November 3, 2008

Editor's Column: Economic Crisis Fallout: Shari'a Banking
By Ilana Freedman, Editor and CEO, Gerard Group

Guest Column: Abkhazia, The Tiny KGB Kingdom
By Konstantin Preobrazhensky & Paul M. Joyal

Editor's Column: Economic Crisis Fallout: Shari'a Banking

A dangerous trend is arising from the failing financial markets, as some of our leading financial institutions look to shari'a financing as a possible substitute or addition to our open market system.

Shari'a banking refers to a system of banking activity that is consistent with the principles of Islamic law (shari'a) and forbids earning or paying interest ('riba') on loans. Also included in the prohibitions of Islamic banking is investment in any business that provide goods or services considered contrary to Islamic beliefs, such as businesses which relate to forbidden foods like pork and alcohol, or forbidden activities such as gambling and commercial sex.

The Short History of Shari'a Banking
Proponents of shari'a finance claim that its principles are based on the teaching of the Koran, and that therefore it is more moral, more ethical, more spiritual, and more fair than conventional banking. In reality, the development of Islamic economics is a relatively new concept invented in the 1940s.

The creator of this system was Syed Abul Ala Mawdudi, a radical Pakistani Islamist whose global aspirations for Islam formed his message: "We cannot expect the rest of mankind to embrace Islam without any effort on our part." According to Alex Alexiev, Vice President for research at the Center for Security Policy in Washington, DC, Mawdudi's objective "was to convince the Muslims that Islam was a complete system of guidance in life in all things temporal or sacral and that the West had nothing useful to offer the Muslims. This was an essential part of his agenda for Islamization, which he pursued vigorously for decades." ¹

By the late 20th century a number of Islamic banks had been formed to apply these principles to private or semi-private commercial institutions within the Muslim community. Today, some are calling shari'ah banking called Islamic finance "the fastest-growing of all the financial sectors around the world." In order to avoid the one of the latest trends is one more closely allied to public relations than economics.

When referring to Islamic banking proponents of shari'a banking are encouraged to use the word 'ethical' instead of 'shari'a'. Promotion for a full-day event at Dubai International Finance Center in November 2007, held in association with The Wall Street Journal, called Islamic and Ethical Finance "the fastest-growing of all the financial sectors around the world."

How It Works
Islamic banking principles forbid the paying or receiving of interest, so profits must be derived in different ways, largely through fees and contributions. With the rise of Islam to prominence in world affairs, shari'a banking principles have been more widely adopted throughout the world. In both Iran and Pakistan, the entire banking systems have been Islamized. The phenomenon has been spreading rapidly by global financial institutions. The recent upsurge in efforts by Islamic financing groups to control the US capital markets has reached an estimated $1 trillion.

Competing in the Free Market
In shari'a financing, home mortgages represent a creative adaptation of conventional mortgages. It works like this: a shari'a bank buys a house and then sells it back to the 'buyer', who pays a rental fee on the use of the house plus a monthly payment that is applied to the eventual purchase price. At the end of the term of the mortgage, the 'renter' becomes the 'buyer' and owns the house.

Likewise, savings accounts follow a shari'a compliant formula. A shari'a compliant bank invests the money deposited in savings accounts by its customers in shari'a approved investments (investments that do not involve forbidden products or activities). The returns are dividends and capital gains which are put in a fund that pays out the regular market savings account interest rate. This is similar to a standard bank savings account, but the money is not insured.

Shari'a finance is largely based on equity markets, excluding, of course, interest bearing instruments, such as bonds. The stock of companies whose product relates to pork, alcohol, and corporations are also excluded from these portfolios. Hedge funds are particularly well suited to the rules of Shari'a finance. The current global economic malaise presents an opportunity to proponents of shari'a finance that is unparalleled. In "Shari'a Finance: a gift from Islam to the world."

Swati Taneja, director of the International Islamic Finance Forum,suggests that, "Now is a golden opportunity for Islamic finance to provide an alternative model which, by its very nature, binds both the real and financial economies - just what the world needs right now . . . There has never been a more interesting time for cautious investors burned in the conventional credit crunch to begin looking at what the Islamic markets have to offer . . Islamic finance is set to make the world a better place."

Shari'a banking is a well-established and rapidly growing industry, which claims to be different from 'regular' banking (which indeed it is), and promotes itself as the financial redeemer that the West, (which it certainly is not). Most significantly, shari'a banks boast about their charitable activities, while hiding the shadowy links between such charities and the global support to terrorist organizations, which is carried out through the shari'a banking system.

