Imagine if you could invest $100,000 to control a $200 million asset for three months and sell it back to the owners for $10 million—tax-free. That's the Somali pirate way.
Tucked behind the shouting dockworkers and fishermen cleaning their nets at the wharf in Bosaso, on the Gulf of Aden, there's a row of decrepit gray skiffs and patrol boats. Strewn with rusted antiaircraft shells and old mattresses, these dead ships look more like floating homeless shelters than vehicles of terror. Out on the water, though, they played a starring role in a booming criminal enterprise. These are the impounded attack vessels used by Somali pirates to hijack passing cargo ships, private yachts, and even massive oil tankers.
Drive a few hundred yards west along the beach, and there, just past the presidential compound, is a well-worn and crowded jail, with 248 pirates among its 400 prisoners. Abdirahman Mohamed Farole, the president of Puntland, insisted that I visit the prison to prove that his tough stand on maritime kidnappers was not just talk. (Somalia has not had an effective central government since 1991; Puntland is one of the country's seven autonomous regions.) Minutes after entering the prison, I was face to face with 51-year-old Farah Hirsi Kulan, or "Boyah," the unrepentant John Dillinger of the Indian Ocean.
Halfway into an eight-year sentence for piracy, Kulan—an arrogant, flash-tempered stick-insect of a man—lounged outside a packed cell block with another famous bandit, Omar Bagaley. A newly arrested 13-year-old, Saynab, sat wedged between Bagaley's knees on a concrete slab. Back in November 2008, Kulan was the first public face of Somali piracy. Not only was he the region's chief scoundrel—he had coordinated the seizure of 25 ships, as he boasted to the BBC in 2009—Kulan began a second career as a "reformed" pirate, advocating for pirates to quit, stop the violence, and go to the mosque. Some believed him, until Kulan was apprehended while fleeing a major pirate planning meeting in Garowe, Puntland's central city, and thrown in jail.
Our conversation was brief and loud. Bagaley stabbed the air with his finger, warning me and my interpreter to back off, while Kulan declaimed, insisting that he had ceased to be a pirate before his arrest and, anyway, he was merely a fisherman, enlisted to repel poachers. What money he earned, he shared with friends. This is a common refrain among Somali pirates: that they're just poor fishermen taking up arms to defend the seas from the predatory practices of foreign poachers—the real piracy, in their view. Some will tell you they go to sea to prevent toxic dumping, too, à la Greenpeace.
It's a romantic angle—and it's wrong. The U.N. Monitoring Group on Somalia estimates that only 6.5 percent of the attacks by gangs of Somali men have been against fishing vessels. According to the International Maritime Bureau (IMB), a London-based nonprofit specializing in global commerce, the estimated $150 million to $300 million in ransom money paid out last year was provided to free the crews of bulk carriers, container ships, and other vessels carrying unglamorous (and lightly protected) cargo. Some of that was paid to recover private yachtsmen. And while a pirate's take may trickle down to friends, President Farole said most burn through cash conspicuously on Land Cruisers, lavish parties, and a steady supply of qat (a mild stimulant chewed like tobacco and imported from Kenya).
Saynab, the 13-year-old would-be pirate, clearly admired his elders in the yard. His implausible story was that he set sail with the pirates to learn how to fish. It was Friday, and he was being visited in jail by his 32-year-old mother and 2-year-old brother. His mother blamed herself for Saynab's predicament: "I only started looking for him 22 days after he disappeared. I thought he just sailed away."
Later that afternoon, when I mentioned Kulan and Bagaley to Farole, laughter broke out in the room. "They think they own the world," Farole said. In his third year as the leader of Puntland, the former banker and PhD candidate at Melbourne's La Trobe University has stepped up his war on the pirates with plans that combine community activism with a new law enforcement group funded by an anonymous donor. (The donor is widely believed to be an Arab state government, but none will confirm this because they don't want pirates targeting their ships.) In the past 90 days, Farole says, pirates have been pushed from fishing ports to Puntland's smaller communities. Elders and residents of coastal towns such as Eyl, Bargal, Laasqoray, and Bosaso have all taken stands against the brigands and their followers. Pirates are forbidden to come ashore, store owners are banned from selling goods to pirates, and pamphlets declare their money to be haram, or against the tenets of Islam.
Despite the imported firepower and the support of residents, Farole's dismissal of Kulan may be years premature. The idea of sailing off to find riches and adventure is a powerful draw, especially for young men with few employment options. When the president hears about the gullible teenager sitting in prison, he is visibly disturbed. He turns to his ministers in the room and says, "Get him out of there. Piracy is no business for a child."
