Piracy Pays: Inside the Lucrative Fight to Foil High-Sea Hijackings

Gone are the days of one-eyed pirates being chased by the dilapidated schooners of ancient naval fleets. The modern-day fight against piracy is more like a 21st century James Bond movie, and it’s a lucrative multi-billion-dollar business.

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Efforts to protect the seas and the shippers responsible for transporting billions of dollars worth of goods each year have ramped up over the last few years amid the re-emergence a half a decade ago of piracy.

Oceans Beyond Piracy estimated in a new report released Tuesday that the cost of piracy in 2012 ranged between $5.7 billion and $6 billion. While that’s down 12.6% from a high of $7 billion in 2011, the cost was reduced as attacks fell sharply and the speed of boats through high-risk areas fell, both a reflection of wide adoption of armed guards on seafaring vessels – the cost of which rose a staggering 80% last year to a high of $1.53 billion.

“The overall cost to the international community remains considerable,” Oceans Beyond Piracy said in a new report, adding that while attacks have fallen to the lowest level since 2007, “the cost to prevent each attack has gone up significantly.”

From the pirates and organized crime rings fueling their sophistication to the private maritime security providers, insurers offering ransom and war coverage at sea and the attorneys who are paid handsome fees to negotiate hefty ransoms, piracy has grown into a thriving business.

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A Necessary Evil

The growing number and improving quality of private maritime security providers was at the heart of a 33% decline in pirate attacks in 2012, to 297 from a high of 445 in 2010, according to the International Chamber of Commerce. The ICC predicts an even greater decline to just 47 in 2013.

Also contributing to the near evaporation in hijackings -- ransoms paid fell 80% in 2012 -- are the industry-wide adoption of best practices and a task force of the world’s biggest naval legions that scout the dangerous waters of the Straight of Aden, Red Sea and Indian Ocean.

Of course, the sweeping reduction has come at a cost, with countries footing the bill for savvy naval ships patrolling dangerous waters and ship owners forking over massive sums of money for anything from security and ramped up ship speeds that eat fuel but help evade pirates to high insurance premiums.

“The problem of piracy -- for us as an employer of thousands of seafarers -- is totally unacceptable,” said Aslak Ross, head of the Copenhagen-based Marine Standards group of Maersk, the world’s largest container shipping company by revenue. “We strongly object to the fact that seafarers in this day and age cannot carry out their jobs without the risk of being held hostage for months on end.”

Shippers are on the hook for more than 80% of the sector’s total costs, responsible for paying the tens of thousands of additional dollars a day rerouting ships, increasing speeds and hiring private security firms to evade attacks, according to Oceans Beyond Piracy, a three-year old think tank focused on improving the response to maritime piracy.

It is, however, a necessary evil for these companies responsible for moving billions of dollars worth of goods through dangerous waters each year, especially as the International Chamber of Shipping predicts the volume of trade moved by sea will increase 50% over the next 20 years.

“When $12 billion worth of cargo is attacked constantly, there is an economic impact globally for everyone from shipping down,” said Alex Popovic, CEO of Virginia-based private maritime security firm Greyside Group.

“Piracy is a global problem,” Ross notes, “as we all depend on the vital trade lanes going through the area, which are used daily to transport goods to and from Asia, Europe and Africa.”

Efficient, and Making A Lot of Money

Before securities ramped up and contributed directly to the thwarting of attacks, pirating was a lucrative occupation, with Somali pirates raking in about $160 million in 2011 on 31 ransoms, averaging about $5 million a pop, according to Oceans Beyond Piracy.

That number shrank to just $31.75 million in 2012, a startling decline of 80.1% as fewer vessels were captured and pirates’ leverage declined.

The steady increase prior to 2012 infused millions of dollars into the underground market thriving in and around Somalia. Given the dissolution of Somalia’s formal banking system, the money was believed to be spent in casinos in Mombasa on the coast of Kenya to be watered down before ultimately ending up in the hands of the Russian Mafia, terrorists groups or being laundered to surrounding nations and regions around the world like the United Arab Emirates.

"In many ways, the private maritime security companies have been victim of their own success."

Peter Cook, security director of the Security Association for the Maritime Industry

Money is also spent to enrich Somali pirates, with the Puntland region of Somalia benefiting in particular, evidenced by the construction of large homes, increases in marriage dowries, high-tech equipment like flat-screen televisions and more expensive vehicles, according to a report of maritime experts commission by the United Nations in 2008.

“The more money these [pirates] garnered from this business – which became a very lucrative business – the more sophisticated they became,” Popovic said. “These guys are efficient, and they’re making a lot of money.”

