C. The legal analysis: overview
The legal practitioner’s job is typically not theoretical; it is fact-based. The lawyer’s work by its nature is to take a specific set of facts and to apply the law. At some early point in the analysis, the practitioner would be confronted by the client’s desire to engage in some form of SCF. First, the lawyer would attempt to understand all of the factual elements of the business, transaction, or investment. Part of the early discussions would include the following questions: what is the client trying to achieve; how does the client wish to achieve these goals; what does the client expect if these goals are not met; who are the players; how are they involved; what decisions need to be made by the various parties; and how are the decisions implemented?
With the facts of the investment or transaction understood, the transactional lawyer must then map out not merely the transactional documents, but also the legal and regulatory issues to be dealt with to achieve the desired end. Thus, in a typical analysis, the lawyer is focused on a fact-specific transaction and would analyze each and every duty or obligation imposed by law and determine what must be done to comply and what must be avoided so as not to breach some duty imposed by statute, regulation, common law, or the contractual obligations underlying the transaction itself.
For purposes of the analysis, rather than examine any particular fact situation, and to avoid an overbroad, far-ranging analysis of the plethora of compliance issues relative to the various SCF investments and transactions, this analysis will begin instead with those specific duties and obligations that might give rise to civil and criminal liability exposure implicated in SCF. The analysis will attempt to track the endogenous-exogenous taxonomy described above. The particular duties examined are certainly not exhaustive but have been chosen because they appear to give rise to the greatest areas of civil liability and criminal exposure. Furthermore, this analysis will limit the examination of the various kinds of businesses and transactions incorporating SCF to those used most prominently in theU.S.market today.
The nubile SCF market migrated from the GCC states via Londonlooking for additional legitimation in the dynamic U.S.financial markets. As much as Londonseeks to be the SCF capital of the Western world, New York is still the “go-to place” for capital markets. The SCF industry has already taken hold in the imagination of many, but certainly not all of the leading U.S. financial institutions, yet it is permeating into wider and deeper audiences in the industry. To date, U.S. financial institutions are engaged in Shariah-compliant stock indexes, publicly traded mutual funds, hedge funds or the so-called “fund of funds” market for sophisticated fund managers and well-heeled clients, sovereign wealth and private corporate bond issuances, consumer and commercial bank loans such as home mortgages — including participation by Fannie Mae and Freddie Mac, car loans, residential and commercial real estate financing, and even some construction financing. The analysis which follows will focus on the most common SCF products utilized in the U.S. today. The specifics of the SCF product will be discussed in greater detail within the analysis.
The legal analysis of the SCF products to follow will examine civil and criminal liability issues relating specifically to the duty to disclose, due diligence, and other compliance issues raised by specific statutes. The examination will not be exhaustive nor will it focus on the myriad of regulatory compliance issues where there is no manifest issue of civil or criminal liability exposure. Specifically, in the disclosure discussion, the analysis focuses on exposure to claims of securities fraud and various statutory and common law regimens to protect against consumer fraud. The analysis of the requirements to conduct due diligence and to meet other compliance mandates will focus primarily on the anti-terrorism statutes, which implicate the anti-money laundering statutes and the anti-racketeering statutes as amended by the USA Patriot Act (“the Patriot Act”). Finally, the other compliance issues will discuss antitrust issues and exposure to tort claims for aiding and abetting terrorism and the violation of internationally recognized norms of the law of nations.