Insider dealing: fraud in Islam?
| DOI | https://doi.org/10.1108/13590791211220412 |
| Pages | 140-148 |
| Date | 04 May 2012 |
| Published date | 04 May 2012 |
| Author | Siti Faridah Abdul Jabbar |
| Subject Matter | Accounting & finance |
Insider dealing: fraud in Islam?
Siti Faridah Abdul Jabbar
School of Accounting, Universiti Kebangsaan Malaysia, Bangi, Malaysia
Abstract
Purpose – The purpose of this paper is to examine whether insider dealing is fraud from the
perspective of Islam.
Design/methodology/approach – The paper uses analogy (qiyas) of the injunctions in the Qur’an
and Sunnah and critical analysis of literature on Islam.
Findings – The paper finds that insider dealing is fraud (taghrir) in Islam and the defrauded party
has the option to rescind the transaction for fraud (khiyar al-tadlis) as well as for latent defect (khiyar
al-‘aib).
Practical implications – The paper is practical as a source of reference in legislating laws relating
to insider dealing particularly where Shari’ah is the principal source of law.
Originality/value – The paper presents a novel attempt in establishing that insider dealing is fraud
from the perspective of Islam.
Keywords Crimes, Finance,Fraud, Insider dealing, Insidertrading, Islam
Paper type Viewpoint
Introduction
In the US, insider dealing has long been regarded as fraud. Rule 10b-5[1], which was
promulgated by the Securities and Exchange Commission (SEC) in 1942 under
Section 10(b) of the Securities Exchange Act of 1934, imposes a duty to, inter alia,
disclose material information in connection with the purchase or sale of a security.
Courts in the US have decided that non-disclosure in such a situation is fraud. In the
UK, failure to disclose material information may tantamount to a criminal offence of
statutory fraud under the Fraud Act 2006[2] although mere non-disclosure is not fraud
under the common law. In South Africa, non-disclosure of material information in
securities transactions is similar to non-disclosure of latent defect in sale of goods, thus,
rendering insider dealing a prohibited conduct[3]. Jabbar (2010) argued that insider
dealing is prohibited in Islam and can be categorised as a criminal offence of ta’zir[4].
However, would Islam regard insider dealing as fraud as well? It is the latter question
that this paper seeks to answer. This paper, accordingly, scrutinises insider dealing as
fraud and the relationship between insider dealing and the law of latent defect from the
perspective of Islam.
Insider dealing as fraud from Islamic perspective
Islam prohibits any kind of fraud in any matter between individuals (Al-Qaradawi,
2003). Fraud is viewed as a serious and heinous moral wrong as exemplified in the
Sunnah[5] of the Prophet Muhammad where he was reported to have said:
[...] he who cheats is not one of us (Coulson, 1984; Rayner, 1991).
A Muslim must be honest and truthful at all times in all circumstances and mu st put his
faith over and above any worldly gain (Al-Qaradawi, 2003). Honesty and good faith in
commercial dealings are also emphasised in the Qur’an and Sunnah
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1359-0790.htm
JFC
19,2
140
Journal of Financial Crime
Vol. 19 No. 2, 2012
pp. 140-148
qEmerald Group Publishing Limited
1359-0790
DOI 10.1108/13590791211220412
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