The risks of paying ransoms to piratesMarch 7, 2012
Murky seas—The pirate, the ship owner, the intermediary and the financial institution
Maritime piracy is a lucrative criminal activity: almost all ransom payments are in the form of physical cash. That cash, usually US dollars, must be transported from financial institutions to the pirates. It is at this point that AML/CTF controls seem to be breaking down, particularly in the countries where the cash is sourced.
Border controls for movement of cash seem to be ineffective in detecting these cash movements. Once a ransom is paid, it is difficult to determine how the money is laundered given the infrastructure constraints of the countries where the pirates are based. Ship owners and insurers are not motivated to co-operate with anti-PFR efforts; they seek the easiest path to getting their vessel and crew back in service.
The FATF recently published a report summarising a body of work undertaken on organised piracy for ransom (PFR) and kidnapping for ransom (KFR). The PFR work focused on the financial implications of piracy as a major revenue-generating offence, and the KFR work looked at the significance of revenue generated by KFR for terrorist groups and criminal organisation and the role played by the formal financial sector.
This article looks at issues for financial institutions arising from PFR. Much of what is said about those issues applies to KFR.
The financial impact of PFR has grown exponentially and led to the deployment of flotillas of warships near Somalia, the Gulf of Aden, the Indian Ocean and the Arabian Sea. PFR increases shipping costs, inflates insurance premiums, interferes with commerce on the high seas, and causes threats to the safety of human lives and property. In the case of Somalia, the impact is severe with shipping of vital commodities such as food and medicines on the decline because of the risks to shipping trying to reach the country.
The World Food Program (WFP) uses a navy escort to reach Somalia and despite agreements by the pirates not to attack WFP ships, they continue to do so. Fishing has dropped by 30 percent in the coastal waters off Somalia because the fishermen are frightened of piracy. Pirates select their targets using carefully gathered intelligence regarding the vessel’s size, the wealth of its owners and the nature of its cargo.
On the upside, there is a housing boom in an area home to many pirates in Somalia and the price of marriage dowries is believed to have increased. Both of these have been linked to the success of PFR. On the flip side, corruption is on the increase because the pirates have more money than the government.
PFR is not a drug trafficking issue: no contraband is moved, no illicit market serviced. Rather, it is a violent, acquisitive crime.
It is transnational because a ship is considered the sovereign territory of the nation whose flag she flies. It is organised because commandeering a ship at sea requires considerable planning and specialised expertise.
It is believed that the current piracy off the coast of Somalia started as local fishermen sought to protect their fishing grounds. Today it is all about enrichment of the pirates, not about traditional industry. PFR risk now extends some 350 nautical miles off the coast of Somalia, whereas in 2004 the risk zone was 50 nautical miles.
The pirates receive perhaps 30 percent of the total ransom money and from this they must pay their operating costs. It is believed that the armed groups which control the local area where the pirates are based may claim as much as 10 percent as a tax or as standover money, with local government officials claiming a similar amount. The person financing the operation may then claim 20 percent as interest on funds they advanced and, finally, the sponsor of the crime will claim the remaining 30 percent. It is these last two areas that usually involve funds leaving Somalia, potentially through the international financial system.
In individual terms, a pirate may earn US$6000 to US$10,000 for one act of piracy, which equals perhaps two or three years’ legitimate income as a security guard for a humanitarian agency and is significantly higher than what local business people earn.
Since piracy ransoms are usually paid in cash it becomes difficult to follow the money flows from the point of payment. Airdrops appear to be the preferred means of delivering ransoms but there is also evidence that parts of ransom payments have been transferred through banks, intermediaries, and alternative remittance systems such as hawalas. Whatever the means used, the trail used by ransom payments begin in the countries associated with the ships, their insurers and the domicile countries of the crews. Even if they access the cash in countries close to the pirates, the funds must leave their banks in Europe or America.
Depending on the circumstances, there can be an interesting convergence of issues confronting both the payers of ransoms and their financial institutions. Where a country has a heightened risk of terrorism, or perhaps law and order is controlled through militias associated with terrorism, payments of ransoms may offend the sanctions laws of the payer’s country as well as its terrorism financing laws. PFR and KFR are both considered predicate crimes in the FATF recommendations.