Piracy is a crime, but it is above all a business, and right now it's a high-volume one. The U.N. Office on Drugs and Crime reports that 1,011 pirates are on trial or in jail in 20 countries, and neither deadly military responses nor harsh sentences have slowed the attacks or piracy's spread. There have been 97 pirate attacks in the Somali region (and 142 worldwide) in the first quarter of 2011, according to the U.K.-based IMB. That's up 177 percent from a year earlier. At the moment, more than 480 people are being held hostage on more than four dozen ships in Somali waters, all awaiting ransom and rescue.
Business is booming, in part, because ransoms keep getting larger. On Apr. 7, Intertanko, an organization of independent tanker owners, reportedly paid $13.5 million for the release of its Very Large Crude Carrier Irene SL, topped up with 1.8 million barrels of Kuwaiti crude. The $200 million worth of oil didn't interest the hijackers. Instead, they used the 1,000-foot-long tanker as a destroyer-class warship. European Union Naval Force, or EU Navfor, which tracks piracy from its U.K. headquarters, reported that the Irene SL pulled up alongside freighters as pirates fired down on their victims from the castle-like heights of the tanker's hull.
To score their $13.5 million payout, the pirates held the Irene SL's 25-man crew for 58 days. That two-month investment netted them a 26,900 percent return on estimated expenses of $50,000. That figure comes from Andrew Mwangura, maritime editor of Somalia Report, the news agency I founded in January. (In an effort to report from within pirate groups, the dissident group al-Shabaab, and governments in Somalia, we've hired several dozen local contributors.) More typically, Mwangura figures, crews raise $300,000 to chase a $4 million ransom. Shipping companies ballpark the impact of pirates on their trillion-dollar shipping business at $7 billion to $12 billion per year, according to Ocean Beyond Piracy figures presented at a Dubai antipiracy conference in April.
Some 23,000-plus vessels pass through the Gulf of Aden annually. This includes tankers carrying 40 percent of the world's crude oil. Running a decent-size cargo ship costs $15,000 to $50,000 per day, according to Hart, a British-owned security firm with offices in Singapore, Cyprus, and the United Arab Emirates, among others. A cargo ship will typically make the Gulf of Aden passage in three days. It would take a similar ship three and a half weeks to go around the Horn of Africa. Geography is the pirates' greatest advantage.
Ironically, piracy in the Gulf of Aden partially grew out of efforts in the late 1990s by the same Hart security outfit to train Somali militias as a self-sufficient coast guard. When the Puntland government fell in 2000, the transition from coast guard to piracy took about a day. Enterprising sailors such as Boyah and 38-year-old Mohamad Abdi Garaad grabbed guns and began boarding unsuspecting fishing vessels operated by Thai, Spanish, and Chinese companies, demanding "fines" of $20,000 to $50,000. A ship could be quickly released if money were paid to a member of the Somali diaspora anywhere from London to Nairobi. Payment confirmed, the ship and crew were sent on their way. Initially, some of the militia discipline held, and any pirate using violence or damaging the ship would be fined or kicked out.
This early piracy still seemed like a tabloid hoax—at least until 2005, when Somali coast guards hired to protect a Thai fishing boat, the Sirichainava 12, seized the ship and demanded $800,000 for its release. The mutineers were overpowered, but the idea stuck. Why accept cash to protect ships when it was just as easy to demand a ransom? In 2006 there were 10 to 20 reported piracy attacks. The next year attacks doubled, and ransoms climbed to $1.5 million.
Using funds from successful hijackings, pirates poured the money back into ships and crews, and in 2008 piracy began in earnest. That year there were 134 pirate attacks and 32 hijackings. It was also the year that the first oil-carrying supertanker, the Sirius Star, was pirated, an act that finally caught the attention of terrorism analysts and military planners.
At present the IMB and Navfor believe there are 10 principal pirate groups, some operating with more enthusiasm than professionalism. After a number of violent responses to piracy by the world's navies, the trade is becoming even uglier. On Feb. 19 four Americans on a round-the-world trip got caught up in a botched rescue attempt and paid with their lives. As this article went to press, at least three Danish children were being held hostage—even after the ship they were held on had been returned to its owner.
One reason for piracy's rise is that, while the risks—prison, death—are high, it's easy for startups to gain market share. All you need is a fishing boat and a relationship with one of the "big three" money men—or a relationship with someone who has a relationship. If you have successfully grabbed ships in the past and have a decent crew, according to a recent investigation by Somalia Report's Mwangura, one of the big three—known by their nicknames, Boyah, Garaad, and Afweyne—will back you for 50 percent of expenses. Then you need to canvas the eight small backers who are good for 25 percent. In all, Mwangura has learned, it takes around $300,000 for a solid run.