For example, several of the 9/11 terrorists were financed through the banks in Dubai, and Palestinian suicide terrorists have been systematically supported by contributions from the national Saudi Bank. Closer to home, the Safa Group, working out of Virginia until they were shut down several years ago, strung together over 100 'not-for-profits' and 'legitimate' commercial enterprises, provided massive financial resources through shari'a fundraising and money laundering. Organizations like the Holyland Foundation in Richardson, Texas were shut down because of their use of charitable contributions to support terrorist activities.

According to www.shariahfinancewatch.org, some of the largest American banks and investment houses are now shari'a compliant, including Barclays PLC, Citibank, N.A., Dow Jones & Company Inc., Goldman Sachs Group, Merrill Lynch & Co., Inc., and Morgan Stanley.

As we watch our Western institutions - universities, the military, government agencies, prisons, even our elementary schools and local governments - slowly eroded through the well-organized infiltration by radical Muslims, it should come as no surprise that our financial institutions, which were built on the concepts of free enterprise and free markets, are already threatened by a foreign and dangerous form of economic corruption. The funds that used to go to fire the engines of commerce are now also firing the demons of terrorism and global warfare.

Ilana Freedman is the Editor of Intel Analysis and CEO of Gerard Group.

Guest Column: Abkhazia, The Tiny KGB Kingdom

The significant Russian FSB presence in Abkhazia, the breakaway province of Georgia, should give the West reason to worry about the future of its ally in the Caucasus. Following is some insight into what this means to the future of the region, and in the larger scheme of global politics.

Background
Abkhazia is a tiny disputed country or province on the eastern coast of the Black Sea Bordered by Russia to the north and Georgia to the east that now plays a pivotal role in the regional power struggle between Russia and Georgia. The history of Abkhazia since August 1991 has been dramatic. After the collapse of the Soviet Union, Zviad K. Gamsakhurdia was elected president, only to be overthrown the following year whenGeorgian troops invaded Abkhazia from sea and land on August 14, 1992. The city of Sukhumi was occupied and the separatist leadership retreated north to Gudauta.

But Chechen sympathizers as well as the Russian military supported the Abkhaz separatists who eventually regained the upper hand. They expelled the remaining Georgian forces from Abkhazia in September 1993, and virtually the entire Georgian population of 250,000 fled with them, becoming refugees in Georgia. In the years that followed, the economic situation in Abkhazia was very difficult, aggravated by sanctions imposed in 1994 by the CIS, which were later suspended by Russia in 1997.

But Georgia did not give up its position that Abkhazia was a part of Georgia. At a press conference on August 19, 2002, President Eduard Shevardnadze warned that changes in Russian policy regarding Abkhazia namely, "the distribution of Russian passports in Abkhazia and South Ossetia is inadmissible from standpoint of international law" and these actions were, "a rude interference into the internal affairs of Georgia".

President Shevardnadze declared that Abkhazia is part of Georgia, so such activity by the Russian side is inadmissible. Nevertheless, Russia was positioning itself to separate Abkhazia from Georgia. As early as the summer of 2002, Russian policy was being designed to provide a pretext that could be activated as soon as the right conditions presented themselves. The election of Mikhail Saakashvili, who replaced Shevardnadze in Georgia's 2003 bloodless Rose Revolution, brought with it new promises to re-integrate Abkhazia and South Ossetia and gave Russia the excuse it was looking for.

The Summer Invasion of 2008
The uneasy stalemate between Georgia and Abkhazia was abruptly interrupted this summer with Russia's massive assault against Georgia. In the aftermath, Russia declared Abkhazia's independence from Georgia, and Venezuela and Belarus quickly recognized it.

A friendship treaty between Russia, Abkhazia, and South Ossetia, was signed on September 17, 2008, providing Moscow with both the ability to reassert itself in the region and help deprive Georgia of its territorial integrity. More than reducing Georgia's influence in the region, the move further eroded Georgia's aspirations to become a member of NATO, and provided a legal basis for spying on Georgia from both of these breakaway provinces. No less important, the treaty allowed Russia to deploy its border guards in both separatists' areas in order to protect their borders with Georgia.

It is important to understand that Russian border guards are subordinate to the Federal Frontier Service, which is part of the FSB (Federal Security Service, inheritor of the KGB legacy). The Federal Frontier Service has maintained its Intelligence Directorate throughout the turbulent post Soviet period, and it is authorized to spy in the territory of all neighboring countries not only by visual monitoring, but also by recruiting their citizens.

The Intelligence Directorate of the Federal Frontier Service is a part of Russia's FSB Intelligence Service, one of three Russian intelligence services, which includes the SVR (Foreign Intelligence Service, formerly the First Chief Directorate of the KGB) and GRU, the Chief Intelligence Directorate of the Russian Army.

