Why the Somali Pirates Keep Getting Their Ransoms

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David B. Hudson / US Navy / Reuters

A package which observers believed to contain a payment drops over the Sirius Star supertanker, January 9, 2009.

U.S. and European officials insist they don't pay ransoms to pirates. And why would they? Shipping and insurance companies now routinely pay ransoms of millions of dollars, dropping sack-loads of cash from airplanes into the Indian Ocean and Gulf of Aden, despite assertions from politicians back home that the money is fueling the rampant piracy.

Here is how the system works, according to kidnap-and-ransom experts who agreed to talk to TIME: Within minutes of a vessel being seized by Somali pirates (or foreign oil workers being nabbed in Venezuela or Nigeria) the crew alerts its company headquarters. There, officials call the company's insurer, which then contracts a "response company" — private firms, like Control Risks in London or ASI Global in Houston, which are generally staffed by former military personnel experienced in hostage situations, and whose day rates can run to thousands of dollars, according to insurance brokers. Those companies begin negotiations with the kidnappers or pirates, and are usually authorized to take decisions without agreement from the shipping or oil companies concerned. Since the pirates off Somalia are motivated by money — rather than politics, as in Iraq and Afghanistan — the talks focus on one issue: the ransom amount. (See pictures of modern-day pirates.)

In negotiations which can drag on for weeks, the sum is agreed — usually more than $2 million for a container ship or oil tanker. Then the cash is air-dropped by private security companies that specialize in delivering ransoms to Somali pirates; insurance brokers say that's only about three companies. "The money is concealed in large floating plastic containers, and flown by air and dropped," says Mike Regester, an insurance broker for the London company Cooper Gay, which covers oil and shipping companies for kidnap and ransom. "Then the pirates go out and pick it up," he says.

That sounds like a scene from an action movie, but in the Gulf of Aden it is legal business practice. That's because the pirates are regarded as criminals, rather than terrorists, under U.S. or international law, which bans money going to individuals or organizations listed as terrorists. Unlike in, say, Iraq, Somali pirates appear to have little interest in killing hostages who are seized along with vessels, and the crews are usually released with the ships when the ransoms are paid. "Paying ransoms is not illegal," says Guillaume Bonnissent, a special risks underwriter for Hiscox Insurance Co. Ltd. in London, which writes about two-thirds of the world's kidnap-and-ransom insurance policies, known in the industry as K&R. In fact, insurance companies never pay ransoms themselves, in part because insurance companies are often banned by law from doing so. Instead, the companies whose workers or vessels are seized pay, and then claim back the money under their insurance policies. "K&R is really reimbursement," says Bonnissent. "We reimburse clients for ransoms paid."

For the U.S. military — as well as the European and NATO officials attempting to smash the pirate networks — the shipping companies' business-as-usual approach works against military strategy. Defense Secretary Robert Gates said as much, when he appealed to companies to stop paying ransoms, during a speech at the naval war college in Newport, Rhode Island on Friday. "Clearly, if they didn't pay the ransoms, we would be in a stronger position," he said.

But Gates' reasoning is unlikely to deter many companies, which simply cannot afford to lose hugely valuable vessels and cargo to seaborne bandits. Indeed, insurance premiums have risen along with the ransom amounts, according to Regester, who estimates that coverage for a single voyage through the Gulf of Aden costs about $20,000. With shipping companies hard-hit by the global downturn, some opt simply to take their chances running the gauntlet of pirates, rather than pay insurance premiums. "I reckon less than 10% of vessels are insured now," says Regester. "K&R policies are considered a luxury." Whether or not they are covered, many companies pay ransoms, calculating that it is cheaper than losing the vessel and its entire cargo. (Read a brief history of pirates.)

Since companies aren't likely to stop paying ransoms, Hillary Clinton on Wednesday told reporters that the State Department was working with shipping and insurance companies to "address gaps in their self-defense measures," in the hope that they can avoid being seized in the first place. Clinton's strategy announcement came days after U.S. Navy SEAL snipers killed three pirates who were holding Richard Phillips, the captain of the container vessel Maersk Alabama — the first U.S.-flagged ship to be seized off Somalia. The last-resort military rescue plan was put into action after ransom negotiations had broken down. (Read a brief history of the Navy SEALs,)

Yet insurance brokers say that ships are protecting themselves as best they can: many vessels are encased in barbed wire and crews often use high-powered water hoses to try to ward off oncoming pirates. Kidnap experts say the pirates are increasingly skilled at seizures; they say they were astonished last November when the Saudi supertanker Sirius Star was seized, since its side had been regarded as too high for pirates to scale. The pirates finally released the ship and its crew two months later, after a security company dropped $3 million in cash over the Indian Ocean. "Even with the best protections in the world, you still have the risk because the pirates are very well armed and trained," says risks underwriter Bonnissent. "It is not as easy as it seems from an office in the Western world."

In addition, insurance brokers and some officials say governments themselves sometimes pay ransoms — especially on land in kidnap-heavy countries like Nigeria, Mexico and Venezuela — despite insisting that they do not. In 2001, for example, the Dutch government paid $1 million to free a doctor working for the aid organization Doctors Without Borders (MSF) who had been kidnapped by Chechen rebels; the government later tried to recoup the money from MSF. "Ransoms are certainly being paid," Antonia Maria Costa, executive director of the United Nations Office on Drugs and Crime in Vienna, said in an e-mail on Friday. "Of course governments do not want to make this public because it violates international standards and signals to bandits and pirates that crime pays."

Rather than governments trying to ban ransom payments — which could be futile — Costa suggests trying to choke off the flow of money pirates and kidnap gangs receive. "They may move some of their money offshore, using the hawala [underground banking] system and through third parties, particularly in financial centers where shipping companies are located." Costa and Clinton have also said that shipping and insurance companies should work on developing Somalia, rather than simply paying ransoms — a suggestion that insurance brokers reject. "It's not down to insurance companies to promote peace in Somalia," says Cooper Gay's Regester. "That is done on a governmental basis." And it is a strategy which has become increasingly urgent for Western governments.

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See pictures of dramatic pirate-hostage rescues.