Piracy: detentions, ransoms and negotiations

By

Rhys Clift Partner Hill Dickinson LLP

Outline

• Piracy (primary focus Somalia, a word on Nigeria) • Context• Coverage• Detentions and statistics• Hostage negotiations - an outline• Logistics and approvals• Topical issues

The curse of piracy

• Piracy is widespread (and always has been):-Eliminated end19th Century; modern escalation

1982/3?Malacca Straits (long standing problem e.g. Gulf of

Siam incident)Attacks, kidnappings and theft off Nigeria (cf Civil

war/terrorism, not piracy?)Violent but low level theft in several ports and

anchorages worldwide (the historical model)But Somalia different both in scale and character

Context: Somalia • The pretext: Legend of over-fishing, lack of other income

(but the lure of easy wealth)• The opportunity: Breakdown of government and rule of

law (lawless state, easy access to land facilities, no land based or coastal policing); and now Yemen?

• The means:Availability of weapons from the civil wars in Somalia

and modern communicationsCapability as seafarers to operate off shore in small

boats (skiffs) and from “mother ships”Now capture from breach front hotels in Kenya!

Context: Nigeria• Method: Kidnap and ransom

But primarily people, not ships/cargoesTaking ashore/Niger delta

• Typical features: Brutality: physical violence, killings (ethnic differences) “Rapid” solutions (days/weeks) “Small” ransoms (USD 250,000? Less?)Same hostage negotiation methods; but quick

• Motive: No political agendaMoney oriented, ditto Somalia (Cf. Colombia (FARC)?)

Definition of piracy: what is not required?

• Wooden leg• Eye patch• Parrot• Jolly Roger

• How had piracy become trivialised? And why? • Geographically distant (Caribbean)• Temporal distance (1780s)

Coverage

• Potentially underwriters on:-Policies covering Hull or War risks

• Check warranties (GOA, BMP 4(August 2011)?)K&R (Special Contingency Insurance)

• Check warranties (GOA, BMP 4 (August 2011)?)P&I ? (piracy as “carve out” from war exclusion)Cargo (for General Average contribution?). ICC (A),

but piracy not covered under ICC (B) and ICC (C)

Coverage: Hull or War?

• Hull Risks: modern split perils of nature, of the seas (broadly), but previously including piracy and barratry

• War Risks: modern split perils of human agency…including riot and civil commotion. More than 12 pirates equals a riot

• Now a settled debate. 2005 London Market Wordings transfer from Hull to War policies:Piracy; Barratry; and Violent theft

• (logic, human agency)

Coverage: P&I Insurance

• Coverage (for example):-Crew liabilities – death, personal injury, loss of

personal effects (psychological damage – Maersk)Pollution/wreck removal (huge liabilities)?Cargo claims – theft/damage to cargo (delayed

delivery)Unrecoverable General Average (breach of the

contract of carriage; failure to exercise due diligence to make vessel seaworthy, breach BMP4)

Coverage: P&I InsuranceTypical defence: Imprudent Trading:-

No claim shall be recoverable from the Club if it arises out of or is consequent upon an entered ship:  …. being employed in an unlawful trade, or  ….. performing any voyage or being employed in any trade which in the opinion of the Directors is imprudent, unsafe, unduly hazardous or improper….

Compliance with BMP4 (August 2011): impact of failure?

Coverage: K&R (SCI)• Separate K&R cover: on the increase..?• Standard K&R policies should cover:

Injury/Loss of LifePayment of Ransom: for all property and peopleEmergency Team Expenses: negotiation/deliveryLOH?

• But: (very) costly (USD X per transit? Non-availability of annual policies?); new tougher criteria (low/slow)

• Subrogation? General Average?• Willing to indemnify but NOT to pay? Who pays?

