Somalia’s Innovating Pirates

Originally Published by the World Peace Foundation Reinventing Peace Blog

By Matt Herbert and David Knoll

The MT Smyrni, a Liberian flagged Tanker, was sailing 250 nautical miles off the Omani coast when pirates were sighted. The pirates closed fast, attacking with automatic weapons. The crew was able to drive the pirates off once, but a second attack overwhelmed the Smyrni. Within moments the vessel had been commandeered, the 26 crewmembers kidnapped, and a new course set towards the Somali coast. The ship’s owners were contacted, ransom negotiation initiated, and its crew held hostage to hedge against attempts to forcefully free the vessel. Ten months later the pirates received $9.5 million dollars, and the owners of the Smyrni received their ship back.

The attack on the MT Smyrni is hardly unique. Over the last eight years, Somali pirates have emerged as perhaps the most successful maritime brigands of the modern age. Between 2005 and 2011, they hijacked 218 vessels and held 3,741 sailors hostage. Their operations peaked between 2010 and 2012, when roughly 3,000 Somali pirates extorted $429.37 million for the global shipping community.

Somali pirates operate well out into the Indian Ocean, extending from the Bab El Mandab Strait to the Maldives. In at least one case, Somali pirates were encountered off the south Indian coast. In an era of increasingly globalized and professionalized crime, Somalia’s pirates have demonstrated that opportunities for lucrative illicit gain still exist on the high seas, albeit without eye patches and peg legs.

Their attention grabbing, large-scale attacks served to remind the world that piracy is not dead, but has simply changed forms. Apart from the direct costs of the ransoms, shippers faced increased insurance premiums on vessels sailing past Somalia. In some cases, shipping companies chose to reroute vessels away from the western Indian Ocean all together, at considerable expense and time. Some estimates peg the annual impact of Somali piracy on the global economy at $18 billion.

The high cost of Somali piracy begs the question: how have they been able to achieve such success? Analyses of Somali piracy have focused on the structural dynamics in Somalia. The most frequently cited enabling factor is weak state authority. Minimal state presence allows pirates to organize and operate with little fear of arrest or interdiction. State weakness also impedes the growth of legitimate industries, incentivizing young men to turn to piracy.

Other analyses have focused on the availability of ships off the coast of Somalia. International shipping relies heavily on the Suez Canal and Bab El Mandab Strait as a shortcut from the Mediterranean to South and East Asia. Add in the tankers moving oil from the Persian Gulf to South and East Asia, and the waters of the Western Indian Ocean are packed with all manner of high value vessels. Despite the threats posed by Somali pirates, it is economically prohibitive for most shipping companies to reroute their cargo, ensuring that prey remains aplenty for pirates.

These structural factors are important in explaining the emergence of Somali piracy, but they are ineffective in explaining its economic success. Somali pirate attacks regularly yield million dollar payoffs. By comparison, pirates in other areas of the globe are often lucky if they can get ten thousand dollars. The main driver of this differential is the innovative nature of Somali pirate operations.

Traditionally, pirates hijacked vessels to steal money, cargo, the ship, or kidnap individuals onboard. These methods all involve a risk-reward tradeoff. Stealing shipboard items such as money or small amounts of cargo is low risk, but not lucrative. Alternatively, trying to steal an entire ship and reregister it is lucrative, but unlikely to be successful and could involve state violence. A large proportion of pirate attacks are basically opportunistic crimes – one or two pirates slipping on board an anchored vessel, stealing money or goods from the ship, and rapidly fleeing. The pirates perpetrating such attacks are generally unorganized and unskilled.

Somali pirates, by contrast, are highly organized groups of men who hold specialized skills. The Somali model is encapsulated in the MT Smyrni episode. Pirates use motherships — often hijacked fishing vessels — and small skiffs to stalk vessels steaming through the Indian Ocean. Once spotted, the pirates use speed and violence to swarm the target and take it over. It is then steered back to the Somali coast, where the vessel’s owner is contacted and a ransom demanded.

