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Julie DiMauro
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Thomas Fox
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Marc Alain Bohn
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Bill Waite
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Shruti J. Shah
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Russell A. Stamets
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Richard Bistrong
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Eric Carlson
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An urgent (and practical) compliance reminder from the crypto crash

One of the astounding facts to emerge from the crypto crash — aside from $200 billion in losses during one 24-hour period last week and overall losses of more than $1 trillion so far — is that before the crash, investors had more than 15,000 cryptocurrencies to pick from.

Because most of those 15,000 cryptocurrencies appeared recently, as did most crypto investors, nobody could have understood how it all worked or the real risks for anyone who decided to invest.

Probably some investors knew they had gaps in their knowledge and invested (speculated) anyway. But how many investors didn’t know they had gaps in their knowledge until their crypto assets evaporated into thin air?

Contrast those investors with Warren Buffett. He knows there are things he doesn’t know and acts accordingly. Four years ago, he explained why he’d never be a crypto investor: “I get into enough trouble with the things I think I know something about,” he said. “Why in the world should I take a long or short position in something I don’t know about?”

It’s a myth that business leaders (or compliance professionals) must always be decisive. As Buffett’s career has shown, more important than making quick decisions is knowing what you don’t know.

Like Buffett, a CEO I worked with understood the danger from things he didn’t know. His company developed big petrochemical projects in Southeast Asia. He’d negotiate with multiple bidders simultaneously and stretch negotiations out for months and sometimes years. He used negotiations not to argue about price but to learn what he didn’t know.

Only after he was satisfied that he’d plugged enough of his previously unknown knowledge gaps would he sign a project contract. The grueling process worked — there were no big surprises. What’s more, most of the contractors, even those who didn’t win work, were generally pleased because they also learned new things they could use next time.

Compliance professionals know a lot. They learn things from whistleblower complaints, employee confessions, and piles of data analytics. But what should trouble (and motivate) them is what they don’t know. That’s where big disasters lie hidden.

Former U.S. Secretary of Defense Donald Rumsfeld explained (with my emphasis) the dangers of what he called “unknown unknowns” during a Q&A about Iraq and weapons of mass destruction:

Reports that say that something hasn’t happened are always interesting to me, because as we know, there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns—the ones we don’t know we don’t know. And if one looks throughout the history of our country and other free countries, it is the latter category that tends to be the difficult ones.

Years ago, Art Markman, a professor of psychology and marketing at the University of Texas, said most of us assume we know more than we do.

“Don’t believe me?”Markman said. “Find an object you use daily (a zipper, a toilet, a stereo speaker) and try to describe the particulars of how it works. You’re likely to discover unexpected gaps in your knowledge. In psychology, we call this cognitive barrier the illusion of explanatory depth. It means you think you fully understand something that you actually don’t.”

Prof Markman said it’s the same in business. People use buzzwords without understanding them. His example was the phrase “streamlining business practices” which, it turned out, lots of people talked about but few could define.

In the same way, buzzwords can disguise compliance issues. Does “synergy” mean the joint venture partner can do things an issuer can’t? What things? Illegal things? What do sales staff mean when they talk about “growth hacking?” Is it just marketing or something more? What about “quick wins,” “moving the needle,” and “low-hanging fruit?”

Does everyone have a common understanding of those buzzwords, or could there be confusion and misunderstanding just below the surface that might result in a compliance problem?

If most of us don’t know how a zipper works (I don’t), imagine how many knowledge gaps we have when it comes to complex business arrangements. There are distant markets, new customers, suppliers, and agents, and the mystery of unfamiliar languages, laws, and local practices.

If we could count all the unknown unknowns in a single new business initiative, which we can’t, uncertainty would overwhelm us.

What’s the fix? Ask a question, then another, and maybe two or three more. Not to obstruct business but to plug the knowledge gaps. Do we need an agent for this job? Why are we making a charitable contribution now? Whose idea is it to fund a college scholarship, and why haven’t we done it before?

For compliance professionals, asking questions is the only way to turn unknown unknowns into known unknowns, or better yet, into known knowns.

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