Coverage: K&R

• Why buy it? • “Kidnap and ransom risks are not adequately covered by

conventional Hull, War and P&I Cover….” (Underwriters: Hiscox, Travelers, Chubb, Chartis, CV

Starr, Griffin,)• Separation of crew from ship? ( “Leopard”)• Warranties in cover: armed guards, military, razor wire,

citadels, other BMP compliance? • Warranty: confidentiality (at risk of loss of cover)

Coverage: So who pays ransom?

• Unless there is K&R (SCI) then..

• Property insurers pay - Hull (maybe War). Beware: ship’s proportion only

• P&I (personal injury and death, wreck removal, pollution). • Clubs say no to ransom (save in extremis?)

• People are the leverage, but property pays

So who pays?

• Cargo do not fund (save in extremis?)• Cargo generally provide GA security (bond/gtee, cash

deposit). But query illegality (where payment of ransom illegal)

• Failure to exercise due diligence to make vessel seaworthy: an intense scrutiny of “piracy preparedness” and “vessel hardening”

• EUNAVFOR data? (name and shame)• Compliance stats for transit? 30/40 %? Who and why?

Detentions and ransoms

• Charts• Stats• Averages• Patterns

Somali Piracy - Durations as at 29 Feb 12For ships hijacked between 01 Jan 10 and 31 Aug 10

www.compass-rm.com

Notes: 1. Total days held at top of each column.2. Green = released vessels. Red = still held3. Date of hijack (under each column) shown as day/month.4.( 20KT) = 20,000 DWT5.B = Bulk Carrier, C = Cargo, D = Dredger, F = Fishing, P = Passenger, Ro = Ro Ro, Rf = Reefer, T = Tanker, Tu = Tug.6.= Reported by media as  in use as a mother ship while under pirate control.7.= Reported to have sunk shortly after a ransom had been paid and the vessel released by pirates.

Duration© Compass Risk Management

Date of Hijack

TC

T

T F BRf

Ro

T

C

BT

TB

TT

1/1 2/1 1/3 5/3 4/4

23/3 29/3 21/4 8/5 11/5 12/523/36/3 28/6 4/7 2/811/4

C

Somali Piracy – Durations as at 29 Feb 12For ships hijacked between 01 Sep 10 and 31 Dec 10

www.compass-rm.com

Notes: 1. Total days held at top of each column.2. Green = released vessels. Red = still held3. Date of hijack (under each column) shown as day/month.4.( 20KT) = 20,000 DWT5.B = Bulk Carrier, C = Cargo, D = Dredger, F = Fishing, P = Passenger, Ro = Ro Ro, Rf = Reefer, T = Tanker, Tu = Tug.6.= Reported by media as  in use as a mother ship while under pirate control.7.Vega 5 used as a mother ship. Sunk after clash with Indian Navy. 8.15 June 2011 fire reported on MV Orna. Pirates moved hostage crew off vessel.

Duration© Compass Risk Management

Date of Hijack25/1211/12 20/12 25/12 27/12 31/12

C

C

B

B

C

C

F

FB

23/10 3/1130/10 11/11 12/11 25/11 5/12 10/12

T

T

P T

C

F C

T

8/9 28/9 10/109/10

T

Somali Piracy – Durations as at 29 Feb 12For ships hijacked between 01 Jan 11 and 31 Dec 11

www.compass-rm.com

Notes: 1. Total days held at top of each column.2. Green = released vessels. Red = still held3. Date of hijack (under each column) shown as day/month.4.( 20KT) = 20,000 DWT5.B = Bulk Carrier, C = Cargo, D = Dredger, F = Fishing, P = Passenger, Ro = Ro Ro, Rf = Reefer, T = Tanker, Tu = Tug, Y = Yacht.6.MV Leopard was abandoned by pirates and crew taken ashore as hostages. 7.FV Chin Yi Wen was recaptured by crew after 3 days.8.= Reported by media as  in use as a mother ship while under pirate control.

