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The economics of product theft favours the pirates

Wed 19 Oct 2016

The economics of product theft favours the pirates
A phantom tanker

In South East Asia, the risk versus return is heavily in favour of the pirates, meaning hijackings are likely to continue, writes Karsten von Hoesslin

Hijacking for product theft in South East Asia has an extremely high rate of return for both the time at sea and the level of risk involved. That level of risk decreases significantly if that hijacking involves a CPO barge as opposed to a product tanker. CPO barges trade regionally within Indonesian waters, where incidents are seldom reported. Although it has become more and more common for CPO barges to hire special branch police to guard the vessels, it is relatively easy for the pirates to overpower them or simply pay them off.

Notwithstanding the planning phase, the fixer or big boss is capable of earning roughly US$1,186,000 for a 14–72-hour operation. Essentially, the net earnings per hour equate to a minimum of US$16,472. If one compares this with the highest paid Somali pirate ransom (US$14,500,000) – the Liberian-flagged Smyrni was held for 10 months, with a net hourly return of US$1,388 – one can ascertain that South East Asian hijackings for product theft are roughly 11.8 times more profitable and entail far less risk.

For the foot soldiers and boarding team leaders, the risk/reward is similar. If on an average job a boarding team member is paid US$36,100 and the team leader US$108,300, their average net hourly income for a 72-hour operation is US$501 and US$1504 respectively.

Therefore, a boarding team leader’s hourly net income is approximately 66 per cent more than that of a Somali pirate big boss/fixer. In West Africa, boarding team pirates are alleged to earn a flat fee of US$10,000 per hijacking for a product theft job. Without taking into account that many of the boarding team are paid significantly less than the promised US$10,000, and assuming that the average hijacking for product theft lasts 108 hours, a West African boarding team member’s net earnings per hour is US$92. That means hijacking for product theft boarding team members in South East Asia earn over 500 per cent more than those in West Africa.

In the Smyrni hijacking, the average boarding team pirate earned a flat fee of US$25,000, which equates to hourly net earnings of just US$3.47. Hijacking for product theft pirates in South East Asia, then, earn roughly 148 times more than Somali pirates.

From a risk perspective, South East Asian pirates face a far lower likelihood of encountering armed guards, hostile crew members, patrolling naval forces, escorts and convoys, transparent shipping companies where crew members are not acting as insiders and tipping off information, or law enforcement agencies with either the will or investigative capacity to conduct proper forensics and post-incident follow up work. Maritime law enforcement agencies in Singapore, Thailand, Indonesia and the Philippines have very little experience with forensics and the bulk of investigations, particularly in Singapore and on Singapore-flagged vessels, are seldom followed up. Cases where there was clearly forensic evidence as well as insider help from the crew include the GPT 21, the Ocean Energy and Ocean Osprey – yet these failed to produce any criminal charges. With respect to Thai investigations, a similar scenario occurred with the Lapin.

Additionally, the optimal earnings presented above demonstrate why an abundance of seafarers, shipyard workers, and water taxi drivers are turning to piracy and operating as boarding team members, and why their leaders as well as the fixers and big bosses are engaged in hijacking for product theft. This is a highly functional business model in South East Asia, and one that offers lower-tier pirates higher net earnings than are to be had in other piracy hotspots.

Except for the Malaysian Maritime Enforcement Agency (MMEA) – which is the sole agency whose efforts have led to arrests, convictions, and prisoners serving more than half of their sentences – there is a void at sea when it comes to the rule of law. Pirate networks are fully aware of the limitations of the MMEA and particularly the 1984 law preventing any Malaysian agency from undertaking hot pursuit in another littoral state’s territorial waters. This is why, although the bulk of hijackings occur in or near Malaysian territorial waters, pirates sail the victim ship to safe areas such as the Anambas Islands, where STS operations can take place without interdiction by Indonesian law enforcement. The Indonesian navy, which is alleged to receive pay offs from pirate networks for information and for turning a blind eye, intimidates the weaker Indonesian marine police in the Riau archipelago and particularly with respect to patrols around the Anambas Islands.

The Indonesian navy’s relationship with piracy has always been a dubious one: new evidence suggests that many of the Aceh-focused hijackings that occurred between the late 1990s and mid-2005 were in fact carried out by rogue elements of the navy, who held captives for ransom on Pulau Telaga Tujöh. Currently, both West Fleet Quick Response detachments in the Riau Islands (in Sekupang and Berakit) [allegedly] share information with pirate networks and resupply provisions to anchored phantom tankers in the Eastern Outer Port Limits (EOPL). Command-level officers are alleged to be involved in cigarette smuggling operations and human trafficking, and have access to two go-fast boats used for product theft hijackings.

When the Singapore-flagged Joaquim was hijacked in the Malacca Strait on 8 August 2015, the Indonesian-flagged phantom tanker Kharisma 9 set sail for the Seribu Islands to offload the hijacked cargo. Despite intelligence provided to the Indonesian navy, the vessel was not pursued.

