THE CITY LAW SCHOOL
LLM IN INTERNATIONAL COMMERCIAL LAW DISSERTATION SUBMISSION FORM
NAMED COPY
NAME STUDENT NUMBER DATE FABRIZIO ANDRÉS GARCÍA 130016192 13/08/2014 BACIGALUPO
DISSERTATION TITLE
"Piracy and Marine Insurance: Assessing modern piracy, the applicable law, the insurance implications of piracy and the effects in the maritime community."
DISSERTATION SUPERVISOR MARK AWARDED PROFESSOR. CHRISTOPHER PARSONS.
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"Piracy and Marine Insurance: Assessing modern piracy, the applicable law, the insurance implications of piracy and the effects in the maritime community."
Student: Fabrizio Andrés García Bacigalupo
Course: LLM – Maritime Law
Supervisor: Professor. Christopher Parsons.
Word Count: 21,556
TABLE OF CONTENTS 1. INTRODUCTION ...... 1 2. MODERN PIRACY ...... 3 2.1. General Definition ...... 3 2.2. Piracy High risk areas...... 4
3. MARINE INSURANCE AND PIRACY, LAW CONSIDERATIONS...... 6 3.1. Law principles...... 6 3.2. Marine Hull Insurance Cover ...... 6 3.3. War and Strikes Hull Insurance Cover ...... 7 3.4. Insurance of the Cargo ...... 8 3.4.1. Insured and uninsured peril in the same event...... 9 3.5. Hijacking for ransom...... 9 3.5.1. General facts...... 9 3.5.2. Potential overlaps with piracy...... 10 3.6. Total loss and detention...... 12 3.7. Ransoms' recovery...... 13 3.7.1. Sue and labour and General Average ...... 13 3.8. Legality and Illegality...... 16 3.9. Public Policy considerations...... 17
4. MORAL HAZARD AND PIRACY ...... 18
5. MARINE KIDNAP AND RANSOM (K&R) INSURANCE ...... 20 5.1. Concept ...... 20 5.2. Marine K&R insurance preliminary issues...... 21 5.3. Marine K&R Insurance Market ...... 22 5.3.1. K&R policies' market comparison...... 23 5.4. The P&I Clubs’ position...... 25
6. COSTS OF RANSOMS ...... 26 6.1. Issues ...... 26 6.1.1. Limited Data ...... 27 6.1.2. Defective piracy reports...... 27 6.2. Ransoms’ direct costs...... 27
7. THE DESTINY OF RANSOMS' MONIES...... 29 7.1. Distribution of the ransom...... 29 7.2. Financiers of Piracy...... 30 7.2.1. How the cash for the operations gets into Somalia...... 30 7.2.2. Piracy investment schemes...... 30 7.3. Low-level pirates...... 32 7.4. Local Communities...... 33
8. ADDITIONAL CRIMINAL ACTIVITIES FINANCED BY PIRACY PROCEEDS...... 34 8.1. Crimes while moving the proceeds...... 34 8.2. Various crimes...... 36 8.2.1. Militias' financing and on-land kidnappings...... 37 8.2.2. Human smuggling and trafficking...... 38 8.2.3. Piracy and Khat...... 39 8.3. Piracy and terrorism...... 40
9. RANSOM PAYMENTS AND MARINE K&R INSURANCE CONSEQUENCES AND IMPLICATIONS...... 42 9.1. Positive considerations...... 42 9.1.1. Proven tool for attacks resolution...... 42 9.1.2. Kidnap and Ransom model modification without a clear replacement solution is risky...... 43 9.1.3. Deterring ransom payments will not reduce piracy attacks...... 43 9.1.4. Ransoms prohibition resulting in more violence and terror...... 44 9.2. Negative considerations...... 45 9.2.1. Insurance of violence, terror and death on sea...... 45 9.2.2. Pirates' performance enhancing...... 46 9.2.3. Illegitimate sub-employment...... 46 9.2.4. Lawless power concentration...... 47 9.2.5. Limitless ransom payments...... 48 9.2.6. Legitimation of ransoms...... 49
10. ANALYSIS AND CONCLUSIONS ...... 50 11. BIBLIOGRAPHY ...... 59
1. INTRODUCTION
“So far as harm is concerned it is true that payments of ransom encourage repetition, the more so if there is insurance cover: The Somali piracy is an eloquent demonstration of that.” David Steel J. at the Bunga Melati Dua.1
From a weight perspective, over 90% of goods are currently carried by sea2 which represents around 93,000 merchant ships, 1.25 million seafarers, and almost six billion tons of cargo moving across the sea. Since the end of the Second World War, the sea based trade has doubled every decade.3 Recently, the world's community has been a witness of the re-emerging and flourishing of one of the oldest crimes against sea trade, marine piracy; and consequently the birth of new relations between marine insurance and piracy.
This document will address the concept of modern piracy, particularly the relation between piracy and marine insurance, analysing the negative and positive aspects of the payment of ransoms, marine Kidnap and Ransom (K&R) insurance, and the effects in the maritime community. Accordingly, several factors will be considered: the high piracy risk areas, the legal and factual relation between marine insurance and piracy and its practical implications; general law principles, the marine and war and strikes hull insurance covers, the insurance of cargo, and insured and uninsured perils confluence issues. Moreover, special emphasis will be taken while considering the legal and practical aspects of hijackings for ransom: the general facts, the potential overlaps with piracy, total loss and detention, the recovery of ransoms, sue and labour and general average, legality, public policy, and the moral hazard component of the relation between piracy and marine insurance.
The marine Kidnap and Ransom (K&R) insurance will analysed through its concept, issues, benefits and harms, legal and factual implications, market, offered services, and the P&I clubs’ position on this matter. Accordingly, the direct and indirect costs of piracy
1 [2010] 1 Lloyd's Rep 509. 2 Day&Griffin, The Law of International Trade (3rd, Oxford University Press, New York 2003) 7 3 D. Rosenberg, “The Political Economy of Piracy in the South China Sea”, in Elleman, B.A, A. Forbers, D. Rosenberg eds. Piracy and Maritime Crime, Naval War College Newport Papers (Newport: Naval War College Press) 1 ransoms will be also analysed, along with the general issues and the particular problems of retrieving information on this matter. Additionally, one of the key issues is the destination of the assured ransom payments, which will be addressed in detail revising the distribution of the ransoms, the role of the financiers of piracy, how they finance themselves and the established piracy investment schemes. Furthermore, an analysis of the role of the “foot- soldier” pirates is fundamental, revising how they behave, operate and spend the ransom money; and how the money is introduced into the local communities.
Accordingly, this document will analyse the effects of the ransom payments, which are additionally assured by the K&R policies. On the one hand, the ransom payments will be considered from the positive perspective, as a proven tool for attacks resolution, and also considering the arguments of the risky modification of the kidnap and ransom model without a clear replacement solution, the ransom payments deter not reducing the piracy attacks, and the prohibition of ransoms resulting in more violence and terror. On the other hand, from the negative perspective, the elements to consider are the insurance of violence, terror and death on sea, the enhancing of pirates' performance, the promotion of illegitimate sub-employment in the relevant jurisdictions, the lawless pirates' power concentration, the potential limitless ransom payments and the legitimation of ransoms. In addition, this work will address the criminal activities that are financed by ransom payments, namely among others: trading money laundering, cash smuggling, misuse of baking online services, financing of militias, human smuggling and trafficking, and the khat business. Furthermore, the potential relation between piracy and terrorism will be also addressed in detail, from the pirates' and official authorities' perspectives.
Finally, the aim of this paper is to analyse the relation between marine insurance and piracy, the negative and positive outcomes of the kidnap and ransom model and the marine Kidnap and Ransom (K&R) insurance, addressing all the implications and issues affecting the maritime industry and the world's communities; analysis performed trough legal, case, statistical, factual, and official data; accompanied with pirates' real testimonies, interviews and reports that evidence the on-going piracy and insurance reality. With this information we will be able to form a strong criterion about the current piracy issue, in relation to the marine insurance industry. With the information presented hereafter we will have enough tools to analyse and apply the measures that need to be taken by the international governments and maritime community to correctly address the piracy issue, towards the achievement of safer seas for the international trade industry. 2
2. MODERN PIRACY
The historical facts of sea piracy, from the 1701 trial of Captain William Kidd;4 to the filmic portrayal of the one patched eye, bearded, untidy, fierce pirate accompanied with a smart bird in his shoulder, sailing the seven seas in a phantom black flagged ship looking for gold in the new world; is not the focus of this document. It is believed that both the traditional and filmic Pirates' conception are, in reality, currently inapplicable; due to the fact that the appearance, ways of acting, pirates' motives and several other factors, are radically different; giving birth to the modern conception of the term “pirate”. Therefore, a realistic, current and legalistic approach to the concept will be in accordance with the ideas presented herein, and the “Captain Jack Sparrow”5 pirate idealisation will be left aside.
2.1. General Definition
Defining piracy is not a simple task, no single and widely agreed definition is available. However, there are various offered conceptualisations. From a wider perspective the International Maritime Bureau (IMB) defines piracy as follows: “An act of boarding or attempting to board any ship with the apparent intent to commit theft or any other crime and with the apparent intent or capability to use force in the furtherance of that act”.6 Hence, from an international law perspective, the 1982 United Nations Convention on the Law of the Sea (UNCLOS) defines piracy in this way: “(a) 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; (b) 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; (c) any act inciting or of intentionally facilitating an act described in sub-paragraph (a) or (b)”.7
From a private civil law perspective, where the Piracy term is applied for example to a carriage or insurance contract, the commonly shared idea of all the piracy definitions is the
4 At the Old Bailey, for Murder and Piracy upon the High Seas; May 3 and 9 1701, in 14 How. St. Tr. 123. 5 Captain Jack Sparrow is a fictional character in the Pirates of the Caribbean film series. The character is portrayed by Johnny Depp. 6 IMB, “Piracy and Armed Robbery Against Ships,” Annual Report Jan 1- Dec 31, 2003, at 3. 7 1982 Art. 101 3 violent criminal act committed at sea. From a criminal law approach, according to Russell on Crimes: “The offence of piracy, at Common Law, consists in committing those acts of robbery and depredation upon the high seas, which, if committed upon land, would amount to a felony there (…).”8 It is relevant to mention that under English law, piracy has always been a common law offence, formerly penalised with death,9 and currently subject to life imprisonment.10 Besides all the possible definitions of piracy, the main idea is robbery at sea, and piracy has always involved forced seizure of property;11 considering the pirates as criminals, not idealists.
2.2. Piracy High risk areas
The Joint War Committee (JWC)12 of the Lloyd’s Market Association, through the advice of security consultants; compiles a list of considered high risk areas for the insurance and maritime community; this list is known as the Joint War Listed Areas (JWLA). The list’s information is often taken as a reference by the insurers when assessing the level of risk of the assured voyage or voyages; and used by carriers to help planning their routes. The most recent revision of the Listed Areas is presented as follows: 13
8 Cited in The Magellan Pirates (1853) 1 Sp Ecc & Ad 81, 84; 164 ER 47, 50. 9 Eg. Captain William Kidd trial 1701, See: Rubin, The Law of Piracy, 2nd edn, Transnational Publishers (New York, 1998), 105-112. 10 Crime and Disorder Act. 1988. 11 On the origins of piracy see: Rubin, The Law of Piracy, 2nd edn, Transnational Publishers (New York, 1998), Chapter 1. 12 JWC further information available at: www.lmalloyds.com/lma/jointwar. 13 JWC “Listed Areas” 12TH June 2013. At. Page 2. http://www.lmalloyds.com/Web/market_places/marine/JWC/Joint_War.aspx – Accessed: 02-05-2013 4
Furthermore, the JWC expands the information presented in the previous chart, to clarify any potential confusion. Regarding definitions, the named countries, unless specifically varied in the chart, include their coastal waters up to 12 nautical miles offshore. Moreover, the named ports include all facilities or terminals within areas controlled by the port authority, or as expressly defined by the underwriters. This includes the offshore terminals or facilities, and all waters within 12 nautical miles of such but not exceeding 12 nautical miles offshore unless expressly stated.14
14 JWC “Listed Areas” 12TH June 2013.. At page 3. See also for or the delimitation of the Sulu Archipelago and Indian Ocean/Arabian Sea/ Gulf of Aden / Gulf of Oman/ Southern Red Sea. 5
3. MARINE INSURANCE AND PIRACY, LAW CONSIDERATIONS
3.1. Law principles
As a general rule, under a marine insurance policy, claims can only be performed for losses generated by an insured peril. In the case of ransom payments’ recovery, the situation has to arise from an insured risk; otherwise, there will be no recovery in any event; with the relevant additional considerations. Currently, piracy is a peril covered in hull and all-risk cargo policies, as a marine risk. It is relevant to consider that a hijacking event can be also or alternatively considered as a riot or civil commotion. Moreover, the hijackers might be persons acting maliciously or terrorists. In the latter scenario, the hijacking would be generally covered under a war or strikes risks policy. Consequently, the differentiation between piracy and other perils is essential to define if the loss falls on the marine or war risk insurers. Furthermore, deductibles do not apply to war risks, but they apply to marine risks; therefore, the definition is essential even if the same insurer covers both marine and war risks.15
Through history the division between marine and war risks has been unsteady. First, piracy was an insured peril under marine risks, after under war risks, and currently the position is reverted to the former, considering piracy as a marine risk.16 However, this consideration may change, because of its increasing prevalence and the expansion of the high-risk areas.17
3.2. Marine Hull Insurance Cover
On the one hand, piracy as a marine risk is an insured peril expressly included in the commonly used Institute Time Clauses (Hulls) 1983 and 1995.18 Moreover, theft with violence by individuals from outside the ship is also an insured marine risk.19 On the other hand, the losses as a consequence of riots or civil commotions are excluded by the War
15 Issue addressed in: Athens Maritime v Hellenic Mutual War Risks (The Andreas Lemos) [1983] QB 647,650. 16 Hodges, Law of Marine Insurance, Cavendish (1996), at 212. 17 Eg, Business Insurance , 'Marine insurers transfer piracy risks to war cover' (businessinsurance.com 2009)
3.3. War and Strikes Hull Insurance Cover
Logically, the excluded perils from the general hull clauses are covered by the Institute War and Strikes Clauses Hulls-Time. Those excluded perils are: under cl. 1.4 riots and civil commotions, under cl. 1.5 persons acting maliciously, or from a political motive and terrorists. Importantly, piracy is excluded from war and strikes cover by cl. 4.1.7; however, if piracy also constitutes a riot, it falls out of the general cover, but inside the ambit of the war and strikes cover. Moreover, loss or damage caused by a person acting maliciously is excluded if also caused by piracy; because of the application of cl. 4.1.7, even if the peril comes within cl.15. Consequently, where a pirate is considered as a person acting maliciously and the loss is caused by his use of any weapon or the detonation of an explosive; the pirate's activities seem not to be covered, either as a war or marine risk.
