balance. Four years later, that balance was listed at 1.9B euros before Wirecard disclosed that it did not exist, causing the company to collapse and landing its CEO under arrest for market manipulation and fraud.

All of this makes me wonder – how did one of the most trusted accounting firms in the world miss a 150M hole in Wirecard’s finances after being told by the trustee that it did not exist? This demonstrates the need for our first lesson – “trust but verify.” In this situation, Wirecard frantically backtracked by inventing a new category of cash to explain its trustee’s statement (a classic example of what people in my generation call “gaslighting”). If Ernst & Young had requested statements directly from the bank instead of relying only on the trustee’s word, they would have quickly discovered the truth of Wirecard’s fraud. When it comes to business relationships, it is important to verify statements through appropriate channels to ensure that a potential contact is capable of backing up their claims.

The second lesson comes from the collapse of FTX, the cryptocurrency exchange created by Sam Bankman-Fried. Early last November, cryptocurrency reporter CoinDesk uncovered that most of FTX’s sister company Alameda Research’s assets were held in FTX’s proprietary cryptocurrency FTT (for context, think of this like Chuck-E-Cheese listing $5B worth of its tokens as assets). After rival exchange Binance sold all of its holdings of FTT, FTX experienced a liquidity crisis as customers rushed to withdraw their funds. Binance offered to bail out FTX, only to rescind the offer a day later, citing concerns of mishandling customer funds. Bankman-Fried was arrested and charged with fraud. John Ray III, who headed the effort to recover assets from Enron and is now doing the same for FTX, stated that “[FTX] was old-fashioned embezzlement,” as customers’ deposits were suspected to have been used for speculation and personal expenses. This demonstrates the second lesson: controls are necessary to restrain human misbehavior. Much fraudulent activity is enabled by a lack of restraint and accountability when we give too much leeway to someone who has not demonstrated the ability to handle it responsibly.

The third lesson comes from the medical startup Theranos. In 2003, a young biotech entrepreneur in a black turtleneck developed a wearable patch to monitor blood and administer drugs. That woman was Elizabeth Holmes, and she would go on to raise $700M to begin Theranos, claiming the company could run a large array of tests on a single drop of blood. After failing to deliver on a contract for Walgreens, investigators eventually discovered that the company’s lab-on-a-chip devices were nowhere near the level touted by the company. In fact, Theranos was using traditional lab equipment to produce its results. The company would later dissolve; Holmes was convicted of fraud in 2022. The third lesson is therefore, “if it sounds too good to be true, it probably is.” Many Silicon Valley startups have fallen prey to the allure of success; with billions of dollars of venture capital chasing the next Steve Jobs, there are strong incentives to over-promise, even among otherwise scrupulous entrepreneurs. Having realistic expectations is essential to insulating against the temptation to over-hype results.

All of these factors are essential to “due diligence,” the process of ensuring a potential business relationship is justified by the facts on the ground. The issue plaguing firms from Ernst & Young down to venture capital is the “diligence” part – verifying partnerships is hard work, and it is easy to take shortcuts. Unfortunately, these shortcuts enable ineptitude to go undetected and fraud to beguile investors. We must be vigilant in our trust.