Thursday, May 06, 2010

Treasure Ships: Somali piracy and the spectre of money laundering

Money Laundering Bulletin (March, 2010)

Piracy has increased exponentially off the coast of Somalia in recent years, with ships hijacked deep into international waters despite the presence of a multi-national naval task force and pirates demanding ever higher ransoms from shipping companies. But while the spoils of piracy are evident in coastal Somali towns, tracking down where the remaining millions of dollars disappears to is hard to pin down, with allegations circulating of ransom money entering the real estate markets of Kenya to money laundering in Yemen and Dubai. Paul Cochrane in Beirut investigates.


Over the past two years, the number of vessels attacked has spiked, from 111 ships attacked in 2008, to 214 attacks and 47 hijackings in 2009, according to the International Maritime Bureau (IMB). And while the number of attacks has increased, so has the area the pirates are operating in, with the United Nations mandated naval force patrolling an area of 9-million square kilometers, almost the territorial size of the United States.

The presence of the 20-nation UN naval task force has led pirates to be increasingly audacious, using faster boats and 'mother ships' to target vessels as far as 1,200 nautical miles from the Somali and Yemeni coasts, from where pirates are based. This has heightened the ransoms demanded to fund the more sophisticated and costlier operations. “When the navies united under a task force, ransoms went up. Before it was $250,000, but now it is an average of $1.25 million per ransom,” said Simon Davis, a former detective and special investigator with Scotland Yard and a consultant on financial crime and piracy in East Africa. “That [ransom] pie graph is getting more and more cuts in it as the money is shared around,” he added.

In January (2010), the highest-ever ransom was paid out to release oil supertanker Maran Centaurus, with reports of anywhere between USD$5.5 million to USD$9 million. According to Chatham House in London, Somali pirates have been paid over USD$100 million in ransoms in the past two years, with USD$80 million accrued in 2008 alone. But where is this money going, especially given that Somalia effectively has no functional banking system?

According to a 2008 UN report using information gathered from the pirate town of Eyl in Somalia, the ransom money is divvied out, with the maritime militia – the pirates involved in the hijacking – getting 30 percent, the ground militia that secures the pirates' bases 10 percent, the local community – elders and officials – 10 percent, the financier 20 percent, and the sponsor 30 percent.

The 50 percent that ends up in the hands of pirates and the local community is having a direct impact on the Somali economy. Cyrus Mody, Manager of the IMB, said that living standards are going up due to “lavish spending by pirates, which is encouraging local industry to build up, and flashy new cars to be driven around because of the new money.” Other parts of the loot is earmarked for investment in the next venture, including faster boats, weaponry and more sophisticated nautical tracking devices.

The pirates run what Mody called an “extremely business orientated” operation, similar to many organized crime syndicates around the world. The three to five major pirate groups that operate from bases on the Somali coastline are either self-funded or financed by external investors.

This is where it gets interesting, and increasingly vague as to where that remaining 50 percent of the ransom money goes out of the hands of the organizers, as well as money the pirates may wish to stash somewhere.

Somalia is a cash based economy so money disappears before anyone knows where its gone,” said Mody. “And from what I've heard is that they demand bills [in US dollars] of low denominations, X amount in 100s, 50s, 20s, and 10s, specified for the drop offs.”


The Kenyan connection


For the money to enter the financial system, it will have to leave Somalia. Kenya is an obvious choice, sharing a 500-mile border with the country and home to some 200,000 Somali refugees. From there, the money could be transferred out through banks or using the informal remittance system hawala to the rest of the world. “The Somali diaspora is a lot wider than people think,” warned Davis.

Furthermore, Kenya is “developing into a major money laundering country”, according to the US State Department's International Narcotics Control Strategy Report 2009, while the Kenyan government has not passed a law that explicitly outlaws money laundering, created a financial intelligence unit or developed “an effective anti-money laundering (AML) regime”. The report further highlighted that Kenya’s financial system “may be laundering over USD$100 million each year”.