Expenses break down as follows: weapons and ammo ($2,000); skiffs and outboards ($14,000); grappling hooks and curved ladders ($1,200); GPS and radios ($4,000); food ($70,000); miscellaneous equipment ($30,000); bribes ($180,000). Once you take hostages, allot $15,000 to pay the land crew to watch over them and the hijacked ship.
Ambitious pirates use rusty skiffs to board and control a "mother ship"—a larger vessel that can deliver a good ransom but can also provide fuel, food, water, and shelter as a staging platform for more attacks farther out to sea. Eventually, when you are pressed too hard by the world's navies, or the mother ship runs out of supplies, you can always abandon ship and grab another.
Naturally, pirates have specialized to make themselves more valuable to gang leaders. A pirate intel crew identifies ships and tracks them via their automatic identification system, or AIS. Once a ship has been taken, pirates use the ship's phone to call a trusted negotiator. Meanwhile, they anchor the ships offshore. According to NATO, about a quarter of pirate attacks are successful, and most pirated ships yield a ransom.
What pirates must excel at is waiting. From the adrenaline rush of attack to the moment of payoff can stretch to a tedious 153 days. Five months is a long time to be responsible for 25 or 30 hostages.
Ransoms are set based on previous payouts. The $13.5 million paid for the Irene SL was an extreme high; the IMB says $2 million to $3 million is a more standard ask. The average payout has been creeping upward as negotiators get smarter and push for automatic insurance payments for cargo or ships. Western hostages on small pleasure craft—a different business altogether—are worth about $500,000 each, but these operations often result in violent retribution. Increasingly, the French, Americans, and Danes will either try to rescue their citizens or go after pirates once a ransom is paid. Overall, that $300,000 investment should yield a payoff of at least $600,000 to $1 million. The lucky can score anywhere from $1.5 million to $8 million. But this is a business: Shoot a crew member, destroy the cargo, damage the ship, and your ransom will be less and take much longer to collect.
Generally speaking, pirate takes are split among several groups. Thirty percent goes to the maritime crew (with a bonus of a Land Cruiser to the first pirate that lands on the ship). The ground crew that watches the ship and hostages for extended periods receives 10 percent. Another 10 percent gets splashed around with local elders, community, and politicians. Twenty percent goes to the little backers. And the big boss receives 30 percent.
There are a lot of fingers in the piracy pie, and it's not just pirates profiting under the equatorial sun. Increasingly, piracy is but one part of a larger economy that includes maritime insurance, with its cash payments (and cash transaction fees); hostage negotiators; an antipiracy equipment manufacturing sector; and, inevitably, soldier-of-fortune protection services.
"Looks like they are getting another ransom ready," joked Jim Heycock, a silver-haired former commando, noting that the lights are still on at the bank down below. We were on the rooftop deck of the Grosvenor House hotel in Dubai as the sun set. Like his boss, Richard Westbury, the owner of Hart, Heycock is a former member of the SAS, the British special forces. Retired and in his fifties, Heycock explained that banks here stay open after hours to count and bundle the multimillion-dollar ransoms.
Every part of the piracy business has an expert now, and while Hart offers a full complement of security services, Heycock and Westbury have lately focused on getting replacement crews to hostage ships and delivering the ransoms.
"In the old days, the standard pirate ransom was around $2 million," Heycock said. "That ransom, in new, sequential, Treasury-wrapped U.S. $100 bills, fits nicely in a large legal briefcase and weighs under 50 pounds." He smiled. "It's a reassuring heft."
Business has never been better. "We made $1.9 million in the last 28 days," said Heycock. He stared at the lights below and pulled on a Cuban cigar. "We are not here to save Somalia," said Westbury. "It's not a solution to piracy, it's a business plan to make money."
Westbury agreed that insurance is the grease that keeps the security business in gear. Hart has a partnership with an insurance company to package its services. Hugh Martin is part of a small group of high-risk insurance brokers willing to play in the area of piracy. A kidnap-and-ransom, or K&R, specialist, Martin works at Swinglehurst in London, far from the skull-cracking heat of Somalia. Swinglehurst is a family-owned business founded in 1999. Like the pirates, Swinglehurst's individual insurance policies are underwritten by anonymous investors.
"When you look at shipping, you are looking at three elements: the owners, the charterer, and the facility company that runs the ship. They often compete with each other," Martin said. "None want to spend any money they don't have to, and none want to be involved in liability regarding loss or damage to crew or cargo, so they turn to insurance companies to remove that risk."
For the insurance companies, piracy is just another game of arbitrage. Worldwide, IMB estimates, 18 vessels have been hijacked in the Gulf of Aden this year, 45 vessels have been boarded, and another 45 ships have been fired on. That's a significant number, but it's still less than 1 percent of the total shipping traffic. That means piracy remains a decent insurance bet. Swinglehurst and Hart have created a package deal. The three-day run will cost a ship operator an additional $180,000, in all, for insurance, security prep, and gunmen.
