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Cambridge Risk Framework Profile of a Macro-Catastrophe Threat Type Political Violence Organised Crime: Piracy Adrian Leonard, Andrew Coburn, Gary Bowman Working Paper 201203.05 Draft: March 2012 Availability for download at www.risk.jbs.cam.ac.uk Cambridge Centre for Risk Studies Working Paper Series Cambridge Centre for Risk Studies University of Cambridge Judge Business School Trumpington Street Cambridge, CB2 1AG United Kingdom [email protected] www.risk.jbs.cam.ac.uk Disclaimer Information: This Working Paper should not be reported as representing the views of the University of Cambridge Judge Business School – Centre for Risk Studies. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the Centre. The Centre will not be liable for any loss or damage arising from the use of this Publication. Acknowledgement This work was carried out with partial support from Centre for Risk Studies A Shock to the System – Research Programme of the Cambridge Centre for Risk Studies Threat Assessment Monograph 4 Political Violence 4.5 Organized Crime – Piracy Adrian Leonard1, Andrew Coburn2, Gary Bowman3* 5 March 2012 Abstract International trading networks, such as commercial supply chains or timely delivery of goods, and national security concerns, such as food and energy delivery, need to consider the threats to them to develop a risk management strategy for resilience. 90% of commerce is seaborne. This publication considers the threat to international shipping networks and commerce that depends on it, from organized crime in the form of piracy at sea. The phenomenon of piracy is profiled, with a history and quantification of recent trends. The geography of threat is described and an index for global terrorism activity is proposed. The potential for step-changes in the level of pirate activity is considered, along with ‘control process’ constraints that limit the rate of change that might be possible. A scenario for extreme pirate activity is developed for use as a stress test in risk management, consistent with a ‘1 in 100’ probability of occurrence. Keywords: Piracy, risk, organized crime, marine, insurance, shipping, Working Paper 201203.05 www.risk.jbs.cam.ac.uk Author(s): 1, Lead subject matter specialist, 'Affiliated researcher, Centre for Financial History at Newnham College, University of Cambridge 2, Centre for Risk Studies, University of Cambridge 3, Centre for Risk Studies, University of Cambridge; Cambridge-Singapore Fellow; partial support from the Institute of Catastrophe Risk Management, Nanyang Technical University, Singapore, gratefully acknowledged * Correspondence to: Gary Bowman, University of Cambridge Judge Business School – Centre for Risk Studies, Cambridge, UK, CB2 1AG. Email address: [email protected] Centre for Risk Studies 1 Cambridge Centre for Risk Studies Working Paper Series 1 Summary Organized crime adds a burden to modern business, increasing costs and adding operational danger to international operations. One of the worst operational hazards in international commerce is piracy. Modern day pirates are criminals who typically intercept ships at sea and steal cargo or hold the vessels, crews and cargo hostage for ransom. Pirates may also make attacks onshore. Piracy has become an industry in its own right in several parts of the world, usually operating from havens away from law and order, in places such as Somalia and Indonesia. Modern piracy has been resurgent worldwide since the mid-1990s. In the period 1995 to 2010 there were over 5,000 recorded pirate incidents worldwide – attempted and successful attacks – an average rate of 320 a year. In a single year, 2009, pirates took 746 hostages, hijacked 56 ships, murdered 8 crew members and injured 59 others. Piracy is seen worldwide, but activity varies in different regions. The late-1990s boom in piracy was chiefly in the South China Sea and Malacca Straits, but this has declined with concerted policing and military assistance. The recent escalation of piracy is from Somalia, attacking the busy shipping lanes around the Horn of Africa and East Africa. The Gulf of Aden has been classified as a piracy ‘war zone’ by Lloyd’s marine insurers since 2008. Commercial shipping companies and their insurers have paid ransoms rather than lose ships and crews. In 2009-10 an estimated $415 million was paid out in ransoms to pirates. The average ransom demand has escalated from an average of $150,000 in 2005 to over $4 million in 2010. In November 2010, Samho Dream, a South Korean oil tanker seized by Somali pirates, was ransomed for $9.5 million. The ransom revenues have also made pirate warlords rich, provided economic support for entire Somalian communities, and been reinvested in the equipment and weaponry for more piracy. Piracy has added significantly to shipping cost overheads, in lengthening travel routes, increasing pay scales for crews, and escalating insurance rates: insurance premiums for ships traveling through the Gulf of Aden have increased