Given the panoply of civil liability and criminal exposure issues analyzed at various levels in this memorandum, and given the preliminary nature of any such effort of first impression, legal minds will most certainly approach the specifics of any fact pattern cautiously and differently. But what should be viewed in a clearer light as a result of this analysis is that any U.S. company or its legal counsel which cavalierly assumes the black box of Shariah and the many exogenous issues surrounding it are not serious legal matters will likely discover at some point down the road that willful blindness only postpones problems; it never eliminates them. And, as most good lawyers know, postponing problems is a sure way to exacerbate them.
From the brief examination of some of the issues as they relate to the case studies, the lesson learned is that — much like the sub-prime meltdown, where financial institutions had placed credit risks and ballooning values into a black box of securitizations, out of sight and out of mind, all with the approval of their legal and accounting professionals — the SCF industry is the latest rage engaging in the same subterfuge. But, instead of bad credit risks and overvaluations, the industry is flirting with a black box the contents of which include a legal doctrine bent on the destruction of the very civilization which has created modern debt-driven finance. While the sub-prime disaster – which followed on the heels of the accounting and fraud scandals of the Enron era, which in turn followed the savings and loan debacle of the last century – should have warned bankers and their facilitators away from black boxes and a lack of transparency, this lesson seems to have been lost on even the most prudent of these professionals.
In fact, the next level of fraud has already been hatched. If, for example, an investor would visit the Internet site of Azzad Asset Management (“Assad”), the investor would find a host of funds marketed around “ethical investing”. With but one or two clicks of the mouse, the investor finds that “ethical investing” includes the application of an “ethical screen” that looks exactly like the DJII screen: the same vice industries are excluded and the same financial ratios (with one minor exception) are used to avoid interest. Nowhere in the marketing material or in the SEC filings for the Azzad funds is the word Islam or Shariah even mentioned.
Assuming the Azzad screens did not correlate with the requirements of Shariah coincidentally, the questions are: Why would Azzad fail to disclose its adherence to Shariah? Did they rely on Shariah authorities to develop their screens? Are there no reputational or financial risks specifically associated with the fact that the Azzad funds adhere to Shariah rules and principles that ought to have been disclosed? Here one sees the Shariah black box repackaged almost entirely into an “ethical” vehicle, presumably as a way to entice non-Muslims to invest in accord with Shariah, or to avoid appropriate scrutiny. Disclosure laws in the financial industry simply do not countenance such deception.
A final note for what might be considered the “nuclear exposure” of the SCF industry. As described above, the leading two dozen Shariah authorities who occupy all of the important positions in the SCF industry effectively establish all its rules and regulations. If, in fact, these men have as their ultimate and collective goal the implementation of a Shariah-based Caliphate in the U.S. and elsewhere in the non-Muslim world and their methodologies include the Law of Jihad, meaning violence when necessary or possible and otherwise fraud and misrepresentations about the true purpose of Shariah, the prima facie case for a massive lawsuit under the Racketeer-Influenced and Corrupt Organizations Act (“RICO”) is almost unavoidable. This is especially true now that the Patriot Act has added the federal terror-related crimes to the RICO predicate offenses and beefed up the predicate offenses relating to money laundering. It does not require more than a cursory examination of the elements of a viable RICO prosecution to recognize the enormous exposure.
RICO is violated when a defendant, or in this case a cadre of defendants acting as Shariah authorities, engage in a “pattern of racketeering activity” and by having:
(1) Invested income from a pattern of racketeering activity in an “enterprise”;
(2) Acquired or maintained an interest in an “enterprise” through a pattern of racketeering activity;
(3) Conducted or participated in the affairs of an “enterprise” through a pattern of racketeering activity; or
(4) Conspire to do any of the above.
The “pattern of racketeering activity” means two or more of the predicate offenses within a ten-year period. The predicate offenses include mail and wire fraud, material support of terrorism, and money laundering. The “enterprise”, which is an entity, person, or group of entities or persons associated in some de jure way (e.g., partnership) or as a de facto association, exists separately from the defendants. In this scheme, the enterprise is the U.S. financial institution involved in SCF. As has been established in the foregoing pages, to the extent that a U.S. financial institution has criminal culpability for the predicate offenses, that particular institution would join the list of defendants and operate as part of the enterprise. The evidence of the RICO crime then would include the fraud and ulterior motives of the Shariah authorities and how they have manipulated the enterprise to achieve their criminal ends. If such an indictment were handed down, it could lead to a pretrial asset freeze and a post-conviction massive forfeiture of the criminal enterprise’s assets.
The question for the U.S. financial industry and the legal profession which is charged with watching over its every move as a fiduciary is whether U.S. financiers will take the black box to the bank or send it back from whence it came.
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- NYT Searches for the Leader of the Anti-Shariah Movement, Finds Me Instead - August 11, 2011
- Criticism of the Oklahoma Amendment banning Shariah from State Courts: Legitimate or ill-considered? - November 29, 2010