June 22 (Bloomberg) -- The fight against Somali pirates, responsible for hijacking about 170 vessels in four years, is starting to draw in British banks, until now a major source of the stacks of dollars used to pay ransoms.
The supply of dollars from U.K. banks dwindled since Prime Minister David Cameron created a 14-nation task force in February to halt payments, said Michele White, the general counsel to the International Association of Independent Tanker Owners, the industry’s biggest trade group. Ransoms reached $160 million last year, according to One Earth Future Foundation, a nonprofit group based in Broomfield, Colorado.
Governments, which spent almost $1.3 billion in 2011 on military interventions including naval patrols, are seeking to restrict the payments because they encourage more hijackings by pirates in Somalia, the world’s fifth-poorest nation. The banking curbs will make it harder for ship owners and insurers to get back the 227 seafarers and 12 vessels still held hostage.
“The only way you release a crew is by payment,” said Cyrus Mody, the assistant director of the International Maritime Bureau in London, which tracks piracy. “It’s true that ransoms are the key fact that keep piracy going, but unless there’s another option available, then pirates are going to take out their frustrations on the crew if they aren’t paid.”
Payments to pirates operating off Somalia averaged $4.7 million a vessel this year, according to the European Union naval force patrolling the region. The pirates hijacked more than 170 ships since 2008 and took about 3,400 seafarers hostage, according to the IMB.
Cameron held a conference of more than 40 nations in February to discuss restoring stability to Somalia and announced the creation of the International Pirate Ransoms Task Force, which met for the first time May 30. Members include the U.K., U.S., and Panama and Liberia, which have the two biggest ship registries. U.K. banks are concerned they may face penalties in the future for being involved in such transactions, White said.
“The very existence of the task force is making the payments much more difficult,” she said, citing insurers and lawyers in London directly involved in ransom negotiations. “The ransom lawyers are on the very margins of their ability to raise physical dollars to pay ransoms.”
U.S. President Barack Obama signed an Executive Order in April 2010 barring citizens from financial dealings with pirates. Since the February conference, the U.S. government has increased pressure on its allies to curb the transfer of payments to Somalia, said Michael Frodl, the founder of C-LEVEL Maritime Risks, a Washington-based company advising banks, transport companies and insurers.
“The Treasury Department does not determine private business decisions of foreign banks outside the U.S.,” John Sullivan, a spokesman for the Treasury, wrote in an e-mailed response to questions. “There has been no change in Treasury’s policy regarding the implementation” of the 2010 Executive Order, he said.
U.K. banks were “a location of choice” for paying cash to pirates until about six months ago, according to Stephen Askins, a London-based partner at law firm Ince & Co. and a former Royal Marine who helps owners and insurers release hostages.
As much as 95 percent of the world’s war-risk insurance is placed in London, and ship owners will go elsewhere if U.K. underwriters can no longer arrange payments, Askins said. Ships need an additional premium for war-risk insurance when passing through waters deemed to be high-risk piracy areas.
“The issue is one of intense international debate and action, and banks will comply with their legal obligations,” the British Bankers Association, which represents 200 lenders, said in an e-mail. “As with processing any sensitive payment, a range of factors need to be considered by the bank concerned.”
Crews are being subjected to increasing levels of violence, the foundation said in a report today. More than 50 percent of seafarers held hostage last year by Somali pirates were abused or used as human shields, it said.
Hostages are being held for an average of eight months, according to the IMB. An outright ban on ransom payments would jeopardize crews, said Allan Graveson, the senior national secretary of Nautilus, the U.K. and Dutch seafarers’ union.
“Banks are worried by the commercial threat, even though payment of ransoms is legal,” Graveson said. “So these dollars do not come from U.K. or U.S. banks, who have been frightened off by talk of a ransom ban.”
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