Duration © Compass Risk Management

Date of Hijack1/1

B

C

12/1 28/224/2

B

Y

T

C

B

T

17/1 19/1 20/1 8/222/1 12/29/2 18/2

B

B YB

CC TT

20/8

B

T

27/12

F

4/11

T

31/10

T

16/3 28/3 8/4 21/4 30/4

T

16/7

Somali Piracy – Durations as at 29 Feb 12For ships hijacked between 01 Jan and 29 Feb 12

www.compass-rm.com

Notes: 1. Total days held at top of each column.2. Green = released vessels. Red = still held3. Date of hijack (under each column) shown as day/month.4.( 20KT) = 20,000 DWT5.B = Bulk Carrier, C = Cargo, D = Dredger, F = Fishing, P = Passenger, Ro = Ro Ro, Rf = Reefer, T = Tanker, Tu = Tug, Y = Yacht.6.= Reported by media as  in use as a mother ship while under pirate control.

© Compass Risk ManagementDuration

Date of Hijack

Ro C

15/02 16/02

Compiled by Leslie Edwards and Jon Lee 29/02/12.Compass Risk Management LtdTel: +44 1476 550166 - Email: info@compass-rm.com

Graph based on a representative sample of 98 ransoms reported paid between 1 Jan 08 and 29 Feb 12.

Sources for ransom figures - media and other open source reporting, including some owners interviewed by the press. Somali pirates own declarations have been used where no other reliable open source is available.

At any given point the graph will show the average reported paid for the previous six ships.

Trend line shown in red.

www.compass-rm.com

Six Ship Moving Average Ransom Reported Paid to Somali Pirates

$M

2009 20102008 2011/12

Scatter chart based on a representative sample of 55 merchant ships hijacked between 1 Jan 08 and 31 Dec 09 on which the media reported that a ransom negotiation had taken place.

Excluded are dhows, yachts, vessels freed by military action and most, but not all fishing vessels and other small craft. Some small local vessels are excluded.

In early 2008 the owner of a hijacked ship would reasonably expect that a release would be achieved in from one to two months. By late 2009 the expected range had increased from about two to five months.

Shortest and longest duration hijacking for each year are indicated.

Compiled by Leslie Edwards and Jon Lee 31/01/12.Compass Risk Management LtdTel: +44 1476 550166 - Email info@compass-rm.com www.compass-rm.com

Duration of Negotiated Somali Hijack Cases in DaysDuring 2008 - 2009

2008 2009

Days© Compass Risk Management

Stolt Strength (161)

BBC Trinidad (20)

Ariana (223)

Bow Asir (14)

Scatter chart based on a representative sample of 57 merchant ships hijacked between 1 Jan 10 and 29 Feb 12 (as at 29 Feb 12).

Released ships shown in green. Ships still held are shown in red.

Shortest and longest duration hijacking for each year are indicated.

In the case of the FV Chin Yi Wen, the crew retook the vessel 3 days after its capture.

The small cargo vessel Savina Fahad hijacked on or about 16 Feb 12.

Compiled by Leslie Edwards and Jon Lee 29/02/12.Compass Risk Management LtdTel: +44 1476 550166 - Email info@compass-rm.com www.compass-rm.com

Duration of Negotiated Somali Hijack Cases in Days During 2010 - 2011

Days© Compass Risk Management

Iceberg (703)

Talca (49)SV Quest (5)

Leopard (Crew (383)

Savina Fahad (14)

Chin Yi Wen (3)

2010 2011/12

Chart based on ship hijacks conducted by Somali pirates by month covering 2008 to 2012.

Excluded are dhows, yachts, vessels freed by military action and most, but not all fishing vessels and other small craft.

The reduction in the number of successful hijacks in late 2011 is attributed to better training of masters and crews, compliance with BMP4, armed guards , naval interdiction and pressure by the authorities inside Somalia.