The detention of the vessel’s crew creates a hostage situation, deterring attempts by military forces to regain control. Instead major shipping companies pay the ransom quickly to ensure the safety of the crew and to get the ship back into revenue generating status. Once the ransom has been paid, the vessel and its crew is released, and the pirates return to the sea try again.

While the Somali model of piracy involves aspects of traditional operational models of piracy, including vessel hijacking and crew kidnapping, it differs in how it leverages value from its victims. Instead of having to engage in the messy task of selling a vessel, or the non-lucrative seizure of the currency aboard, the Somali pirates have realized that simply extorting international shipping companies can garner large profits. The companies in turn are incentivized to negotiate by the high value of the ships seized, the physical threat to the crew, and the significant cost of their vessel being idled. The cost of an idle vessel can be particularly acute, with some estimates putting the daily cost at $17,500 for a bulk carrier.

The hijack-ransom is shocking in its simplicity and impressive in its profitability. What makes this method effective is not simply the enabling conditions, but the innovative operational methods that have been introduced. The recent success of the international community to slow Somali piracy might convince some that the threat has been removed, however the factors that produced hijack-ransom piracy are in place in other regions indicating that Somali-style piracy could be poised to spread. A forthcoming post will address how hijack-ransom piracy might proliferate.


Out of Sight, Out of Mind: Barclay’s Bank Kiboshes Somali Remittances

Originally Published by the Global Initiative Against Transnational Organized Crime, Available Here.

In May, Barclays Bank announced it would be withdrawing banking services from 250 money transfer services, including a number that provided remittance services to Somalia and Somaliland. This was the last western bank serving Somalia.  Barclay’s rational for the service termination revolved around the weak internal controls against money laundering and terrorist finance many of the businesses reportedly had.

In reality, it is more likely that it was a fear of risk that motivated Barclays to act. Over the last decade, anti-money laundering regulations have become increasingly strict. In recent years, financial regulators have moved aggressively against banks handling “dirty money”, often levying massive fines for non-compliance. The $1.9 billion settlement HSBC reached with the U.S. this August, has prompted an increasingly risk averse banking community to minimize their exposure to businesses deemed to be potential money laundering and terrorist finance threats.

Anti-money laundering (AML) efforts are a tricky balancing act for banks. At a base level, AML efforts necessitate that exercise due diligence in providing banking services and implement “know your customer” (KYC) rules.  The challenge for many remittance services is that many users, and especially recipients, do not possess the official identification necessary to meet KYC requirements. Being unable to guarantee that those who engage in remittance activities via their banking partners are not laundering money or funding terrorists, banks have opted for the extreme option and excised them from their banking systems.  A report by Thompson Reuters issued this month offers a pragmatic, risk-based approach to KYC requirements.

In taking this decision, Barclay’s may have mitigated the risk that it faces, but its actions will have significant consequences for the economy, development and thus stability of Somalia, whose future is again looking more fragile.  This stems of the importance of remittances for senders and receivers, as well as the size of the economic flows. Somalia alone receives $1.2 billion in remittances annually. Many Somali families depend on remittance to supplement their incomes.  Furthermore, this decision is in fact only minimally effective, or possibly even counter-productive, in the broader battle against money laundering and organized crime. Given the importance of the remittance flows, there is little chance that the Somali diaspora will cease sending money simply because the legal channels are withering away.  Instead they will turn to informal, often untraceable money remittance systems – such as hawalas – to support their families in Somalia.

The shift from formal, traceable systems – despite their flaws – to untraceable channels hinder the efforts of FIUs and law enforcement agencies to identify and trace actual terrorist and criminal finance. It may even provide a benefit to criminal actors, as the new channels for otherwise licit remittance funds pulsing through the informal challenges will overwhelm and camouflage the far smaller number of illicit transactions. Thus, Barclay’s decision has produced few winners – not the migrants, the remittance receivers, nor law enforcement agencies. In an ironic twist, the only beneficiaries appear to be Barclay’s itself and the international criminals and terrorists that it ostensibly acted to impede.