Fort Walton Beach Council agenda — 03-09-2010 Regular — reading text

Do these charities have overseas branches? Is the financial institution wiring the funds domestically or internationally? Who or what organization founded the charities and who controls them today? Anti -Trust and Collusion Another area of civil liability. exposure arises under antitrust law, imposed by the need for Shariah authority boards. At present, approximately sixty Shariah scholars monopolize the positions available on the Shariah advi- sory boards of major SCF institutions worldwide. There has been a concerted effort among these Shariah authorities to impose universal standards to prevent materially divergent opinions. This effort has been spearheaded by the Accounting and Auditing Organization for Islamic Financial Institutions ( "AAOIFI ") and the Islamic Financial Services Board ( "IFSB "). The former seeks to establish accounting standards for the various SCF transactional structures. The latter is striving to set the stan- dards by which Shariah authorities self -regulate and interact with the finan- cial institutions which employ them. According to the IFSB, the AAOIFI and the independent writings of many of the Shariah authorities, there are designs to establish industry-wide minimal credentials a newcomer would be required to obtain to enter this lucrative consulting business. The initial antitrust issue raised by such efforts is the problem of "group boycotts" or, alternatively, the implication of " self-regulation" for a small, discreet and insular group of authorities who have almost total market share deciding how one gains entry into the market. Applying their standard " rule of reason," courts will look to the motivations and anti -competitive effects of such " industry standards." This is especially problematic in SCF because, should a non -recognized Shariah authority attempt to market his services to the financial institutions seeking Shariah guidance, a ruling by the existing Shariah authorities that the newcomer has not satisfied their credentialing requirements would, as a practical matter, 53  The Criminal and Civil Liabilities Associated with Shariah -Compliant Finance render the market closed to that newcomer. The " closed- shop" quality of SCF will exacerbate this syndrome. Financial institutions that market SCF products to the Shariah- adherent consumer are extraordinarily sensitive to the problem that public disputes among the Shariah authorities over what is permitted or prohibited could devastate the demand for SCF products generally. At the very least, they could certainly render suspect any given SCF product. The problem of "self- regulation" would become an issue for the financial institutions themselves if they play some material part in this effort to control entry into the market by newcomers, whether via de jure or de facto collu- sion with the dominant group. Another problem, however, which would cer- tainly implicate liability for the financial institutions directly, is what has been described as " rules collusion." In the latter case, the effort by the financial institutions and their agents — the Shariah advisors —to agree upon what transaction structures and invest- ments should be considered " Shariah- compliant" will most assuredly work to limit the development of new competitive products by the market players. The effect wild be further to shape and minimize competition among cartel members in order to increase the profits of the parties to the agreement. SCF presents substantial antitrust liability exposure . Shariah -Compliant Finance and Sovereign Wealth Funds The investing practices of sovereign wealth funds ( SWF) —some of which have ties to Shariah Compliant Finance ( SCF) —have been a matter of growing concern in recent months. Thanks in particular to vast transfers of petrodollars to SWFs of Shariah -based Islamist regimes, the connection between the two needs to be considered carefully in any assessment of the SCF phenomenon and its implications. Sovereign wealth funds are widely seen as the new frontier in international capital markets. Currently, some three dozen SWFs control approximately 3.2 trillion in assets, with various projections for growth to $ 12 -$ 15 trillion by 2015. A number of serious concerns have been expressed by Western political leaders and regulatory officials including: Chairman Christopher Cox of the Securities and Exchange Commission: Investment decisions of SWF " go beyond profit and loss." They are " significantly less transparent than hedge funds," and " present I challenges to a ( U. S.) regulatory system premised on free markets, the 54 Shariah, Law and `Financial Jihad': How Should America Respond? free flow of information and investor incentives based on profit and loss." Clay Lowery, Acting Under Secretary of the Treasury for International Affairs: " Little is known about their ( SWF) investment policies," and they are "rarely subject to market disciplines, being controlled by public servants imperfectly accountable to the citizens for whom they were investing." (" [ I] mperfectably accountable" is of course a euphemism for not accountable in any material way. ") Simon Johnson, Chief Economist, International Monetary Fund: SCF financial flows were going increasingly through `black boxes' and could pose risks to global stability." Robert Kimmitt, Deputy Treasury Secretary: " The benefits of SWF invest- ments to the recipient countries depend on the extent to which the behavior is economically driven... rather than politically driven." Larry Summers, former Secretary of the Treasury: SWF activities are cross- border nationalization." While these and other concerns are often raised, very