Another relevant issue is the absence of a catchall provision. In the general and war and strikes clauses, all insured risks are specified. The issue emerges when the hijacking event will not fall within any of the listed insured perils, in either policy; commonly this happens when the hijacking has political motivations. Therefore, this situation will not be considered as piracy while not also being considered within the ambit of other specified perils. Additionally, the exclusion of the Violent Theft, Piracy and Barratry Clause in International Hull Clauses 2003; would exclude piracy as a marine risk from the International Hull Clauses. However, the coverage could be arranged as a war risk using the violent Theft, Piracy and Barratry Extension, or by mutual risk association22; on this the P&I clubs' rules differ little, being the most common clubs' provisions stated as follows: “1)
20 IHC 2003, cl 29.4. Including: “Loss, damage, liability or expense”. 21 IHC 2003, cl 30. 22 Eg. Hellenic War Risks www.hellenicwarrisks.com 7
To provide cover excluded from the general hull clauses, with the relevant exclusions clauses attached; 2) To provide positive cover against a number of specified perils; 3) To exclude anything covered by the general hull Clauses, with the relevant exclusion clauses attached.”23 This process has been considered tortuous, complex and convoluted in the extreme.24
It is believed that no problem would arise as long as the general clauses and exclusions are clear, and the listed covered perils in the war policy match exactly those excluded from the general policy. In practice, piracy is commonly covered by a mutual war risk association. However, the remaining issue is when the hijacking is not piracy and is not one of the excepted marine hull perils and may not be covered by either marine or war policy.
3.4. Insurance of the Cargo
Piracy, unless additional cover is explicitly added, could only be covered if the all risks Institute Cargo Clause A – ICC (A) policy is used. If so, this policy covers all risks unless excluded; therefore, in spite of the absence of piracy as a listed insured peril, as not being excluded, is covered. On the one hand, losses generated by riots, civil commotions (whether or not these amount to piracy)25 terrorists, or any person acting from a political motive, are excluded by the strikes exclusion.26 However, there is no exclusion for “persons acting maliciously”. On the other hand, losses caused by riots, civil commotions, terrorists, or any person acting from a political motive; are covered by the Institute Strikes Clauses (Cargo).27 It is relevant to emphasise that riots, civil commotions and terrorism are not marine risks; piracy it is indeed a marine risk. Additionally, under ICC (A) hijacking is covered; because the ICC (A) is an all risk policy, subject to exclusions, and the hijacking falls under none of the listed perils.
23 Eg. Hellenic War Risks, 'Rules' (hellenicwarrisks.com 2014)
3.4.1. Insured and uninsured peril in the same event
There are potential overlaps between piracy and the exclusion of riots and civil commotions from marine policies, violent theft, and persons acting maliciously. Therefore, it is relevant to analyse the cases where a hijacking event amounts to both an insured and an uninsured peril. Usually in the contracts of carriage, riots and civil commotions are excepted perils.
The interpretation of the policy is the pivotal element when defining who covers an event constituting both an insured and an uninsured risk. Following the International Hull Clauses statement that the exclusion clauses “shall be paramount and shall override anything contained in this insurance inconsistent therewith”; it is suggested that if a piratical event is also an uninsured risk; it is not covered. In the case where a piratical event is covered under a general all risk clauses, but then expressly excluded, it would be logical to infer that the specific exclusion will prevail. Therefore, the position in respect of cargo, in this specific situation, is the same as for hulls.
3.5. Hijacking for ransom
3.5.1. General facts
In this matter the definition of the insured perils is essential; because the ransom payments are covered by marine insurance only if their purpose is to minimise or avoid an insured peril. Usually the hijackings will fall within the UNCLOS definition if they are violent and their objectives are private. To cite a current situation, at the moment the means of Somali attackers are considered to be private gain, but there is a latent fear that this may change. From a legalistic perspective, if a hijacking is used to fund terrorism or has a political purpose, would not constitute piracy. Moreover, in Somalia at least, the international community is trying to implement appropriate measures for intervention, without regard if the attack is considered to fall or not within the international definition of piracy. Anything that falls within the UNCLOS piracy definition falls into the contractual definition; provided that, the requirement for private gain is preserved.
9
3.5.2. Potential overlaps with piracy
If the elements of the specific attack are political they will not fall within any definition of piracy, either in international or private law. The main issue is whether the event constitutes another insured peril under a war and strikes risks policy. The possibility of the hijacking falling within no insured peril at all has to be considered; because the hull clauses specifically list the covered risks. This is not a problem for cargo under ICC (A), where anything that is not excluded, is covered by the marine risks policy.
A case where a hijacking did not constitute piracy due to the public rather than private intentions is Republic of Bolivia v Indemnity Mutual Marine Insurance Co.28 Here, Farewell LJJ and Vaughan Williams evaluated the case's incidents as civil commotion, which was excluded from the marine policy; the events were part of a rebellion. Specifically, Farewell LJJ considered that the events were those of the kind of “intestine troubles which sometimes lead to civil war.” However, further in the same judgement; it was stated that in spite of the certainty that a civil commotion is not piracy; it does not mean that all political hijackings constitute civil commotion; consequently they may not be an insured peril. To constitute a civil commotion, there has to be some elements such as violence29, a degree of civil unrest, and a degree of people's insurrection30; events considered more than a leaderless mob; not necessarily constituting a revolt against the government, element which is commonly present in terrorists hijacking but may not be present in all cases.
Besides the existence or not of civil commotion, losses caused by persons acting from a political motive and by terrorism; are covered by war risks insurers. However, is possible the emergence of remoteness issues. Bennet stated that: “it is unclear whether the hijacking of a vessel for ransom in order to finance political activities would itself be regarded as politically motivated”31. Therefore it can be inferred that the same doubt emerges where the intention of the hijacking is to finance terrorism activities. Furthermore, it is relevant to remember that if the aim of the hijackers is political or terrorist; the events will not be considered as piracy, and they may not amount to any of the other perils insured under hull marine or war policies.
28 [1909]1 kn 785, 801 (Farwell LJ). 29 Supra, note 18, at paras. 14.15 – 14.17. 30 Supra, note 28, at 785, 798 (Vaughan Williams LJ). 31 Supra, note 18 at paras. 14, 29. 10
Additionally, if there are twelve or more hijackers, the event may constitute a riot. In this case, depending on whether is a cargo or hull cover; the case would fall within the war and strikes, or strikes exclusion. Moreover, a hijacking can also constitute violent theft. Whether for private or public ends; this situation is included within the IHC. It is believed that in practice, where there is a hijacking for ransom; theft is unlikely to be the motivation of the offenders or the consequence of the hijacking.
Another potential overlap with piracy is where damage is caused by persons acting maliciously. If so, the situation is usually excluded from marine hull policies, where the damages arise from the use of any weapon or detonation of an explosive; it is also excluded from the war risks cover if the malicious act also constitutes piracy. The “persons acting maliciously” concept was addressed at first instance in The Mandarin Star, where Lord Denning MR stated that malice signifies: “spite, or ill will, or the like”32. Subsequently, this decision influenced The Andreas Lemos case where the assured at first instance accepted, in accordance to Lord Denning's criteria, that the loss was not caused by “persons acting maliciously”.33 Furthermore, in The Salem34 Mustill J implied that personal malice was needed to constitute a malice act; by stating that the thieves of the oil cargo were not persons acting maliciously and they did not have malice against the cargo owners. Mustill J believed that the thieves simply wished to steal the cargo, and they were not inspired by any personal malice against the cargo owners or the goods; considering the loss a by-product of an operation carried out for purposes of gain, not a malice act. Conversely, when this case went later to the House of Lords35 the assured's position was considered valid; stating that if personal malice is needed to constitute “persons acting maliciously” pirates for ransom will never be acting maliciously, even if the ransom is not paid, generating the consequent deliberate destruction of the vessel, constituting this act also a by-product of the operation.
Furthermore, in The Grecia Express, Colman J held that to constitute a malicious act is enough to show malice against the goods; it is not necessary to also show malice against the owner to be considered a person acting maliciously.36 It was also held that malice had
32 Nishina Trading Co Ltd v Chiyoda Fire and Marine Insurance Co. Ltd (The Mandarin Star) [1969] 2 QB 449, 462. 33 [1983] QB 647, 652. 34 Shell International Petroleum Co Ltd v Gibbs (The Salem) [1982] 1 QB 946, 966 (Mustill J at first instance). 35 [1983] 2 AC 775 36 Strive Shipping Corp v Hellenic Mutual War Risks Association (The Grecia Express) [2002] 2 Lloyd's Rep. 11 the same definition stated in the Malicious Damage Act 1961, which requires nothing more than the property in question is intentionally caused to be, or is actually lost or damaged in circumstances amounting to recklessness on the part of the same person. It can be inferred from this approach that if the motive is theft this will not be satisfied, because the hijackers will not damage their loot (the goods); therefore they will not be persons acting maliciously. However, following the same view, the hijackers would become persons acting maliciously if they afterwards destroy the ship and cargo; in this case, only if they use weapons or explosives, the event will fall outside the marine risks and war hull cover.37 Importantly, if the assured is only covered for marine risks, failure of negotiations could led to the ship's destruction, which in turn could led to a loss of insurance cover.
3.6. Total loss and detention
As general rule, there is a total loss where the assured is irretrievably deprived of the insured property.38 A constructive total loss exists where the subject-matter insured is reasonable abandoned on account of its actual total loss appearing to be unavoidable; or because it could not be preserved from actual total loss without an expenditure which would exceed its value. Also, a constructive total loss exists where the cost of recovering the ship or goods, as the case may be, would exceed their value when recovered.39 There must be a reasonable abandonment of the insured property by the assured to constitute a constructive total loss; conversely no abandonment is required to constitute an actual total loss. At first glance, the application of these provisions is clear. However, the issue arises where a ship is detained by pirates. In The Bunga Melati Dua40 the assured cargo owners could not claim total loss; because they were obliged to show either an actual total loss, or that the ship and cargo had been reasonably abandoned on account of its actual total loss appearing to be impossible to avoid. Proving that was impossible, because the vessel and cargo were captured by pirates near the Somali coast.
Additionally, the assured must be irretrievably deprived of his property to demonstrate an actual total loss from the time of the capture. In capture situations there is some
88, 96. 37 On persons acting maliciously, supra, note 18, at paras. 14.20 – 14.27. 38 Marine Insurance Act 1906, Section 57 (1) 39 Ibid, Section 60 (1) 40 [2010] 1 Lloyd's Rep 509. 12 authority41, but is important to consider that each capture event is different.42 David Steel J also in The Bunga Melati Dua examined in detail the Somali pirates' modus operandi, the evidence of what happened in the past to other vessels, and experts’ evidence. The information showed that no cargoes had actually been lost, and the evidence suggested than the release of the ship and cargo would occur after six to eight weeks. In fact, the ship and the sister ship that were both captured; were recovered on payment of a ransom, eleven days after the purported notice of abandonment. In this case, the evidence was widely convincing, offering good prospects of the ships' recovery. Furthermore, the cargo- owners were not able to claim a constructive total loss; firstly, there was no reasonable basis for considering an actual total loss as unavoidable43; therefore, this conclusion relays on the policy excluding s.60 (2). Secondly, the absence of abandonment would have made no difference; in fact, at the moment of the purported notice of abandonment, both ship and cargo owners were negotiating with the pirates. It is believed that is unlikely to succeed on claiming an actual and/or a constructive total loss simply generated by the capture; because most ships and cargo in Somalia are released after a relatively short period of negotiations.
3.7. Ransoms' recovery
It is believed that in ransom attacks, if the ransom is paid, even if the act constitutes piracy or another insured peril, neither the vessel nor cargo will be necessarily damaged. From the marine insurance perspective, two main questions arise. One the one hand, if the ransom is paid, is it possible to recover it under the policy? On the other hand, if the ransom is not paid, and consequently the vessel and/or cargo are lost, is it possible to recover the loss? The answers will be analysed in the following sub-sections.
3.7.1. Sue and labour and General Average
In most of the cargo-carrying vessels cases, ship-owner and cargo-owner will share a common interest in the preservation of the vessel and its cargo. Moreover, where a cargo ship is in ballast is possible the existence of a freight interest. That freight interest can be observed in SS Carisbrook Co v London and Provincial Marine and General
41 Dean v Hornby (1854) 3 El & B1 180. 42 The Salem [1983] 2 AC 775, note 34, [38] 43 Ibid at [57] 13
Insurance Co,44 where the ship was in route to take cargo, freight on which was payable on delivery.
In the mentioned situations the issue is whether the ransom payment, usually performed by the ship-owner, can be considered as a general average act. Whether the payment of a ransom is recoverable in general average or by other ways, is completely independent of insurance considerations. However, in the case where the hijacking constitutes a general average act and also an insured peril under the hull insurance; a ship-owner who pays is allowed to claim the full amount on his hull policy; therefore the insurers surrogates in respect of cargo and other contributions.45 Consequently, contributing cargo interest could next recover from their cargo insurers; providing that the hijacking constitutes an insured peril under those policies.46 On the other hand, in the case where a cargo-owner pays the ransom, he would be able to recover the full paid amount under his cargo cover, with subrogation operating as previously analysed.
It is necessary to discuss the sue and labour clauses before establishing if ransom payments are recoverable as general average. Section 78 (4) of the Marine Insurance Act 1906 defines sue and labour: “It is the duty of the assured and his agents, in all cases, to take such measures as may be reasonable for the purpose of averting or minimising loss”. Moreover, a classical sue and labour clause can be found in the IHC: “the underwriters shall contribute to charges properly and reasonably incurred by the assured their servants or agents for such measures”.47 In these clauses there is weightier authority; because if ransoms are in principle recoverable under sue and labour clauses, why should the general average concept, in relation to sue and labour clauses, be treated different. According to section 78 (2) 1906 Act: “General average losses and contributions and salvage charges, as defined by this Act, are not recoverable under the suing and labouring clause”. Therefore, in the case of cargo ships, the claim will be excluded from the sue and labour clause; because the claim will normally be in general average. However, in the case where the ship is not for cargo, or is in ballast where there is no freight interest; the issue will be solely between the ship-owner and the hull insurers, because where a ship-owner who pays a ransom will be unable to claim a general average contribution.
