Shariah’s Black Box

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[1] The distinction made throughout between a SCF “investment” and “transaction” is intended and important in this context. SCF expresses itself in fundamentally two ways: (a) “the investment” refers to the kind of investment or business Shariah is understood to permit (i.e., equity versus debt with interest; asset-based versus intangibles such as derivatives or hedging transactions based upon future contingencies; and commerce in permitted versus prohibited industries) and (b) “the transaction” refers to the way in which a permitted investment or business transaction is structured typically through the use of nominate contracts (i.e., an “interest-free” loan may be structured as a cost-plus sale or sale/lease back). See infra notes 4-5.

[2] This memorandum uses the term “facilitator” (or in some cases “professional facilitator”) to mean the range of legal, accounting, and financial advisor professionals who are intimately involved in the promotion and structuring of SCF investments and transactions. An example of this burgeoning cottage industry can be gleaned by looking at the promotional material for the myriad of professional and business conferences dedicated to SCF. See, e.g., Upcoming Event, Arab Bankers Ass’n of N. Am., available at https://www.arabbankers.org/shared/layouts/section.jsp?_event=view&_id=120130_U127360__132301 (last visited Jan. 24, 2008).

[3] See, e.g., Islamic Finance: The Regulatory Challenge (Simon Archer & Rifaat Ahmed Abdel Karim eds., 2007); Ayman H Abdel-Khaleq, Offering Islamic funds in the US and Europe, International Financial Law Review, available at https://www.iflr.com/?Page=17&ISS=16434&SID=515350 (last visited Jan. 24, 2008).

[4] See, e.g., The Politics of Islamic Finance (Clement M. Henry & Rodney Wilson eds., 2004); see also Ibrahim Warde, Islamic Finance in the Global Economy (2000).

[5] Michael J.T. McMillen, Symposium: Islamic Business and Commercial Law: Contractual Enforceability Issues: Sukuk and Capital Markets Development, 7 Chi. J. Int’l L. 427 (2007).

[6] See, e.g., The Politics of Islamic Finance, supra note 4; Jane Pollard & Michael Samers, Islamic Banking And Finance: Postcolonial Political Economy And The Decentring Of Economic Geography, 32 Transactions of the Institute of British Geographers 313 (2007), available at https://www.blackwell-synergy.com/doi/pdf/10.1111/j.1475-5661.2007.00255.x?cookieSet=1 (last visited Jan. 24, 2008).

[7] This memorandum does not address in any meaningful way SCF insurance. This is due in large part to the complex nature of the business of insurance and its regulation and the relatively untested models for Shariah compliant insurance schemes from within the SCF industry itself.

[8] The post-Enron “Sarbanes-Oxley” world is the recent result of this failure. See, e.g., Harvey J. Goldschmid, Comm’r, Sec. & Exch. Comm’n, Post-Enron America: An SEC Perspective, Address at the Third Annual A.A. Sommer, Jr. Corporate Securities & Financial Law Lecture (Dec. 2, 2002), available at https://www.sec.gov/news/speech/spch120202hjg.htm (last visited Jan. 24, 2008).

[9] Beyond the Enron-era, the financial world is in the midst of the “sub-prime mortgage securitization” industry meltdown, see, e.g., Ben S. Bernanke, Chairman, Fed. Reserve, The Recent Financial Turmoil and its Economic and Policy Consequences, Address at the Economic Club of New York (Oct. 15, 2007), available at https://www.federalreserve.gov/newsevents/speech/bernanke20071015a.htm (last visited Jan. 24, 2008), which is already being compared to the debacle of the Savings & Loan crisis, see, e.g., Amy Waldman, Move Over, Charles Keating – Causes Of The Savings And Loan Scandal, Washington Monthly, May 1995, available at https://findarticles.com/p/articles/mi_m1316/is_n5_v27/ai_16947718 (last visited Jan. 24, 2008).

[10] While it is not the purpose of this memorandum to detail the legal risks for the professional facilitators, there is substantial legal exposure for the legal, accounting, and financial professionals who provide the knowledge and expertise to develop the financial and legal instrumentalities of SCF. While “scheme liability” under a Rule 10b-5 private right of action has been put to rest by Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 128 S. Ct. 761 (2008), to the extent that the lawyers get involved in drafting the “representations”, liability will still apply.  See Louis Loss & Joel Seligman, Fundamentals of Securities Regulation 1329-1332 (2004) (for a discussion on “primary liability” for lawyers under Rule 10b-5); id. at 1465-1469 (for a discussion of the “duty to report evidence of a material violation” under Part 205 to Title 17 of the Code of Federal Regulations promulgated by the SEC pursuant to Section 307 of the Sarbanes-Oxley Act of 2002).

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