For Australian reporting entities, the risks of PFR and KFR sit with their customers who are security advisers to private enterprise, shipping companies, freight companies, insurers and associated service providers; any of whom may be involved in passing funds to pay ransoms through the global financial system. There have been at least sixteen instances of ransoms being paid for Australian who have been kidnapped in recent times, according to a recent program on National Radio. One high profile instance involved Nigel Brennan and a high profile Australian who contributed to his ransom.
Case studies have shown that breakdowns in AML/CTF controls (such as reporting cash being moved across borders and suspicious matter reporting) have been present in a number of cases where ransoms have been paid.
Examples of fund flows are:
- Bulk cash movement of US dollars from a bank in the US to a bank in Denmark and then supplied to an insurance company to be supplied to pirates by a privately hired company at a hotel in Dubai. None of the marked bills were ever traced. It is not known if bulk cash declarations were filed or any suspicious matter reports were lodged. Law enforcement agencies were involved.
- Withdrawal of US$1.7 million in cash from a Danish bank and the money moved out of Denmark for an airdrop to the Gulf of Aden by the shipping company involved. An additional amount was wire transferred as a side payment to the negotiator acting for the pirates. It is not known if bulk cash declarations were filed or whether any suspicious matter reports were lodged, or the wire transfer reported. Law enforcement agencies were involved.
- Cash paid in a money drop to Somalian pirates was then believed to be transferred to the United Arab Emirates via a number of hawala transactions. This cash needed to be acquired from the financial system and then moved across country borders to reach the pirates.
- A ransom of US$1.35 million was airdropped for the release of a ship and crew off the Somalian coast. This cash needed to be acquired from the financial system and then moved across country borders to reach the pirates.
The FATF provided a description of a general typology for PFR: a vessel is seized, the owner or management company is contacted, and a ransom payment is negotiated, often by third party intermediaries.
The insurance company of the hijacked vessel then arranges for a cash payment. The cash is obtained from a financial institution (which may be the insurance company itself) and packaged for delivery, often being airdropped to a prearranged location.
These payments seem to demonstrate two money laundering/terrorist financing vulnerabilities: that these payments often do not result in bulk cash disclosures/declarations and/or suspicious transaction reporting to the FIUs. This occurs either because jurisdictions lack these requirements and/or those facilitating the payments of ransoms are successfully evading these reporting requirements.
Once ransoms are paid and the cash enters Somalia, ‘following the money’ becomes difficult because there are no mechanisms to identify the source and destination of these funds, and because the trail goes cold if such payments were not previously reported to FIUs and other AML/CTF authorities.
A research paper released in 2005 showed connections between Al Qaida and its south-east Asian wing, Jemaah Islamiyah, and plans for disruption to vital installations such as oil refineries.
One of their strategies is to target the dependence of the West on secure supplies of oil and access to international markets. Maritime piracy fits neatly into such a strategy. The Singapore transhipment hub is a point of great vulnerability to maritime piracy and terrorism attacks for the south-east Asian region.
Difficult questions arise out of the FATF typology for any financial institution, including Australian financial institutions.
People’s lives are at stake in a maritime piracy event (which is not usually a factor in the typical transactions that arise for consideration in the life of an AML/CTF compliance officer). Investigations into a proposed transaction may reveal a connection between the pirates and Middle Eastern or Asian terrorism groups.
A financial institution refusing to be involved in such a transaction based on legitimate concerns about breaching domestic criminal laws may be taking steps that cause further jeopardy to lives which otherwise may have been saved through payment of a ransom.
An AML/CTF Compliance Officer might need to balance the risk of loss of human life against the risks of being involved in terrorism financing offences when reviewing a transaction yet to be completed…
Indeed, Ms. Geary is quite correct. It is tempting to save lives of individual hostages, but in the long run it finances terrorist groups, their attacks, and increases the price tags on the heads of international traders and travelers.
Read the rest at AML Magazine.