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Solving the Pirate Problem: Let’s Start with the Banks

June 17, 2011

By Ann Hollingshead

Ann Hollingshead is a Financial Transparency Coalition blog contributor, whose posts appear weekly. Formerly a Junior Economist at Global Financial Integrity, Ann is now pursuing a Master of Public Policy (MPP) from the University of California Berkeley. Follow her on Twitter: @AnnHollingshead.

Pirates are a problem. Every year they cost the world between $7 and $12 billion in ransoms, insurance premiums,

Pirate Flag

Pirate flag hoisted at Dunbar, East Lothian | Richard West*

security equipment, naval forces, prosecutions, anti-piracy organizations, and economic losses to regional economies. And these economic costs don’t include the human ones, which are also sizeable. Every year seafarers are attacked with automatic gunfire and RPGs, beaten, and held in extended confinement as hostages. Pirates sometimes use these hostages as human shields against naval vessels and often abuse their captives, both physically and psychologically. Paul and Rachel Chandler, a retired British couple who were on the “trip of their lifetime,” endured a horrific 13-month ordeal after Somali pirates snatched them from their yacht in 2009.

While some nations with weak governance and strategic coastlines, like Nigeria and Indonesia, have in the past been home to pirates, they have found the most comfortable base in Somalia. The geographic, political, and economic climates of the failed state make it the ideal breeding grounds for piracy. Pirates, many of whom have few other economic opportunities, exploit its weak governance and long coastline, seeking refuge in its large interior landmass. And so, despite the international community’s increased patrolling and other security efforts, which have at least resulted in reduced success rates, piracy off the Horn of Africa has risen dramatically in recent years. At the beginning of this year, there were 97 recorded attacks off the coast of Somalia, compared to only 35 last year.

Piracy in Somalia has bred an economy of its own. In coastal pirate towns, the entire local economy revolves around hijacking ships, where, “hundreds of men, women, and children [are] employed as guards, scouts, cooks, deckhands, mechanics, skiff-builders, accountants and tea-makers.” A local security officer noted to Reuters: “Piracy-related business has become the main profitable economic activity in our area and as locals we depend on their output.” The man even claimed the district government “taxes” the proceeds of piracy and uses the revenues to fund schools and hospitals. In fact, in that area of the world, the industry has become so profitable and ubiquitous it has given rise to a pirate stock exchange. Yep, that’s right.

In their fundamental form, stock exchanges provide two things: capital for businesses and profit sharing for investors. Businesses need money for inputs (whether that’s factories or boats, guns or computers) and investors are willing to provide them with that money up-front if there is a chance of some (higher) future payout. It therefore seems rather natural that pirates, who need more money for boats and guns, would allow investors to profit from ransoms in exchange for investment up-front.

The world’s first pirate stock exchange is in Xarardheere, Somalia, where locals buy “shares” in one of over seventy pirate “companies” and then get a return if the company is successful. The exchange is open 24 hours per day and is open to anyone with money to put in, which has inspired at least one pirate to call it a “community activity.” As a result of the pervasiveness and structured organization of this dirty money, it does not stay in cash, but eventually flows into legitimate financial institutions. As Avi Jorisch, a former U.S. Treasury official and president of the Red Cell Intelligence Group, has noted: “Pirates, like all other criminals, eventually use the banking sector.” And there is our opportunity.

Increased patrolling and security have not contained this problem. It is only by cutting off finances that we can hope to effectively root out piracy. Jorish says the Financial Action Task Force (FATF) needs to “get serious about including piracy within its mission of highlighting how money launderers and terrorists raise and move funds” and recommends the UN implement a travel ban, asset freeze, and arms embargo on Somalia.

This ageless problem is only going to get worse. But now, unlike in centuries past, we have the tools to fight it systematically—and preemptively. We will not effectively control piracy until we control pirate financing. Let’s start with the banks.

* Image License: Some rights reserved by Richard West

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Disclaimer: Unless specifically stated to be the views of the Financial Transparency Coalition, the opinions expressed on this blog are solely the opinions of the individual blogger and are not necessarily those of the Financial Transparency Coalition.

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