Instead, the navy claimed it arrested another vessel involved in the case, which was fictitious. The Kharisma 9 is owned by a Jakarta businessman and chartered by a former Indonesian naval officer working for the Singaporean big boss that arranged the hijacking of the Joaquim.

On land, there is limited focus on investigating either maritime criminal networks or their cash flows and banking habits. There is minimal agency co-operation, such as between the police and MMEA. In Singapore, the Police Coast Guard and Maritime Port Authority have not actively pursued the criminal elements in the city-state’s bunkering market, while the anti-corruption agency is hesitant to initiate any probes into the banking sector. Given the limited action by the majority of agencies tasked with combating piracy, hijacking for product theft remains an ideal way to reap great rewards with little risk. Short of being caught by the Malaysians, pirate networks understand that boarding team members and team leaders can buy their way out of long sentences, and in exchange will end up serving a maximum of 10 per cent of their intended prison terms.

The model is likely to remain viable, for the following reasons: the structure of the networks and their ability to remain fluid and diversify; the nature of the shipping industry in South East Asia, particularly with respect to the ease with which documents can be forged and liquid product blended; the acceptable risk and high rewards benefit those at all levels of criminal activity;  the levels of corruption in select agencies; and the lack of interest among other agencies that could target criminal organisations on land and those abusing the region’s banking sector.

Although the Orkim Harmony case may result in a slight pause in operations against product tankers, hijackings will not cease. Rather, the focus will shift to lower risk targets such as CPO barges. On 28 January 2015, the Malaysian-flagged Sun Birdie was hijacked and the pirates consequently arrested (recently, they were convicted). But after a mere fortnight, the Thai-flagged Lapin was targeted by an associated network. This only demonstrates that, in spite of arrests, pirate networks can continue to operate. So long as the demand for black-market product exists, and the aforementioned variables are in play, hijackings for product theft are likely to continue to be the preferred business model for maritime-orientated criminal operations in South East Asia.

 

From the case files: anatomy of a product tanker heist

In this example, based on a real case, the fixer, boarding team leader, and buyer have met and agreed to hijack a tanker carrying 6,000 metric tonnes of marine diesel oil (MDO). The agreement is that the buyer will take 4,000 tonnes of the product. The Singapore market price for the product is US$900 per tonne. The agreed purchase price is US$504, making the total cargo valued at US$2,021,602 for the buyer who gets it illegally.

The forger will charge US$3.66 per tonne, and therefore his pay-out up front is US$14,626. The insider, if the information is accurate, will receive a flat fee of US$36,100. Notwithstanding the phantom tanker charter or a tug rental, a set fee of US$15,000 must be held in the event that all of the team is captured. This is a slush fund to pay off judges and public prosecutors in the event of an arrest and/or conviction. In many cases, a facilitation fee (approximately US$15,000) is paid to the Indonesian navy, so that it will not interfere during a hijacking. The financier therefore must be prepared to commit up front US$80,150. But the return, if the piracy is successful, doubles to approximately US$144,246.

Each boarding team member will earn US$36,061 if successful, while the boarding team leader earns triple that amount. With an average of nine pirates, plus the team leader, this totals US$432,738 of post-operation pay-outs, leaving the running total at roughly US$576,984.

If conducting a CPO hijacking, the use of a tugboat will cost approximately US$72,123, while chartering a phantom tanker and paying off its owner and crew costs roughly US$288,492. Returning to the above hijacking case, the additional cost for the phantom tanker and its crew makes the total overhead approximately US$865,476.

Once the transfer is complete and the buyer has wired the US$2,021,602 into the fixer’s account, payments totalling US$865,476 are dispersed. Generally, the phantom tanker’s owner and financier will receive wire transfers (in Singaporean dollars) while the boarding team payments will be withdrawn and delivered in cash once the boarding team returns to the rendezvous point. The fixer and/or big boss will have earned roughly US$1,153,968 on a job likely lasting less than 24 hours. These funds remain in the Singaporean bank account.

Hijacked cargos, which inherently become black-market product, fetch approximately 60 per cent of what would be their regular market value. Except lubricant base oil (which is extremely valuable due to its diverse uses), nearly all other products – whether CPO, marine gasoil (MGO) or marine fuel oil (MFO) – can be secured for two-thirds of the value of legitimate product. Depending on the product and whether it is destined for an upstream, midstream or downstream market, it will be blended with legitimate product or sold separately. The bulk of MGO, MDO, MFO and ADO is blended in either the Western Outer Port Limits (WOPL) or the Eastern Outer Port Limits. The more refined products are preferred in the WOPL, and the heavier fuel oils transferred off Berakit.


Karsten von Hoesslin is the manager of special projects at Risk Intelligence. Karsten has conducted crew release and vessel recovery operations off the Horn of Africa and in South East Asia. This article is an edited version of longer article, South East Asia piracy: Networks, economics and risk versus reward, first published in Strategic Insights. Strategic Insights is a series of maritime security analysis reports by Risk Intelligence. For more information, see: www.riskintelligence.eu

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