Compiled by Leslie Edwards and Jon Lee 31/01/12.Compass Risk Management LtdTel: +44 1476 550166 - Email info@compass-rm.com

www.compass-rm.com

Somali Piracy – Hijacks by Month2008 - 2012

© Compass Risk Management

Somali Piracy – Hijackings by Ship Size Classification2005 – 2012 (As At 31 Jan 12)

www.compass-rm.com

Ship Size Classifications Used

•Below 10,000 - Small/Coastal•10,000-30,000 - Handysize•30,001-50,000 - Handymax•50,001-80,000 - Panamax•80,001-199,000 - Capesize •150,000-320,000 - VLCC

Total

Size (DWT)

Compiled by Leslie Edwards and Jon Lee 31/01/12Compass Risk Management LtdTel: +44 1476 550166 - Email info@compass-rm.com

© Compass Risk Management

Notes:

Greater vulnerability of vessels below 30,000 DWT attributed to:

•Typically lower freeboard (less than 2m) making boarding easier. Exception being tankers which typically have low freeboard, regardless of size.

•Relative lower speed (15 knots and below) of smaller vessels making them easier to board.

•Lower vessel/cargo value works against expense of additional security measures.

Compiled by Leslie Edwards and Jon Lee 29/2/12Compass Risk Management LtdTel: +44 1476 550166 - Email info@compass-rm.com

Somali Piracy Crew Fatalities 2007 - 2012

www.compass-rm.com

TOTAL REPORTED CREW FATALITIES = 78

© Compass Risk Management

www.compass-rm.com

Compiled by Leslie Edwards and Jon Lee 29/2/12Compass Risk Management LtdTel: +44 1476 550166 - Email info@compass-rm.com

TOTAL REPORTED CREW FATALITIES = 78

Somali Piracy Crew Fatalities 2007 - 2012© Compass Risk Management

Killed during clashes with International Naval Forces: Died during captivity – illness/neglect/malnutrition:Deliberately killed by pirates (post initial hijacking):

Killed during initial hijack:

Killed during rescue operations:

Hostage negotiations• Crisis Management Team:

not decision makers/owners• Communicator:

sits in CMT• Negotiator:

(specialist skills): advises CMT; daily briefing, debriefing, planning, communications (eg. military)

• Lawyer (can be useful!): coverage advice, regulatory

approvals, logistics

Hostage negotiations

• Negotiators - requirements and role

Advisor (strategy and tactics)Not decision makerExperiencedDisciplinedObjectiveConfidentiality

Hostage negotiations

• “Usual” chronology of incident:-Contact with pirates: how, when?Demands and offersTest of willsNegotiation: like no other (positional, not principled?)Agreement: and a signed settlement agreement (!)Ransom drop (and counting/distribution)Ship release (double attack? protection/convoy?)

Hostage negotiations• Balance and management of numerous factors:-

Officers and crewVesselFamiliesGovernments/diplomatic contacts/pressuresMedia (ideally no contact!)Bunkers: problematic (Navies? Secure barges?) Food, water, medicinesPirates: clans, rivalries, investors, communicationsTime and silence(s) (days and weeks)

Hostage negotiations

• Fix target settlement figure (TSF) and initial offer• When to make initial offer; progressive offers• Positional bargaining (not principled bargaining); worse?• Sticking to the plan• Negotiator: advises and guides• CMT: retains and exercises control • Careful structured approach• Use of established psychological principles

Hostage negotiations: those that are stuck and those released (price)• Stuck?:

– Iceberg: 703 days– Albedo : 463 days – Orna: 436 days– Shiuh Fu: 432 days ( crew Leopard 383 !)

• Released (recent) a clear escalation?:– Rosalia D’Amato (220d)11/2011: USD 7 million?– Savina Caylyn: (317d)12/2011: USD 11.5 million?– Fairchem Bogey: (145 d) 01/2012: USD 7/8 Million?

