Reference no: EM133092466

Pirates! The Bane of Transnational Shipping

Transnational is an international company that arranges transportation for large cargo items and shipments of large orders. Transnational has a fleet of cargo ships. Each cargo ship has a crew of 25 employees. Transnational's head of security, Jack Davis, is a retired U.S. Navy officer who, until January 2009, worked for the U.S. Department of Homeland Security. Davis has, since the time of his being hired at Transnational, alerted senior management to the evolving issue of pirates. Despite several international incidents and a growing Somalian pirate operation, the response of management to Davis's concerns has been one of postponement. So sophisticated is the pirate operation that they have an impound area at the wharf in Bosaso, on the Gulf of Aden. The pirates have actually developed a business model that they use for obtaining ransom money from the companies that own the ships: 

1. The pirates penetrate ships, despite barbed (razor) wire and the use of water hoses, and a host of other pirate prevention tools, including using laser beams that blind pirates trying to approach the ship, ropes to throw into the pirates' boats' propellers to stop them from getting close to the ship, and decoy watchmen (these are dummies that are strapped to the rails to fool pirates into thinking that there is extra security aboard the ship.11 

2. The pirates demand that the ship be taken to port, although sometimes they use the ship to take other ships during the journey. 

3. After seven to ten days, the pirates make contact with the ship's owner to begin negotiations.

4. The pirates hold hostage crew and any passengers on the ship while negotiations are ongoing. Those conducting the negotiations for the ship owners could be specially trained consultants or experts who work for maritime insurance companies. 

5. The average length for the negotiations is six to eight weeks. For example, in 2011, Somalian pirates held one ship with a crew of twenty-five for fifty-eight days. The average ransom for regular transport ships is $5 million. Oil tankers bring $10 million. The ship held for fifty-eight days brought a $13.5 million ransom. 

6. The ransom is delivered by specially trained experts, generally by floating plastic containers, by tugboat, or through airdrops to the pirates on the ship. 

7. The pirates generally take a day to count the cash, and retain hostages as they do so. 

8. The ship is then retaken by the owner and escorted out of the harbor by the country's naval forces.

9. The last step is divvying up the ransom. The pirates on the boat get 30 percent. The pirates who negotiate get 10 percent. The remaining 60 percent is paid to government officials and investors. Government officials must be paid in order to ignore calls for assistance from the ship's owners and insurers. And, yes, there are investors who front the pirates for the costs of their boats and getting out to sea for purposes of a takeover. The costs of keeping the ship for fifty-eight days was about $50,000. However, with a payment of $13,500,000, the pirates earned a 26,900 percent return on their investment. From the shipper's perspective, it costs between $15,000 and $50,000 per day to run the ship (crew, power, food, etc.) 

The pirate industry has taken hold in Somalia, and with 23,000 ships coming through the Gulf of Aden annually, the operations of pirates appear to be located centrally. There are eighteen to twenty-one ships hijacked each year, with the hijacking going all the way through the harbor negotiation stages. Another forty-five ships, on average, have been boarded by pirates, with necessary steps taken to remove them or pay ransoms. Still another forty-five ships, on average, are fired upon by pirates, with no further possession of the ship. For every 1,000 ships, there are about 90 that are confronted by pirates. Because of these figures, the security business-those who deliver the ransoms-is booming. 

Most insurers agree with Thomas Jefferson, who said that force was more economical and more honorable than paying ransoms and that the best protection is the threat of lethal force, which means having people on board the ships who are armed, have plenty of ammunition, and are specially trained. However, a four-person security team costs about $30,000 per day. In exchange, insurers will reduce the cost of insurance by $20,000. One of the problems security firms face is recruiting enough security team members who have sufficient training. 

Let us posit a scenario: On September 11, 2013, a group of pirates board a Transnational ship that is, at the time of the takeover, sailing off the coast of Africa. The pirates have demanded payment of $25 million, or $1 million for each crewmember, and imposed a deadline of five hours for Transnational's decision and promise of payment. The pirates have also indicated that they will begin killing crewmembers one at a time if their deadline for Transnational's agreement to the payment is not met. Davis has advised Transnational to go ahead and simply pay the pirates because "Lives of employees are at stake and my job is protecting employees." However, a Transnational senior officer has cautioned in a meeting, "That's a bribe, and Transnational has a longstanding practice of not paying bribes." 

Discussion Questions 

1. The officers, the board, and Davis seek your advice. Be sure to apply all applicable principles, forms of analyses, readings, and so on, you have studied to date. What advice would you give? 

2. Is the descriptor "bribe" accurate in this case? 

3. Is this situation different because human life is involved? 

4. What impact does the institutionalization of piracy in Somalia have on companies' decision-making processes with regard to handling the pirates and preventing pirate attacks?