44 [1902] KB 681. 45 Ibid, s. 66 (4) 46 Ibid, s. 66 (5) 47 IHC, s 2003, cll. 9.1. and 9.2. 14
On the one hand, Royal Boskalis Westminster NV v Mountain48 is the leading authority regarding ransoms and sue labour. In this case, owners of dredgers, under the sue and labour clause in the hull insurance war risk policy, claimed for the costs incurred in respect of the permission, agreed with the Iraqi authorities, to release seized ships after the invasion of Kuwait in 1990. These ships were not cargo vessels and there would have been no question of a claim in general average. Consequently, the Court of Appeal held that the costs incurred for releasing the insured property were able to be recovered, in principle, under a sue and labour clause. However, due to the fact that the “claim waiving” agreement with the Iraqi authorities was obtained under duress, it was unenforceable. Therefore, no loss could be proved and the assured's claim failed. In contrast, the claim would have been successful if the assured had made a money payment, and it is believed the case's reasoning extends in principle, to any payment of ransom performed to release the insured property.49
On the other hand, Hicks v Palington50 is the old authority on cases where a ransom payment can constitute a general average act. This case seems to fall within the definition in s. 66 (2) of the Marine Insurance Act 1906; therefore, it is suggested that if ransoms, in principle, are recoverable under sue and labour clauses, then is hard to believe why they should be treated differently in general average. Basically, the reasonableness requirement stated in the 1906 Act51 is the same in sue and labour and general average, both involving the preservation of property. In the case of a ransom situation the act of the general average will be expenditure not sacrifice. Moreover, the additional requirements that the expenditure has to be extraordinary, and voluntarily performed, do not add anything in a ransom situation.52 Where the York-Antwerp Rules are incorporated the payments of ransom would be regarded as the direct consequence of a general average act.53 Therefore, if payments of ransom can be recovered as sue and labour expenses then, they are ought to be recoverable as a general average expenditure. However, it is important to note that for general average it is necessary a successful outcome, whereas that is not necessary for sue and labour.54
48 [1999] QB 674. 49 Ibid, at 720 (Phillips LJ). 50 (1590) Moore's (QB) R 297 51 S. 66 (2) and s. 78 (1) (4) 52 MAI 1906. s. 66 (2) 53 As required by Rule C. Considered in Australian Coastal Shipping Commission v Green [1971] 1 QB 456. 54 See supra, note 18 at 444. 15
3.8. Legality and Illegality
It is relevant to consider the illegality, and public policy issues of ransom payments. Under s. 15 (3) of the Terrorism Act 2000 a person commits an offence if he: “a) provides money or other property, and b) knows or has reasonable cause to suspect that it will or may be used for the purpose of terrorism”. However, generally, under English Law is not an offence to pay ransoms, thought it may be illegal in other jurisdictions.
Basically, if the Terrorism Act 2000 is infringed, the assured will not be able to claim on the basis of either general average or sue and labour; because he would have to rely on his own illegal act. Accordingly, Lord Jauncey in Tinsley v Milligan55 stated that: “a party is not entitled to rely on his own fraud or illegality in order to assist a claim or rebut a presumption.” The courts might today be introducing a more flexible approach into that idea; but currently this principle will be operative when is attempted to recover a payment made against the provisions in the Terrorism Act. 2000. The main issue is to prove the link between that ransom payment and terrorism activities, issue that will be addressed further in this document.
As it was previously stated, the ransom payments in England are legal. However, the issues emerge where the ransom payment is legal in England but illegal in other jurisdiction, for example the flag state, or the country of payment. Importantly, there is the English Law principle that an English Court will not enforce a contract which, though lawful on its face, is entered to promote an illegal purpose. This principle extends to the promotion of the breach of a foreign law, and is not confined to a purpose which is illegal in the UK.56 This criterion also extends to the execution of an act in a foreign and friendly State which violates the law of that jurisdiction; therefore, it is not limited to acts that are illegal in the UK.57 It can be inferred, that the principle where a party may not rely on his own illegality is not only applicable to breaches of English Law. Following this, foreign laws have to be considered in conjunction with English Law, regarding any payment of ransom; towards the determination of the assured's claiming ability.
55 [1994] 1 AC 340, 366 56 Mahonia Ltd v JP Morgan Chase Bank [2003] 2 Lloyd's Rep 911, [29] (Colman J). 57 Regazzoni v KC Sethia (1944) Ltd [1958] AC 301, 317 (Viscount Simonds). 16
3.9. Public Policy considerations.
The public policy provisions are generally aimed to eliminate or at least discourage extortion. Public policy was an issue discussed by Phil LJ in Royal Boskalis Westminster NV v Mountain.58 In spite of the non-application of a public policy principle in this case, and the considerable duress in the case regarding the idea that if the assured simply paid money for the release of the dredgers, the payment would have been recoverable; Phil LJ left open the issue whether a sue and labour clause covers payments made under threats of total loss, from whatever source, which are against to English law notions of legality.59 It is believed that in a hijacking case, where a threat of destroying the vessel and/or cargo exists; and it is evidently a more dangerous situation than the one in Royal Boskalis; it is at least a matter of discussion if a ransom payment would not be possible to recover in case of a hijacking event.
Furthermore, the issue was also addressed in the The Bunga Melati Dua60 by Steel J; where it was held that there was not actual or total loss; under the basis of the on-going ransom process and its likely outcome. In this case, the assured argued that although the ransom payment was legal, it was against public policy and therefore the facility for recovering property by bribing should not be regarded as relevant or appropriate when considering whether the ship and her cargo were in practice irretrievable.61 Certainly, Steel J was not persuaded by the assured's argument and citing Royal Boskalis Westminster NV v Mountain he stated that the payment was not illegal according to English Law, and that the kidnap and ransom cover is a long standing and important feature of the insurance market. However, he was not prepared to state that such policies, that are acceptable to the insurance industry, should be rendered unenforceable.62 Finally he expressly accepted that public arguments can take two directions, one the one hand he said: “So far as harm is concerned it is true that payments of ransom encourage repetition, the more so if there is insurance cover: The Somali piracy is an eloquent demonstration of that.” It is believed that that the agreement or not with this criterion is a subjective matter. On the other hand he continued by saying: “(…) But if the crews of the vessels are to be taken out of harm's way, the only option is to pay ransom (…).”
58 Supra, note 48. 59 Ibid at, 672, 699. 60 Supra, note 40. 61 Ibid, at 58. 62 Ibid, at 60-62 17
4. MORAL HAZARD AND PIRACY
Certainly, from the insurance perspective and its relation with piracy, a fundamental aspect that needs consideration is the moral hazard concept. Historically, liability insurance has been constantly criticized with the argument that such insurance might generate changes in the behaviour of the assured. Moreover, the fear has been that the policy-holders would become careless putting in risk lives and property; idea that constitutes the classic conception of moral hazard, and it is still present in the modern insurance practice. In the specific case of marine insurance in general, the fear was that due to the insurance cover, the enterprises would be less motivated to build safe and strong vessels, and consequently careless navigation, scuttled ships and higher risks for the sailor would be present.63 These fears are still latent, however new concerns have been raised. Accordingly and from a more modern perspective, Professor Christopher Parsons,64 establishes that the “moral hazard” concept can be divided in several forms.65 For the purposes of this work the forms that will be considered are the “policyholder hazard” and the “claimant hazard”.
On the one hand, the “policyholder hazard” is the traditional form of moral hazard. It appears in possible situations where the behaviour of the policyholder, in this particular case the ship-owner, carrier or cargo owner, changes and generates negative outcomes; basically the policyholder becomes more careless.66 As it was said, this is the classical conception of moral hazard, and the classical argument taken by early detractors of liability insurance was that this type of insurance was against public policy. This type of moral hazard would motivate the ship-owner of taking pirate infested routes without the basic or necessary precautions, instead of using safer or alternative routes and having all the pertinent counter-piracy security measures; attitude motivated by the knowledge that in the event of a pirate hijack he is covered by his insurance policies. Consequently, it is believed that this lack of care would generate a direct incentive to the piratical organizations to attack the ships, increasing the number of targets for the pirates.
63 Chris. Parsons, 'Moral Hazard in Liability Insurance', Geneva Papers on Risk and Insurance, Vol 28, No. 3, 2003. at s. 4. 64 LLB, Ph.D, Professor in Insurance and Course Director MSc Insurance and Risk Management at Cass Business School, London. 65 For further information see: Chris. Parsons, 'Moral Hazard in Liability Insurance', Geneva Papers on Risk and Insurance, Vol 28, No. 3, 2003. 66 Ibid, at s. 3. 18
On the other hand, the “claimant hazard” refers to the possible effects of liability insurance on actual and potential claimants.67 At first glance, this type of hazard is related to first-party insurance; however, the existence of this hazard in liability insurance has been also widely evidenced.68 In this particular case, the beneficiaries of the money paid by the insurers, in spite of not being actual or potential claimants, would be the pirates. Therefore, some possibilities arise in this situation: first, it is believed that the pirates would prefer to target ships and cargo which are insured rather than attacking the ones that are not, due to the simple fact that getting the payment from the insurers would be less problematic than getting it from the ship-owner, cargo owner or carrier. In this particular case the secrecy element of the insurance plays a pivotal role, being more attractive for the pirates to hijack that a completely assured vessel, rather than an uninsured one. However, even with that well applied secrecy element, the pirates know that is extremely rare to find a commercial vessel without proper insurance against the piracy risk, especially regarding ships sailing to high piracy risk areas and with special covers such as the K&R policies; increasing the incentives for the pirates to execute the attacks.
Second, another possibility is the potential collusion between the policyholder and the beneficiary of the policy proceeds, in this case, the pirate associations. Basically, this collusion will constitute a deliberate fraudulent association between the policyholder and the pirates, arranging and organising the entire attack; on the part of the ship-owner acting as a “victim” and on the pirates acting as “hijackers” dividing among them the received ransom money: “(...) a third party claim [the pirates are not claimants but beneficiaries] allows the perpetrator to defraud an insurance company without having, himself, to buy any insurance at all (...)”69 It is believed, due to millionaire amounts paid for ransoms, that this is widely possible, and the incentive for ship-owners of colluding with pirates are not scarce.
67 Ibid. 68 See: Cummins, D. J. & Tennyson, S. (1996) 69 Supra, note 63. at s. 5. 19
5. MARINE KIDNAP AND RANSOM (K&R) INSURANCE
5.1. Concept
As it was discussed, generally, all vessels will be covered from the piracy risk under the H&M marine risks or war risks policy. Additionally, the ship-owners have the option to purchase Marine Kidnap and Ransom (K&R) coverage, to be protected against the piracy risk. In spite of the first glance appreciation of the modernity of this type of insurance; K&R insurance is not a new concept; it can indeed be traced back to 1932 when in the Lloyd's underwriters brought the K&R product to the market, following the kidnapping and murder of the son of the famous aviator Charles Lindbergh.70 It is relevant to consider that kidnapping may itself be sub-dived in different types, being each type treated and insured in a specialised way. Accordingly, kidnapping for profit at sea is different from political or profit kidnapping of an individual on-land. For the purpose of this paper the kidnapping and ransom insurance will be analysed in relation to marine piracy.
The Marine K&R policies provide additional cover that is not always given by the H&M or war risks policies. It is considered that these insurance policies are designed to address the growing demand of ship-owners and carriers driven by the latent fear of shipping through the Somali coast without some type of liability limit and overall protection.71 These policies cover specific additional situations; such as the insurance for the ransom while in transit; fees charged by a public relations consultant, interpreter and independent negotiator, medical and psychiatric fees, and the costs of the travel of the assured and the families of the victims, among others.
70 Bogardus, John. “Spreading the Risks: Insuring the American Experience.”Maryland: Posterity Press [2003] 71 Lennox-Gentle, Thaine “Piracy, Sea Robbery, and Terrorism: Enforcing Laws to Deter Ransom Payments and Hijacking” Transportation Law Journal, Vol. 37:199 [2008] 20
Currently, the marine K&R insurance market is developing and this type of insurers are in a strong competition. It has been suggested that these policies are often used when the ship-owner desires high limits for ransom payments or finds the premium too high in traditional Hull and Machinery or War Risk coverage.72 Therefore, the K&R underwriters are trying to achieve a competitive advantage. Consequently, some consultancy groups, which are not the response consultants, are providing pre-voyage audits to improve the ships' piracy response plans. These consultancy services are generally directly available to ship-owners; however, some K&R insurers, as a marketing strategy, have agreed with these consultancy groups to include this service in the marine K&R underwriters offer.
5.2. Marine K&R insurance preliminary issues
First, if the ransom payments are covered under H&M marine risks, war risks, and marine K&R policies at the same time; the possibility of double insurance is open. It is believed that this is a matter that should be carefully handled at the policy creation stage.
Second, in the case where a ship-owner, in addition to the traditional insurance, purchases K&R coverage, it is fundamental to ensure that the policies dovetail in a proper way, and in the event of an incident all the policies response with coordination. For example, all the mentioned policies are subject to limits; in the case of the H&M marine risks and war risk insurances the limit will be defined by the vessel's insured value which is likely to be much higher than the ransom payment value. Conversely, in the K&R insurance if the ransom payment exceeds the limits of the policy; it is important to ensure that the H&M marine or war risks policy, as applicable, will contribute above the exceeded K&R policy limit.
72 World Bank. 2013. “Pirate Trails: Tracking the Illicit Financial Flows from Pirate Activities off the Horn of Africa”. A World Bank Study. Washington, DC: World Bank. Doi:10.1596/978-0-8213-9963-7. 21
Third, K&R policies include a confidentiality requirement. One the one hand, it is suggested that if the existence of a K&R policy is made public, there would be a profit inspired demand. The secrecy element of the K&R policy prevents its entrance into an illegal market for which a demand has been created73; basically, if the pirates know the existence of these policies; they will spot a market to exploit. On the other hand, in the case where a vessel is seized by pirates, all the parties with an interest on the ship, crew and cargo; have to work together to obtain the best outcome. In an ideal scenario, the K&R insurers will waive confidentiality from the inception contract's stage, up to the interests of other insurers. Provided that a minimum confidentially waiver has to be applied after the vessel has been seized, as an emergency action.
Fourth, from a practical point of view, a clear benefit arises where the ship-owner has acquired K&R insurance, and the war risks insurer will usually reduce additional premium. However, in this situation the war risks insurer has to be aware of the existence of the K&R policy as a matter of course and the ship-owner is obliged to obtain from the K&R insurer's a disclosure permit.
5.3. Marine K&R Insurance Market
Importantly, each K&R insurer has partnered with a response consultant, and the most active underwriters regarding the K&R market are the following:
INSURER RESPONSE CONSULTANT Aspen AKE Group Catlin Security Exchange Chartis Clayton Consultants CV Starr Neil Young Associates Griffin BGN Risks Hiscox Control Risks Travelers ASI Global 74Marsh.
73 Lobo-Guerrero Luis, “Biopolitics of Specialised Risk: An Analysis of Kidnap and Ransom Insurance”, Lancaster University, United Kingdom, [2007] 74 Marsh, “Piracy: The Insurance Implications” 2011, at p. 8, http://uk.marsh.com/NewsInsights/Articles/ID/5056/Piracy-The-Insurance-Implications.aspx – Accessed: 01-05-2014 22
The cover from these insurers can be purchased by an annual scheme on a global basis or covering individual voyages; the premium establishment is based on various factors such as the date and route of the voyage, the number of voyages through high risks waters, speed, size, type and freeboard, type of cargo and crew numbers, available security measures in the vessel; as applicable. Moreover, the queries usually are if the vessel is in accordance with BMP3?75 Does the vessel have a secure and totally equipped citadel? There will be a security team on board the vessel during the voyage? Will be this security team armed or unarmed? Will razor wire be utilised? And any additional information to help the underwriter in the assessment of the level of risk.
