The purpose of this memorandum is to examine Shariah-compliant finance (“SCF”) in light of existing U.S. law. The result of this examination will be to highlight and to examine areas of civil liability and criminal exposure unique to SCF investments and transactions in the U.S. as they have been developed and utilized by various financial institutions and facilitated and promoted by legal, accounting, and financial professionals.
This analysis is a first of its kind in the published literature. To date, there has been no focused effort to identify and analyze the implications for civil liability and criminal exposure for U.S.financial institutions and other businesses engaged in any of the various manifestations of SCF from a legal and regulatory framework. While some of the SCF professional and scholarly writings published conventionally in professional journals and books and increasingly on the Internet address broad regulatory concerns, economic risks, and transactional and market-related hurdles, scant attention has been paid to the specific civil and criminal liability implications of SCF. Necessarily, this is an introductory and preliminary effort. Each specific area identified in this memorandum, and quite likely many others, require and deserve a detailed treatment by academics and legal professionals, including government attorneys involved in financial regulation and compliance, policy specialists, and most importantly practitioners advising their clients on the advisability and the logistics of SCF.
All too often the legal or accounting professional acting as a facilitator, driven by complex legal- or accounting-intensive tasks and further motivated by exorbitant professional fees and the desire to develop a specialized expertise for yet future marketing of services, loses sight of the fundamental threshold issues for any new and novel market transaction: Does the transaction or business model comply with existing civil and criminal statutory and regulatory frameworks? Does the transaction expose the client to unique and elevated civil liability and criminal exposure or regulatory intervention?
Unfortunately, the history of the legal and accounting professions in properly guiding clients involved in finance-intensive industries through the legal hazards of complex and novel transactions has not been good. In just the past three decades, problematic transactions were structured and manipulated by financial institutions and finance-driven businesses and facilitated almost unimaginably by their attorneys, accountants and financial advisors. The lesson professionals should have learned — but appear not to have, given what can only be described as the blind exuberance driving SCF — is that huge profits and explosive growth, massive public relations and marketing efforts, and popular appeal in the financial industry does not establish even a minimal baseline for legal compliance.
Whether a new financial product or an innovative structure for an existing business is compliant with the civil, criminal, and regulatory frameworks imposed on a lightning fast and fully reticulated finance-driven economy is no longer a question for a single professional. Careful analysis and due diligence across several disciplines conducted in a fully-informed, interactive environment is not a luxury of the prudent but a necessity for all but the reckless.
The watchword ought to be: Transparency. Any new financing technique or fad driven by huge profits or enormous liquidity without absolute transparency should automatically raise red flags for the financial institutions exploiting them and the professional facilitators structuring them.
SCF exposes the financial institutions and other businesses which attempt to exploit this new industry to a whole host of disclosure, due diligence, and compliance issues, all of which elevate substantially the civil liability and criminal exposure such companies otherwise factor into their business risk profiles. What is clear from this preliminary legal analysis of what might be called the SCF industry is that very little of this increased civil and criminal exposure has been recognized, analyzed, or guarded against in any meaningful way.
The salient points of this analysis are:
- The Shariah black box syndrome: U.S. financial institutions and businesses involved in SCF risk grave consequences by willfully ignoring the endogenous elements of Shariah. Ignoring what Shariahis — both in theory and in practice — and its intimate connection to Islamic terror and holy war against the non-Muslim world amounts to corporate recklessness.
- Putting Shariah in a black box and treating its prohibitions as if they were benign secular and objective “screens” ignores the duty of disclosure of the most important elements of Shariah: its purposes and its ultimate methods.
- Undoubtedly, a reasonable post-9/11 investor contemplating an SCF investment would consider (a) the goal of establishing Shariah as the law of the land and (b) the promulgation of the Law of Jihad to establish this goal material to the investment decision.
- To the extent that U.S. Shariah authorities or foreign Shariah authorities retained by U.S. businesses advocate the implementation of historical and traditional Shariah, they risk being charged with a violation of 18 U.S.C. § 2385.
- U.S.financial institutions and businesses have a duty to conduct reasonable due diligence investigations to be certain that their respective Shariah authorities are neither advocating crimes in the name of Shariah nor promoting the material support of terror, either through legal rulings or through the funneling of “purification” funds to terrorists. Failure to conduct such due diligence might very well lead to civil liability, if not criminal exposure.
- The Shariah black box is yet another financial fad like the sub-prime market where transparency is shrouded in opacity in the mad rush to market-share and quick profits. U.S. mutual funds are poised to embrace SCF without a word about the risks associated specifically with Shariah. U.S. banks are cavalierly promoting Shariah-compliant loans as “interest-free” when in fact they are merely repackaged loans at standard interest rates. This violates any number of consumer protection statutes. Financial institutions are underwriting Shariah-compliant loans and bond issuances without really understanding the risks associated with default and bankruptcy treatment.
- Insofar as U.S. financial institutions participate in and cooperate with the Shariah authorities’ efforts to establish the rules and regulations for the SCF industry, antitrust issues such as rules collusion are likely to present yet additional issues of exposure for those embracing this new industry.
- The current structure of the SCF industry in which two dozen of the most influential Shariah authorities control the way funds go in and out of the largest financial enterprises in the world creates the paradigmatic pattern of predicate racketeering activity any aggressive prosecutor or plaintiff’s lawyer looks for in a RICO cause of action.
The failure by corporate management and their legal advisors to confront these issues in any serious fashion is not surprising given the wholesale failure of the participants and facilitators in this industry to have undertaken a serious analysis of these risks. The extant legal academic and professional literature reads more like promotional material and not serious legal analysis conducted by men and women trained to protect clients from their own blind enthusiasm. The legal industry has gone down this road too many times in the past. The difference this time is that the risk is not simply financial; it is potentially existential.