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Eric Meyer walked out of a London office two weeks ago, a sheaf of signed fatwas in hand. Hoping to cash in on the trend in financial products aimed at Muslims, the head of the New Canaan, Conn.-based Meyer Capital Partners started calling Islamic law scholars a year ago. His pitch: hedge funds that Muslims could invest in without violating strict tenets of Islamic law that prohibit financial speculation and the earning of interest. The fatwas — or Islamic legal opinions — contained the blessings of three Islamic scholars, all of whom had reviewed Meyer’s proposed fund and deemed it compliant with Shariah, or Islamic law. Meyer also had formal assurances from a team of King & Spalding lawyers that his plans adhered to secular law in the United States as well. “I was on cloud nine,” he says. “The lawyers from King & Spalding really did a yeoman’s job of bridging the two worlds.” King & Spalding isn’t the only U.S. firm collaborating with Islamic scholars. Gibson, Dunn & Crutcher; Bryan Cave; and Wiley Rein & Fielding are some of the firms getting a piece of the Islamic finance pie. Islamic finance was born in the 1970s, after a swell in oil revenues and the resurgence of fundamentalist Muslim movements. The growth meant potential new legal clients, and so American and London lawyers started specializing in investments and financing structures that satisfy Shariah requirements. While experts differ over exactly how much investment money Muslims around the world have at their disposal, there’s little doubt it’s a big number, and growing fast. It has taken time and financial wizardry to get some of that capital into the Western market. And paving the way has been a fleet of lawyers who are as comfortable talking about ijarah, or lease deals that comply with Shariah, as they are parsing conventional Western contracts. (See “ What Is Shariah?“.) “Ten years ago, there were four or five Western lawyers with a little bit of experience in Islamic law,” says Yusuf DeLorenzo, one of the scholars who helped vet Meyer’s new Shariah-compliant hedge fund. Now nearly a dozen firms have Islamic finance working groups or lawyers who specialize in the practice area. “It’s become a very, very big business,” says DeLorenzo, a Northern Virginia- and London-based consultant who helped set up the first Dow Jones Islamic Markets Index five years ago. REDIFINING THE ART OF THE DEAL Shariah is based on the Quran, the teachings of Muhammad, and the work of Muslim scholars during the first two centuries of Islam. Its principles prohibit Muslims from participating in some of the mainstays of Western business, such as earning or paying interest and engaging in speculation. However, Shariah does permit other forms of investment, such as ijarah wa iqtina (lease purchase financing), mudaraba (trust finance), and musharaka (equity participation). James Phipps, 38, got interested in Islamic law and culture while serving as an Army interrogator during the first Gulf War. He then spent time in Riyadh, Saudi Arabia, studying at the King Faisal Center for Islamic Studies and then working in an outpost of Jones Day. Now an associate in Wiley Rein’s international business ventures practice, Phipps helps craft joint venture agreements between Muslim and non-Muslim businesses. Deals are sometimes canceled when Muslim and secular parties can’t reach a compromise. But more often the parties make concessions, according to Phipps. “The Muslims that I know are pretty practical people who want to realize the best return they can on their money and do what needs to be done,” he says. And a handful of Shariah jurists who specialize in finance are more than willing to level the path to Western markets for investment-savvy Muslims. Says DeLorenzo: “As a Shariah scholar, I feel more than anything a consumer advocate. I ensure that the service or product is one that a Muslim investor can use with a clear conscience — that the returns will be halal.” Phipps worked on, for example, a $300 million-plus transaction for a communications network in the Middle East. The buyer, a country with a largely Muslim population, opted for what’s known as a build-own-operate-transfer model. A BOOT is a means of financing large-scale infrastructure development used primarily by governments. Under this model, private sector investors provide the capital for construction, build, and operate the infrastructure for an agreed period of time and then transfer ownership back to the government. The model is conventional in Western terms, but also works as an Islamic finance tool because it doesn’t require the buyer to make or receive an interest payment. “From the buyer’s vantage, BOOT doesn’t cause any trouble in terms of Islamic law,” Phipps says. “And the deal itself didn’t strap the non-Islamic [seller] to doing business itself in the Islamic way.” Shariah compliance in government procurement can present a stumbling block, Phipps says. One such deal fell through because the non-Muslim seller in a large project for a Gulf-state government was not willing to forgo interest on late payments, having already agreed to a discounted selling price. There are ways of addressing late payment, Phipps notes, but they often mean that the Muslim party ultimately pays a higher purchase price. MELDING ISLAMIC, WESTERN LAWS As recently as a decade ago, Muslim investors who were determined to grow their wealth in accordance with Shariah — and reap the returns of conventional Western