From a general perspective, the current K&R policies' premium is between US$12,000 to US$18,000 for a single voyage through the Gulf of Aden. In this case the limit of cover is around the US$5 million for a fourteen knots of speed vessel with a freeboard of at least five metres, counting with the standard required security; including razor wire and a fully equipped citadel. Furthermore, reductions of premium may apply up to a twenty five percent for a four man unarmed security team on board during the duration of the assured voyage; moreover, the reduction could reach the fifty percent if the security team is armed.76 It is believed that the K&R insurers may not quote where either the vessel's speed or freeboard does not meet the expectations, or if there is not a security team on board. It is important to note that these figures should only be considered as a general guide; all the figures may vary according to the specific situation.
5.3.1. K&R policies' market comparison.
The following table details the wide range of services offered by the marine K&R insurers and allow us to contrast the products of each underwriter.
75 The 3rd Edition of the shipping industry's Best Management Practice to deter Piracy off the Coast of Somalia and Arabian Sea Area (BMP3). 76 Britannia Steamship P&I Club Rules. 23
Table 1.
Hiscox Travelers Catlin Aspen CV Star Griffin Chartis INSURED LOSSES Ransom ✓ ✓ ✓ ✓ ✓ ✓ ✓ Ransom in transit ✓ ✓ ✓ ✓ ✓ ✓ ✓ Consultant fees & expenses ✓ ✓ ✓ ✓ ✓ ✓ ✓ Legal Liability ✓ ✓ ✓ ✓ Optional ✓ ✓ Personal Accident x ✓ ✓ x x ✓ x ADITIONAL EXPENSES Independent negotiator's fees ✓ ✓ ✓ ✓ Silent ✓ ✓ Independent PR consultant fees ✓ ✓ ✓ ✓ Silent ✓ ✓ Independent interpreter's fees ✓ ✓ ✓ ✓ ✓ ✓ ✓ Assured's travel and accommodation costs ✓ ✓ ✓ ✓ ✓ ✓ ✓ Travel costs of victim's family ✓ ✓ Silent ✓ ✓ Silent Silent Medical/psychiatric fees ✓ ✓ ✓ ✓ ✓ ✓ ✓ Legal advice ✓ Silent Silent Silent ✓ ✓ Silent Reward ✓ ✓ Silent ✓ ✓ ✓ ✓ Costs of fuel oil used by seized vessel as a result of the event US$ 250,000 US$ 250,000 ✓ US$ 250,000 US$ 150,000 ✓ US$ 100,000 included in included in included in included in Reasonable costs paid to port authorities for seized vessel(s) ✓ US$ 150,000 ✓ above above above above inc. in ransom Negotiator's fees - carried out on pirates' side US$ 50,000 Silent x Silent Silent Silent limit PERSONAL FINANCIAL LOSS 100% of insured person's gross salary ✓ ✓ ✓ ✓ ✓ ✓ ✓ Costs for salaries of negotiating employees ✓ Silent Silent ✓ Silent ✓ Silent Sums payable by way of interest on loans ✓ ✓ ✓ ✓ ✓ ✓ ✓ Costs, fees and expenses of temporary security measures ✓ ✓ Silent ✓ ✓ Silent Costs of communication/recording equipment and advertising ✓ ✓ ✓ ✓ ✓ ✓ ✓ Reasonable fees and expenses of independent forensic ✓ ✓ ✓ ✓ ✓ Silent ✓ analysts Reasonable rest and rehabilitation expenses of assured and Max 25 % of US$ 25,000 US$ 25,000 ✓ US$ 10,000 US$ 150,000 ✓ family main limit Reasonable costs of cosmetic or plastic surgery ✓ ✓ ✓ ✓ ✓ ✓ ✓ Job retraining costs ✓ ✓ Silent Silent Silent Silent Silent Reasonable costs of transporting any ransom to perpetrators ✓ ✓ ✓ Silent ✓ Silent ✓ Costs of inability to attend to personal financial matters ✓ ✓ Silent Silent Silent ✓ ✓ Costs of repatriation & burial/cremation of the body of kidnap Silent ✓ ✓ Silent ✓ Silent ✓ victim(s) All other reasonable expenses incurred during and after insured ✓ ✓ ✓ ✓ ✓ ✓ ✓ event EXCLUSIONS Loss or damage to the property of the assured (vessel, cargo & ✓ Silent ✓ ✓ Silent Silent Silent other) Surrender of a ransom in a face to face encounter ✓ ✓ ✓ ✓ ✓ ✓ ✓ Surrender of a ransom at location kidnap occurs or extortion is ✓ ✓ ✓ ✓ ✓ ✓ ✓ made Fraudulent or criminal act of an Insured person ✓ ✓ ✓ ✓ ✓ ✓ ✓ Surrender of cargo, goods and/or cash in transit for use as ✓ ✓ ✓ ✓ ✓ ✓ ✓ ransom Surrender of the vessel(s) for use as a ransom ✓ ✓ ✓ ✓ ✓ ✓ ✓ Use of pathogenic or poisonous biological or chemical materials x ✓ x ✓ ✓ x ✓ Nuclear reaction, nuclear radiation or radioactive contamination x ✓ x x ✓ x ✓ Insured persons taking part in armed forces, police or security x x ✓ x x ✓ x organisation Legal advice obtained without the insurer's consent x ✓ ✓ x ✓ SUBROGATION CONDITION Waive all rights of subrogation against assureds' hull & ✓ ✓ ✓ ✓ x ✓ ✓ machinery insurers and/or assureds' marine war risks insurers. Above Subrogation Waiver include Cargo x x ✓ ✓ x ✓ ✓ OTHER Automatic termination of policy if vessel changes flag state - x x x x x ✓ x unless agreed by underwriters Losses which would normally be insured under hull policies x x x x x ✓ x whether purchased or not are excluded Source: Marsh, “Piracy: The Insurance Implications” 2011, appendix A.
24
5.4. The P&I Clubs’ position.
On the one hand, in a hijacking situation, there would be a “moral duty” on the ship-owner to secure the release of his employees by paying a ransom; nonetheless, there would not be a legal obligation to do so.77 On the other hand, the P&I clubs will only respond where the member has legal liability; therefore, it can be inferred that the ransom payments are not covered by the P&I clubs, due to the in-existence of a legal duty and legal liability on the ship-owner. Moreover, the P&I Clubs in the International Group78 have all made clear that ransom payments are not covered by them. However, liabilities such as loss of life and personal injury, substitution, repatriation, losses of personal effects of the crew, will remain covered; due to the absence, in the clubs’ rules, of a specific piracy exclusion. Also, the contributory negligence of a ship-owner could result in liabilities as a consequence of, for example, cargo liability, wreck removal and pollution.
Furthermore, the members of the International Group, in 2009, jointly published a document containing the answers to frequently asked questions in relation to piracy.79 This document stated that while ransom is not expressly covered by the Clubs: “it is possible that ransom might be recoverable from clubs at the discretion of boards under sue and labour or omnibus provisions if this is not recoverable under any other insurance and cannot be recovered from other sources”80 Moreover, the same publication also stated that the payment made to secure the release of a hijacked vessel or cargo is a general average expense and this practice is upheld by English courts; therefore, the ship-owners would be able to recover the contributions, from the clubs, via general average.81 In relation to the cargo, where the proportion of the cargo on general average is irrecoverable due to a breach of the contract of carriage by the ship-owner; the P&I clubs agree that they could be liable to reimburse the general average proportion of cargo.
It is believed that it would be appropriate the member’s notification to his club if the vessel is seized by pirates; even if the P&I club is not directly involved. This is relevant because the Club can become a part of the support network of the ship-owner, due to the club’s
77 Supra, note 70, at p. 9. 78 List of members and further information see: http://www.igpandi.org/Group+Clubs. Accessed; 02-05- 2014. 79 Uk P&I Club “International Group Piracy FAQs” 02/06/2009, http://www.ukpandi.com/knowledge/article/international-group-piracy-faqs-181/ , Accessed: 02-05-2014. 80 Ibid 81 Ibid 25 capacity to advice his member in relation to the duties under cargo contracts and additional legal matters. Moreover, the P&I club should be aware if the ship-owner intents to avoid a pirates’ menace executing a change of route. This is important cause this decision may deemed to be a breach of contract, for example, when avoiding the Gulf of Aden and deciding to sail through African coasts. In this scenario, the ship-owner should inform and consult his club if whether additional ship owner’s liability insurance may be necessary.
6. COSTS OF RANSOMS
6.1. Issues
Without a doubt, the cost of piracy is not easy to calculate. About this, the General Insurance Research Organising Committee (GIRO) stated that there is a big challenge in pricing maritime insurance products; among other factors, because the information about the attacks is often vague. Reasonably, the ship-owners do not wish to encourage more piracy acts by revealing extensive details; but as a side effect, this lack of information makes difficult the calculation of the real costs of piracy.82
Moreover, the disagreements between the industrial and governmental figures related to the costs of piracy are evident. The positions are clearly opposite, and a recent study83 observed that: On the one hand, a shipping investment specialist based in New York stated: “It is no big deal...insurance covers it”; on the other hand a maritime lawyer asserted: “It is putting a lot of pressure on costs at a time when the market is still quite depressed from where it was 18 months ago. Either you pass on those costs or it drops to the bottom line.” Moreover an industry consultant stated: “The insurance industry has not completely got his hand around it.” Furthermore, Per Gullestrup CEO of the Danish Clipper Group, who suffered a capture in 2008, mentioned: “This whole thing is costing the industry billions”. The differences of approaches are obvious. Furthermore, the mentioned study also stated the challenges and issues in gathering accurate information on the costs of piracy are the following:
82 GIRO: Sanders, David et al, Marine Piracy, The Actuarial Profession, 11 October 2010. 83 Eden, Scott, “The Pirates' Toll: Insurance and Razor Wire”, TheStreet.com, 17 March 2010, http://www.thestreet.com/story/10704568/1/the-pirates-toll-insurance-and-razor-wire.html?kval=dontmiss , Accessed: 05-05-2014 26
6.1.1. Limited Data
The experts have analysed hundreds of relevant documentation regarding piracy and the shipping industry, but unfortunately it is believed that there is still data that could not be found. The experts use proxies, averages, and estimations to fill the gaps left by this lack of information, and they are always encouraging data sources, academics, industry representatives, and any other person to collaborate on this matter.
6.1.2. Defective piracy reports
The International Maritime Bureau (IMB) is commonly accepted as the main source regarding piracy information. Nonetheless, the IMB is limited by the quantity of piracy attacks permitted to document and report. The head of the Piracy Reporting Centre of the IMB, Noel Choon, has recognised that approximately half of all the pirate attacks remain unreported: “In some cases the ship's owners dissuade the captain from reporting an attack...they do not want bad publicity or the ship to be delayed by an investigation”.84 Moreover, the UK government also estimates that piracy attacks occur about 25 percent more than the official statistics figures show; some other experts have mentioned that around 30-40 percent of pirate attacks to commercial vessels are reported.85 It is suggested that piracy events are intentionally hidden by the maritime industry and government for both commercial and political motives.
6.2. Ransoms’ direct costs
Having in consideration the previously stated facts; the increase of ransoms' amounts has been evident. Specifically, the Somali pirates are the main seekers of ransoms; while pirates in other regions are more dedicated to steal vessels or cargo, instead of ransoming the crew's and vessel's value. According to the UNODC-WB86 dataset; among 2005 and December 201287 between US$339 and US$413 million were paid by concept of ransoms for vessels and/or seafarers kidnapped by Somali pirates. Moreover, the pirates' most profitable year was 2011, when they accumulated between US$151.1 and US$155.67
84 Gwin, Peter, “Dangerous Straits”, National Geographic, 1 October 2007. 85 Koburger, Charles W Jnr. (2010), “Selamat Datang, Kapitan”, Piracy and Maritime Crime, Naval War College Newport Papers, Elleman, B.A, A. Forbes, D. Rosenberg eds. Newport, Naval War College Press, p75. 86 UNODC WB. United Nations Office on Drugs and Crime. World Bank. “Dataset on pirate financiers”- 2012 87 The cited version is used because it covers a longer period than the one presented in 2013. 27 million. Nevertheless, the drastic change in the amassed amounts took place between 2007 and 2009, when there was more than a triplication, within a 24 months period, of cases where ships were released against a ransom payment. Although In 2008, 42 vessels were hijacked and only 22 were released after ransoming; leaving pirates with an important number of vessels to be released later on or to be used by them as mother ships for their operations.
Therefore, the information showed that between 2008 and 2009 the pirates became faster in capturing but not in releasing the vessels. This is due to their success in the operations and the increasingly lengthy condition of the negotiations, in some cases taking more than a year.88 As in any regular business, the operation costs are higher when the stocks are greater; meaning that in piracy more vessels captured imply more hostages to guard and feed, and more militias on shore to guard the ships and their crews; all of whom need to be paid and fed, among other expenses.89 26 in 2008, and 27 in 2010, vessels were released after ransoming the pirates; but in 2009, 46 vessels were released in the same way; these figures can be contrasted and interpreted as a pirates' attempt to lower costs generated by a higher number of ships at their control.
Furthermore, in 2010 pirates released against a ransom payment 24 of 50 captured ships. In that year fewer number of ransoms were paid to pirates, but ransom payments increased in average amount from an estimated of US$2.2 million in 2009 to approximately US$3.67 million in 2010. Importantly, in 2011 the pirates accumulated between US$151.1 and US$155.67 million in ransoms; which is believed to be the pirates’ largest amount of ransoms so far.90 Conversely, 2012 was the least successful year for the pirates since 2007. The decrease began in 2011 and it is attributed to the increased presence of private security personnel on board the ships; and to the action of the military forces in the region. In 2012 Somali pirates successfully hijacked 15 ships in contrast with the 48 in 2009, 50 in 2010, and 31 in 2011. Taking the information of 2012 the estimated ransom average is US$4 million per ransom; pirates also seized more ships in 2012 than they released after a ransom payment. At the end of 2012 there were only four ships held by Somali pirates.91 However, the paid ransoms for the release of two of the four
88 Supra, note 86. 89 Supra, note 72, at. p. 41 90 Supra, note 72, at. p. 42 . 91 Supra, note 72, interview with EUNAVFOR analyst in Seychelles on 7 March 2013. 28 mentioned vessels at the beginning of 2013 was reportedly US$13 million; which indicated that the two other vessels, if the pirates managed to hijack more vessels, will likely gather higher ransoms per vessel than in 2013 rather than in the previous year. It is suggested that the declining activity in 2013 may well be not just more than a temporary break, due to the amounts already collected by the pirates' financiers until this moment. See graphic No.1.92
Graphic No.1: Evolution of ransom payments.
7. THE DESTINY OF RANSOMS' MONIES
7.1. Distribution of the ransom
Once the targeted ship is hijacked by a Pirate Action Group (PAG) militia, the vessel is taken to the shore where the interpreter/negotiator establishes the ship's value. Later, when ransom money is received, it is distributed among the following parties, by the following methods.
92 Supra, note 72, at p. 42 29
7.2. Financiers of Piracy
The operations’ financiers, depending on their investment, receive between the 30 and 70 percent of the ransom payment. Nevertheless, the generally accepted amount is 30 percent of the total payment.93 It is believed that the money moving, ransom sharing, and financing methods applied by the financiers are fluid and are constantly evolving; therefore the following factors and schemes has to be analysed keeping in mind those characteristics.
