A second form of this problem arises when some of the gross income of a business is from Shariah prohibited sources. This can occur in several ways but typically in two: The first is via what one might term the exceptional event when the Shariah “filter” misses some tainted source of income altogether. This might happen when a Shariah-compliant company in a Shariah-compliant mutual fund acquires a forbidden company, the main business of which is in a forbidden industry such as finance or hog farming. Assuming the acquired company’s forbidden assets are not de minimus, this renders the parent company in the mutual fund’s portfolio Shariah-prohibited and the equity position in that company must be sold. The proceeds of that sale will include a certain amount of profits attributed to the forbidden assets. That amount must be calculated and “purified”.
The second occasion for purification is more typical. For example, a mutual fund is permitted to invest routinely in companies which earn up to a fixed percentage of their income from interest. Notwithstanding this leniency, any profits to the mutual fund attributed from this forbidden income must be “purified” at some point.
Because the calculation of this purification can be complex, most Shariah authorities either insist or prefer that the purification take place by the SCF institution so the Shariah authorities will have the opportunity to properly assess the amount needed to be purified and supervise the logistics.
As in the charitable contribution discussion, this purification process is typically not fully disclosed in public filings of U.S. SCF financial institutions. The questions raised above about disclosure for the general charitable tax apply here mutatis mutandis. But since most Shariah authorities have ruled that it is more appropriate to have the purification process carried out by the SCF company rather than at the individual investor level, one might reasonably assume that this is the general rule.
In both instances, the legal advisor to the SCF financial institution or business must be very careful about how these charitable contributions are made and who the beneficiaries of these funds are. Given the history of Islamic charities funneling contributions to terrorist organizations directly and indirectly through other charitable organizations in a laundering process, the anti-money laundering laws must be analyzed carefully by the attorney to be certain that the financial institution is not facilitating a criminal violation and that there is strict compliance with all reporting requirements.
The principal anti-money laundering statutes are Title 18, Sections 1956 and 1957. As indicated above, the focus of these statutes is on criminalizing the movement of funds from unlawful activity. As such, it has a limited application to the issue of charitable contributions directed by Shariah authorities related to a given SCF financial institution. The legal advisor, however, must take the following into consideration in proffering his advice. Section 1956(a)(2) criminalizes the following:
(2) Whoever transports, transmits, or transfers, or attempts to transport, transmit, or transfer a monetary instrument or funds from a place in the United Statesto or through a place outside the United Statesor to a place in theUnited Statesfrom or through a place outside the United States—
(A) with the intent to promote the carrying on of specified unlawful activity; . . ..
Two issues stand out. One, a purely domestic transfer of legal funds with the requisite criminal intent is not a per se violation. Arguably, if a domestic transfer took place but with the understanding that the funds would at least in part find their way overseas as part of the criminal intent, such a transfer would, it seems, be prohibited. Thus, aU.S.financial institution might very well run afoul of this provision when it “purifies” its forbidden assets by transferring funds to a terrorist-supporting charity overseas or possibly even to a domestic charity as a conduit to problematic overseas groups.