Piracy Reaches Its Foregone Conclusion

When Somali pirates killed four Americans last week, criminals pulled the triggers, but the guns and bullets were paid for by the families, employers and national governments that ransomed earlier hostages.

As I sadly predicted in this space more than a year ago, the practice of paying ransoms has led to more pirate attacks and more-violent pirates. In 2010, pirates off the coast of Somalia hijacked a record number of ships. They seized 49 vessels and took 1,016 crew members hostage.

Yesterday we received news that another pleasure craft, this one a sailboat with seven Danish citizens aboard, has been commandeered by pirates in the Indian Ocean. The boat, whose passengers include three children between the ages of 12 and 16, was reportedly headed toward Somalia. It would be the first known abduction of children by Somali pirates.

The international community has tried to deal with the problem, but it has not made any serious effort to do the one thing that could actually put a stop to this wave of crime on the high seas: make certain that piracy does not pay.

Rather than cut off the flow of funds, maritime nations deployed more patrols in the pirates’ hunting grounds. The International Maritime Bureau credits patrols with cutting the number of attacks in the Gulf of Aden from 117 in 2009 to 53 in 2010. But pirates have circumvented the patrols by greatly expanding their reach. Increased attacks in the Red Sea and in the Indian Ocean east of Somalia brought the total number of attacks in 2010 to 217, compared to 212 in 2009.

The ocean has thus far proven too big for the patrols to keep tabs on the dispersed pirates. The European Naval Force now attempts to patrol about 2 million square nautical miles, an area nearly four times the size of Alaska. As pirates have been forced to move farther from shore, they have also started to seize larger ships to use as floating bases, Giles Noakes, head of security at the Baltic and International Maritime Council, explained to Bloomberg.

There have occasionally been attempts to rescue hostages. These efforts sometimes succeed, but they also put captives and would-be rescuers in harm’s way. Last week’s killings on the captured yacht, the Quest, came after U.S. naval forces blocked the pirates. The killings on the Quest may also have been retribution for earlier U.S. efforts to keep pirates from their prey. The Quest was attacked just after a Somali pirate was sentenced to more than 33 years in prison for participating in the 2009 hijacking of the Maersk Alabama. The U.S. navy successfully defended that ship, shooting two pirates in the process.

Pirates have said that they will continue to kill hostages rather than surrender them to rescuers.

A Navy special operations team killed two pirates aboard the Quest. Two more were dead when the U.S. forces boarded the boat, apparently as a result of internal fighting. Thirteen others were arrested, but their absence will not constrain the pirates’ manpower. As Roger Middleton, an analyst covering Somalia at the Royal Institute of International Affairs in London, told Bloomberg, “Every time some of them are arrested, there are plenty of others happy to take their places because it’s so well paid.” As with the drug trade in our hemisphere, there will always be people willing to risk death or arrest if the potential reward is big enough.

Governments and shipping companies that pay ransoms and also pay for stepped-up patrols are funding both sides of the piracy fight. This can lead only to escalation, with each year bringing more kidnappings and more violence. Average ransom payments rose to $5.4 million last year, compared with $150,000 in 2005, according to the One Earth Future Foundation. It is no wonder that pirates have ample resources to invest in larger and more deadly operations.

I still believe the steps I suggested in my earlier column make more sense. Shipping in pirate-prone areas should be required to travel in convoys with an armed escort. Boat traffic on the Somali coast should be quarantined within that country’s 12-mile territorial limit until Somalia is able to end piracy through onshore law enforcement. (At the moment, the Somali central government has barely enough strength to control a few blocks of territory surrounding its offices in Mogadishu). Governments and companies that succumb to ransom demands should be blacklisted and barred from international ports. Individuals and corporations should be strictly prohibited from paying any ransom.

Combating pirates effectively will require much more international cooperation, coordination and toughness than we have yet seen, but there is simply no other solution. We cannot buy our way out of this problem because pirates are not in the business of reducing the number of hostages they hold. The pirates are not stupid. They will never allow the number of hostages held at any particular time to drop to become small enough number that foreign governments might be comfortable invading the pirates’ land bases to put them out of business for good.

