Cultural chasm at the centre of credit union’s losses, judge says
How a deal to help devout Ontario Muslims buy homes went astray, costing Central 1 Credit Union millions and resulting in fraud charges — but no convictions
When a Shariah-compliant mortgage-lending program blew up in 2010 and several million dollars went missing, Central 1 Credit Union was the victim of a cultural misunderstanding, not a fraud, an Ontario Superior Court justice recently ruled.
Justice Jane Ferguson said Central 1 didn’t understand the business relationship it was in 10 years ago when it lost several million dollars in the collapse of UM Financial.
In a 68-page ruling, Ferguson recently found Omar Kalair and Yusuf Panchbhaya not guilty of all charges surrounding the disappearance of more than $2 million worth of gold bars. The bars are definitely missing, last seen on their way to Egypt, but Ferguson decided it wasn’t theft, just a routine business risk that Central 1 had to bear.
Ferguson ruled that the key issue in the case was whether Kalair and Central 1 were partners in a program to provide Shariah-compliant mortgages for Muslim homeowners, as Kalair argued, or was Central 1 just a lender that provided $100 million to Kalair so that he could arrange such mortgages, as Central 1 and the RCMP said.
The justice came down squarely on the side of Kalair and the defence. It’s a case that the judge said required her to take a crash course in Sharia law so she could understand the deal. It’s also about $2.4 million in payments by homeowners that was turned into silver and gold bars. The silver was recovered, the gold was apparently sent to Egypt to pay Muslim clerics who had provided professional opinions that the home buying procedure met strict requirements set out in the Koran.
Omar Kalair was born in Mississauga, to parents who were immigrants from Pakistan, and graduated from Wildrid Laurier University in 1996 with a degree in business economics. He was active in the Muslim student community at the university and helped create the first prayer room. In the early 2000s he had the idea of arranging home financing for Muslims who believe the Koran prohibits interest payments. He approached more than 70 financial firms before getting some interest from Credit Union Central of Ontario (CUCO) in late 2003.
Jens Lohmueller, then manager of commercial lending and product development for CUCO, worked with Kalair, who was president and CEO of UM Financial, to develop the business model that would provide Shariah-compliant mortgages to Muslims who wanted them.
Lohmueller was hoping to lead credit unions into a lucrative new market that had not been touched by the big banks. CUCO was the trade association and financial services provider for most Ontario credit unions and was owned by the credit unions and regulated by the province.
The plan was that the central credit union would provide the money that was used to purchase homes and structure the payments so they weren’t interest paying, something some Muslims believe they must avoid. Kalair’s company would handle marketing and collection of the payments. It would also ensure that the project was Shariah-compliant, which meant dealing with Muslim clerics to ensure the deal was structured appropriately. Panchbhaya, a cleric who Kalair had known for years, led the Sharia Ethics Board. Testimony during the trial last fall was that he had no business experience, limited understanding of English and no involvement in UM Financial’s bank accounts.
Shariah-compliant mortgages avoid the payment of interest by requiring the homeowner to pay an amount as “profit” instead of interest on the loan. Like conventional mortgages, the homeowners were required to make monthly payments.
“What, to an outsider, might have appeared to be religious hocus-pocus was in fact a carefully crafted contract providing funding on the basis of partnership between Kalair’s company and the Muslim homeowner,” defence counsel Edward Prutschi wrote in the Toronto Sun after the ruling.
In her judgment, Ferguson admitted she was skeptical of the concept. “I initially believed that an unwillingness to pay conventional interest on a loan appears (to use Kalair’s counsel’s word) “bizarre” until I learned that the payment of interest is considered a serious sin in the Islamic faith and violates a central pillar of Shariah law. This understanding was essential in my understanding of Kalair’s operating mind.”
During the trial, the defence relied on an 2005 agreement that Lohmueller and Kalair developed that used Shariah-compliant terminology, not normal commercial lending terms.
In a submission in March, defence lawyer Prutschi said: “The relationship between C1 and UM was from beginning to end structured by, and governed in accordance with, Sharia-law principles. C1 intentionally or through negligent inadvertence unilaterally changed that relationship.
“The defence concedes the physical transfer of money and precious metals took place, but denies any suggestion of deceit, dishonesty, falsehood or fraud.”
He argued that the relationship was a joint venture, or limited partnership, not simply a loan.
After Lohmueller left Central 1 in 2007, Vicky Sacco became the manager responsible for administering the UM Financial account and tracking payments from homeowners. She testified she was never told that the deal was structured differently from all other loans she managed and had never seen the agreement between Lohmueller and Kalair.
“Although Ms. Sacco is not to blame for the gaping communications failure separating C1 and UM, she is a symptom of that colossal miscommunication which left a yawning chasm between the factual realities understood by Kalair on behalf of UM as contrasted with the factual realities understood by Sacco on behalf of C1 in the post-Lohmueller era,” the defence submission says.
In her ruling, the judge said that Sacco is not to blame for the miscommunication but is a symbol of the chasm.
