Pirates of Somalia - American Ship Highjacked

http://www.acams.org/Members/ResourceCenter/ACAMSToday/2009_January.pdf

PIRATES OF SOMALIA – Money Laundering on the High Seas
By Milimo Moyo
Original version of the article publised by ACAMs today, January/February 2009 issue, p.22
Introduction
Pirates have become an increasingly topical issue these days. While the title of this article may sound like a possible sequel to the movie, Pirates of the Caribbean, its subject-matter consists of something more sinister – the increasingly dangerous and growing threat of piracy and maritime terrorism off the coast of Somalia. The pirates of Somalia are not Johnny Depp types sailing around with fake swords and dreadlocks. Instead, they are a brazen and ruthless lot; the sheer scale of their criminal activities has turned the waters off the coast of East Africa into the most dangerous in the world. The pirates use sophisticated equipment, speedboats and weapons to hijack ships often demanding huge ransoms from which they have reportedly made millions of dollars2. Such huge sums of illicit funds inevitably have to be laundered which raises the question of whether a plausible effort to fight money laundering in Somalia is even possible. This article will examine that possibility in the context of anti-money laundering initiatives in that part of Africa. But first, it is important to briefly examine the problem of piracy in that region of the world.
Piracy and Ransom Demands
On November 17, 2008, the New York Times reported that a Saudi-owned supertanker carrying more than $100 million worth of crude oil had been seized by pirates off the coast of Kenya. The 1,080-foot ship has become the largest vessel seized to date. By November 20, 2008, the pirates had demanded a ransom of $25 million payable in 10 days. It goes without saying that this was just one more hijacking in a long list of pirate acts in the area. In September 2008, the pirates had seized a Ukrainian tanker. These are just examples of what has been a growing maritime problem for many years. Due to the vast area of the affected waters, it is impossible to effectively prevent piracy. Most ships are manned by a small and, often unarmed staff, leaving the tankers even more vulnerable to the pirates. The New York Times explains the problem:
“The piracy industry started about 10 to 15 years ago, Somali officials said, as a response to illegal fishing. Somalia’s central government imploded in 1991, casting the country into chaos. With no patrols along the shoreline, Somalia’s tuna-rich waters were soon plundered by commercial fishing fleets from around the world. Somali fishermen armed themselves and turned into vigilantes by confronting illegal fishing boats and demanding that they pay a tax”3.
For their troubles the pirates acquire millions of dollars which they use to live the high life in Somalia4. The question is why is it difficult to trace this money and prevent its laundering?
Somalia’s failed government = No Money Trail
Somalia’s central government collapsed in 19915 and this left the country wallowing in a sea of lawlessness. The country has no formal banking system and therefore no regulation of financial transactions. Against this background, it is often impossible to trace the trail of the ransom money derived from piracy. It has been stated that piracy will not be resolved until political stability has been established in Somalia. Such stability would inevitably be accompanied by economic development which would discourage the population from turning to piracy for a living. Stability would also put in place the institutions necessary to curb crime and money laundering. There are other countries in that region of Africa that have stable governments and are actively involved in preventing money laundering in their countries. Their efforts are worth articulating albeit briefly.
Anti-Money Laundering efforts in eastern and southern Africa
Somalia’s neighbor, Kenya, is part of the Eastern and Southern African Anti-Money Laundering Group (ESAAMLG) whose 14-country membership is dedicated to fighting money laundering the eastern and southern part of Africa. Consequent to the Somali pirates’ latest escapade, Kenya’s foreign minister, Moses Wetangula, announced Kenya’s willingness to convene a conference to discuss ways of fighting piracy6. Such a conference would be opportune particularly in light of recent security reports that the gaps in Kenya’s anti-money laundering regime make the country vulnerable to money laundering activities by, inter alia, the pirates7.
The Somali pirates greatly rely on the hawala system of money transmission; therefore, there is need for countries such as Kenya, Tanzania, Zambia and other members of ESAAMLG to prevent or monitor the use of hawala in their jurisdictions so as to trace money derived from piracy. In its 2004-2005 Money Laundering and Terrorist Financing Typologies Report, the Financial Action Task Force’s described an alternative money transfer system, like hawala, as a “financial service that accepts cash, cheques and other monetary instruments or other stores of value in one location and pays a corresponding sum in cash or other form to a beneficiary in another location by means of a communication, message or transfer or through a clearing network to which money/value transfer system belongs”8.
Such a system makes it possible for vast sums of money to be transmitted globally with little or no documentation at all. According to writers, Patrick Mayoyo and Lukas Barasa: “Investigators say this system of money transfer (hawala) not only abets piracy but also hampers investigations by countries tracking proceeds from drug-trafficking, arms-smuggling and terrorism activities”9 and piracy. Such difficulties could be overcome through a rigorous and effective anti-money laundering regime in the region.
Money Remittances
There is no doubt that money remittances are a major aspect of Somali life; remittances are a source of income for the majority of Somali people. However, Somalia’s money remittances have been known to be vulnerable to money laundering and terrorism financing. On September 23, 2001, the United States issued Executive Order 13224 which, among other things, authorized aggressive actions against the bankers of international terrorism. In particular, the order shut down Somalia’s largest money remittance company, Al Barakaat, on the grounds that the company raised “money for terror, invest it for profit, launder the proceeds of crime, and distribute terrorist money around the world to purchase the tools of global terrorism”10. The 9/11 Commission went to great lengths to distinguish money remittances from hawala: “The key difference is in how the money or value moves between the office obtaining the money from the customer and the office paying the money out to the ultimate beneficiary. In transferring value between the sending and receiving offices, a money transmitter uses the formal financial system typically relying on wire transfers or a correspondent banking relationship. A hawala …does not use a negotiable instrument or other commonly recognized method for the exchange of money”11. The report also notes that “Usama Bin Ladin and al Qaeda made significant use of hawalas to move money in the Middle East” prior to 9/11. Due to the blatant lack of formal institutions in Somalia, it is easier for money to be transmitted through the more informal hawala system; hawala is not inherently criminal but it provides for a conducive environment for criminal activity. Consequently, criminals, such as pirates, take advantage of the minimal identification requirements under hawala for easier transmission of funds and utilize the hawala system as a way to launder their funds or, possibly, finance terrorism.
Conclusion
These concerns are not lost on ESAAMLG member countries that recognize their own vulnerability to money laundering especially in view of their proximity to Somalia as well as the fact that they are largely cash-based economies. These countries are making efforts to establish comprehensive AML laws and financial intelligence units that are equipped to investigate and trace money derived from illegal activity12 including piracy. In instances where the pirates have to trade with merchants in neighboring countries, the importance of effective AML processes in the region cannot be overstated. Bulk cash smuggling, for example, is closely watched in the region. ESAAMLG countries are working hard to improve their AML regimes. They are drafting or implementing AML laws, creating or establishing Financial Intelligence Units and training their personnel to enforce money laundering prevention. With such efforts in mind, it is hoped that a conducive regional environment exists to continue the fight against piracy and, consequently, money laundering and terrorism financing. At the outset, the fight against the pirates of Somalia calls for stable government and regulatory institutions in Somalia itself. Only then will an effective regime for fighting piracy, money laundering and terrorism be possible.