The establishment of the FSB Intelligence station will be new for the destitute smuggling capitol of the Caucasus, South Ossetia, while the prosperous Abkhazia will find nothing new in it. In fact, Abkhazia seems to be a country with the world's largest number of the KGB agents per capita.

Abkhazia was infiltrated by the KGB during Soviet times, inspired both by its strategic location and its wonderful Black sea beaches. The Soviet Union took advantage of the strategic importance of Abkhazia, and constructed a great number of military bases there. They were managed by the Defense Ministry, which was not the same as the KGB, but it was rigorously monitored by the KGB's 3rd Directorate, which was responsible for the military counterintelligence.

The 3rd Directorate of the KGB was tasked with recruiting not only the soldiers and officers at the military bases, but also Abkhazian and Georgian nationals living around these bases. Those recruited were tasked to inform the KGB about everything from foreigners trying to take picture of the bases to crimes and other violations by Soviet military personnel. Because Abkhazia is located near the Russian border, a significant settlement of KGB Frontier Troops and checkpoints was considered essential.

The Frontier Troops were also charged with recruitment of many agents among the Abkhazians near the border in order to obtain information about unknown persons appearing along the border. Since the entire Black Sea coast was regarded as the Soviet border, the number of agents who were required was significant.

In the Soviet era, the sapphire sea, relic pines, and wonderful air inspired USSR's leaders to construct their "dachas" there. The entire life-support system of the Soviet top leadership was managed by the KGB 9th Directorate (now the Federal Guard Service), which supported all aspects of life of the Politburo members and their families down to the production of flowers for the elite and their guests.

The importance of this small corner of the world was such that the KGB had its own ministry there, not just a KGB regional directorate as it was common for the most of other districts. Although Abkhazia was a mere Georgian province, it was granted status of the "Autonomous Soviet Socialist Republic", or a quasi-independent state and was obliged to possess some attributes of the independent state like a handful of nominal ministries including the KGB.

Traditionally, it was very hard to find an Abkhazian family where at least one of the numerous relatives was not also related to the KGB either as a former officer, or a civil employee, or a secret collaborator. The penetration of the KGB and the Soviet Army into Abkhazia was not restricted only by their bases and outposts

They have also opened many sanatoriums there for rest and relaxation. After 1991, when Georgia gained independence, many of the former Defense Ministry sanatoriums were transferred to new owners. But the KGB sanatorium "Lighthouse" was not transferred and still belongs to the FSB, symbolizing the retention of the traditional KGB/FSB powerbase in Abkhazia.

Abkhazia's Role in Today's Regional Conflict
In Abkhazia it is hardly possible to find a politician without a KGB background. This has assisted Russia in illegally providing Abkhazians with Russian passports. Today, over 90% of the Abkhaz population have been granted Russian citizenship and are registered at the Moscow Regional Election District.[i]

Russia's Friendship treaty with Abkhazia and South Ossetia of September 17, 2008 has made these territories a de facto part of Russia. In return, for giving Russia the opportunity to build its military defense machine there, Russia will provide Abkhazia with energy and transportation systems, as well as communications and television. Only one thing is left to be done - annexation these territories, although internal Abkhazian resistance to this move remains. The cultivation of Abkhazian independence may be one of the unintended outcomes of this covert effort.

Abkhazia - Russia's Newest Spy Center
In order to avoid outright confrontation with the international community, Abkhazia is now seeking to join the Russia-Belarus union state, which will allow it to be independent on paper only. This decision seems to have been made four years ago, as soon as President Bagapsh came to power. Upon becoming the President he declared himself the supporter of this idea.[ii] Pavel Borodin, the State Secretary of the Union State of Russia and Belarus has supported this intention on September 18, 2008, on behalf of Russia as follows: "Abkhazia and South Ossetia can join the Union State".[iii]

But such a kind of a Union State assumes the creation of a joint KGB structure. Russia and Belarus first legalized this in 1997 in the form of The Security Committee of the Russian-Belarus Union. Just as Belarus intelligence has become just another part of the Russia's spy network. It is spying on the U.S.A. under Moscow's guidance; Abkhazia will likely fall into a similar role. But legalization procedures are not even necessary there. The Russian KGB has always felt at home there and is now expanding its reach - a reach that will be felt around the world before we are even aware of it.

[i] Olga Allenova, "The Moscow Regional Abkhazian District", "Kommersant" magazine, July 30, 2007

[ii] "Abkhazia: the" Oligarchs" has joined with "Chekists' (KGB Officers)". Newsru.com, December 6, 2004

[iii] regnum.ru

Konstantin Preobrazhensky is a former Lt. Colonel in the KGB who defected to the United States, where he received asylum. He is the author of seven books on the KGB.

Paul M. Joyal is a prominent intelligence expert who specializes in Russia, Georgia, and the former Soviet Union.

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