Some intelligence consultants see a threat from Islamic Banking where others don’t

A dedicated group of intelligence consultants are sounding the alarm over the growth of Islamic banking and its potential nexus to radical Islamic and terrorist causes, even as many in the banking industry dismiss their concerns as overstated.

Islamic banking, a relatively new concept internationally, wtth the first Shariah compliant institutions developing in the late 1960s, has spread exponentially across the globe and includes several institutions in the U.S. Shariah-compliant assets of the top 500 Islamic banks grew 27.6 percent from November 2007 to $639.1 billion, according to a November 2008 article in UK-based The Banker. And, increasinly, many large Western institutions, including HSBC and Citigroup, offer Shariah compliant mortgage and investment products.

Islamic banking adheres to Shariah law by forbidding the charging of interest and investment in businesses involved in products or servces contrary to Islam. With mortgage products, for example, the Islamic bank holds the title to the property and rents it back to the customer. Rents are calculated base on market interest rates and consist of rent and principal payments.

Shariah compliant financing also involves the donation of a certain percentage of the customer’s and bank’s own funds as charitable contributions, as required by the Islamic rinciple of"zakat," or "alms for the poor."

As a financial product, Shariah compliant financing can be safe and secure, said consultant John Cassara. However, the real concern is that Shariah compliant banks answerto a dilferent authority than secular regulators, said Cassara, a former special agent wiith the U.S. Treasury Department.

"What concerns me is the fact that the end all of Shariah compliant financing is Shariah law," said Cassara. "It doesn’t make any dilference what the U.S. Constitution says, what the rule of law says, what the Financial Action Task Force says, what the written ‘Know Your Customer’ policies say, it doesn’t make any dilference to the die hard Islamist. Shariah is the ultimate authority and that is worrisome."

The bulk of Shariah compliant assets are concentrated in Iran, which is troubling, said Christopher Holton, a Vice president with Washington D.C.-based security organization The Center for Security Policy. Iran had $235.3 billion in Shariah compliant assets in 2008, according to The Banker, over twice as much as Saudi Arabia. In addition, The Banker ranked Iran’s Bank Melli as the largest Islamic bank, with $35.5 billion in Shariah compliant assets.

Bank Melli has been sanctioned by the U.S governmentfor its involvement in weapons proliferation since October 2007.

"If a bank like this can be considered A-OK by Shariah authorities, exactly what kind of
standards are they using?" wrote Holton on his blog, Shariah Finance Watch.

The Treasury Department has not issued any specific warnings or guidance regarding Shariah compliant banking. While acknowledging that Shariah compliant financial products can be complex, Stuart Levey, the Treasury Under Secretary for Terrorism and Financial Intelligence, has stated that such practices are monitored byfederal banking agencies and that the risk factors with Islamic banking are not unique.

"Treasury’s interest in Islamic finance is the same as the Department’s interest in all financial
services providers across all countries and cultures, which is that there should be effective prudential supervision and regulation to promote financial transparency, including anti-money laundering and counter-terrorist financing (AML/CFT) safeguards," wrote Levey in April 2008 in response to written questions from lawmakers regarding Shariah financing.

Calls to Treasury were not returned.

Levey’s statements and the "blind eye" of large institutions looking to tap Shariah compliant assets, indicates that the U.S. public and private sectors are not taking the risks of Shariah financing seriously, said Cassara.

"I am frightened that one day the radical Islamists will exert their infiuence in both international nd domestic financial systems," said Cassara, "That is the ‘Trojan Horse.’"

Another concern of Cassara and Holton is the potential for radical Islamic leaders on Shariah
compliance boards to steer zakat funds to charities that may be contributing to terrorist organizations. Islamic banks are required to establish committees consisting of Islamic scholars to ensure that the bank is operating in compliance with shariah principles, including the distribution of zakat funds.

For instance, Dow Jones recently removed Islamic scholar Muhammad Taqi Usmani from its
Islamic Index Shariah Advisory Board over his writings supporting the attack of U.S. troops in Iraq, said Holton. "He’s making decisions where these zakat payments are made so there is a tremendous potential for terrorist financing to occur." Usmani is currently on HSBC’s global Shariah advoisory board, noted Holton.

Usmani is not a specially designated national sanctioned by the U.S Qovernment noted Holton. "Standard due diligence is not going to cut it when it comes to this stuff," he said.

However, other terrorist financing specialists see these and other concerns as being overstated.

Banks dealing with Shariah compliant financing need to take care that they are transparent
regarding the identity of the religious authorities on their boards as well as their charitable
giving, however these concerns are not unique to Islamic banking and appl to all financial
institutions, said a Washington D.C.-based counter terrorism financing expert speaking on
background.

"The myth that it is some kind of Trojan Horse with which radical lslamists are trying to infiltrate the west and global financial structures is baseless," according to the individual.

Furthermore, dissenters to Cassara and Holton note that the U.S. Treasury has found it
necessary to designate only one Islamic bank, BeitAl-Mal Holdings in December 2001, as a
"Specially Designated Global Terrorist" Furthermore, the bank’s designation was not based
on its Shariah compliance but on its control by Hamas.

Islamic banking remains as highly regulated as any other form of banking and the risks of being associated with radical Islamic charities and involvement of designated individuals are
the same with any regulated institution, said Thomas Timberg, senior economist with Nathan Associates in Washington, D.C

"The concern about charitable funds [going into the wrong hands] is already controlled by the fact that if the group is unacceptable and on the Treasury’s designated list, they can’t make payments to them," said Timberg.

Originally published at moneylaundering.com