7.2.1. How the cash for the operations gets into Somalia.
As reported, some pirate financiers have only limited sums of cash inside Somalia; however, they hold important deposits in foreign banks.94 To solve the lack of cash flow for financing the operations, financiers have developed a strategy that is associated with the “reversed trade-based money laundering” method, where the financiers act as import/export coordinators. For instance, a pirate sponsor associates with a Somali based legitimate businessman who requires purchasing goods in a country A. The financier will ask his associate B in country A to buy, using the pirate financier money deposited in a bank abroad, the goods needed by the legitimate businessman; then the purchased goods are shipped by B to the legitimate businessman in Somalia; when the goods are received, the businessman repays in cash to the financiers the value of the goods received by him.95 This operation does not have transfer costs for the financier, who is able to immediately use the cash received to finance his criminal operations.
7.2.2. Piracy investment schemes a) Sole investor scheme
According to the reports, some financiers receive 50 to 70 percent of a ransom payment.96 Therefore, it can be inferred, that this type of financiers were sole investors. For instance, three specific cases has been reported; first, the MV Blue Star that was released in March
93 World Bank Report 2011a. “World Development Report 2011—Conflict, Security and Development.” http://siteresources.worldbank.org/INTWDRS/Resources/WDR2011_Full_Text.pdf. 94 Supra, note 72, researchers' correspondence with the Seychelles’ Financial Intelligence Unit, December 2, 2012. 95 See further, section 8.1 (a) herein. 96 Supra, note 86. 30
2009; second, the MV AlNisr AlSaud released in July 2012; cases where the sole investor collected 50 percent of the total ransom. Third, in the case of the MV Thor Star that was released in March 2009, the only investor received the 75 percent of the total ransom.97 In this scheme the investor maintains a higher degree of control over the operation, meaning that the hijackers on sea respond to one sole chief of the operation. b) Collaborative scheme
This is a “shareholder” financing model.98 A board of piracy financiers is created to gather the necessary money to fund a piratical expedition.99 Specifically, the average cost of a pirates’ operation involving two skiffs100 and cartels, is US$30,000101; several sponsors might finance the operation, each of them contributing approximately US$5,000 to US$10,000.102 Then, the money gathered is passed to the leader of the pirates, who is responsible for arranging the operation. This organisation performs the PAG members recruiting, and purchasing all the necessary supplies.103 Importantly, the PAG includes, as a rule, at least one elementary English speaker member, typically the leader, who can read a vessel manifesto. Moreover, a second leader commands the on-shore force and his duty is to secure the captured ships and the pirate base; normally he is also part of the board of financiers.104 c) Amateur pirates' scheme
There are some amateur or artisanal pirates operating in the Gulf of Aden;105 however, the sponsoring proportion of these pirate activities is unknown. What is clear is that these are
97 Ibid. 98 United Nations Security Council “Report of the Monitoring Group on Somalia and Eritrea pursuant to Security Council Resolution 1916" (2011). 99 Jorisch, Avi. “Today’s Pirates Have their Own Stock Exchange; Western Powers Patrol the Seas But Do Little to Stop Pirate Financing.” Wall Street Journal (Online), June 16, (2011), http://online.wsj.com/article/SB10001424052702304520804576341223910765818.html. Accessed: 07- 05-2014. 100 A “skiff” is a light rowing boat or sculling boat, typically for one person. Concise Oxford English Dictionary, Oxford University, 2008. 101 Hansen, Stig Jarle. “The Dynamics of Somali Piracy, Studies in Conflict & Terrorism” 35 (7–8): 523–30. (2012). 102 UNODC Report 2011a. “Study on Illicit Financial Flows Linked to Piracy off the Coast of Somalia.” (2011). Background document developed for the First UNODC Conference on Illicit Financial Flows Linked to Piracy off the Coast of Somalia, Nairobi, May 17–19, unpublished. 103 Supra, note 72 at p.45. 104 Supra, note 98. 105 Supra, note 72, researchers' interviews with pirate inmates and reformed pirates of the Youth Organization Against Piracy in the Seychelles. 31 low-scale operations, formed by family members or relatives who share between them the operation's expenses; each of them bringing weapons, a ladder or money.106 The cost of these operations it is no more than US$300107 and the success of them is limited. The original investment is proportionate to the return, and is based on the amount of ransom received and after the deduction of all the expenditures.
7.3. Low-level pirates
The low-level pirates, also known as “Foot Soldiers” who are sent out to hijack the ship(s) get paid when the ransom is received. First, they receive a payment of a previously agreed standard fee. This fee is about 0.01 percent to 0.025 percent of an average ransom payment; which approximately accounts to US$30,000 to US$75,000. Second, a bonus up to US$10.000 is given to the pirate that first board the vessel and to the pirates that brought their own latter or weapon.108 After analysing the pertinent reports, it is suggested that their payment ranges between US$10.000 and USS$75,000 including the applicable bonuses.
According to the reports, the low-level pirates spend their money mostly in sex workers or slaves, trafficked girls109 khat110, alcohol, and costly vehicles.111 As an example, in one specific case an interviewed reformed pirate stated that in one hijacking he collected a US$2.5 million ransom; of this sum his investor received an estimate of US$800,000 and he personally received US$40,000. Later the pirate spent his part in a $10.000 car and US$20,000 in a loan to a friend, as an investment for a new operation that finally failed; the remaining $10,000 was spent on “leisure”, according to his words. Most of the interviewed pirates agreed that the majority of money was spent on leisure activities in their hometown; and that the alcohol came from Ethiopia, the khat from Kenya; and from Somaliland, Djibouti and Ethiopia the sex workers and trafficked girls.112 Regarding khat, it is
106 Ibid. 107 Supra, note 72, researchers' interviews with pirate inmates and reformed pirates of the Youth Organisation Against Piracy in Garowe, Puntland. 108 Supra, note 98.
109 Supra, note 72. Appendix A “Human Trafficking Case Studies” at. p. 85.
110 Is a flowering plant, native from the Arabian Peninsula and the Horn of Africa. It causes excitement, loss of appetite and euphoria. It is essential for the pirates’ performance during an attack. Further information: World Health Organisation “Assessment of khat” 2006, available at: http://www.who.int/medicines/areas/quality_safety/4.4KhatCritReview.pdf 111 Supra, note 72, researchers' interviews with pirate inmates and reformed pirates of the Youth Organisation Against Piracy in Garowe, Puntland. 112 Supra, note 72, at. p. 45 32 commonly provided by a credit scheme during the hijacking operation; its consumption is recorded in books and the amount consumed is discounted from the pirate's payment when the ransom is received.113 Additional deductions apply regarding the food supply114 and fines arising from the pirates' bad behaviour during the operation. On this, according to the a list presented in the 2011 UNODC Conference on Illicit Financial Flows Linked to Piracy115 the fines imposed to the pirates include: US$5,000 fine and dismissal for mistreating the crew; US$10,000 fine and dismissal for refusing to follow an order; and a US$5,000 fine for falling sleep on post.
7.4. Local Communities
Once the vessel is on shore another militia, apart from the PAG, guards the ship and an entire new economy arises. The pirates and the kidnapped crew are provided with catering services offered by local cooks, khat, alcohol, and prostitution among other goods and services.116 All the “pirate community” services providers are paid when the ransom is collected;117 each provided service is registered and all the information and receipts are kept by the businessman.118 Importantly, services and goods are loaned to the pirates up to a 100 percent interest.119 For instance, hypothetically, if a pirate asks for a $20 dollar bottle of liquor, and promises to pay it once he gets his payment from the ransom; he will be obliged to pay $40. Furthermore, in many cases the payments are also made to local militias with the control of the port, such as the agreement made with Al-Shabbab in Xarardheere, whereby pirates would share with the militia the 20 percent of their payments.120
113 Supra, note 72, researchers' interviews with pirate inmates and reformed pirates of the Youth Organization Against Piracy in the Seychelles. 114 Supra, note 72. 115 Supra, note 93. 116 Supra, note 86. 117 Supra, note 93. 118 Supra, note 72. Researchers’ correspondence with the Seychelles’ Financial Intelligence Unit, December 2, 2012. 119 Supra, note 72. Researchers' interview with pirates in custody. 120 Ahmed, Mohamed, and Abdi Sheikh. “Somali Islamists Want to Do Ransom Deals on Board.” Reuters, March 1. (2011). Supra, note 98.
33
8. ADDITIONAL CRIMINAL ACTIVITIES FINANCED BY PIRACY PROCEEDS
8.1. Crimes while moving the proceeds a) Trading Money Laundering
Broadly, money laundering is the process where the source and ownership of criminally originated wealth and property, is changed to confer on it a legitimacy perception. From the criminal law point of view the three basic requirements to configure money laundering are: a) the need to conceal the real ownership and origin of the proceeds; b) the need to remain in control of the proceeds; and c) the need to change the form of the proceeds.121 It is believed that these elements are clearly present in the following laundering methods used by piracy financiers.
The shipping business is the perfect vehicle to transfer and launder the proceeds. Among others, under and over invoicing are two of the easiest ways to transfer money from one jurisdiction to another. For example, the piracy financier A located in B wants to transfer the piracy money to location C. On the one hand, if the financier A owns a business, he will request his associate D located in C, to ship goods valued at US$200 and D will send the goods with an invoice of US$230 to A. Finally when D receives the money, he will deposit the US$30 from an illegitimate origin in the account of A in country C.
Moreover, based in the same example, in the case where A does not own a business, he can use an intermediary E in location B, and use one of the normal transactions of the intermediary with country C. In this case, A will give the US$30 to E, who will include them in the payment and the process continues as the first example ending being legitimate funds in the account of A in location C. Importantly, the main effect of using an intermediary or not, is that is harder for the law enforcement agencies to track that operation. As reported, trade-based money laundering is one of the principal methods to move and legalise the proceeds from piracy.122
121 House of Lords: European Union Committee 19th Report of Session 2008-09: “Money laundering and the financing of terrorism”, Volume I: Report. HL Paper 132-I , London (2009) 122 Supra, note 72, researchers' interview with The Financial Unit of the Seychelles on Saturday August 9, 2012. 34
It is relevant to mention that for the purposes of the UK, the Proceeds of Crime Act 2002 in its sections 327 to 340 sets the money laundering as a crime, and details the penalties and all possible situations. b) Cash smuggling at the frontiers
The cross-border transportation of cash is performed to move the piracy proceeds between Somalia and its neighbouring countries. The penetrable condition of the borders between Somalia and its neighbours is a commonly accepted fact by the authorities. As an example, there is only one main customs checkpoint between Somaliland and Ethiopia, located in Togochale.123 Moreover, the frontier between Ethiopia and Puntland is not correctly monitored; basically because in that place there is no concrete road. One customs official admitted that due to the scarce control in the border, the proceeds from piracy could be used to finance the Ogaden National Revolutionary Front and pirates to destabilised Ethiopia.124
Furthermore, also the border between Kenya and Somalia has a penetrable condition; factors such as: the incursion in 2010 of Al-Shabaab fighters in the region of Wajir; the kidnapping in Dadaab in 2011 of Spanish aid workers; the tourists' abduction on the Island of Lamu; among others, confirm this. Additionally, the use of aircrafts to smuggle cash outside Somalia is another tactic.125 In this method, the aircraft flies directly to other countries where the requirements for cash deposits are low, and the cash disclosure requirements in the border are not strict. c) Misuse of wire transfers
In spite of the constant political and economic instability and the collapse of state infrastructures in Somalia126, the access to wire transfers from Somalia is allowed to make easier the operations for the local businessmen. Moreover, due to the logistics and services advantages; Dubai is currently an important trading partner of Somalia; and along
123 Supra, note 72. researchers' interview with The Ethiopia Customs and Revenues Authority. See photo: http://www.flickr.com/photos/danielzolli/4467852680/?q=togochale. 124 Supra, note 72, researchers' interview with the customs officials in the region. 125 Supra, note 72, UNODC researchers' communication with a western security source on June 15, 2012. 126 Nenova, Tatiana. “Anarchy and Invention: How Does Somalia’s Private Sector Cope without Government?” Africa Region Findings No. 254, Private Sector and Infrastructure Series, World Bank, Washington, DC, September, https://openknowl- edge.worldbank.org/handle/10986/9655. (2005). 35 with Djibouti they have become the principal transit spots for Somali business transactions.127 Importantly, the Somali economy is based in the trade with Gulf States, mainly of livestock; 128 due to this fact the majority of transactions go to Dubai.129
These wire transfers are used by pirates. As an illustration, where a pirate makes US$75,000 and desires to invest it; he will contact a relative living in a foreign country, this relative will open a bank account on his name and the pirate will transfer the money to that new bank account. Then, they make an agreement in which the relative obliges himself to invest the money or open a business that will be run by him, on behalf of the pirate. Consequently, the profit from this activity will be completely or partly transferred to the pirate, by the request of the latter of financial support “for his mother” or any other false argument.130 Wire transfers have also been evidenced in several ransom payments; in the cases of the MV Pompei and MV CEC Future131 the negotiator accepted for himself a separate wire transfer to an account in a bank that he stated was used working with the ship-owner.
8.2. Various crimes
The latest investigations on piracy state that in the north of Galkayo132 exists a growing operation of pirate financiers.133 This activities' increase generates concerns about the different criminal activities and investment patterns of these criminal networks. Moreover, it has been reported that there is an on-going link with insurgent groups who moved from the south to the north of Somalia.134 Furthermore, the criminal organisations located in the north part of Galkayo join more easily with pirates’ networks operating in the area of Bargaal.135 Additionally, the mentioned criminal networks are also investing considerable amounts in military capacities on land and militias.
127 Supra, note 72, researchers' interview with the Central Bank of Djibouti, June 4, 2012. 128 Majid, Nisar. “Livestock Trade in the Djibouti, Somali and Ethiopian Borderlands.” Africa Programme, Chatham House, London, (2010). 129 Supra, note 72, researchers' interview with Senior Management of a commercial bank in Djibouti on June 4, 2012, and interviews in Hargeisa, November 2011. 130 Supra, note 72, researchers' interview conducted with the East African Seafarers’ Association Programme, 2011. 131 FATF (Financial Action Task Force). “Maritime Piracy and Related Kidnapping for Ransom.” Working Group on Typologies, Financial Action Task Force, Paris, (2011). 132 Galkayo is the capital of the Somali north-central Mudug region. 133 Supra, note 86. 134 Supra, note 72, researchers' interviews with Puntland Officials in Garowe, Puntland, April 8–9, 2012. 135 Supra, note 86. 36
8.2.1. Militias' financing and on-land kidnappings
This analysis will be developed through a contrast between the operations of financiers in the south and north of Galkayo. Reportedly, the financiers operating in the north of Galkayo invest more in political influence and militias than the financiers operating in the south. Specifically, has been reported that 12 financiers have made investments of this type in the north; while in the south there has been reported 7 financiers' similar investments. This situation is considered to be an improvement and it can be explained by two reasons: First, the criminal networks have found confrontation with the local communities; for example this can be evidenced when residents pushed the pirates out of the port city of Eyl.136 Consequently, pirate financiers that own a militia get more power in the communities. Second, the pirates' kidnapping for ransom operations on land have increased the military presence. As an example, in July 11, 2011 three Kenyan aid workers of the International Aid Service were kidnapped on-land in Bacadweyne, Somalia, located 45 kilometres north of Galkayo.
