Paying Pirates Is Delivering The Expected Results

Sometimes it’s better to be wrong than right. Unfortunately, when I wrote here two years ago about what would happen if seafaring countries continued to submit to the demands of pirates, I was right.

At that time, piracy was still mostly limited to the area surrounding Somalia and the Gulf of Aden. When I wrote about the issue again last March, the affected area had expanded, but piracy was still a regional problem, not a continent-wide one. Since then, however, attacks on Africa’s opposite coast have spiked.

Cyrus Mody, manager of the International Maritime Bureau, told the New York Times that there have been 19 pirate attacks this year in the Gulf of Guinea, in northwestern Africa. Just last month, a fuel tanker was boarded off the West African nation of Benin and the ship’s 23 crew members were taken hostage. As recently as last year, according to Mody, the Gulf of Guinea was piracy-free.

Pirates in West Africa followed the lead of East African pirates for the same reason Google and Amazon are mimicking the daily deal format that Groupon and LivingSocial originated. When a business model is profitable, people copy it.

Of course, the two sides of the continent have unique problems, and individuals in each region have taken up piracy for a complex assortment of reasons. In East Africa, the political black hole of Somalia has left many of the country’s 9.1 million people with no opportunity to earn a living through legitimate work. West African countries like Benin and Ghana are paragons of stability compared to Somalia. In those countries, however, recent oil discoveries have suddenly introduced a new level of income disparity, bringing a new level of political upheaval in response.

On the surface, the recent rise of piracy may seem like a violent extension of local resistance to oil production, rather than part of a global kidnapping industry. Nigeria’s Jubilee oil field was discovered in 2007 and has reserves of 600 million barrels. That discovery, along with smaller ones, has had a dramatic impact. Activists claim that oil companies’ negligence has resulted in hazardous pollution and spills that have made entire villages uninhabitable. This August, in a British court, Shell accepted responsibility for two spills. The company faces a suit at The Hague from another town, where a major pipeline burst in 2004. Despite paying the price of oil production in environmental consequences, poor citizens have received little of the wealth being extracted from their coasts in return.

But the advent of the oil industry has not just highlighted the poverty of ordinary citizens; it has also brought an abundance of high-value, difficult-to-defend targets to the region, in the form of tankers and refineries. John Drake, a senior consultant at the London-based security firm AKE, told Time Magazine that the motives for attacks on oil companies are “murky.” It’s unclear, he said, whether the attacks are meant primarily “to generate political impact or generate ransom.” In 2010, average ransom payments rose to $5.4 million, according to the One Earth Future Foundation.

Anger against oil companies may be part of what spurs West African pirates, but we can be certain that if the ransom money disappeared, the vessel seizures would cease too. Appeasement of the Somali pirates has given rise to their West African imitators. “They’re being inspired by the earnings of pirates elsewhere in the world,” Drake said of the West African pirates.

The United Nations and the International Maritime Organization are working with West African governments to implement patrols in the currently unprotected region. But as long as piracy is allowed to remain profitable, these patrols will only push pirates to expand their reach even further. The only way to stop piracy from spreading is to punch a hole in its business model by outlawing ransom payments.

Increased patrols, if not accompanied by other measures, may actually do more harm than good. We cannot patrol the entire ocean. The more we force pirates into new waters, the less likely it is that we will be able to stop kidnappings before they happen.

Refusing to make ransom payments will not be easy. Innocent people may die as a result. Governments, corporations and individuals will all have to be watched closely to ensure their cooperation, and tough punishments will have to be dealt to those who give in. Governments that make payments should face the threat of sanctions; corporations should be blacklisted from international ports if they are caught paying ransoms for their employees. Individuals with family members at risk will need to be monitored carefully, and may need to have their assets frozen.

I would not advocate this strategy if there were any other effective options. There aren’t. Our only choices are to take firm action now to show pirates that they cannot make money off terror, or to wait and allow more people to be kidnapped. The pirates are offering the world a choice: Get tough up front or pay ransoms forever.

If the world’s legitimate governments value freedom of the high seas, they must to defend it before this epidemic spreads any further.

About Larry M. Elkin 534 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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