Follow the Khat: Tracking Piracy’s Financial Flows

It is high season for reports and studies relating to piracy. The latest World Bank report, Pirate Trails, which follows the recent IMB annual report on the number of piracy incidents as well as the UNSG situation report on piracy in Somalia, is dedicated to the largely unchartered topic of the illicit financial flows of Somali piracy. So far, apart for the disappointing report of the UK sponsored International Piracy Ransom Task Force, little public attention has been paid to tracking and disrupting the financial flows generated by piracy through the payment of ransoms for ships, crew and their cargos. Pirates, defined in the report as hostis humani generi (but wrongly attributing this definition to Cicero) have been capable of modernizing their actives and developing specific business models that adapt to the situation in which they operate. In Somalia, alongside pirates who attack and board ships crossing the Gulf of Aden, a sophisticated network of investors, local and foreign financiers and shareholders, but also negotiators, interpreters, guards, cooks and drivers, flourished and profited from piracy.

The report estimates that US$339 million to US$413 million was claimed in ransoms between April 2005 and December 2012 for pirate acts off the Horn of Africa. With low level pirates typically netting a pre-agreed fee between US$30,000 and US$75,000 (about 0.01–0.025 percent of an average ransom payment), the pirate financiers who invested in the piracy operations receive the bulk of the ransom, estimated at 30–75 percent of the total ransom.

Ransom payments can be invested locally, generally by low level pirates but increasingly also by financers, or moved by financial transfer, particularly to Djibouti, Kenya, and the United Arab Emirates. Most of the money is moved by cross-border cash smuggling, made easy by the porosity of the borders in the region and trade-based money laundering. Money transfer services are also exploited to move money outside Somalia.

Depending on the profit made, ransom money may be used to fuel other illicit activities in the region. Some pirate financiers are engaging in human trafficking, including migrant smuggling, and investing in militias and military capacities in Somalia. To launder their proceeds, pirate financiers can also buy into legitimate business interests, particularly the real estate market. Allegations that ransoms payments fueled the real estate prices in the region are not new, although any definitive evidence has yet to be shown. Other legitimate businesses in trade (for example, trade in petroleum), transportation, and the services industry (for example, restaurants, hotels, shops), also offer viable opportunities for the pirates to invest the proceeds from piracy, depending on the profit originally made.

Khat (also commonly referenced to as qat, qaad, gat, jaad, tchat, and miraa) is a small leafy plant. Among communities in the Horn of Africa and the Arabian Peninsula, the chewing of khat is a social custom dating back many thousands of years.

Khat (also commonly referenced to as qat, qaad, gat, jaad, tchat, and miraa) is a small leafy plant. Among communities in the Horn of Africa and the Arabian Peninsula, the chewing of khat is a social custom dating back many thousands of years.

Interestingly, the report sheds light of the role played by the trade of Khat, a mild stimulant popular in Somalia and very popular among pirates, in the financial flows generated by piracy. Khat is provided on credit to low level pirates throughout highjack operations. Its use is recorded. When ransoms are finally paid, the debt accumulated by the pirates during the captivity period is paid back by subtracting it from their share of the profit. In light of the potential profit to be generated, pirates are ready to pay their khat’s provisions at a price well above the market price. There is more. Given the lucrative nature of the trade, which predominantly cash-based, the traditional culture of khat chewing in Somalia, and Somalis’ control over the distribution network, pirates are also investing their profit and increasingly buying into this multi-million dollar business. Khat trade with northern Kenya, in particular, is largely unregulated and is becoming fertile ground for the pirates’ business interests in this sector. An estimate of nine tons of khat is flown daily from Kenya to Mogadishu. The report recommends the regulation of the khat trade as one of the means to disrupt piracy financial flows in the region. Considering the pirates involvement in the  growth, distribution and consumption of khat, however, the khat trade may already be an effective indicator of the pirates financial and laundering activities. Monitoring this business can therefore add to the efforts to track the pirates network upwards to their financiers within and outside Somalia.

The Report of the International Piracy Ransoms Task Force is Available

The International Piracy  Ransoms Task Force, established at the London Conference on Somalia, issued its final Report on December 2012. The objective of the Task Force, composed of representatives of 14 States, was “to develop a greater understanding of the payment of ransoms in cases of piracy, in order to put forward policy recommendations to the international community as to how to avoid, reduce or prevent the payment of ransoms. The ultimate goal of this effort is to reach a point where pirates are no longer able to profit from ransom payments and thus abandon the practice of kidnapping for ransom.”