Nevertheless, the pirate networks operating in the north of Galkayo are not the only involved in on-land kidnapping activities. According to the 2011 UN Report of the Monitoring Group on Somalia and Eritrea137 several members of the Hobyo-Xarardheere criminal networks138 are allegedly involved in kidnapping activities in the Somali hinterland. Actually, in the communication released in the twelfth plenary meeting of the Contact Group on Piracy off the Coast of Somalia held in 2012 at New York; was raised: “a concern over the potential expansion of criminal activities on land, in particular the kidnapping of humanitarian workers and civilians, by networks involved in piracy.”139 In addition, the networks that are more active in militias' investments are located in Puntland, where as reported, cooperation between Al-Shabaab and pirate financiers have been evidenced.140
136 Supra, note 72, researchers' interviews in Bossaaso, October 2011.
137 Supra, note 98. 138 Members involved: Abdiqadir Mohamed Abdi, Ahmed Garfanje, Hussein Jiis, Ahmed Sanaag, and Afweyne. 139 Contact Group on Piracy off the Coast of Somalia, 12th Plenary Session “Communique”, 25 July 2012, New York. at. p. 1. s. 1; http://www.thecgpcs.org/plenary.do?action=plenarySub&seq=21 Accessed: 12- 05-2014 140 Supra, note 72, researchers' interviews with Puntland officials in Garowe, Puntland, April 8–9, 2012. 37
8.2.2. Human smuggling and trafficking
According to the UNODC141 at least four pirate financiers are involved in a variety of smuggling acts. As reported, of these four financiers two are performing human trafficking and/or migrant smuggling activities. One of these cases was reported where a ship was hijacked by the same PAG militia that, prior that hijack, dropped people on the coast of Yemeni on its way back to Somalia.142 The operational links between migrant smugglers and pirates requires further research; however in spite of the lack of information, the reports have included interviews with convicted pirates and migration authorities to obtain the most accurate information possible on the topic. On the one hand a pirate, convicted in Kenya, accepted that before getting into piracy he smuggled migrants on his way to the Republic of Yemen and carried weapons to deliver in Somalia in his return, working as a nexus between the Republic of Yemen and Puntland smuggling people and weapons.
On the other hand, Chris Horwood, coordinator of the Regional Mixed Migrations Secretariat143, which supervises the transit of migrants between Yemen and the Horn of Africa; informed that the amount generated by smuggling operations from Bossaaso to Yemen is approximately US$3 million per year;144 similarly, the average amount that pirates received for each successful ship hijacking and release operation between 2005 and 2012 is US$3.06 million.145 However, the low-level pirates may be interested in becoming migrant smugglers, because the risk of death is lower and the operations’ duration in piracy is higher (weeks or months) than in the human smuggling (8 to 15 hours).146 Moreover, as detailed above, a “foot-soldier” would expect to gain between US$30,000 and US$75,000 for a successful hijacking operation after several months or in some cases more than a year; conversely, in an smuggling operation the foot soldier would share the average operation's income of US$9,000147 between himself and his sponsor, in a single journey to Yemen.
141 Supra, note 86. 142 Supra, note 72, researchers' communication with a Regional Anti-Piracy Intelligence Coordination Centre (RAPPICC) analyst on March 11, 2013. 143 Funded by the European Commission with international support. 144 Supra, note 72, researchers' communication with Chris Horwood, January 16, 2013. 145 Supra, note 86. 146 Supra, note 72, researchers' communication with Chris Horwood, January 16, 2013. 147 Supra, note 72, researchers' communication with Chris Horwood, January 16, 2013. 38
8.2.3. Piracy and Khat
Throughout the communities in the Horn of Africa, the Arabian Peninsula, and specifically in Somalia, the consumption of Khat148 is normal, actually is an ancient custom. Importantly, Khat as a trading commodity worth hundreds of millions a year; on this, the Somali analyst for the BBC Nuradin Dirie said: “The khat network reaches every corner of Somalia every day of the year and doesn't stop for wars, drought, floods, epidemics, friday prayers, Ramadan - anything really.” 149 From the legal perspective, Khat is a controlled substance and in some countries, like the United States, is illegal. Conversely, in countries such as the United Kingdom, Somalia, Ethiopia, Kenya and Yemen; the Khat trade is legal. Moreover, the trading in khat is highly monitored in Ethiopia and Djibouti whilst in Kenya is not monitored at all; consequently, in the last country the inflow of piracy proceeds is less complicated.
Unfortunately, there is not enough official information available regarding the khat's figures; being this a growing, and in several cases unregulated sector. Therefore, it is believed that the most suitable method of gathering information is to interview people involved in the khat trade. The following information is a product of interviews performed by a researchers' team in Maua, Kenya.150 According to the officials of the Wilson Airport outside Nairobi, around 9,000 kilos of Khat are flown daily from Kenya to Mogadishu, divided equally in three flights each with 3,000 kilos. Therefore, it is estimated that the quantity of Khat exported annually only to Mogadishu, is about 3.285 million kilograms.151
From the business point of view, the pirate communities are willing to pay high prices for the khat; it can be purchased by normal people in the streets of coastal cities for approximately US$50 per kilo; however, the pirates can pay up to three times the regular price, meaning up to US$150 per kilo.152 It can be inferred that a considerable amount of the money earned by the low-level pirates is spent on khat. Consequently, because of the profits of the khat business, this trade is partially sponsored by ransom money from pirates; while some pirates are buying khat for their consumption, several pirate financiers are also making investments in that trade. Moreover, due to the cash-based nature of the
148 Supra, note 110. 149 Dirie, Nuradin (Somalia Analyst, BBC News). “Somalia: Far from a Failed State.” 2012. http://www.bbc.co.uk/news/world-africa-1708066. Accessed: 12-05-2014. 150 Supra, note 72, researchers' interviews in Maua, Kenya. 151 Calculation: 9,000 kilograms per day × 365 days a year. 152 Supra, note 98. 39 transactions in the khat business is not difficult for the pirates to launder the ransom money by entering in the khat trade. It has been reported that Mohamed Abdi Hassan, also known as “Afweyne”, who is considered one of the fathers of piracy; has officially and publicly retired from piracy activities, and has moved to investing large amounts of money on the khat trade;153 additionally Cisse Yulux, who is a widely known pirate warlord, as reported, has also moved to the khat trade in the Bari region.154
8.3. Piracy and terrorism
On the one hand, The United Nations Monitoring Group has recognised that some evidence indicate that there is a real link between piracy and terrorism: “there is some evidence of linkages between piracy, arms, trafficking, and the activities in some armed opposition groups”.155 Specifically, there is some evidence that Al-Shaabab is providing combat training to pirates, and in exchange the pirates are providing maritime training to the members of Al-Shaabab.156 Moreover, there are also reports of tacit agreements among Somali businessmen, pirates and Al-Shaabab, that vessels sailing in and out of ports of the region will not be disturbed.157
On the other hand, from a diplomatic perspective, The UK House of Lords and the European Union Committee issued a report on this topic,158 making clear that any study of terrorism financing is bound to consider the proceeds of piracy. In this report the existence of a high risk of the piracy proceeds being invested in terrorism activities is stated in this way: “(...) there is a serious risk that a significant proportion of money paid to pirates as a ransom could be used for the financing of terrorism”159 As analysed before, the connection between piracy and any kind of illegal investments and activities, including terrorism, is real; however, this is a matter where the lack of information does not permit to assess with certainty the suspicions. On this, the Economic Secretary to the UK Treasury Ian Pearson MP, stated that: “(...) there is no direct evidence of the proceeds of piracy being directed towards terrorism”; however, he also stated that: “I have been careful not to
153 Ibid. 154 Supra, note 86. 155 U.N. Sec. Council, Monitoring Group on Somalia, “Report of the Monitoring Group on Somalia Pursuant to Sec. Council Resolution 1811 (2008)” at para 107, U.N. Doc. S/2008/769 (Dec. 10, 2008). 156 Bruno Schiemsky, “Piracy’s Rising Tide – Somali Piracy Develops and Diversifies,” Jane’s Intelligence Review, Jan. 20, 2009, http://www.janes.com/news/security/jir/jir090120_1_n.shtml. Accessed: 14-05- 2014. 157 Ibid. 158 House of Lords: European Union Committee 19th Report of Session 2008-09: “Money laundering and the financing of terrorism”, Volume I: Report. HL Paper 132-I , London (2009) 159 Ibid, at para. 166. 40 say that is not going to terrorism. What I have said is that we have not found a direct link to that”.160 This second statement clearly opens the possibility of the existence of the connection between pirates and terrorists; but it is believed that being the interviewee an important public agent he needed to be cautious on his statement.
Moreover, the UK Home Office trough the above mentioned representative, recognised the existence of terrorist groups in Somalia and the neighbour areas, but also added that the connection between Somalia pirates and terrorist groups is unknown. Consequently, the agent implied that if the existence of that link is known in the future, a person might have a reasonable motive to suspect that money or property involved in a ransom payment may be used for terrorism; if so, it is believed that the payment of a ransom would be in breach of sections 15-18 of the Terrorism Act 2000. Basically, the statement of the Home Office is that anyone involved in a ransom payment must be sure that there is no reasonable cause to suspect that the money of that ransom will or may be used for purposes of terrorism. The EU Committee considered this official attitude as: “Extraordinarily passive and complacent” also stating that the government in conjunction with other states are: “far better placed than individual ship-owners to decide whether ransoms are likely to be used to finance terrorism; but they seem unwilling to shoulder the responsibility”.161 Criteria that is shared by this author, the ship-owners have a lot more things to be concern of during a regular commercial sea journey, they are businessmen forming part of a services providers industry for the international trade community; they have less tools and power to asses if the money paid by them via ransom will be or not used for financing terrorists' activities; therefore, the authorities intervention has to be improved.
160 Ibid, researchers' interview with Ian Pearson (Q 479-480). 161 Ibid, at para. 167. 41
9. RANSOM PAYMENTS AND MARINE K&R INSURANCE CONSEQUENCES AND IMPLICATIONS
It is firmly believed by this author that after the detailed analysis of modern piracy, the legal aspect of it in relation to marine insurance, the study of the specific details of the highly structured internal operations of the piratical organisations and the financial, sociological, and logistical aspects of them; and after addressing of all the possible usages, effects, and repercussions of the piracy proceeds; it is relevant to aim directly to the core of the issue, and analyse the positive and the negative considerations of the assured ransom payments additionally covered by the K&R insurance policies.
9.1. Positive considerations
As it was previously discussed the Marine K&R policies provide additional cover that is not always given by the H&M or war risks policies.162 From an insurance business perspective, it is believed that the variety of situations covered by the K&R policies end in shaping a great insurance product. In this situation, from an assured perspective, he obtains security while knowing that he is fully covered in all possible situations inherent or arising of a piracy attack, allowing him to be unconcerned regarding the piracy risk, and also being sure that he will not be liable for the potential payments in case of not having insurance covering a piratical attack and all the correlated expenses. Moreover, from the insurers’ perspective, it is believed that their product portfolio is enhanced, the services offered are wide and consequently the business productivity and profitability, in general sense, will increase. As the K&R policies cover ransom payments, it is relevant to consider the positive effects of paying ransoms which are insured as afore discussed.
9.1.1. Proven tool for attacks resolution
It is argued that voiding or detaining ransom payments and the insurance of them, will respectively eliminate and complicate a widely proven tool for the resolution of hijacking situations. Arguably this prohibition and complication would result in risking the vessel, its cargo and most importantly the lives of the sailors: “Currently the only avenue available to
162 See: Section 5.3.1, herein. Table 1 for a detailed list of the additional covers given by the K&R underwriters. 42 the ship-owner [for solving a hijack situation] is the payment of a ransom”163 Currently, besides all the possible considerations, the payment of the ransom is the most common and safe way to deal with a hijacking situation. It is also widely accepted by the maritime community and it is fully covered by the marine insurance industry.
9.1.2. Kidnap and Ransom model modification without a clear replacement solution is risky.
The current modus operandi of the pirates is basically based on the capture of vessels, hostages and the consequent trade of them for ransom. For the achievement of payments the hostages and ships have to be unharmed and if the negotiations succeed and the payment is performed there is no risk of life or property loss. It is argued that if the pirates notice that the ransom payments are being banned or uninsured, they are likely to seek for alternative ways of getting profit from the attacks, turning the attacks less peaceful and the pirates' behaviour less careless with the hijacked crews and ships. According to Stephen Carmel representative of Maersk Line LTD; the Somali pirates are likely to test the resolve of the ship-owners that are unwilling to pay ransoms, by holding multiple hostages and horrifically sacrifice them one at a time until payment.164 Obviously, it is believed that in case of a prohibition of or non-insurance of ransom payments, the ship-owner is pushed to pay the ransom with his own funds to avoid any loss of life and he later would claim any duress argument to support his act against the authorities, and the success of that action is not guaranteed. Consequently, if the kidnap and ransom model is modified there must be a clear alternative way to deal with the issue to avoid the potential harms of banning the ransom payments to the pirates; if not, it is argued that is better to keep the kidnap and ransom model going.
9.1.3. Deterring ransom payments will not reduce piracy attacks
It is argued that the prohibition of paying ransoms and the lack of insurance of these payments, are likely to slightly decrease the possibility of a pirate getting payment arising from a piratical act; however, the technical, practical, and logistical difficulties of the
163 By Cyrus Mody, (IMB) cited in: William Marx, “Ransom Payments Give Wing to More Somali Piracy”, AOL NEWS, Nov. 19, 2009, http://www.aolnews.com/world/article/ransom-payments-give-wing-to-more- somali-piracy/19262064. 164 Charles Marts, “Piracy Ransoms – Conflicting Perspectives”, One Earth Foundation, (2010). Researcher's telephone interview with Stephen Carmel, Senior Vice President of Maritime Services, Maersk Line Limited (June 11, 2010).
43 hijacking process will not increase due to a ransom payments’ ban or complication, and the performance of the hijackings will not be stopped by a payment prohibition. Consequently, it is suggested by several representatives of the shipping community that the concerns have to be focused on preventing the occurrence of the attacks rather than prohibiting the ransom payments when the attack has been already performed: “We have to be concerned about preventing [hijackings] from happening.”165
9.1.4. Ransoms prohibition resulting in more violence and terror.
As specifically analysed further in this document166, the opportunities of getting a legitimate job for the Somali and Horn of Africa citizens are scarce. Therefore, it is suggested that the desperation and the willing to survive will encourage these citizens to keep performing piratical acts. The issue is deep, and the source of that desperation has to be solved, generating more opportunities for the citizens of the affected jurisdictions, which is an entire separate matter of study, outside the scope of this paper. As long as the legitimate job opportunities are inexistent, the citizens will be willing to join the pirate organisations and the piratical acts will remain; and if the ransom payments are banned or not insured, the violence will tend to increase, because the motives of the pirates will not cease. Hence, those motives will be even stronger and the violence and terror of the attacks will consequently increase, by using any possible means to gain profit of each attack.