The increased tech-savvy among pirates -- they now use satellite phones and global positioning systems as well as higher-caliber weapons -- also allows them to target specific ships, with those carrying oil, known by pirates as “black gold,” a bulls eye because of the commodity’s importance to Western society. Pirates also make money by stripping ships of electronic equipment and cargo to be sold on the black market, though statistics on that burgeoning underground market are virtually nonexistent.

Negotiations between pirates and ship owners and the associated underwriters can last for months, but once a deal is reached -- and deals are almost always reached in pirate hostage situations -- helicopters drop wads of cash -- millions of dollars worth -- using parachutes onto skiffs.

The process is a heavy expense to ship owners and underwriters responsible for paying negotiators and organizing drop offs. At the same time, crew deaths were at a high in 2010 and 2011 as pirates sought higher pay outs and demanded urgency, which weighed on premium rates.

The “industry is paying dearly to suppress the cost of piracy,” said entrepreneur Marcel Arsenault, a part of the nonprofit One Earth Future.

The ‘Greatest’ Factor to Evading Pirate Attacks

Vessel operators spent between $1.15 billion and $1.53 billion on armed guards in 2012, nearly triple the $530 million they spent in 2011, as an estimated 50% of vessels employed guards compared with just 30% the year prior, according to the Oceans Beyond Piracy report.

There has been significant growth in the use of private armed security onboard ships as well as citadels, or safe rooms, where crews can seeks shelters in the event of an attack.

The private security industry began to take off as governments – already cash strapped and spending money on naval ships  – began handing over the responsibility to the private sector, sort of like how Blackwater, a private company now known as Academi, makes defense systems for global militaries.

The U.S. has long been onboard with private companies taking the reins, while the Sri Lankan government last year handed over control of two of its floating weapons armories to private company Avant Garde, the country’s largest security firm with a workforce of more than 6,500.

“Without a shadow of a doubt it is the utilization of those armed guards that has been the greatest factor at reducing piracy attacks,” said Peter Cook, security director of the Security Association for the Maritime Industry (SAMI), a membership organization representing 176 private maritime security companies.

However, regulatory hurdles remain for this young industry. Not every nation allows the use of armed guards, and Egyptian officials last week seized a Togolese-flagged ship in its territorial waters for carrying too many weapons, releasing it days later after deeming it owned by a maritime security company.

The Cost of Piracy

That heightened security has weighed on an industry already strung out financially.

As security firms emerge to meet the growing demand, though, competition is being spurred, easing costs. While the going rate for a four-man armed security team was about $5,000 per day a few years ago, today it ranges from just $3000 to $3,500.

Maersk told Fox Business that it uses armed guards on a “case-by-case basis and after a thorough risk assessment,” though it wouldn’t give further details on the number of vessels or guards employed onboard.

The Denmark-based shipping giant, which operates several of the world’s largest ships, says it has strict vetting procedures in place as well as “clear rules of engagement” in terms of the private maritime security firms it uses to protect its fleet.

On the security firm Greyside’s website, testimonials tout armed guard’s ability to thwart attacks, with one, LPG Tankers, in the summer of 2011 saying the Greyside guards helped the company evade pirate attacks, enabling the crew to concentrate fully on its actual seafaring duties.

Popovic, who has taken six voyages through the dangerous North Indian Ocean waters and witnessed pirate attacks during three of them, said Greyside also trains crews and audits ships to help block unwanted entry at sea.

Indian Ocean's Worst Enemy: Complacency 

While Maersk says armed guards have proven to be effective in the fight against piracy, Ross says the company must stress that guards alone will “not make the problem go away.”

“The problem of piracy can only be solved by a coordinated effort by the international community to fight the organized crime behind piracy,” Ross said in an email. Equally important, he notes, is tackling the root causes of piracy, such as why young men are driven into it.

There is fear among all parties involved, though, that complacency – given the sharp decline in attacks – could lead to a re-emergence of piracy down the road. The money spent by military operations to thwart piracy fell 14% in 2012 to $1.09 billion, according to Oceans Beyond Piracy, a reflection of a decrease in naval assets deployed.

“I think our worst enemy at the moment in the northwest Indian Ocean is complacency,” Cook said. “If shipping companies don’t maintain their guard, if nations providing [naval] ships don’t continue to provide funding,” there’s a strong chance piracy will return, he said.

At the same time, shipping companies with already painfully thin margins may look to lower costs by reducing layers of security. They already have, with the average size of security guards on boats in recent years declining to three from four or more previously.

"In many ways," Cook said, "the private maritime security companies have been victim of their own success."

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