Martin points out that the highly competitive shipping industry is driven primarily by the need to cut costs. "Insurance premiums for the Gulf of Aden area have gone up tenfold and now twentyfold," he says. "In addition, loss of income caused by a hijack can hit the bottom line, so K&R specialists are under the gun to come to quick agreements, but not accept initial demands too easily." It is legal to pay ransoms in the U.K., Martin says, because piracy is not considered theft—since the pirates intend to return property and people—and the ransom is not supporting organized crime because it ensures the safe return of property and life. If shipping companies do feel the pain of piracy, they pass on the cost to the consumer; shippers through the Gulf of Aden generally tack on $1 per container foot, according to Maersk Line, the world's largest shipping business.
In Maersk's Copenhagen offices, I met with Lars Lorenzen, the company's head of security. Lorenzen views piracy as a manageable risk, just one line in a complex matrix of calculations that shipping companies must make every day. While the April 2009 seizure of Maersk Alabama was a high-profile case, Lorenzen says Maersk has kept pirate losses to a minimum. He credits good security management procedures, rerouting ships, and training with keeping his other ships out of the hands of Somali pirates. Lorenzen and Erik Rabjerg Nielsen, Maersk's head of daily operations for container freight, calculate that piracy cost Maersk $100 million in 2010. This year it expects to spend $200 million. That works out to an additional $100 to $200 on every $3,000 container-shipment bill.
Bryan Toki is a 21-year veteran of the New Zealand army and former NZ Māori Rugby forward. He is also the man you go to in order to improve your chances of safe passage through the Gulf of Aden. Despite two decades of military training, he was never interested in becoming a hired gun. "A lot of my mates were lured to Iraq. I wasn't," he says. "I knew if I went there, I would never come back."
Instead, Toki became an antipirate profiteer. He puts together teams of Western security guards to equip, man, or accompany ships from Southeast Asia to Nigeria to Yemen. He's done about 120 missions, he says, and averages three or four a month. Toki estimates his crews encounter pirates on about 20 percent of their runs.
"Back in 2004 we started in the Malacca Straits and made $8 million dollars," said Toki over a drink at Le Meridian Hotel in Dubai. "We were successful because we put $300,000 into the legal side of the business to find out what is right and what is wrong," he said. "A vessel has a right of safe passage from point A to B. ... But if we start doing our drills, we can be seen as a threat to the sovereignty of the nation whose waters we are in."
To keep pirates at bay, Toki's team first must survey and "harden" the ship, working with the captain and then training the crew. The team goes over emergency drills, welds plates on weak entry points, puts barbed wire on accessible decks, and trains for attack on the vessel. The enemy is always innovating. "The pirates are not stupid," Toki said. "They are very aware, far more aware than we are. The pirates even run three shifts now, one in the water, one on land, and one on leave."
Once at sea—and depending on the client—Toki's team either runs an armed escort or positions men prominently on the ships. "We do more with our binoculars and radios than our guns." Toki notes. "Fifteen minutes is the average time it takes from the time a crew spots a pirate attack until they are on board. When the pirates attack, they do so in small boats, often in multiples trying to confuse and overwhelm the ship." Toki and his crews have a number of tricks up their sleeves, ranging from the use of ordinary fire hoses to dropping 20-kilogram iron weights on the fragile fiberglass skiffs that come up alongside a ship. "The last thing we would do would be to shoot someone. The idea is to deter. If you're driving a VIP through Baghdad, I would be low-profile. But out here, you want to be visible."
Restraint has made Toki's business valuable. It also frustrates him. Piracy can be assessed and accounted for like any other maritime threat, but that doesn't make it any less evil. In March, Toki and Hart were hired by the owner of the Rak Afrikana, a bulk cargo carrier with steel and cement on board, to deliver a ransom and tow the disabled rig back home. The ship and its Indian crew had been held hostage for 332 days. The pirates finally settled for $1.2 million (down from their $3.5 million demand) because the ship had sprung a leak. As Toki's men hooked up the slowly sinking ship, he could see the other large vessels being held, but not yet ransomed. He was haunted by the sight of Chinese sailors, rail-thin with beards down to their waist, waving for salvation on a nearby ship. "I had a 50-cal. on the bow, and I wanted to open up on those bastards who were holding them and free those poor souls," Toki recalls. "But I had to remind myself, this is a business."
Robert Young Pelton is the publisher of Somalia Report and the author of The World's Most Dangerous Places and Licensed to Kill.
Source: Bloomberg Business Week
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