165 Joseph Cox, president of the Chamber of Shipping America, in R.G. Edmonson, Order Against Ransom: Executive Order Raises New Questions on Piracy It Imposes Restrictions on Ransom for Somali Pirates, Journal Of Commerce, May 10, 2010, http://www.joc.com/maritime/order-against-ransom – Accessed: 24-06-2014.
166 See: Section 9.2.3. Herein. 44
9.2. Negative considerations
On this, some piracy and insurance experts believe that the policies paying ransoms, in general sense, affect negatively the “risk v. reward” ratio for a career pirate. Therefore, the pirate's motivation to attack innocent ships will completely cease only if those ransoms are not paid as a matter of law.167 However, in reality as analysed before these ransoms are paid by the traditional marine insurance policies and additional insurance products and is the most common and accepted way of solving a pirate attack. What it is definitely a real fact is that piracy is an on-going situation that needs to be deter towards the accomplishment of a safer international trade. Therefore, some of the effects of the assured ransom payments, additionally covered by the K&R policies, are the following:
9.2.1. Insurance of violence, terror and death on sea
Obviously, a piracy attack is not friendly. Pirates who are trained to capture vessels and crew for ransoming purposes use physical and psychological violence against the hostages. Therefore, the violence is a “sine qua non” element of a piracy attack, element that will always be present. Moreover, besides the previously analysed usages of ransom, that income is also used to upgrade arsenals by buying automatic weapons, rocket propelled grenades, and surface to air missiles, among others; 168 increasing the violence and the danger.
Although the pirates, to receive the ransom, prefer to keep the crew safe; crew-members are beaten and traumatised during the attack and captivity period.169 For example, in the case of the MV Faina a high profile cargo vessel captured carrying soviet tanks; the captain of the vessel died from a heart attack after the pirates hijacked the ship;170 after this lamentable situation the crew of that ship experienced post-trauma stress, requiring professional treatment.
167 Supra, note 71, at s.V. 168 U.N. Sec. Council, Monitoring Group on Somalia, “Report of the Monitoring Group on Somalia Pursuant to Sec. Council Resolution 1811 (2008)”, ¶ 266, U.N. Doc. S/2008/769 (Dec. 10, 2008). 169 Roger Middleton, Piracy in Somalia: “Threatening Global Trade, Feeding Local Wars” 6 (Chatham House Africa Programme, The Horn of Africa Project, Briefing Paper AFP BP 08/02, 2008), http://www.chathamhouse.org.uk/files/12203_1008piracysomalia.pdf. Accessed: 13-05-2014 170 Gillian Brigham, MSC Aids Mariners In Need: Catawba Assists MV Faina During 4-Month Pirate Captivity, SEALIFT, Apr. 2009, http://www.msc.navy.mil/sealift/2009/April/catawba.htm. Accessed: 13-05- 2014 45
9.2.2. Pirates' performance enhancing
It is evident that the pirate networks are not willing to stop their operations; they are actually committed to the continued exploitation of the commercial shipping industry in the Somali waters for the short and long term.171 If the pirate networks become more powerful they will recruit more pirates and their operative capacity and range of action will consequently increase. The expansion of the range of action of the pirates can be evidenced by the guides for the shipmasters regarding the distance to be taken off the Somali coast to avoid any possible piracy situation. Initially the recommendation was to maintain 50 nautical miles off the Somali Coast; in 2008 the recommendation was 200 nautical miles.172
Furthermore, in 2009 the best practices recommended a 600 nautical miles distance off the Somali coasts, recommendation that is illustrated, as not taken in consideration, in the famous 2009 case of the Maersk Alabama,173 portrayed in the Hollywood movie “Captain Phillips”.174 The latter recommendation evidences that the pirates have expanded their range of action on sea and have been operating farther offshore for a considerable period of time. Of course, this widening of action and performance enhance is a consequence of higher incomes received by the ransom payments.
9.2.3. Illegitimate sub-employment
Due to the lack of political stability and other sociological and economic factors, Somalia is not capable of offering support to legitimate businesses and consequently legitimate employment to their citizens.175 In this social chaos, is logical to infer that many young men are attracted to become pirates and are also driven by the desperation because of the lack of opportunities: “in a region where legitimate business is difficult, where drought means agriculture is nothing more than subsisting farming, and instability and violence make death a very real prospect, the dangers of engaging in piracy must be weighed against the
171 Supra, note 71, at s.5. 172 Ibid, Middleton, at. 4. 173 John Curran, Mutiny: “Crew Blames Richard Phillips, Maersk Alabama Captain, for Ignoring Pirate Warnings”, Huffington Post, Dec. 2, 2009, http://www.huffingtonpost.com/2009/12/03/maersk-alabama- richard-phillips_n_378134.html. 174 “Captain Phillips” is a 2013 American thriller film starring Tom Hanks. The film is based on the true story of the 2009 Maersk Alabama hijacking. 175 Abdinasir Mahamed & Sarah Childress, Telecom Firms Thrive in Somalia Despite War, Shattered Economy, WALL ST. J., May 11, 2010,
46 potentially massive returns.”176 Moreover, the increase of young men becoming pirates is evidenced by the head of the East African Seafarers' Union, Andrew Mwangura, who stated that in 2005 there were approximately five gangs with less than 100 pirates. Later, youth who have been training as bodyguards and militia, have evidenced the rewards of piracy, and they later have become pirates. This raised the estimate in 2010 to more than 1,100 pirates.177
9.2.4. Lawless power concentration
It is believed that being a pirate financier is a fairly low-risk and high-reward illegal activity, performed by those who own capital and are able to organise a pirate network. The risk is low due to the fact that they are operating in jurisdictions where the law enforcement and controls are weak. It is not hard to believe that the leaders of these pirate networks have a strong interest in maintaining the lawlessness and impunity in the regions where they operate, so they can keep the business going. It can be inferred that the lawless and impunity environment creates a relative comfort situation while operating, without any fear of prosecution. Moreover, they are able to keep their hostages and the seized vessels close to the coast without fearing the forceful intervention of any authority.178 In many cases, due to the lack of political stability, government order, accountability and the presence of million dollar ransoms; some of the pirate networks are better funded and armed than the regional authorities.179 Reportedly, as examples, in Puntland the security dispositive is weak, and in central Somalia the law enforcement is inexistent.180
Logically, the lack of law enforcement facilitates all the piratical activities. On this the UN Security Council has been emphatic asking the authorities in the mentioned jurisdictions to: “increase efforts to combat piracy, consider possible targeted measures against those involved in pirate activities, and prohibit the provision of support to the Puntland security sector in the absence of significant improvement.”181 It is believed that these statements
176 Supra, note 71, Middleton, at. 5. 177 Daniel Wallis, “Piracy Ransoms Funding Somalia Insurgency” REUTERS, Aug. 24, 2008, http://www.reuters.com/article/idUSLO00572320080824. 178 Brian Reyes, ‘This Is a Siege Situation... What Else Is an Owner Going to Do?,’ LLOYD’S LIST, Sept. 29, 2008, at 4 . http://lettersfromgib.files.wordpress.com/2008/12/piracy-feature.pdf ,Accessed: 14-05- 2014 179 Supra, note 168. 180 Ibid. 181 Somalia: Piracy, Security Council Report, Apr. 20, 2010, at 1, 3, 47 are logical and necessary but their scope is limited, signifying only warnings and no concrete solutions or beneficiary actions on territories that the issues are deeper and more complicated. Furthermore, the impact of the lawlessness in these territories does not only extend to commercial shipping; it also involves the international aid and protection plans for the region. For example, the so called “pirate king” Mohamed Abdi Garraad182 as reported, hijacked a shipment from the World Food Programme destined to Somalia; this hijack delayed the food distribution to this country; and made Garraad, in the view of the UN, a threat to peace and security. Not surprisingly, Puntland’s authorities did not take action to apprehend this criminal.183
9.2.5. Limitless ransom payments.
As analysed in Section 4, the ransom payments have been consistently rising over the last years. It is believed that this continued increase will make difficult the operation of small shipping companies, small local trade businesses and the entire shipping industry. In this sense, it is relevant to keep in mind that the ship and the cargo have a pecuniary value, but the lives of the crew have no price. The main problem is that piracy, as widely explained before, has become a lucrative business and logically if the business is lucrative the incentives to cease it do not exist: “where giving ransom payments of a few million dollars per ship...the criminal groups are the big winners....insurance companies do not mind paying a few million dollars for the ransom of a tanker whose temporary disability in the hands of pirates would cost as much per week”.184 If the motives for paying ransoms remain, specifically the latter type of economical/factual assessment from the ship-owners, cargo-owners, and carriers; there is no strong motive to consider that the average ransom payments will decrease or stop rising.
http://www.securitycouncilreport.org/atf/cf/%7B65BFCF9B-6D27-4E9C-8CD3- CF6E4FF96FF9%7D/Update%20Report%2020%20April%2010_Somalia.pdf Accessed: 14-05-2014
182 Monthly Forecast, Somalia, SECURITY COUNCIL REPORT, May 2010 (Garaad as the “Pirate King”), http://www.securitycouncilreport.org/site/c.glKWLeMTIsG/b.5968925/k.9BBB/May_2010brSomalia.htm. Accessed: 14-05-2014 183 Supra, note 168
184 Antonio Maria Costa, “The War on Piracy Must Start on Land”, N.Y. TIMES, June 8, 2010, http://www.nytimes.com/2010/06/09/opinion/09iht-edcosta.html. Accessed: 14-05-2014 48
9.2.6. Legitimation of ransoms
It is believed that transforming the ransom payments as a normal and standard process of the international sea trade industry is extremely dangerous. Pirates currently operate with a certain level of comfort, facilitating their attacks. Moreover, pirates work with unhindered domestic support and they are capable of outwitting those who balk at the payment of ransoms.185 It is believed by this author, that if ransom payments remain legitimate, the pirates will not have any real motivation of ceasing their activities; the threats of terror and violence will continue and they will seek greater rewards if the payment of ransom process keeps becoming natural and fluent: “If we legitimize the ransom process by failing to legislate against it in a global level, we perpetuate this unbalanced potentially limitless grant of power to a criminal enterprise.”186
185 John Drake, “Ships Face Greater Attack Risk in Indian Ocean”, LLOYD’S LIST, Feb. 19, 2010, http://www.lloydslist.com/ll/sector/piracy-and-security/article10199.ece. Accessed: 15-05-2014 186 Supra, note 178. 49
10. ANALYSIS AND CONCLUSIONS
Modern piracy is definitely a relevant issue for the Maritime Industry. Defining “piracy” is not a simple task, but there is available information that helps us to understand the concept; nevertheless, the main idea of piracy is robbery at sea, and the execution of illegal acts such as seizure of ships and kidnap of crews with economic benefit motives. There are established specific piracy high risks areas around the globe; among others, the most troubled zone is the Horn of Africa, the Gulf of Aden, the African coast and specifically Somalia; providing that these are not the only areas where piracy cases have occurred.
Due to the number of piracy situations occurred over the last decade, the insurance industry plays a pivotal role when analysing piracy. The relation between piracy and marine insurance is evident and its analysis is essential. Traditionally, the piracy risk has been insured for the vessel, the cargo or both; and has been covered by the Marine H&M Hull insurance or the War and Strikes hull insurance cover; each of those policies with their specific characteristics. It is important to establish that there are several types of hijackings, the type analysed throughout this paper is the hijacking for ransom, not the political or other motives hijackings. The latter differentiation is essential, and overlaps between piracy and other situations are possible. In this sense, it is suggested that a reconsideration of the insured perils will be beneficial. The potential overlap between piracy and riots, kidnap hijackings, terrorism, and with persons acting maliciously; is evident. Under the existing hull regime, in the situation where the hijackers are pirates and persons acting maliciously, there is a potentially serious gap in cover. With enumerated perils a hijacking is able to fall between all stools, coming clearly with none.
Importantly, the moral hazard element is present in all types of marine and non-marine insurance policies. Specifically, regarding the relation between marine insurance and piracy; the policy-holder and the claimant moral hazard are present, being an important fact to consider while purchasing additional K&R cover. It is believed that this moral hazard element is activated by the action or omissions of the assured, being a matter of the particular behaviour of the insured, not a matter of the insurance policies by themselves. Meaning that in this particular case the behaviour of the assured has to be analysed rather than the existence or not of a particular insurance policy. If the moral hazard increases is due to the deliberate action or omissions of the assured not just by the existence of any
50 kind of insurance policy.
In a hijacking situation two essential insurance queries arise: First, if the ransom is paid, is it possible to recover it under the policy? Second, if the ransom is not paid, and the vessel and/or cargo are lost, is it possible to recover the loss? On this the sue and labour and general average provisions need consideration. In the first question, the answer depends if the event is considered to be a general average or a sue and labour act. Regarding the second question, if the loss has been considered to be a consequence of piracy acts or by persons acting maliciously, the owners of the cargo should be able to recover under an all risks policy; again taking in consideration the specific case, facts and applicable law. On the payment or not of ransoms, another issue to consider is the legality of that payment; that assessment clearly depends of the specific provisions of each jurisdiction and the public policy considerations; from a general perspective, under the English law the payment of ransoms is not an offence; however, this may not be applicable in other jurisdictions.
Besides the traditional insurance policies covering the piracy risk; the ship and cargo owners and carriers, have the option to purchase Kidnap and Ransom (K&R) coverage, to be protected of the piracy risk. These policies provide additional cover that is not always given by the H&M or war risks policies. In the case where the ransom payments are covered under H&M marine risks, war risks, and marine K&R policies at the same time; the possibility of double insurance is open; it is believed that this issue can be solved in the policy creation stage. In addition, these policies are subjected to limits and conditions. In the K&R policies, regarding the limits they are established according to the market; importantly, if the ransom payment exceeds the limits of the policy, it is important to ensure that the H&M marine or war risks policy, as applicable, will contribute above the exceeded K&R policy limit. Also, the K&R policies include a confidentiality requirement, to avoid encouraging the attacks; it is suggested that the requirement of keeping the K&R policies as a secret, will prevent the effective performance of the joint work of the crew and cargo interest towards the correct management of the hostile situation; consequently, it is believed that this requirement should be waived to the strictly necessary extent to get full cooperation among the parties. Furthermore, to avoid disputes regarding to which insurer cover which situation, it is suggested that the K&R policies should name the charterer and the owner of the cargo as insured or note that the cover was procured on behalf of all charterers and cargo owners for their respective interests and rights. 51
Being the K&R policies an insurance product, a specific market and specialised underwriters exists. It is suggested that insurance and in this specific case the K&R policies are products competing in a specific market; in fact, these are specialised and unique products tailored on demand of the market: “there is no such thing as insurance in general. There are only insurance companies who are in competition with each other”.187 Therefore, the premise of the K&R policies as a product in the market has to remain in our minds towards any analysis of them. Importantly, the P&I Clubs have stated that in general sense, the ransoms are not covered by them; with the applicable considerations.