from $500 per voyage in 2008, to up to $150,000 in 2010. The total costs of piracy including commercial cost escalation, re-routing and security measures are estimated to be in their billions: One estimate puts the cost as high as $12 billion in 2010. The rapid growth in piracy threatens to have even worse consequences. A step-change increase in the frequency of pirate incidence could have a severe impact on world trade: very significant reductions in traffic along the trade lanes between the Far East and Europe would result, according to some analysts, causing major strcutural shifts in global trading patterns. For piracy activity to achieve a step-function increase, new conditions would have to arise, for example increases in the pirate populations through economic austerity and failed states; increased incentives with escalating ransom values; any reduction in naval deterrence; or new techniques and weaponry that could increase pirate success. The rate at which pirate activity can increase is however constrained by ‘control processes’: the rate at which new pirate action can occur is limited by logistical challenges of pirates gearing up their activity, manning and equipping larger numbers of pirate teams; by adaptive and defensive strategies adopted by the sailing vessel targets, and most importantly, by the naval and military response to counter increases in pirate activity. A stress test scenario of pirate activity is proposed for risk management, representing a ‘1 in 100’ probability level of occurring in the short term. Analysis suggests that there is a 1% probability of pirate activity suddenly increasing to a level of 1,000 incidents in a single year, or 3 times the current annual average rate. For the stress test scenario 75% of these attacks are assumed to occur in the East Africa ocean region. The piracy stress test scenario can be used to assess supply chain vulnerabilities, food and energy security management, and other risk management activities. Centre for Risk Studies 2 Cambridge Centre for Risk Studies Working Paper Series 2 Definition No definition of piracy has been universally agreed. The United Nations Convention on the Law of the Sea includes ‘any illegal acts of violence or detention, or any act of depredation, committed for private ends by the crew or the passengers of a private ship or a private aircraft, and directed: (i) on the high seas, against another ship or aircraft, or against persons or property on board such ship or aircraft; (ii) against a ship, aircraft, persons or property in a place outside the jurisdiction of any State; any act of voluntary participation in the operation of a ship or of an aircraft with knowledge of facts making it a pirate ship or aircraft; any act inciting or of intentionally facilitating an act described *above+.’ However, this definition captures only acts committed in international waters, which excludes, for example, piracy in the Strait of Malacca. To account for this, the International Maritime Bureau (IMB) has broadened the definition to include any ‘act of boarding (or attempted boarding) with the intent to commit theft or any other crime and with the intent or capability to use force in furtherance of that act’. Others have adapted the definition to exclude politically motivated crimes. Further, a distinction must be drawn between piracy and privateering. The latter is a state-sanctioned act of war by private agents against an enemy nation’s merchant shipping, but has the look and feel of piracy. 3 The Threat Seaborne trade accounts for as much as 90% of international trade, and any vessel is a target. The immediate threat of piracy is obvious: danger to the property and safety, and to the lives of mariners. According to the International Maritime Organisation, pirates killed eight crew members, and fifty- nine were injured or assaulted in 2009. About seven hundred and forty-six were taken hostage or kidnapped; in total fifty-six ships were reportedly hijacked1. Small private vessels may be attacked for the crews’ valuables; larger vessels sometimes have the additional lure of the ship’s safe, which often includes large sums of cash for port payrolls, and potentially items of cargo. At the other end of the scale, massive cargo and crude carriers have been hijacked and taken hostage by pirates, either for ransom or for the sale of their cargoes. The average length of a hijacking of vessel and her crew is over 7 months2, removing the vessel from productive service and causing distress and management distraction for the shipping companies and their customers. 3.1 Consequences Beyond the immediate threat to trade goods, vessels, and to the individuals facilitating their transport, piracy attacks can generate significant and far-reaching secondary outcomes. 3.1.1 Increased cost of shipping One is additional cost. Marine insurance is routinely and almost always purchased for international cargoes and vessels, but a concentration of piracy attacks can drive insurance prices higher by multiples.