Shariah’s Black Box

SCF is first and foremost a modality to structure modern secular financial activity in a way to comply with Shariah. While legal practitioners, for the reasons discussed above, are inclined to leave well enough alone and allow the Shariah scholars and authorities sole access to this black box, professional and fiduciary duties and responsibilities do not permit such a hands-off approach. The lawyer has an absolute duty to his client to warn of civil and criminal liability exposure when such exposure exists. This is true even when the client is not inclined to ask any questions beyond, “How do we get this deal done?”[115] Competent legal counsel understands that when the client’s competitors are rushing to cash-in on the newest fad in the international financial markets with literally trillions of dollars flowing out of the ground and looking for an investment to land on, prudence tends to take a back seat to following the herd. As noted earlier, very high-priced lawyers and accountants with sterling reputations have on more that one occasion in recent history failed to brake the blind enthusiasm and excesses of their clients as they rushed head-long into exotic and innovative transactions. The criminal failure in these debacles has been the fact that without the professional facilitators’ own version of blind enthusiasm – a willful acceptance of their clients’ blind enthusiasm — and with just a modicum of prudent and analytical scrutiny, theU.S. financial and legal systems would not have suffered as they have.

So it is with SCF. If the Shariah in SCF actually means something, the lawyer representing a U.S. financial institution desiring to enter this new arena needs to find out what that something is. This inquiry can be termed an analysis of the endogenous elements or aspects of Shariah.[116] To understand the risks and exposure for a financial institution contemplating SCF, the lawyer first must understand what Shariah itself says it is – that is, what the Shariah authorities understand it to be, without reference to how SCF attempts to navigate the demands of modern finance. While this inquiry will only be relevant to part of the analysis of the client’s potential exposure, it will most certainly be relevant to many fundamental issues of SCF. Moreover, to the extent that Shariah compliance is determined by Shariah authorities, presumably there is something in the institution of Shariah itself that will inform the lawyer about who qualifies for such a role and how. Finally, to the extent that Shariah is in fact what its proponents say it is – a way of life combining authoritative Islamic legal, moral, theological, and normative social constructs – the attorney will likely have a responsibility to be certain that his client has conducted the necessary due diligence to be certain that these structures are not in and of themselves violations of U.S. law.

Some preliminary questions would be: What is the purpose of Shariah? Is there a Shariah with a purpose or are there many? If there are many, how are they distinguished and how are they similar so that they are all called Shariah? Who determines what Shariah is? Who determines what is permitted and what is forbidden in Shariah at any time? Is Shariah finance or economics a separate and distinct discipline within Shariah? Does Shariah recognize a SCF transaction even if it is utilized to undermine or destroy Shariah? Does Shariah include theological purposes? Does it incorporate the purposes or designs of any one political system over another? The answers to these and many questions like them must be part of a knowledge base available to the lawyer as he begins his analysis of specific legal duties in the context ofU.S. law.

As discussed above, SCF is a term of art used to describe the contemporary Islamic legal, normative, and communal response to the demands of modern day finance and commerce. As such, the rules and norms of Shariah are being forced to attend to the demands of a Muslim demographic which desires to exploit the opportunities available in Western financial and legal structures yet at the same time to remain faithful to a system which rejects as unlawful and evil much of the Western financial premises about political economies and structures. To achieve this seemingly impossible goal, Shariah authorities have developed a whole range of transactional structures and legal-definitional parameters to guide them in their ultimate determination whether a given transaction or investment is permitted or prohibited.

In this part of the analysis, the lawyer should begin to address the features of SCF which might raise liability exposure issues that are not inherent to Shariah principles but are adaptations of Shariah principles to fit Western financial structures and institutions. An example of a transactional structure to deal with this collision between a Shariah world and a Western one built on the time-value of money in the form of interest is the sale-lease back agreement.[117] While sale-lease back agreements are not unique to SCF and in fact are a popular vehicle in contemporary finance, in the two contexts they are not identical in structure and worlds apart in their purposes.[118] An example of the legal-definitional parameters set out by Shariah authorities to deal with the doctrinal conflicts between the two systems would be the ruling that while interest income is absolutely forbidden in Shariah, it is not forbidden to invest in a company that earns less than X%[119] from interest income which is not a core business of the company (i.e., interest earned on liquid assets or accounts receivables).

In addition to the exogenous structural and definitional efforts to fit Shariah into modern finance, another example would be the make up and structure of a Shariah advisory board and how it plays some authoritative role in the financial institution with which it is associated. Thus, while Shariah authorities have been an endogenous element within Shariah for over a millennium, private Shariah advisory boards sitting together in the capacity of something akin to an independent audit committee within the structure of a financial institution is an innovation to respond to a financial landscape understood to be exogenous to Shariah.[120] Thus, for example, the lawyer might try to understand what kind of organization Shariah requires for a Shariah advisory board and are there implications for the client or for the Shariah advisory board itself relating to the very real possibility of competing loyalties.