Financial Networks and Ransom Payment: Target Pirates or Payers?
In the last few years, Somali pirates have evolved from a small group of bandits into a network increasingly functioning like a sophisticated global organization with hijackers, investors, guards, professional negotiators and money laundering agents working in tandem. This efficiency has made it very difficult to counter the threat of piracy but targeting financers and negotiators is part of a more proactive strategy being adopted by the United States. Other countries are also on board with this plan of attack on the financial network of Somali pirates. The Contact Group on Piracy off the Coast of Somalia (CGPCS), a multilateral diplomatic effort consisting of 60 countries is adding a working group that will focus on illicit transnational financial flows. Many nations are also working towards implementing better forensic methods to deny pirate chiefs the ability to benefit from their ransom proceeds. So what is the likelihood of success of these measures?
|Pirates cornered Photo courtesy|
A comparison to ongoing campaigns against the financial networks of al-Qaeda and Iran’s Revolutionary Guard illustrates some of the benefits of pursuing this strategy and highlights key pitfalls to bear in mind. A Council on Foreign Relations (CFR) report last year highlighted the difficulties being faced by al-Qaeda operatives including a “shortage of food, weapons, and supplies brought about by a dearth of cash” after a crackdown by financial regulators. Stuart Levey, the Under Secretary for Terrorism and Financial Intelligence, claimed success of the financial strategy in Iran as well in a recent testimony before the House Committee on Foreign Affairs where he stated that: “Iran has dramatically reduced access to financial services from reputable banks, and is finding it increasingly difficult to conduct major transactions in dollars or euros [which is] creating the leverage needed for effective diplomacy.” However, terrorism and piracy are relatively cheap activities. There are more sources of illicit funds than agencies could potentially crackdown on and like cash-strapped al-Qaeda affiliates, pirates may turn to criminal activities like smuggling and drugs to maintain their status quo.
The direst impact of the crackdown on pirate networks, however, would be a forced increase in the scope of their activities from traditional hijacking to terrorist actions. Given all these issues associated with the crack down on pirates’ financial networks, we must consider our alternatives with the other party to the transaction, that is, the shipping companies and their cohorts that pay the ransoms demanded by pirates.
The United States has consistently urged global shipping corporations not to yield to pirate demands for ransoms. Even Somalia’s own foreign minister, Mohammed Abdulahi Omar Asharq, pleaded with shipping firms to not pay ransoms since they were “institutionalizing hostage taking” by doing so. However, this advice has not been heeded and the willingness of shipping companies to cooperate with pirates to ensure the safe return of their ship, crew and cargo has resulted in the total ransom amount paid to pirates each year rising from about $3 million to more than $75 million from 2007 to 2010. The average ransom has also risen from $300,000 to more than $4 million in the same period. This increased payoff has resulted in pirates taking more risks when attempting hijackings. So what can we do to force shipping companies to comply?
The United States is believed to be testing national and industry reactions to modification of existing United Nations resolutions and US Office of Foreign Assets Control Regulations that would ban vessels freed from pirates following the payment of ransom from coming to the United States or freeze the assets of ship-owners that have a registered presence in the country. It is already illegal under the Patriot Act to pay a ransom for the release of an American national taken hostage overseas and imposing these after-the-event sanctions would give the government leverage against non-US ship-owners as well.
The potential benefits of this step include forcing ship-owners to choose safer, albeit more expensive, routes (that is, avoiding the Gulf of Aden/Suez Canal and diverting around the Cape of Good Hope) and increase employment of self-help measures such as armed guards on board their ships. These steps would protect vessels from hijacking and thus prevent ship-owners from making the difficult decision between not paying the ransom and welcoming the ire of the United States’ government. The potential risks include increased violence and loss of civilian life if armed commercial vessels provoke a more brutal response from pirates and isolation in the global trade market of the United States if it implements such stringent measures without adequate support from other nations. These steps might also lead to an underground market for ransom payments by impatient ship-owners that get tired of waiting it out or the sale of the cargo on board the hijacked ships in the black market by the pirates in lieu of ransoms.
Targeting ship-owners that pay ransoms has its pros and cons. However, despite the potential drawbacks, it is essential that we find some way to penalize shipping companies, insurance firms, or other organizations with interest in the cargo that yield to pirate demands since it is our best shot at controlling piracy. When a ship is hijacked, it is understandable that shipping companies want to end the ordeal as quickly as possible, not just out of concern for their crew but also the commercial imperative to free their ships when the ransom payment is a minor percentage of the ship and cargo value involved. However, it is this dynamic of today's piracy that makes it less like terrorism or drug dealing and more like prostitution, with an implied collusion between pirate and ransom payer. Just as the best way to clean up a red light district is to arrest the johns as well as the prostitutes, we need to make the countries and companies that collude in the blackmail pay a penalty in order to reduce piracy off the coast of Somalia.
By Rohan Poojara
The author is a Research Assistant in the economic policy group of the American Enterprise Institute.
Comment on this article!