The conclusions and recommendations of the Task Force, included in the Report, build upon the following main options to reduce and avoid the risk of ransom payments to pirates:

  • strengthen the co-ordination between Flag States, the private sector and military responders to prepare for potential hostage situations, in order to shorten the decision-making process during the narrow window of opportunity for intervention after a piracy incident;
  • develop a new strategic partnership between Flag States, the private sector and law enforcement agencies that brings together those tackling piracy and those subjected to it in a united effort to break the piracy business model. In particular, this partnership should develop a more co-ordinated approach to information-sharing which would greatly enhance the quality and quantity of information exchange both to reduce ransom payments and to provide evidence to pursue and prosecute all involved in piracy, from those directly attacking ships to the kingpins who direct this organised crime;
  • encourage the implementation of anti-piracy measures, including still greater compliance with industry Best Management Practice, under the leadership of flag states and supported by the private sector, including insurance companies, in whose interests it is to mitigate risks.

Among the main practical recommendations put forward in the Report are the consolidation of various regional information-sharing frameworks to achieve a “one stop shop” mechanism for the diffusion of relevant information in the immediate post-hijack phase; the conduct of ransom negotiations with the knowledge of relevant national and international authorities in order to foster mutual assistance between these and the private sector; and the development of a mechanism maximising the evidence-gathering process immediately after the release of the vessel or its crew for subsequent prosecutions.

In line with the Task Force’s objective, the 15 page-long Report focuses mainly on the establishment of broad policies to improve communication and coordination to prevent hostage and ransom situations in the future. Several of these policies have been already under discussion for long time and by a number of institutions involved in the fight against piracy. Hopefully, the issuing of the Report will provide for a swift implementation of these policies. Regrettably, the Report does not contain an analysis and more practical recommendations directly relevant to actual hostage-taking, vessels’ hijacks and, more particularly, ransom situations. Given the wealth of knowledge and the technical resources available to the Task Force and its member states, as well as other participants from the private sector, it would have been preferable to expand on the Task Force’s mandate to immediately initiate an information sharing and lesson-learned process relevant to these aspects of piracy ransoms.

Somalia Monitoring Group Report Now Available

The latest Report of the UN Monitoring Group on Somalia is now publicly available. The Monitoring Group is tasked to focus on the ongoing violations of the embargo imposed on Somalia since 1992 by the Security Council. The Group prepares reports of its activities, which are then submitted to the UN Security Council and its subsidiary Sanctions Committee on Somalia. The Sanctions Committee concerning Somalia was intially established to oversee the arms embargo and its violations. The mandate  of the Committee was then amended and modified by subsequent Security Council resolutions relevant to Somalia. In parallel, the Committee also oversees a sanction regime imposed on Eritrea. For further information, see here.

The Report, of over 300 pages in length, can be downloaded here. A previous unofficial dissemination of the Report generated a debate on the ongoing situation in Somalia, particularly concerning allegations of widespread corruption and collusion of government officials. Several aspects of the Report are also dedicated to the issue of piracy off the coast of Somalia. (See paras 38-50 and Annex 4). Interestingly, the Monitoring Group has found no evidence that would suggest a structural or organizational link between Al-Shabaab as an organization and Somali pirate networks.

“Somali-based piracy threatens not only the peace, the security and the stability of Somalia, but regional and international security as well. Although pirates have been more active than ever in 2011, the adoption of best management practices by the shipping industry, more effective international counter-piracy naval operations and the increasing use of private maritime security companies have substantially lowered the number of vessels successfully hijacked. As a result, pirates have to adapt and diversify, engaging in kidnap for ransom on land, and marketing their services as “counter-piracy” experts and “consultants” in ransom negotiations. This evolution of the piracy business model is being driven largely by members of the Somali diaspora, whose foreign language skills, passports and bank accounts are all valuable assets. But the Monitoring Group has also been able to confirm the collusion of senior Transitional Federal Government officials in shielding a notorious pirate kingpin from prosecution, providing him with a diplomatic passport and describing him as a “counter-piracy” envoy.”

According to the Monitoring Group, the situation appears particularly concerning in the autonomous Puntland region (see Annex 4.1). In particular, the Report discussed the much rumored Puntland Maritime Police Force, in connection with the use of private security companies operating on the ground in the region (See Annex 5.3).

The Report is also critical of the role of the international community, calling for a more robust commitment to investigate Somali piracy from a law enforcement perspective and to prosecute identifying key individuals who organize, finance or benefit from it, also singlying out a somewhat ambivalent role played by the UK in twarthing piracy.

“The UK Government’s ambivalent posture with respect to Somali piracy is illustrative of a more general international reluctance to tackle Somali piracy as a form of international organized crime, rather than as a sui generis product of Somali statelessness requiring custom-made military and custodial responses. Unless and until this attitude changes, international counter piracy efforts will continue to treat the symptoms of Somali piracy rather than the cause.”

