The Economics of Piracy: who benefits

[T]he pirate economy is poorly understood. A report released on November 4, 2013 by the World Bank, the UN and Interpol sheds new light.  The authors interviewed current and former pirates, their financial backers, government officials, middlemen and others. They estimate that between $339m and $413m was paid in ransoms off the Somali coast between 2005 and 2012. The average haul was $2.7m. Ordinary pirates usually get $30,000-75,000 each, with a bonus of up to $10,000 for the first man to board a ship and for those bringing their own weapon or ladder.

Qat, a narcotic plant that is chewed by many, is often provided to pirates on credit during an operation. Their consumption is recorded and, when the ransom is paid, each pirate gets his share, minus what he consumed.  Other deductions include food and fines for bad behaviour, such as mistreating the crew, which often carries a $5,000 fine and dismissal…Some pirates find it difficult to retire because they end up in debt at the end of a hijack. Part of the ransom money flows to local communities that provide services to pirates.  Payments go to cooks, pimps and lawyers, who are increasingly sought after, as well as banknote-checkers with machines that can detect fakes. Money is also paid to militias that control ports. Under one agreement in Haradheere, a port north of Mogadishu, Somalia’s capital, pirates paid a “development tax” of 20% to the Shabab, an Islamist rebel group tied to al-Qaeda.

During operations, pirates spend with abandon. Interest rates on loaned goods and services are high: $10 of mobile-phone airtime is charged generally at around $20. The men on the anchored ships also pay up to three times the market price for qat, driving up prices on the coast. “With piracy everything became more and more expensive,” complains a fisherman-turned-pirate. Some locals (including former pirates) offer services to potential and actual victims of piracy, for instance as consultants, negotiators or proof-of-life interviewers. Some of these “companies” openly advertise their services, sometimes contacting victims directly.

Financing pirate expeditions can be quite cheap by comparison. The most basic ones cost a few hundred dollars, which may be covered by those taking part. Bigger expeditions, involving several vessels, may cost $30,000 and require professional financing, This comes from former police and military officers or civil servants, qat dealers, fishermen and former pirates. They take anywhere between 30% and 75% of the ransom.  A typical operation has three to five investors. Some provide loans or investment advice to other financiers. Some financiers, especially those in the Somali diaspora who have little cash inside Somalia but large deposits abroad, employ what the report describes as “trade-based money-laundering” to send funds to Somalia. This involves finding legitimate Somali importers willing to use a financier’s foreign money to pay for their shipments and reimburse him at home in cash once the goods are sold.

The same technique is sometimes used to transfer ransom money out of Somalia. Cash is also smuggled across the region’s porous borders or transferred through intermediaries. One pirate took $12,000 in $50 and $100 bills to an office that transmits money and wired it abroad, bought a car and shipped it back to Somalia. The Somali financial sector is surprisingly dynamic and growing more quickly than state institutions. Various internet-payment services have popped up, even in the roughest parts of the country.

The report identifies Djibouti, Kenya and the United Arab Emirates (UAE) as the main transit points and final destinations for much of the loot. The financial institutions in Dubai, part of the UAE, are a particular worry. Investigators concluded that the ransom from the hijacking of the MV Pompei in 2012 was moved to Djibouti, then wired to banks in Dubai.  A third of pirate financiers invest profits in setting up militias or gaining political influence. Some also finance religious extremists.

Excerpts from Somali piracy: More sophisticated than you thought, Economist, Nov. 2, 2013, at 53

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