Hostage negotiation: pending

• Those currently held:

– Liquid Velvet: taken 1st November 2011

– Enrico Ievioli: taken 27th December 2011

– Leila: taken 15th February 2012

– Savina Fahad taken 16th February 2012

Logistics: planning and cost

• Negotiators fees: variable (USD 25,000 per week? More?)

• Cash in transit cover: 3%? (but cf Mogadishu arrests)• “Cashing up” and bank fees: fee 2%? plus £50,000?

(source difficulties); • Private jet (PJ): booking, payment, over-flight

permissions: fixed, say USD 120,000 (but query method)

Logistics: planning and cost

• Delivery aircraft (DA) (not pressurised, open in flight): fixed, say USD 300,000 ( inc security?) (query method)

• Transfer of cash between PJ and DA; where, how? • “New long haul” method• Security from bank vault to pirates (video evidence): fixed• Est: USD 1 million plus (in addition to ransom). More?

Regulatory matters: approvals?• For example:

OFAC (Office of Foreign Asset Control): Executive Order 13536. Always

Federal Reserve (for the bank)UK SOCA (Serious Organised Crimes Agency):

money laundering (and local equivalents)UK HMRC (currency transfer across borders) (ditto

local)UK Border Control (ditto local)Other national requirements? Clear (political) pressure not to pay

Regulatory matters: approvals?

• OFAC: problems?Prohibited personRegulated payer: US Citizen Us Company or branch”

Beware…“this correspondence does not authorise the payment of a ransom or constitute a “non-objection” to the payment of ransom”But still want to know: nature, date, amount and

denomination of ransom payment. VigilantPrompt: the humanitarian case (two clans)

Regulatory matters: approvals

• Federal Reserve: Banking requirement

• SOCA: few difficulties Principal concern is money laundering “Appropriate consent” under Proceeds of Crimes Act

2002Now very rapid (days previously weeks)

Regulatory matters: illegality?• Where payment is to release from captivity and demand

is for personal gain: legal in UK• Illegal in other States: Russia, USA, others?• Where payment is to release from captivity and demand

is for political purposes or to fund terrorism? illegal in UK • Where demand is for release of persons not property

(illegal Italy, Columbia? (Somalia?))• Cf: Somalia Piracy (criminal) and Nigeria Piracy

(political?)• Check each relevant jurisdiction; when/how?

Topical issues?• The liability of armed guards and state military (Italy)

“Enrica Lexie” (the killing of fishermen 19/2)Flag State endorsement / liability?

• GUARDCON (BIMCO standard terms for armed guards)• Tracing (and recovery?) “illicit funds”: a new impetus

(World Bank, Interpol, UNODC, SOCA, OFAC, USDOJ)• Escalation in crew claims (physical injury, psychological

injury). Exposure of owners, managers, crewing agencies• The prevention of ransoms? What then?

Conclusions • Piracy (attacks) off Somalia unlikely to stop soon• Failure of Yemen to make matters worse (but elections)?• Negative impact of “mother ships”• Arming ships may help (no successful attack on armed

ship): but escalation of violence (Enrica Lexie)?• Durations increasing? Est. 7 months; ditto ransoms?• Every incident/matter similar but different. No

“commoditisation”• Negotiations very problematic: (knowledge & experience)• Logistics very problematic: (knowledge & experience)• The prevention of ransoms: serious consequences

Kipling: the legacy of appeasement?

It is always a temptation to a rich and lazy nation,

To puff and look important and to say: "Though we know we should defeat you, we have

not the time to meet you.

We will therefore pay you cash to go away."

And that is called paying the Dane-geld; But we’ve proved it again and again,

That if once you have paid him the Dane-geld You never get rid of the Dane.

For “Dane” read “pirate”.

Contact:-Rhys Clift

Hill Dickinson LLP

Direct Dial

+44 (0) 20 7280 9199

Email

rhys.clift@hilldickinson.com

Fax

+44 (0) 20 7283 1144

Website

www.hilldickinson.com