In January(2010), Nairobi opened an investigation into property owned by foreigners as real estate prices in the capital have soared in recent years and there have been allegations that Somali piracy money is being invested in the country.

We do know a lot of money gets siphoned into Kenya where a lot of real estate is being picked up at double and triple the price it really is,” said Mody. “One could speculate that the money is going into property, but we need more evidence.”


The Middle Eastern angle


Maritime consultancy company Idarat Maritime Ltd. (IML) has stated that the pirates use forward operating bases in the Seychelles and also work with Yemenis to launch attacks. According to an AML report, the pirates “are believed to have received financial support from wealthy individuals in the Middle East, seeking to make good returns in this business. There have also been suggestions from the Saudi military that Iran’s Revolutionary Guards have assisted the pirates, a move that may make sense given Iran’s covert involvement in Yemen’s civil war.”

Yemen's president Ali Abdullah Saleh also has close links to Somali leaders, which could be hindering security developments in preventing piracy, while the Yemeni government is notoriously corrupt, ranking 154 out of 180 countries in Transparency International's Corruption Perceptions Index 2009, making the country a possible money laundering haven. Yemen has AML regulations and is a member of the Middle East and North Africa Financial Action Task Force (MENA-FATF), but the country is “vulnerable to money laundering and other financial abuses,” said the State Department report.

Ransom money could be entering Iran, Yemen and maybe the United Arab Emirates,” said Davis.

In April 2009, a US Naval Institute confirmed that piracy funds are being deposited in Dubai, where they are then laundered. However, the UAE authorities said such allegations were “baseless.” Beirut was also flagged as a possible money laundering destination, but again the Lebanese authorities denied any illicit activity.

Indeed, more evidence is needed all round. “You will never find “evidence” that funds have been dealt with by any bank or city, all you will get is denials,” said one maritime analyst that wished to remain anonymous. “All you need to do is to follow the same rules that you apply to any criminal organization, there really is no difference, and terrorists are normally also gangsters as well, so the same rules apply. Remember that the IRA used to hold up banks and sell drugs, while the Rajah Sulaiman gang in the Philippines used terrorist means to get protection money from ferry companies. So you cannot say that Dubai, London, or New York are involved,” he added.


Illicit money?


While concrete evidence linking the ransoms to money laundering is lacking, a further complication of the piracy issue is whether the ransom money is actually proceeds of crime, and therefore illicit funds to be watched out for. “The money is not from an illegitimate source, there are no claims of mistreatment, the ship is freed and the owners are happy they got the ship back – insurance is collecting, so no one is complaining,” said Davis. “It is not a suspicious payment but a business transaction,” he added.

Davis said other factors should be investigated, particularly given the presence of the UN task force, which is supposed to secure the Horn of Africa for shipping. “Are sea faring companies ignoring advice and gambling by plying certain routes? Have companies been approached to pay off pirates not to be hijacked? And why is there no true Maritime Law to cover all and everyone who arrests pirates?” he queried.

However, the situation on the ground in Somalia is clearly exceedingly complex, with a UN arms embargo monitoring group reporting that Egypt, Iran, Libya, Saudi Arabia, Syria, Yemen and Lebanon’s Hizbullah were all supporting warring factions, while the maritime analyst said that secret services from numerous nations are involved in gun running and criminal activities.

Nonetheless, the proceeds of Somali piracy can be considered high risk.

Given that the US has taken a strong stand on the piracy issue, that there are known designated terrorist entities inside Somalia who could be involved, and that world opinion is squarely against anything involving these pirates, you do not want to be on the wrong side of the United States on this matter; Watch yourself,” said Kenneth Rijock of World-Check, a British company that maintains a database on politically exposed persons (PEPs) and high risk individuals and entities.

The company has advised compliance officers to raise the country risk on neighbouring Eritrea, Yemen and Kenya, while being vigilant about transfers out of Dubai.


Money Laundering Bulletin - Informa UK Ltd

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