little attention has been paid to date to another disturbing dimension of SWF —their increas- ingly close and synergistic relationship with Shariah -compliant finance in the Muslim world in general, and the Gulf in particular. Given the explosive growth of SCF compared to conventional banking in the Gulf and the strong government support behind this trend, it is very likely that SCF and Gulf - based SWF are rapidly becoming one and the same phenomenon. This would mean that —at some point in the near future, if not already —SWF will become an instrument for promoting and legitimating Shariah in the West. There are several factors characterizing the political economy of the Gulf that intensify this concern: None of the Arab Persian Gulf states are run by representative govern- ments; rather, all are governed by ruling families in a quasi -feudal manner. Most wealth in these states belongs to the ruling families and their coteries. These families are thus not only the rulers but also the owners of the states they preside over. Gulf sovereign wealth funds, therefore, do not in any real sense belong to the people ( in contrast, for example, to the Norwegian SWF, which does), but to the respective ruling elites. They are run in accordance with the political and economic interests of the latter, not the former. For investment purposes, there is little difference between officially 55  The Criminal and Civil Liabilities Associated with Shariah -Compliant Finance designated SWF, such as the Dubai Corporation for Government Investment, and sovereign wealth as represented, for example, by the vast holdings of Dubai ruler, Sheikh Maktoum. Most business and financial transactions in the Gulf are far from transparent and severe restrictions on ownership and investment by foreigners are in place. All Persian Gulf rulers support or otherwise appease Shariah- centered Islam, which demands jihad against the infidel. They are thus, to one extent or another, inherently inimical to U. S. and Western interests, although many of them simultaneously seek military protection from America. It is these realities that make a synergistic nexus between SWF and SCF inevitable and highly troubling in its implications for Western capital mar- kets. This dynamic is already in evidence and growing rapidly. Some of its visible manifestations include: Strong government support for Shariah -compliant finance throughout the Gulf: For instance, the huge Dubai Holding concern owned by Sheikh Maktoum, has recently been acquiring existing Islamic banks and sponsoring new ones. The Dubai government -owned Dubai International Financial Centre ( DIFC) intends to become an international center for " Islamic finance regulations, standards and practices" by cre- ating " an Islamic hedge fund platform, an Islamic finance portal, a com- modity exchange (murabaha) and Islamic finance institutes." Interlocking directorships between Islamist Shariah -compliant finance, sovereign wealth funds and sovereign wealth: For example, Sheikh Maktoum' s right -hand man and chief investment officer, Soud Baalawy, is simultaneously the chairman of the Noor Islamic Bank, executive chairman of the Dubai Group and vice chairman of Bourse Dubai, the world' s biggest bourse for Islamic bond ( sukuk) listings. Direct sponsorship and financial support by Persian Gulf rulers for Shariah -centered Islamists and Shariah banks: The two Islamic banks in Qatar (the Ilnternational Islamic Bank of Qatar and the Islamic Bank of Qatar) are (both owned by the ruling Thani family and have the strident Islamist Sheikh Yusuf Al Qaradawi as the chairman of their Shariah advisory boards. European nations and the U. S. government have slowly begun to demand greater transparency with respect to sovereign wealth funds. For example, on March 14, 2008, European Union leaders called for an international code 56 Shariah, Law and ` Financial Jihad': How Should America Respond? of conduct governing sovereign funds. They reposed in member govern- ments the power to shield strategic industries such as defense. On March 20, 2008, U. S. Treasury Secretary Henry Paulson announced an agreement with the sovereign funds of Abu Dhabi and Singapore to adopt rules for greater disclosure. In particular, the latter pledged to ensure that their investments are for economic rather than " geopolitical" purposes. Most oil exporting countries with sovereign wealth funds, however, are lob- bying for the minimum amount of transparency. In April 2008, Bader al -Saad of Kuwait' s $ 250 billion sovereign wealth fund said European Union and U.S. plans to force more disclosure could harm the global economy. He declared that increased scrutiny " will result in an adverse impact on global capital flows" and " won' t solve or prevent any future financial crises." Later that month, Neil Nicholson, a corporate partner at Denton Wilde Sapte Dubai —a leading firm in structuring both sovereign wealth fund and Shariah -compliant finance transactions —published an article at www.thelawyer.com highly critical of Western nations' interests in trans- parency. Wrote Nicholson, " Tension has been increasing between East and West over the West' s calls for greater transparency and regulation for sover- eign wealth funds ( SWFs). Nicholson' s thesis is that, since big international banks have lost money and — with the blessing of their governments —asked sovereign wealth funds to help stabilize Western capital markets by bailing out those financial insti- tutions, the United States and other developed nations have no grounds for insisting on burdensome, new regulations of the SWFs. The author warns in a none -too -subtle fashion that the West needs to be cautious in its approach to