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

misleadingly so: Anti -Money Laundering. The Fund has established an Anti -Money Laundering Compliance Program ( the " Program ") as required by the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 ( " USA PATRIOT ACT "). To ensure compliance with this law, the Fund' s Program provides for the development of internal practices, procedures and controls, desig- nation of anti -money laundering compliance officers, an ongoing training program and an independent audit function to determine the effectiveness of the Program. Procedures to implement the Program include, but are not limited to, determining that the Fund' s Distributor and Transfer Agent have estab- lished proper anti -money laundering procedures, reporting suspicious and /or fraudulent activity and a complete and thorough review of all new opening account applications. The Fund will not transact business with any person or entity whose identity cannot be adequately verified under the provisions of the USA PATRIOT ACT. Given the documented record creating at least associational ties between the Fund' s principal owner (including the Fund Adviser) and individuals and organizations tied to the material support of terrorism, a pro forma recitation of compliance with the Patriot Act falls well short of the due diligence 66 Sharjah, Law and `Financial Jihad': How Should America Respond? required by the relevant statutes. For example, during the period NAIT was operating as a Dow Jones licensee, what exact monitoring protocols did the Fund have in place to make certain that neither the Fund Advisor nor the Fund' s principal shareholder utilized any of the Fund' s distributions for criminal activity? Other trenchant questions include: Did the Fund conduct a thorough investigation into the tens of millions of dollars raised by NAIT in tax-exempt contributions for the purchase of the Fund shares? Were these monies from domestic or overseas sources? Has anyone attempted to source these contributions? While the Fund might argue that sourcing an investment from NAIT is sufficient, given the history of NAIT, its associations, and more importantly its role as a " trust" holding the funds and property of individual Muslims, associations of Muslims and Muslim organizations, regulations promulgated under the Bank Secrecy Act likely require that the Fund verify the source of NAIT' s funds. On March 21, 2008, presumably in response to the termination of its licensing agreement with Dow Jones, NAIT's Dow Jones Islamic Fund renamed itself the Iman Fund, and the Fund' s website has been reworked. The Dow Jones Islamic Fund also attempted to cleanse the Fund' s public filing in a variety of ways including removing key information on Shariah and the Shariah advisors. It even went so far as to declare that "The section entitled ` More Information about the Dow Jones Islamic Market Indexes SM' on pages 6 -7 and the section entitled " Shariah Supervisory Board" on 10 pages 7 -8 were each removed in their entirety. " Such efforts, of course, merely serve to compound the problems with transparency of SCF- related activities described above. Would not an investor want to know why these changes were required? Would it not be material to a reasonable investor to know that Dow Jones had terminated its relationship with DJIF precisely because of its ties to financing terror? Indeed, the failure to disclose these material facts appears, to amount to a cover -up —a potential matter of civil, if not criminal exposure in its own right. Dow Jones' unsavory and still -unfolding experience with NAIT should be a cautionary tale for all financial institutions and investors contemplating involvement with Shariah- compliant finance and its proponents. 10 Supplement dated March 21, 2008 to the Dow JonesSM Islamic Fund Prospectus dated September 28, 2007. 67  Case Studies: 11. Caribous Coffee, Shariah- Compliant Finance and Main Street aribou Coffee began as the dream of John and Kim Puckett, a young couple on a backpacking trip to Alaska. They wanted to change their life around and decided upon a new start -up ven- ture: a coffee cafe chain envisioned as a competitor to the industry giant, Starbucks. In 1992, they opened up their first store in Minneapolis with an initial investment of $ 50,000. By December 2000, the upstart chain had raised $ 40 million through several private investment rounds and had opened 149 stores in a half - dozen markets —a commendable achievement, but still a distant second to Starbucks' more than 3,000 stores. Poor management systems, board issues and a host of other problems prevented the company from exploit- ing the market and raising capital for further expansion. The company needed money badly. Investors were not going to invest further and some were even threatening to exercise their put options to get their money back, with interest. By the end of the year, the Pucketts had arranged for an exit strategy, agreeing to sell approximately 84% of Caribou Coffee to an Atlanta -based company called Crescent Capital Investments, Inc., for a price tag of approximately $ 84 million. Crescent was owned by a Bahrain -based investment bank called First Islamic Investment Bank, which was, in turn, funded by mostly wealthy Arab investors from the GCC states. Over the next five years, with the added capital, Caribou grew substan- tially and by July 2005 was operating 337 coffeehouses. Notwithstanding the company's continued operating losses, the time apparently was ripe for a public offering to raise an additional $ 90 million from the U. S. invest- ing public. In July 2005, the company' s