The boom in piracy

Piracy, including kidnap and ransom, is very much a growth business, worth millions of dollars a year. So why has it become such a big problem, how do the pirates operate and who ends up with the cash? Simon Wilson reports on the world's piracy hotspots, and asks whether the practice can be stamped out.

Piracy, including kidnap and ransom, is doing so well in some parts that a kind of profit-sharing co-operative has been set up to share out the proceeds. Simon Wilson reports.

Where is piracy a big problem?

The Strait of Malacca near Singapore, between Malaysia and the Indonesian island of Sumatra, along with the South China Sea, are historically the biggest hotspots: 30% of all known incidents still take place in these waters, which account for a quarter of global seaborne trade. However, more recently, the Gulf of Aden and the Indian Ocean have put themselves firmly on the map piracy there is booming. Impoverished ex-fishermen from Somalia are taking advantage of the country's lawlessness to bring hostages back to land before playing a waiting game for ransom money with shipowners.

How successful are Somali pirates?

According to the International Maritime Bureau, the Gulf of Aden has become relatively well defended against attack. So now pirates are threatening ships due to berth at Mombasa in Kenya and Dar es Salaam in Tanzania. In the past two years, pirate attacks have spread from the Horn of Africa and Gulf of Aden shipping lanes deep into the Indian Ocean and south along the coast towards the Mozambique Channel. Last month, for example, pirates attacked the MV Nele Maersk, a Danish-flagged container ship, nearly 1,900km (1,000 nautical miles) east of the Somalian coast a new record distance. This geographic reach makes responses slower and deterrence harder. And now, rich from recent attacks, the pirates are upping their game by employing hand-held GPS and satellite phones in their search for new quarry.

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So how frequent are the attacks?

The International Maritime Bureau, which monitors pirate activity, reports 359 attacks and attempts so far this year; 195 of these are blamed on Somalian assailants, with 11 ships and 262 crew being detained. That compares with 293 incidents last year. And while pirates used to make money from just robbing crews and cargo, they increasingly favour kidnap and ransom.

What's a typical ransom?

The amount demanded per vessel has reportedly shot up from less than $50,000 per vessel five years ago to more than a million today. According to a recent report by Reuters, that makes piracy such big business that sea gangs in the main "pirate lair" of Haradheere have even set up a funding co-operative to let locals get in on the action a sort of "stock exchange meets criminal syndicate". Industry experts say that the kidnappers typically start by demanding around $10m, but an average actual payment might be more like $1m-$3m. It was widely reported, for example, that the oil tanker Sirius Star a supertanker carrying a quarter of Saudi Arabia's daily output of oil was released for $3.2m last November. Many deals remain secret or unreported, so it is impossible to put a precise figure on the overall value of ransoms paid. Roger Middleton, a piracy expert at Chatham House, estimates it to be least $100m in the past two years.

Who gets the cash?

According to a report in maritime newspaper Lloyd's List, a typical deal sees nearly 50% going to a small number of senior gang leaders, usually based outside Somalia. Cash from Somali piracy has already inflated the top-end of the Kenyan property market, for example. A further 30% goes to those who provide services to the pirates, such as catering and guards, leaving 20% for the young men who actually seize the ships. Some analysts think each pirate might make around $10,000 per job. They usually demand cash. Indeed, one negotiator reports that some gangs even have cash-counting machines and devices to check for counterfeit notes. But even today's large sums paid in ransom only account for about 25%-30% of the overall cost of freeing a crew, according to London-based underwriter Hiscox.

What are the other costs?

Shipowners need to employ specialist lawyers and security firms to conduct negotiations, arrange for delivery of ransom cash (often via Dubai or Djibouti), free and repatriate the crew and recover the ship. According to the South China Morning Post, in Somalia the resulting bill is often higher than the ransom. There is one winner kidnap and ransom insurance is booming. The premium for a single trip via the Gulf of Aden can be $20,000.

Can Somali piracy be stamped out?

It seems unlikely. The Somali pirates enjoy some great advantages. Unlike the tight straits of southeast Asia, the vast expanse of the open ocean is incredibly hard to police. And the lawless coastal areas of the failed state of Somalia dominated by warlords, gangs and tribal leaders mean they are in effect free to enjoy their ill-gotten gains in relative comfort. On any given day about 20 or 30 naval vessels patrol the Gulf of Aden and Somali basin, in a co-ordinated international effort aimed at tackling Somali piracy. But the pirates' evident willingness and ability to mount raids more than a thousand miles from shore, plus their shift to a strategy of fewer, more violent attacks on higher-value targets, mean that the problem is not about to go away.

Simon Wilson’s first career was in book publishing, as an economics editor at Routledge, and as a publisher of non-fiction at Random House, specialising in popular business and management books. While there, he published, a bestselling classic of the early days of e-commerce, and The Money or Your Life: Reuniting Work and Joy, an inspirational book that helped inspire its publisher towards a post-corporate, portfolio life.   

Since 2001, he has been a writer for MoneyWeek, a financial copywriter, and a long-time contributing editor at The Week. Simon also works as an actor and corporate trainer; current and past clients include investment banks, the Bank of England, the UK government, several Magic Circle law firms and all of the Big Four accountancy firms. He has a degree in languages (German and Spanish) and social and political sciences from the University of Cambridge.