style investment — enjoyed few options. “They didn’t have available to them the smorgasbord of risk-reward adjusted investments available to secular investors in the West,” says Donald Knight, a senior partner in King & Spalding’s Middle East Islamic finance practice. But they did have capital. Banks and their lawyers quickly found that adapting Western business transactions to Shariah principles can create challenges. One example: During any corporate acquisition, it’s typical for the buyer and seller to differ on the value of the target company. In secular transactions, that’s often resolved by an arrangement requiring the purchaser to pay additional money if the acquired company meets certain earnings targets after the deal is completed. That structure isn’t an option under Shariah, because it is considered speculative. Knight, the King & Spalding partner, says he knows how to get around that obstacle. But he isn’t advertising it — or for that matter any of the solutions his firm has devised for solving problems when Muslim investors do business with non-Muslims. Knight isn’t alone in his reluctance to provide details about his handiwork. American lawyers who specialize in Islamic finance insist they aren’t being cagey — just wise in protecting legal solutions that can take years to refine and can be applied to a broad range of transactions. Protecting Shariah-compliant financing structures as if they were secret formulas makes sense as the volume and sophistication of financial products and contracts for Muslim investors grows. Dow Jones’ Islamic Markets Index was started in 1999 and has since expanded into a family of indexes of businesses that are broadly in accord with Shariah principles. And London-based HSBC Bank launched its Islamic banking arm, Amanah Finance, in the late ’90s. Before Muslims had the option to make the kinds of sophisticated Shariah-compliant investments now being offered, they either opted for conventional interest-based investments — or kept their capital under the proverbial mattress. “There was a certain amount of money that was not being invested, or being invested in less than optimal circumstances that were compliant with Islamic law,” says Wiley Rein’s Phipps. Over the last five years, Gibson Dunn has represented clients in Islamic-compliant real estate acquisitions valued at more than $500 million. The acquisitions include multifamily apartment complexes, industrial property, and office buildings. The firm has primarily relied on an ijarah — or master lease — between property owners and Islamic investors to keep the transaction compliant with Shariah. One of the common ways to structure a Shariah-compliant “mortgage” is through murabaha, a purchase and resale agreement in which the capital provider purchases the property and resells it at a higher price to the ultimate buyer. Last year, Middle Eastern investors, including Israelis, put $1.2 billion into U.S. commercial real estate, eclipsing for the first time Germans, who have traditionally poured the most foreign investment into U.S. real estate, according to Real Capital Analytics. A large portion of that capital came from Muslim real estate investors who in the past had bought property outright, which meant few Muslims strictly adhering to Shariah invested in U.S. commercial real estate, says David Furman, a real estate partner with Gibson Dunn. Furman says he spends time explaining to property managers and lenders, who can be dubious about perceived constraints of doing business under Shariah, how Islamic investors follow a set of rules that are different, but not too different. Or as Mahmoud El-Gamal, chair of Islamic economics, finance, and management at Rice University in Houston, puts it: “The name of the game is to try to maintain noticeable differences between conventional finance and Islamic finance in order to use the Islamic brand name, but then to convince regulators that it isn’t so different. That’s where interaction between Muslim jurists and lawyers comes in.” Judith Lee, a D.C.-based partner with Gibson Dunn, addressed a conference of Islamic auditors and accountants in Bahrain in March about compliance with the USA Patriot Act. The international trade and customs lawyer says the group was concerned not only with finding new finance mechanisms that followed their own religious laws, but with making sure they weren’t disobeying U.S. statutes. “The goal of the conference was twofold: how to operate on par with Citicorp and still maintain fidelity to Shariah, and how to respond to increasing scrutiny on money laundering and terrorism funding,” says Lee. Lee says the Islamic investors are “not parochial” and frequently operate in different jurisdictions. But as they increasingly become major players in world financial markets, they are learning to cope with regulations while remaining in compliance with their own religious laws. She thinks that having a U.S. law firm can help to smooth the way. “A lot of it is overcoming bias with people who are not very familiar with Islamic financing and reassuring companies that none of the bad guys on any list are involved in our client’s financing,” says Lee. Wiley Rein’s Phipps is hopeful that the work of U.S. law firms in Islamic finance can do even more than that. “Understanding Islamic law principles is a way we can be connected to the Islamic world in a healthy way,” says Phipps. “It should be an engine for continuing to improve relations.”

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