Horrific Somali piracy attacks are occurring with less frequency, but as a nefarious and risky enterprise — business is booming. FoxNews.com reported 31 ransoms in 2011 brought in a record $160 million for Somali pirates — with ransoms running about $5 million each -- and the trend is only increasing. Geopolicity estimates this number could reach $400 million in the next three years.
Douglas Burnett, partner in the Maritime Practice Group at Squire Sanders U.S. LLP, said the model is succeeding because these ruthless pirates are hanging onto their captures for longer, and charging more money than ever before.
“They’re getting better at their business, and the escalation is going up dramatically,” Burnett said. “There are fewer successful hijacks, so when they get [a capture] they want to make back their investments.”
Pirates operate in organized clans, Burnett said, with investors that fund them that demand significant return on investments (ROI). There are groups of pirates that carry out the crimes, and negotiators who speak English, both of whom get a cut of the ransom money.
Meanwhile, Navy units are decreasing their presence because governments don’t have the money to fund them, Burnett said, and ships are taking matters into their own hands, hiring armed guards to journey with them and drive down their own insurance premiums.
“Once a ship is captured, it’s hard for the states and companies to say, ‘no,’ because that is the whole point of the ransoms—they are holding your people hostage and will kill them if you don’t pay,” he said.
What’s alarming is, believe it or not, two industries with similar growth rates are the cost of college tuition and health-care, Burnett said.
While its life or death in a piracy situation, if you strip that away there are similarities in piracy’s tactics to that of a car towing business, he said.
“When your car gets towed, you have to pick it up at the lot and pay an exorbitant price for it,” he said. “You have no choice. This may be lucrative for the city that is collecting taxes on it, but you feel like a victim. Your car is gone; you need it, and are coerced into paying.”
Burnett said there are actually some business lessons that can be taken away from these ruthless criminals. Small business owners should appraise their own risks.
“Taking precautions of preventative measures is worthwhile,” he said. “In the companies’ case, it’s hiring armed guards, planning their voyage and training their crews. That can significantly reduce their risk.”
Having insurance is always a smart idea, anticipate the worst and plan accordingly, he said.
“Look at the lessons learned from others in your situation and calculate them into your model,” Burnett said.