The problem has already reached a scale that ensures that some hostages are going to be killed. It may or may not be the unfortunate individuals who happen to be held right now in Somali harbors, or in less vulnerable inland hideouts. The best-case outcome probably would occur if the pirates became convinced that no more ransoms were forthcoming, that further hijack attempts would be thwarted, and that they would be allowed to escape with their previous ill-gotten gains if they released their most recent batch of hostages unharmed. Almost every other scenario to shut down the pirate trade involves the likelihood of innocent people getting hurt.

The Quest incident proves that we can’t keep seamen and travelers safe by keeping the pirates in business, either. All we get is more pirates, and more ruthless ones at that.

We can also assume that the pirates’ gangs are using their wealth ashore in ways that make a functioning civil society in Somalia more elusive than ever. Somalia did not create this problem. We did, by paying ransoms. We are therefore going to have to be the ones to fix it.

About Larry M. Elkin 525 Articles

Affiliation: Palisades Hudson Financial Group

Larry M. Elkin, CPA, CFP®, has provided personal financial and tax counseling to a sophisticated client base since 1986. After six years with Arthur Andersen, where he was a senior manager for personal financial planning and family wealth planning, he founded his own firm in Hastings on Hudson, New York in 1992. That firm grew steadily and became the Palisades Hudson organization, which moved to Scarsdale, New York in 2002. The firm expanded to Fort Lauderdale, Florida, in 2005, and to Atlanta, Georgia, in 2008.

Larry received his B.A. in journalism from the University of Montana in 1978, and his M.B.A. in accounting from New York University in 1986. Larry was a reporter and editor for The Associated Press from 1978 to 1986. He covered government, business and legal affairs for the wire service, with assignments in Helena, Montana; Albany, New York; Washington, D.C.; and New York City’s federal courts in Brooklyn and Manhattan.

Larry established the organization’s investment advisory business, which now manages more than $800 million, in 1997. As president of Palisades Hudson, Larry maintains individual professional relationships with many of the firm’s clients, who reside in more than 25 states from Maine to California as well as in several foreign countries. He is the author of Financial Self-Defense for Unmarried Couples (Currency Doubleday, 1995), which was the first comprehensive financial planning guide for unmarried couples. He also is the editor and publisher of Sentinel, a quarterly newsletter on personal financial planning.

Larry has written many Sentinel articles, including several that anticipated future events. In “The Economic Case Against Tobacco Stocks” (February 1995), he forecast that litigation losses would eventually undermine cigarette manufacturers’ financial position. He concluded in “Is This the Beginning Of The End?” (May 1998) that there was a better-than-even chance that estate taxes would be repealed by 2010, three years before Congress enacted legislation to repeal the tax in 2010. In “IRS Takes A Shot At Split-Dollar Life” (June 1996), Larry predicted that the IRS would be able to treat split dollar arrangements as below-market loans, which came to pass with new rules issued by the Service in 2001 and 2002.

More recently, Larry has addressed the causes and consequences of the “Panic of 2008″ in his Sentinel articles. In “Have We Learned Our Lending Lesson At Last” (October 2007) and “Mortgage Lending Lessons Remain Unlearned” (October 2008), Larry questioned whether or not America has learned any lessons from the savings and loan crisis of the 1980s. In addition, he offered some practical changes that should have been made to amend the situation. In “Take Advantage Of The Panic Of 2008” (January 2009), Larry offered ways to capitalize on the wealth of opportunity that the panic presented.

Larry served as president of the Estate Planning Council of New York City, Inc., in 2005-2006. In 2009 the Council presented Larry with its first-ever Lifetime Achievement Award, citing his service to the organization and “his tireless efforts in promoting our industry by word and by personal example as a consummate estate planning professional.” He is regularly interviewed by national and regional publications, and has made nearly 100 radio and television appearances.

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3 Comments on Piracy Reaches Its Foregone Conclusion

  1. You are correct, it was a mistake to bargain with them to begin with. I alos believe that after this incident there will be a standing order to shoot every armed pirate when confronted. No more capturing them then releasing them, if they are found armed then they should be shot. Common sense should tell anyone they are either headed out in an attempt to hijack and possibly kill or have already participated at least once. No country’s taxes should be used to help pay for them in prison and once released, if physically able, they will be back at it.

  2. the feds killed those hostages, not the pirates. fbi’s arrogance cost the life of 4 innocents, no profit in killin hostages. what the hell is the fbi doin in the middle of the med anyway?

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