Discussing the opposing views held by Kalair and Central 1 after Lohmueller left, the judge says: “I accept Kalair’s evidence that this unilateral change in viewpoint was never communicated to him. Years later, Kalair continued to use the language of Shariah law, while Sacco used the language of traditional finance. This caused friction in the CUCO/Central 1 relationship and is critical to understanding and assessing the honesty of Kalair’s belief in the propriety of his actions.”
The UM Financial arrangement developed during a period of change and turmoil at Credit Union Central of Ontario. It was pursuing a merger with Credit Union Central of British Columbia, a much larger organization, that it hoped would allow it to provide more services to Ontario credit unions.
But the 2007 financial market collapse hit the Ontario credit union hard. It had invested several million dollars in asset-back commercial paper that for a period was untradeable, when the markets froze as U.S. banks stopped lending to each other, worried they would be stuck with worthless subprime mortgages.
Ferguson writes that in August 2007, “CUCO/Central l unilaterally stopped advancing funds for new mortgages due to the credit crisis. Existing mortgages would be renewed as they came due but CUCO/Central 1 ceased to honour its $49 million commitment.”
The credit union merger went ahead in July 2008 once a way had been found to handle the commercial paper problem. But in November 2010, the new organization, Central 1 Credit Union, notified UM Financial it wanted to end the partnership and demanded to be repaid $32 million. In March 2011, the credit union gave Kalair notice it was applying to appoint a receiver to take over UM Financial’s assets.
“That was the dagger that killed UM Financial. As soon as the matter ended up in the courts, we knew no one would want to do business with us,” Kalair testified last November.
At one point, Kalair sued Central 1 in a civil action seeking $50 million lost due to the cancellation of the loans. He scrambled to find another investor to replace the credit union.
The cancellation created chaos and confusion for the 170 homeowners who were paying UM Financial. Some turned to traditional lenders, some kept paying even as the company was wound up and some turned to lawyers to fight their loss of a Sharia-compliant arrangement. Testimony at the trial showed that no homeowners lost money. All their payments were ultimately tracked by receiver Grant Thornton and attributed to their homes.
Kalair said he had to pay $2.8 million to the clerics who had issued five fatwa declaring that the UM Financial program met the strict requirements of the Koran. He acknowledged in court that in September 2011 he typed up the invoice, but insisted that was only because Panchbhaya, head of the clerics Sharia Ethics Board, could not type.
Kalair took money from UM Financial’s bank accounts to purchase silver and gold that would be used to pay the clerics. He testified that on Oct. 4, 2011 he met Joseph Adam, the manager of finance for the board of clerics, to turn over the gold.
“We agreed to meet on Islington. I removed all the gold bullion from my office and gave it to Joe Adam. We did a car-to- car transfer,” he testified.
The receiver quickly went to court to get the return of the silver and gold. The silver was returned but Adam apparently took the gold to Egypt and never returned.
When Grant Thornton took over as receiver it began an investigation that revealed that UM had accumulated payments from homeowners intended to be paid against their mortgages which were never applied by UM. A forensic accounting expert found that the total amount of misapplied mortgage payments totalled $4,341,581.93.
In February 2014 the RCMP’s Greater Toronto Area Financial Crime Unit charged Kalair and Panchbhaya with theft over $5,000, fraud over $5,000 and laundering the proceeds of crime.
The investigation, which was conducted with the Office of the Superintendent of Bankruptcy, also resulted in three charges under the Bankruptcy and Insolvency Act of fraudulent disposition of bankruptcy property, failure to comply and failure to answer truthfully.
In her testimony, Sacco was unable to quantify the loss to Central 1 and said it is still being paid by some homeowners who have not moved their mortgages.
The judge said she accepted that UM Financial and Central 1 had entered into a limited partnership model with a Shariah-compliant contract. “The Crown submits that the arrangement was a typical debtor-creditor relationship but I do not accept that position,” she wrote.
She said Kalair believed on reasonable grounds that the partnership granted him full authority to utilize funds to make expense payments and purchase precious metals on behalf of the Sharia Ethics Board. “There was no intent to steal, defraud, or deprive. Although Kalair concedes that he was dishonest, any inconsistent explanations offered by him to third parties did not alter the fact that he acted at all times in accordance with his reasonably held belief that the funds were his to use for the … partnership.”
Abdulkater Thomas testified as an expert on Islamic finance and Shariah-compliant agreements. The judge says Thomas identified “the cultural chasm that delineated the relationship” between Kalair and Central 1. Thomas testified that it appeared Kalair did not realize that” Central 1 viewed him as a normal lender, while Central 1 was taking a harder and harder view that this is purely a borrower/lender relationship.”
The judge concluded: “A joint venture or partnership that subjects one partner to a risk of loss (or actual loss) is not a crime. CUCO/Central 1 withdrew from the . . . partnership when, taking into account expenses of the venture, there were insufficient profits to cover liabilities.”
Turning to Kalair, she concludes: “I find that he honestly believed at all times, and had reasonable grounds to believe, that he was acting appropriately under the circumstances.”