lawyers and accountants began the registration process under the 1933 Act for an initial public offering. One of the issues the lawyers for Caribou confronted was if and how to disclose the fact that its principal shareholder, Crescent, and its parent First Islamic Investment Bank (which had changed their names to Arcapita Inc. and Arcapita Bank BSC, respectively), were Shariah observant and required that Caribou also operate its business according to Shariah. That fact would, at the very least, have implications for the risks that might arise from the following: prohibitions that precluded the company from incur- ring interest -based debt; limitations on the kinds of foods it could serve its customers; and restrictions on the use of traditional, yet speculative, hedging strategies to guard against future price increases for its principal commodity, coffee. 68 Shariah, Law and `Financial Jihad': How Should America Respond? The problem with which the attorneys had to wrestle did not end there. Three years earlier, a public relations firestorm had erupted forcing Caribou Coffee to respond publicly to accusations that it had aligned itself with a supporter of terrorism. In July of 2002, an Internet -based campaign began accusing Caribou Coffee and its principal shareholder of being associated with and utilizing a Shariah advisory board, which included a controversial Shariah scholar named Yusuf AI- Qaradawi. As noted above, Qaradawi is well known for his statements in favor of jihad, including suicide -homicide attacks against Israeli citizens by Palestinian terrorists and legal rulings sup- porting jihad, such as that carried out by Hamas and Hezbollah against Israel. At the time, both Hamas and Hezbollah were designated as " Foreign Terrorist Organizations" ( FTOs) in the 2001 Report on Foreign Terrorist Organizations released by the State Department' s Office of the Coordinator for Counterterrorism. This designation effectively criminalizes any person or organization which provides material support to the FTO. A flurry of main- stream media stories appeared and Caribou Coffee was inundated with bad press and angry customers, including talk of a boycott by some Jewish groups. After weathering the storm for several months, Arcapita severed its relationship with Qaradawi stating that Qaradawi had " resigned" ( not unlike Dow Jones' narrative that Usmani " resigned "). Another facet of this affair was an accusation that Arcapita was funneling charitable contributions — presumably from its Shariah charitable tax contri- butions or its purification of forbidden profits —to terrorist organizations with connections to Qaradawi. When the Jewish Community Relations Council of Minnesota and the Dakotas heard about the possible connection between Caribou and Qaradawi, they initiated an investigation and the Minneapolis - based company cooperated. According to local media, Caribou and its Bahrain -based majority share- holder offered to allow the Jewish community organization to investigate all of the company' s charitable donations. Arcapita reportedly hired the well - known law firm of Gibson, Dunn & Crutcher to certify that no charitable con- tributions were transferred to groups banned under U. S. law. According to news reports, that certification was made. In the wake of these actions, the first draft of the IPO registration state- ment, which was filed with the SEC pursuant to the 1933 Act, contained the following disclosures: Under the " Risk Factors" rubric beginning: 69  Case Studies: Caribou Coffee, Shariah -Compliant Finance and Main Street Arcapita will continue to have substantial control over us after this offer- ing ....Our compliance with Shariah principles may make it difficult for us to obtain financing and may limit the products we sell. Our majority shareholder operates its business and makes its invest- ments in a manner consistent with the body of Islamic principles known as Shariah. Consequently, we operate our business in a manner that is con- sistent with Shariah principles and will continue to do so for so long as Arcapita i1r; a significant shareholder. Shariah principles regarding the lend- ing and borrowing of money are complicated, requiring application of qualitative and quantitative standards. The negotiation and documentation of financing that is compliant with these principles are generally complex and time consuming. As such, if we have immediate liquidity needs, we may not be able to obtain financing that is compliant with Shariah princi- ples on a timely basis. A Shariah -compliant company is prohibited from engaging in derivative hedging transactions such as interest rate swaps or futures, forward options or other instruments designed to hedge against changes in interest rates or the price of commodities we purchase. Also, a Shariah -compliant company is prohibited from dealing in the areas of alcohol, gambling, pornography, pork and pork -related products. We may be subject to adverse publicity resulting from alleged state- ments about Arcapita or complaints or questions from our customers aris- ing from such adverse publicity. During 2002, we were subject to adverse publicity due to attempts to connect Arcapita with inflam- matory and controversial statements made by one of its former out- side advisors, in his individual capacity, regarding a variety of sub- jects, including events in the Middle East. We may be subject to simi- lar adverse publicity in the future. Even if unfounded, such adverse public- ity could dlivert our management's time and attention and adversely affect the way our customers perceive us, our net sales or results of operations, in