Finally, the Report also discusses the role of private maritime security companies (See paras 72-74 and Annex 5.4) and the risk of some of these representing a potential new channel for the flow of arms into Somalia. In this regard, the Report expresses concern for the increasing use of “floating armouries” to store arms and ammunitions at sea.

“The Monitoring Group recommends that:

(a) The Committee should proceed without further delay to designate known pirates and their associates identified by the Monitoring Group or Member States for targeted measures;

(b) The Security Council should consider the possibility of establishing a specialized investigative group of experts with a mandate to collect information, gather evidence and record testimonies relating to acts of Somali piracy, including and especially the identification of pirate leaders, financiers, negotiators, facilitators, support networks and beneficiaries;

(c) The Security Council should consider making explicit reference, in its next resolutions on Somalia and piracy, to the Monitoring Group’s responsibility of investigating and identifying key individuals responsible for acts of piracy off the coast of Somalia, as well as the movement and investment of piracy proceeds, and call upon Governments, international organizations and national law enforcement agencies to exchange evidence and information with a view to the arrest and the prosecution of senior pirate leaders and their associates, or to their designation for targeted measures;

(d) The Security Council should consider options for the establishment of an international regulatory authority that regulates, monitors and inspects the activities of private maritime security companies operating floating armouries and providing armed protection to vessels in international waters.”

Kingpins Enjoy Impunity

A confidential UN report, made available to Reuters, highlights the considerable disparity in the treatment of low-level operatives versus pirate kingpins in that the latter enjoy impunity. The report notes:

The UN Monitoring Group on Somalia said in a report to the Security Council, seen by Reuters, that senior pirate leaders were benefitting from high level protection from Somali authorities and were not being sufficiently targeted for arrest or sanction by international authorities.

[...]

The UN report said pirate leaders are now increasingly involved in land-based kidnap for ransom of foreign tourists and aid workers in northern Kenya and Somalia, as well as selling services as counter-piracy experts and consultants in ransom negotiations, and exploring “new types of criminal activity”.

“This evolution of the piracy business model is being driven largely by members of the Somali diaspora, whose foreign language skills and bank accounts are all valuable assets,” it said.

[...]

The [Monitoring] Group said that in spite of three international task forces and efforts by a dozen national governments in maritime counter-piracy efforts, serious legal obstacles remain that “impede the prosecution and sanctioning of pirate leaders and kingpins”.

Further to this last observation, a recent opinion by a U.S. District Court brings into question the ability to prosecute pirate kingpins who never set foot aboard a pirate vessel on the high seas. For reasons I will set forth in a forthcoming post, I think the court reached some faulty conclusions. But if the reasoning in that opinion gains traction, prosecution of high-level pirates under the framework set forth in UNCLOS will become increasingly untenable.

ReCAAP and the Anti-Piracy Information-Sharing System in Asia

Furthering its current efforts to enhance international cooperation to tackle piracy, the United Kingdom recently became the 18th party to the Regional Cooperation Agreement on Combating Piracy and Armed Robbery against Ships in Asia, commonly referred to as ReCAAP.

Entered into force in September 2006, ReCAAP is the first regional agreement for the promotion and the enforcement of multilateral cooperation against piracy and armed robbery at sea in Asia. Among its original contracting parties are South and East Asian countries. Since its entry into force, ReCAAP is also open for accession by other countries. Like the U.K., other global shipping countries with an interest in Asian maritime economy, such as Norway and the Netherlands, are also parties. Pursuant to its Article 1, ReCAAP adopts the same definition of piracy set forth in UNCLOS as well as the IMO definition of armed robbery at sea. However, ReCAAP does not provide for enforcement powers beyond those already provided in UNCLOS. Many of the lessons learned from the implementation of ReCAAP were incorporated in the Djibouti Code of Conduct, which provides a framework for information sharing, training and capacity building in the Gulf of Aden.

Notably, ReCAAP established an Information Sharing Centre (ReCAAP ISC), which is now a recognized international organization, headquartered in Singapore. ReCAAP ISC’s main functions include facilitating communication and piracy-related information-sharing among the contracting parties as well as furthering capacity building with other organizations and the shipping industry to develop and improve anti-piracy measures. As part of its mandate, ReCAAP ISC produces periodic consolidated incident reports and alerts on piracy and armed robberies at sea in the Asia region. Incidents are classified under 4 different gravity levels, measuring violence and economic impact.

 Map of ReCAAP Consolidated Incident Report for January 2012

Once piracy hot-spots, the straits of Malacca and Singapore as well as the South-China Sea more recently registered a significant drop in piracy related incidents. Due to improved surveillance and security presence, reported incidents now mainly consist of armed robberies or petty thefts at ports and anchorages, particularly in Indonesia.