Financial crimes

Author:Siti Faridah Abdul Jabbar
Position:School of Accounting, Faculty of Economics and Business, Universiti Kebangsaan Malaysia, Bangi, Malaysia

Purpose – The purpose of this paper is to establish that financial crimes are unlawful (haram) in Islam and accordingly, the responsibilities of the Sharia's Supervisory Boards of Islamic financial institutions include the prevention and control of financial crimes. Design/methodology/approach – The paper presents an analogy (qiyas) of the... (see full summary)


The impact of financial crimes such as insider dealing, market abuse, fraud and money laundering on individuals and the commercial sector, as well as on the national and international economic systems can be very colossal and seriously damaging that efforts to prevent and control the perpetration of the financial crimes have been undertaken and intensified at national, regional and international levels. Among the efforts that has and is being pursued is greater cooperation against financial crimes that takes place not only between public bodies but also the public bodies and the private sector. The growing importance of the role of the private sector as the front line mechanism against financial crimes is acknowledged and the management of financial institutions, for example, is encouraged to play an active role in preventing and controlling financial crimes and their related risks. While the management of conventional financial institutions may find such a role an additional task to their current responsibilities, the Shari'a Supervisory Board, i.e. the extra organ of management for Islamic financial institutions1, may, however, find the role part and parcel of their responsibilities in ensuring Shari'a-compliance2 by Islamic financial institutions. This is based on the fact that the Shari'a Supervisory Board cannot authenticate an Islamic financial institution's operations and activities as Shari'a-compliant where the institution is involved, either directly or indirectly, in a financial crime since financial crimes are prohibited in Islam.

The prohibition of financial crimes in Islam

Financial crimes such as insider dealing, fraud3 and money laundering4 are prohibited in Islam although the crimes are not specifically mentioned in the Qur'an5 and Sunna6, i.e. the primary sources of the Shari'a. The prohibition of the financial crimes in Islam is in fact analogised from the many injunctions in the abovementioned two texts of revelation. This is because qiyas7 (analogy) is also a source of the Shari'a albeit a secondary one8. To illustrate how the analogy works, let us take the prohibition of insider dealing in Islam which can be analogised from the injunction in the Qur'an and Sunna that commands an Amin, namely a person who occupies a position of trust, to fulfil his obligations with amana (faithfulness or honesty) and not to abuse the trust placed upon him9. In discharging his duties, he is to observe, inter alia, what is haqq, namely what rightfully belong to the respective parties10. To put it simply, what rightfully belongs to another and of which he has no right to it, he is not to misuse it. Otherwise, he would have committed a breach of trust which may also be referred to as khiyana, i.e. a treacherous act or an abuse of position11. Accordingly, an analogy can be drawn from the injunction in the Qur'an and Sunna that a person who occupies a privileged position in a company (Amin) and who is in possession of material non-public information that belongs to the company is to use the information only for the purposes for which he is entrusted with (amana; haqq) and not to abuse that trust by using the information for other unauthorised use such as insider dealing (khiyana). It follows that insider dealing is prohibited in Islam on a basis similar to that under the temporal law, namely that the act is tantamount to a breach of fiduciary duty12. Some other injunctions in the Qur'an and Sunna that can be analogised to operate as the authorities for the prohibition of insider dealing are those that prohibit the taking of unfair advantage of others13, and that command equality14 and honesty15 to be observed. These find their equivalence in the temporal law that prohibits insider dealing in order to protect the counterparties to a transaction on the basis of the fraud-on-marketplace-traders theory16, equitable principle of fair dealing ( Rider, 2000 ; Schotland, 1967 ; McVea, 1993, pp. 46-7 ), unfair advantage theory17 and parity-of-information approach ( Loss, 1983, p. 852 ).

As for the prohibition of other financial crimes in Islam, suffice it to say that their prohibition can be analogised in a similar manner. What is to be discussed next is whether the financial crimes are similarly regarded as a crime (jinayah) in Islam. The answer to the question is in the affirmative and, in fact, the financial crimes can be categorised as ta'zir, i.e. one of the three categories of crime under the Shari'a18. Ta'zir refers to an act or omission which has not been specifically prescribed as a crime by the Qur'an and Sunna but which may be declared as one if public interest so requires. The exact scope of ta'zir is left opened by the two divine sources and the state is given the discretion to determine what amounts to ta'zir. The discretion is afforded to the state to ensure that the requirements of the prevailing circumstances relating to, for example, time, place and society are kept in view. Therefore, new ta'zir offences may be created with the passage of time and likewise, a ta'zir offence which has been prescribed by the state may cease to be a crime provided they are done without infringing the fundamental principles of the Shari'a. With regard to punishment for ta'zir offences, the Qur'an and Sunna do not fix a specific punishment albeit having specified a set of punishments ranging from light punishments to harsh ones19. The authorities, namely the legislature and the judiciary, are given the discretion to determine the specific punishment by taking into account factors such as the intensity of the offence, circumstances of the case, the offender's intention, age, mental and physical conditions, and by keeping in view the requirements of the divine sources20. Accordingly, in Islam, financial crimes can be prescribed as ta'zir offences and suitable punishments can be imposed for committing them where it is in the public interest to do so.

The prevention of financial crimes by the Shari'a Supervisory Board

Having established that financial crimes are prohibited in Islam, it follows that the crimes are haram (unlawful or impermissible) activities. Since one of the many responsibilities of the Shari'a Supervisory Board is to ensure that Islamic financial institutions are not involved in any haram activities21, the prevention and control of financial crimes, thus, fall within the ambit of the Shari'a Supervisory Board's duties and responsibilities of ensuring Shari'a-compliance on the part of the Islamic financial institutions. Such a prevention and control may be performed through the various functions of the Shari'a Supervisory Board, for example, while reviewing the decisions of the board of directors and top management of Islamic...

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