Shariah’s Black Box

[81] The lawyers’ imputed knowledge is “rudimentary” because very few of the lawyers acting as facilitators in the SCF industry fully understand or acknowledge what Shariah is beyond thinking of it as just another “value-based screen.”

[82] For the Dow Jones Islamic Market Index Portfolio’s Registration Statement filed pursuant to the Investment Company Act of 1940, Part B, Item 12, see Dow Jones Islamic Market Index Portfolio, Registration Statement (Form N-1A), available at https://www.sec.gov/Archives/edgar/data/1088654/0000935489-99-000014.txt (last visited Jan. 25, 2008). In addition, in Part A of the of the registration statement, there are warranty disclaimers relative to the DJII, the most important of which is:

Although Dow Jones uses reasonable efforts to comply with its guidelines regarding the selection of components in the Dow Jones Islamic Market Index, Dow Jones disclaims any warranty of compliance with Shariah law or other Islamic principles . . . 

While this might insulate Dow Jones from a claim of breach of warranty, it does not address the failure to disclose material risks relative to the very real problem of competing Shariah authorities.

[83] This example is not academic. One of the leading Shariah authorities on SCF has recently shaken the Shariah-compliant bond industry by stating that he does not believe the current structures approved by most Shariah advisory boards are in fact Shariah-compliant. See Sebastian Abbot, Muslims Debate Bonds, Morning Call, (Jan. 12, 2008), available at https://www.mcall.com/business/local/all-islamicbonds.6224369jan12,0,6766410.story (last visited Jan. 25, 2008).

[84] The exposure for this now defunct fund in such a lawsuit would arguably be “relatively high” due, in large part, to the failure of the registration statement to detail the fact that Shariah by its own terms rejects the notion that a given Shariah expert or legal authority, or even a single Shariah advisory board, can rule definitively on what is or is not proper compliance with a Shariah principle. Even an individual ruling soundly rooted in consensus among other scholars might be challenged on the grounds that it violates a particular canonical precept.  See, e.g., Vogel & Hayes, supra note 18, at 32-34. This fact and the likelihood of such disputes arising among Shariah authorities given the current Shariah landscape, which already shows a fair amount of discordance based, in large part, along geographical contours, suggests that the fund managers had a duty to investigate these rather material facts and to disclose them to their investors. See generally id. at 28-52. For a series of good articles on SCF as it appears in different geographical locations and the role of geo-political factors in its development, see The Politics of Islamic Finance, supra note 4.

[85] The following represent just a few of the queries one might expect to be addressed, all of which force the issue of what does the Shariah in Shariah compliant finance really mean: Is a company dedicated to atheism or polytheism Shariah compliant even if it passes the “objective” screens discussed in the text above? What about abortion clinics? Is a company that otherwise passes the publicly-disclosed filters remain Shariah compliant even if it is owned by or domiciled in the territory of the enemies of the Muslim nation (i.e., an Israeli-owned or domiciled company)? When the Dow Jones Islamic Index publicizes that weapons manufacturers are forbidden, does Shariah in fact forbid weapons manufacturing by Muslims for Muslim nations? Would it be material to a reasonable U.S. investor to know if the answers to any of these questions is “no”? What would happen if the U.S. went to war against a major Shariah-compliant Muslim nation and, as a result, the GCC states together with most of the authoritative Shariah scholars in the world declare the war an act of war against the entire Muslim nation? Will this declaration of war affect the Dow Jones’ Islamic Index filters? Would any company owned by non-Muslim U.S. citizens be Shariah-compliant under those circumstances? For a related discussion, see infra notes 362-366 and accompanying text.

[86] See supra note 59 and accompanying text.

[87] See Vogel & Hayes, supra note 18, at 24-28.  Vogel and Hayes note especially the minority view that interest is not prohibited: “But such Muslims, though numerous, appear to be in the minority. A much larger number, supported by a near-unanimity of traditional scholars, seem certain that modern bank-interest falls within the revealed prohibitions and entails a major sin, tolerable only in the throes of necessity.” Id. at 25 (emphasis added).

[88] In some complicated cases, both judicial and arbitration venues are chosen depending upon the specific issue litigated or the type of enforcement sought. See, e.g., 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).

[89] See generally David S. Ruder, Lessons From Enron: Director and Lawyer Monitoring Responsibilities, (Oct. 10, 2002) (paper presented to the 41^st Annual Corporate Counsel Institute, Chicago, Illinois), available at https://www.law.northwestern.edu/professionaled/documents/Ruder_Lessons_Enron.pdf (last visited Jan. 28, 2008); see also Model Rules of Prof’l Conduct R. 1.2(d) (2002); Am. Bar Ass’n, Annotated Model Rules of Professional Conduct 39-40 (5th ed. 2003).