Related Articles

Images

New Money And Old Religious Rules

Connecticut firms help broker business deals under Islamic law

By DOUGLAS S. MALAN

The growing influence of the Islamic religion and the growing wealth among Middle Eastern Muslims and Muslim-Americans are influencing how many business deals are conducted. At the same time, they're creating new opportunities for American lawyers, including several in Connecticut.

Murtha Cullina and Shipman & Goodwin are two mid-sized firms that are throwing elbows with heavyweight international firms after establishing Islamic Finance and Banking practices, which facilitate commercial transactions within the boundaries of Islamic law.

Both Connecticut firms started their practices on the strength of lateral hires from the international firms that laid the groundwork in the 1990s. Even today, lawyers say, legal work entwined with so-called Shari'ah transactions remains a largely untapped resource as Islamic investors have proliferated in recent years on the strength of petro dollars.

"We hit the wave at a good time" in 2005 when Murtha Cullina created the practice, said Robert V. Giunta Jr., the firm's practice group co-leader with Midhat Syed. "There's been an explosion [of activity] over the last three years. A lot of firms are looking to do this."

But it's not easy. Shari'ah principles diverge markedly from traditional Western business methods. They're rooted in 500-year-old commercial practices that are based on Muslim tenets of fairness and equitable business relationships and on the teachings of Allah and Mohammed.

Here's just a sampling: Islamic law prohibits the payment or receipt of interest. It forbids investment in businesses related to alcohol, munitions, pork or Western-style banking. It requires that all risk must be shared equally among investors and no profits are to be granted without the appropriate exposure to risk.

"It's very interesting for any finance lawyer who enjoys complex work," said Richard Rochlin, a partner of Shipman & Goodwin who brought his practice from Dechert's Hartford office.

Rochlin said many people he meets have no knowledge of Islamic finance and wonder if he's helping to support terrorist cells. He said his clients "despise the jihadists and radicals."

Billions At Stake

This past spring, Murtha Cullina helped Edible Arrangements International, a Wallingford company whose stores sell fancy fruit platters, obtain working capital from the Bank of London and the Middle East. At the time, Edible Arrangements President Tariq Farid praised the law firm for its "comfort with Islamic concepts and familiarity with the Islamic finance market."

But there are even bigger businesses involved. Murtha Cullina counsels Chicago-based UIB Capital, which is a private equity subsidiary of Bahrain-based Unicorn Investment Bank. The firm also works with Zayan Finance, a New York-based organization that offers Shari'ah compliant mortgage products for commercial real estate.

Nationally, Church's Chicken restaurant franchise and Caribou Coffee are among the more familiar brands that operate under Shari'ah. In fact, about $900 billion in assets around the world are managed in accordance with the practice, according to data released by Thomson Financial earlier this year. That amount is growing by 20 percent per year.

"There's a modern trend to start incorporating the practices of the religious system into the business world," said Mally Chakola, an associate in Dreier's Stamford office. She's studying the intricacies of Islamic finance as her firm considers developing a practice area.

"I've noticed it has become a growing trend with the spread of Islam and the increase of investments from the Middle East," Chakola said. "It's amazing to hear how many people just got back from the Middle East or are going to the Middle East. It's just buzzing."

Rochlin, of Shipman and Goodwin, outlined an oversimplified Shari'ah structure, using a real estate transaction as a basic example. A group of Muslim investors wants to purchase a property in the United States. The investors retain a supervisory board of Shari'ah scholars who are well-respected religious men with a thorough understanding of Islamic financial practices. The board members serve as neutral third parties to determine if the investment opportunity complies with Muslim principles, and they issue a decree, or fatwa, that states as much. With their seal of approval, the deal moves forward.

A deal's success often hinges on the board's makeup, said Chakola. An investment opportunity can "gain more respect because [the investors] are able to get board members who are well-respected in the community," she said.

Of the several hundred Islamic finance experts who are retained as advisory board members around the world, one of the most popular is Yusuf Talal DeLorenzo, who grew up as Joseph DeLorenzo, an avid Red Sox fan in Hyannisport, Mass.

Separate Companies

Here's where the law firms come in: They draft the framework for the proposal and explain to the advisory board how it is an acceptable investment vehicle. The plan often involves setting up a separate funding company that has a relationship with a bank in the U.S. That company pays the debt service on the loan based on the particulars of a conventional loan document.

Because the Islamic investors cannot pay interest, a separate lease agreement, known as an ijara, is signed between the funding company and the investors. The investors make a payment, which covers the debt service with the bank, to the funding company. The investors also deal with the funding company on tax matters.

If the investors take over a building that includes a profitable bar, which could violate their beliefs, there are ways of working around that problem, Rochlin said. One possibility is to take the money from the bar and donate it to charity, which would then make the deal compliant. "They realize they're in a modern financial world and they have to find ways to make it work," Rochlin said.

Because of the difference in business traditions, there are frequent dealings between the law firms and the bank's lawyers to make certain that the deal is suitable for Islamic investors. With additional parties comes more paperwork, meaning Shari'ah transactions always take more time and cost more money than traditional Western deals, Rochlin said.

There's also a premium placed on personal contact, which requires multiple trips to the Middle East so that clients "can see you and shake your hand," Rochlin said.

Giunta, of Murtha Cullina, said any attorney engaged in an Islamic finance practice must study a large body of books to learn both the financial aspects and cultural underpinnings of the belief system. There also are numerous conferences in the Middle East to build up one's knowledge base. "It's an ongoing learning process," he said.

But it's been made easier with the addition of Hartford associate Umar F. Moghul, who joined the firm from King & Spalding, one of the early leaders in the field.

"This has the potential to be one of the largest practice areas in our firm over time," Giunta said. "We're swimming with a lot of the big boys." •