Regarding the costs of piracy, the assessment is not easy due to the limited available data, the defective piracy reports, among other factors. Nevertheless, the available information makes us conclude that between 2008 and late 2010, the Somali pirates captured more, and released less vessels by ransom payments. Specifically, in 2010 the vessels held were 28 and the released vessels 24. As a result of this situation, among other pertinent considerations, the proceeds collected by the pirates in 2011 reached a peak of an estimated US$151.1 million to US$155.57 million; figures confirming the millionaire and lucrative condition of this illegal business.
On the one hand, the payment of ransoms, and consequently the insurance products covering these expenses are considered beneficial, and positive outcomes are suggested. From a pro-ransom perspective, due to the proven effectiveness of paying ransoms as a method of solving piracy attacks, securing the release of the captured ship, its crew and cargo in a peaceful and fast way; it seems unreasonable to remove or void the only way, available to the ship-owner, of settling in the best possible way the hostile piracy situation: “In short the only realistic and effective manner of obtaining the release of a vessel is the negotiation and payment of a ransom”.188 It is argued that in a hijacking situation the ship- owners' risks are high, being in danger their vessels, their crews, and their financial stability. Therefore, voiding the most effective way of taking care of their interests it is considered harmful and unfair.
187 Ewald, Fran ois. 1999. 'Genetics, Insurance and Risk ', in T. McGleenan, U. Weising and F. Ewald, ed. Genetics and Insurance, Oxford: BIOS(17-34). 188 Masefield AG, [2010] EWHC (Comm) 280, [13] 52
Additionally, it is argued that the danger of changing the model of ransom payments, without having a clear replacement method of solving a hijacking situation, would turn the pirate organisations from a kidnap and ransom model to a capture, kill and cargo sale, similar to other regions in the world. Therefore, until the achievement of an effective and clear method to replace the kidnap and ransom model, it is suggested that the dangers are too high and the model has to remain untouched. It is also suggested that the pirates will not deter their attacks based on a prohibition of ransom payment or the lack of insurance. Their labour does not get harder because of this, and they will find new ways to get profit of their hijackings. Consequently, it is argued that the concerns have to be focused on the previous stages of the attack, generating rules to prevent the occurrence of the attack, not prohibiting payments when the attack has already be performed and many other interests are at risk.
In addition, due to the lack of legitimate job opportunities available to the citizens in the affected jurisdictions, the attacks will not easily cease. The issue is complicated, and the roots of the problem have to separately analysed and addressed towards the prevention of the increase of citizens joining the pirate organisations because they do not have any other option. From this perspective, if the ransom payments are banned, or the insurance of them is not permitted, the attacks would become more violent, causing more terror to the maritime community; therefore, if the core of the problem is not addressed any superficial provision, such as banning ransom payments would be more harmful than beneficial.
On the other hand, from an anti-ransom and insurance of them perspective; it is relevant to address what are the destinations of the piracy proceeds. First, the largest part of the ransoms goes to the financiers of piracy. These financiers hold highly sophisticated networks that allow them to take the cash into Somalia to execute the operations. They usually receive between 50 to 70 percent of the ransom payment, calculation based on the level of investment that is conducted through sole investor, collaborative and amateur pirates schemes; each of them with their specific characteristics and methods. Second, the rest of the money is given to the low-level pirates or “foot-soldiers”, that are the material actors of the hijackings, receiving between US$10.000 and USS$75,000 for each successful attack. That money is basically spent in sex workers, sex slaves, trafficked girls, alcohol, khat, costly cars; and in some cases the most intelligent pirates re-invest their earnings in new operations. Third, as a consequence of the second consideration, the 53 ransom money flows into the local communities who are the services and goods providers for the pirates. All the goods that they purchase before the attack are given by abusive credit schemes, and the pirates have to pay a lot more back at their return. It is suggested that this entire system is one of the main factors why the majority of pirates find difficult to retire after their debut in the business; they contract so much debt than they are left with nothing after reimbursing their expenses. Eventually, this type of credit operation and leisure based expenditures will oblige the pirates to go back to sea, and the vicious circle becomes infinite. Moreover, it is believed that this issue is enhanced by the general feeling of loss and the evident lack of education of the foot soldiers.
Logically, the pirate financiers need to re-invest and generate more profitability of the money received by a ransom payment. Due to this fact, additional criminal activities are conducted with those proceeds. A trading money laundering system has been evidenced, and with the disguise of legitimate businesses transactions the piracy proceeds are being laundered. Also it has been evidenced that the cash smuggling across the borders is a common activity. Additionally, an abusive and illegal misuse of wire transfers and internet banking systems are being performed, being the banks a medium for this illegal proceeds transfers. Furthermore, it has been evidenced that the piracy proceeds are used to finance militias and on-land kidnappings; it is clear that these criminal networks, financed and powered by the proceeds from piracy, have to be weakened and further eliminated by targeting them and disrupting their financial capabilities; if not so, these groups would keep representing a threat to the international community.
Another serious crime generated by the piracy proceeds is the human smuggling and trafficking. As previously said, the piracy proceeds are spent by the low-level pirates not only in alcohol and khat but also on sex workers, trafficked girls or even sex slaves. It is believed that this is an awful reality where humanitarian connotations can be taken in consideration; such as aids and sexual transmission diseases in general, mortality, unwanted pregnancy and so forth; realities that are evident and need to be addressed by the international community from the piracy and insurance perspective. Also, it is clear that pirate financiers spend the proceeds on a wide range of activities, ranging from legal to illegal businesses; from trafficking and smuggling human beings to investments in alcohol, weapons, and khat. It is surprising and clearly evident the high level of sophistication of these networks; definitely not expected at a first glance for an individual estrange to these matters. This reality generates an immense concern because the evolution of the pirate 54 financiers has taken them from being the most successful criminals at sea to become also the most powerful offenders on land; due to their weapon capacity and financial power. Another industry emerged as a product of the ransom money is the Khat business. As a consequence of the participation in the khat business, wealthy pirates are capable of operate their own distribution networks and former pirates have absorbed former cooperatives of khat. Also, pirate financiers can increase their profits by accessing to pirate markets where khat is sold at higher rates. Furthermore, the pirate financiers and former financiers that have turned into khat businessmen, have an increasing power over the economy of the main khat producer jurisdiction, Kenya. It is evident that the money of the ransom is wisely invested and does not generate any positive outcome.
Regarding the apparent connection between piracy and terrorism, it is suggested that even with a slight suspicion of that link, an investigation and global concern has to be raised in an international level, and the issue must not be ignored. It is considered that the issue of the possibility of the proceeds of piracy being invested in terrorist organisations and the amounts of these investments, need to be considered by the UK government and the international community in general, as an urgent matter to solve. It is believed that the lack of action of the pertinent control agents would be helping the financing of terrorism instead of deterring it. The house of lords was clear on this topic stating in the previously mentioned Report that: “In every case where a ransom has been demanded and the payment is being assembled in the UK, those involved have in our view a duty to seek consent for the payment of a ransom”. Furthermore, it is suggested that the effects of this harmful link are various: “It [piracy link with terrorism] endangers lives, curbs, trade, kills tourism, steals food aid, enriches criminals, funds insurgents and perverts the regional economy.”189
As it was previously stated the Marine K&R insurance covers the ransom payments, and facilitates the process of that payment. Besides the previously cited issues several other have been analysed. Regarding the Insurance of violence, terror and death on sea, the violence in the piracy attacks tends to escalate unless proper action is taken. Actions should include restricting and minimising the opportunities for pirates to gain a reward for the unlawful acts; 190 K&R insurance policies are another option, variable, opportunity for
189 Supra, note 184. 190 Michael Bradford, Lloyd's Reports Record Profit for 2009, Bus. INS., (2010) http://www.businessinsurance.comlarticleJ20100324INEWS/100329970. Accessed: 13-05-2014., Middleton, at. 6. 55 the pirates to obtain their ransom, moreover, makes the process easier, faster, and less painful. On the pirates' performance enhancing, approximately 33,000 ships sail through the Gulf of Aden each year, which evidences that the pirates have enough targets to attack.191 Again, if the K&R policies secure the money and the process of paying the ransoms to the pirates, they will be stronger, and their range of action will increase not diminishes. About the illegitimate sub-employment as a consequence of all the socio- logical facts and elements previously analysed, the young men in those countries are being forced to join piracy, and not working in legal and legitimate activities. They are becoming also victims of an entire social disease, fuelled by the money paid by ransoms that is more than secured while a ship-owner, carrier or cargo-owner purchases a K&R insurance coverage over the regular covers available to him by the traditional methods of insurance.
Moreover, the lawless power concentration is a reality; as evidenced, the ransom payments generate powerful piracy networks; being these payments the main fuel of their operations. The security measures in the vulnerable territories allow them to work freely and the ransom payments are being managed in a calm way without any fear of prosecution. Moreover, the negative effects of these pirates' activities are wider; not being the commercial shipping industry the sole victim of these pirates’ concentrated power, also the international humanitarian missions and aid programs in favour of these countries are being affected. It is believed that if these payments are assured by the marine K&R policies, are being facilitated to the pirates; consequently, these cash inflows will keep rising the concentration of power of these criminal organisations, and the impunity environment in the weak legal enforcement systems across the region. Regarding the limitless ransom payments; it is suggested that if these ransom payments and the insurance of them continue, the underwriters’ offer would have to adapt to the evolving limits, resulting in the coverage limits increase due to the market's demand; the chain is infinite. From the insurance business perspective, if the demand exists the offer will consequently remain. In this specific situation if the ransom payments tend to increase, the K&R policies' limits will increase in the same way; consequently the premiums charged and the profits of this type of underwriters will also increase. The question is where is the limit of the harms against the maritime industry and the international and local communities?
191 William Matthews, Lawmakers Have Many Ideas, Few Answers to Piracy, DEFENSE NEWS, Apr. 16, 2009, http://www.defensenews.com/story.php?i=4043805. 56
Regarding the legitimation of ransoms; it is believed that the ransom payments additionally covered by the marine K&R insurance policies, with all the specialised services that are part of their coverage; helps the legitimation of the ransom payments. The fact that the intervention of professional negotiators, special agents, financial institutions, security consultants, among others, will make the pirates believe that everything is legitimate, and the ransom payment is not an important harm to “the big” shipping companies, carriers, or cargo-owners. With the feeling of legitimacy that the marine K&R policies give to the ransom payments, the pirates will surely continue the attacks; or at least they will not have a strong motivation to detain their activities.
It is believed that if the ransom payments continue as a matter of law, and remain additionally covered by the marine K&R policies, the insurers will keep profiting from this. Additionally, from a maritime security and commercial shipping perspective, these insurers are implicitly and maybe unintentionally encouraging future pirate attacks to commercial vessels. It has been evidenced that these policies do not work in favour of the stoppage of pirate attacks; in fact they permit to the assured the payment of ransoms without any fear of legal recourse or operative complication. It can be inferred that the entire international community is encouraging piracy to continue while legitimising ransom payments as a normal expense in a commercial sea voyage. “By being complicit in allowing piracy to continue on the high seas, insurance companies will be deterred from paying ransoms if they are held to criminal penalties”.192 An example of the criminalisation of ransom payments, piracy acts and payments supporting those criminal acts, can be observed in the terrorism sections in the legislation of the United States193 Moreover, president Barack Obama issued an Executive order No. 13536 who sets an important statement towards the end of the profitable piracy business in the Horn of Africa; being the purpose of this order to restrict the payments to individuals who maintain the legal impunity in the area.
It is believed, based on the evidence presented herein, that the relation of marine insurance and piracy is intimate. All the factual, statistical, and legal information regarding this relationship has to be analysed in depth and correctly contrasted. A detailed analysis of modern piracy, of the positive and negative considerations of the payments of ransoms, and how the general insurance and Marine Kidnap and Ransom (K&R) work in relation to these payments, is essential. This analysis will allow us to form a strong criterion about the
192 Supra, note 71 at. s. V. 193 See: 18 U.S.C. §§ 956, 1203, 2280. 2339A (2006). 57 measures that the international maritime community needs to apply towards this reality. It is believed by this author that it is possible that the prohibition of paying and insuring the payments of ransoms is not a perfect solution, and it may be considered an small step now, towards the eradication of piracy; but it is suggested that is an essential step that needs to be taken in the overall fight against piracy looking for safer seas for the international trade community. Also, prohibiting the ransom payments and insurance of them could be the motor driving the international community action on this matter, obliging the pertinent jurisdictions to collaborate in the same objective, being a well-coordinated international fight with a common aim.
However, this author also believes that the piracy issue have to be also addressed by the international community from its roots. The piracy issue begins on-land, in jurisdictions where the social problems are abundant; therefore, the international fight has to be not only focused on ransom payments, it has to be also focused on the social reality of these undeveloped jurisdictions. The piratical acts have to be detained from their roots, eliminating the motivations of the young people to become pirates at first instance; it is believed that this can be achieved by using the political and economic power of the big nations, to help them out of their deep issues, which finally encourage piracy more than the ransom payments. It is firmly believed that if the ransom payments and the insurance of them are detained in conjunction with a serious international addressing of the roots of the problem, we will be able to transit trough safer seas in the next years to come, and the piracy concern would become part of the history. Finally, it is suggested that there is no right or wrong answer, there is not a universal solution to eliminate piracy, there is just information available to us, and our knowledge, approach and formation will let us conclude which is the best way to approach the piracy and its insurance issue.
58
11. BIBLIOGRAPHY
PRIMARY SOURCES:
UK Statutory Instruments: Crime and Disorder Act. 1988. Marine Insurance Act 1906
International Conventions:
Council of Europe: “Convention on Laundering, Search, Seizure, and confiscation of the Proceeds from Crime and on the Financing of Terrorism-” The Warsaw Convention. Open for signature on 16 May 2005.
United Nations Convention on the Law of the Sea (UNCLOS) 1982.
Cases:
1701 trial of Captain William Kidd At the Old Bailey, for Murder and Piracy upon the High Seas; May 3 and 9 1701, in 14 How. St. Tr. 123.
Athens Maritime v Hellenic Mutual War Risks (The Andreas Lemos) [1983] QB.
Australian Coastal Shipping Commission v Green [1971] 1 QB.
Dean v Hornby (1854) 3 El & B1.
Hicks v Palington (1590) QB.
Mahonia Ltd v JP Morgan Chase Bank [2003] 2 Lloyd's Rep.
Nishina Trading Co Ltd v Chiyoda Fire and Marine Insurance Co. Ltd (The Marine Star) [1969] 2 QB.
Panamanian Oriental Steamship Corp v Wright (The Anita) [1970] 2 Lloyd's Rep.
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Conference on Illicit Financial Flows Linked to Piracy off the Coast of Somalia, Nairobi, May 17–19, unpublished.
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