US court dismisses lawsuit about AIG’s takaful business

US court dismisses lawsuit about AIG’s takaful business

By Blake Goud Available at: http://www.thereviewme.com/2011/01/us-court-dismisses-lawsuit-about-aigs-takaful-business/

A Michigan court dismissed a case filed against the US government challenging the permissibility of the Federal assistance provide to American International Group (AIG) on the basis that AIG provided Islamic financial products and therefore the assistance violated the First Amendment of the US Constitution, which prohibits the government from engaging in the establishment of religion. The case ultimately revolved around the size of AIG’s takaful business, which the Court noted accounted for only 0.022% of total revenues in 2009; the subsidiary which offers takaful in the United States generated 0.0006% of its revenue from that product in 2009. The case was filed on behalf of Kevin Murray, a military veteran, by the Thomas More Law Center, a right-wing Christian legal organization. When I inquired in 2009 after the plantiff’s standing to proceed with the case was upheld, Dr. Robert Tuttle, a Professor of Law a George Washington Law School and expert on Establishment Clause cases, expressed doubts that it would succeed.

The Court reviewed the financing provided by the US government to AIG, but excluded $40 billion in preferred shares that were used to repay debt owed by AIG to the Federal Reserve Bank of New York, leaving only the $30 billion extended under the Emergency Economic Stabilization Act (the TARP), of which $7.5 billion had been drawn on by AIG by February 2010. AIG was required to certify the uses of the funds provided by the US government. The plantiffs in the case argued that the AIG bailout was undertaken with the purpose of advancing religion because AIG was provided funds “to support all of its activities” including Islamic finance (takaful).

However, the court decided that the TARP legislation and the AIG bailout was created for a secular purpose (preventing the collapse of the financial system) and relied upon the small share of total revenue generated by Islamic finance by AIG to support its case in this case. The Court also rejected the claim by the plaintiffs that the TARP bill led to the government taking control of AIG, which included its subsidiaries that offer Islamic financial products noting that “the Trust [which holds ownership for the benefit of the Treasury department] was established by actions taken pursuant to Section 13(3) of the FRA [the Federal Reserve Act]–not the EESA [the TARP]“. Section 13(3) of the Federal Reserve Act allows the Federal Reserve, which gives the Federal Reserve Banks the power to intervene in unconventional ways under “unusual and exigent circumstances”.

In this claim which was based on the government being entangled with AIG’s Islamic finance business by virtue of the financing it provided, the plaintiffs argued that the case is similar to the government providing grants to religious organizations and used their expert witnesses to attest to what they consider the insidious aspects of Islamic finance, which the Court found was irrelevant because it did not address AIG’s takaful business specifically. The Court also noted that “Plaintiff cannot defeat Defendants’ motion for summary judgement, or prevail on its own, but arguing that the evidence in support of his claim is so overwhelming that he need not present any [evidence] to the Court”.

In addition, the Court found no evidence to meet the other ways in which the government could be entangled based on AIG’s offering of takaful products; in order to do so, the organization would need to be primarily ‘sectarian’ (i.e. provide a primarily religious mission) or the government funding would have to fund religious teachings directly. In the other claim for excessive entanglement between the TARP funds and AIG’s takaful business, the court ruled against the plaintiffs on the basis that the plaintiff’s ceded the point by declining to provide evidence and failure to respond to the US government’s arguments against their claim.

Finally, the plaintiffs claimed that the Treasury Department had given its stamp of approval to Islamic finance by publishing a paper on by Dr. Mahmoud El-Gamal on Islamic finance, by creating the position of scholar in residence, which was held by Dr. El-Gamal, by having a member of the Treasury Department speak at the Harvard University Forum on Islamic Finance and by holding an “Islamic Finance 101″ conference. The Court found that, in addition to those events being held prior to the TARP legislation, they did not “show that the government favorably endorses Sharia-based Islam or religion in general” and that it was permissible for the government to endorse an educational message relating to religion citing previous court rulings permitting using the Bible for the “study of history, civizilation, ethics, comparative religion, or the like”.

The case is significant for Islamic finance in the US because it demonstrates that not only did the Islamic finance activities of AIG when it was under majority ownership by the government not pose a threat on grounds of money laundering or the financing of terrorism, it did not violate the establishment clause. The former was not mentioned in the order, even as the Thomas More Law Center, which brought the lawsuit, cited as justification for the lawsuit that “in abetting the spread of Sharia-compliant financing, AIG and the federal government are abetting the same legal system that motivated the murder of nearly 3,000 Americans on 9/11″. This case should have been the spotlight for Islamic finance if it were engaged in illegal practices because the plaintiffs were arguing that not only was AIG supporting Islamic finance, but the government was by virtue of its ownership of nearly 80% of the company. However, there was no finding that Islamic finance had led to support of any illegal acts and beyond that, the government’s actions did not violate the Establishment Clause.

This won’t stop the echo chambers that are the anti-Islamic finance movement from continuing to spread their baseless claim that Islamic finance supports illegal activities including terrorism, but it does discredit their claims substantially. If there were any untoward activities in Islamic finance, this would have been the ideal forum for this group and its supporters to make it. The judge’s order did strike at the heart of one of their main “arguments”: that non-permissible income that is donated to charity is used to support charities promoting violence or proselytizing. The judge noted in a footnote that Lexington Insurance Company, which offers a “takaful homeoners policy”, “a certain percentage of the net surplus, if any, derived from the collection of premiums is paid out to either the National Children’s Fund or the International Federation of Red Cross & Red Crescent Societies […] selected precisely because they lack religious affiliation”.

In the best case scenario, this ruling could provide support to US financial institutions involved with Islamic finance, whether or not they received or have outstanding loans from the TARP fund. It demonstrates that the US courts view Islamic finance as “just another business”, as they should. It also supports the precedent from the East Cameron sukuk case that Islamic financial products will be judged by US courts on their merits as financial products, and not on the basis of the religious and ethical grounds for their origination. In my opinion, the Establishment clause is important both because it limits the ability of the government to favor one religion over another, but also because it limits the ability of groups hostile to one religion or another from using the cudgel of litigation to limit the freedom to shape individual’s choices based on their religious beliefs, even where these are expressed by demanding products from large financial institutions that may be bailed out by the US government from collapse based on their other business activities. This should be supportive for Islamic finance in the US because it moves the focus–both in the legal and regulatory sense–from the religious arguments to the practical arguments. How does Islamic finance work as a financial product? Is it fair to consumers? How does its structure fit in with the regulations and laws of the US? This is where Islamic finance belongs in its relationship with secular governments and it should also move the discussion among lawmakers and regulators from the “Islamic” aspect to the “finance” aspects.

Best Regards
ZULKIFLI HASAN

One thought on “US court dismisses lawsuit about AIG’s takaful business

  1. takaful says:

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