Episode 52: with Anja Shortland discussing the risk of hostage crises, piracy and stolen art

Anja Shortland is a Professor of Political Economy at King’s College, London. Her teaching is on the economics of crime and she researches the world’s trickiest trades: the resolution of hostage crises and piracy incidents, stolen and looted art, and ransomware. She is particularly interested in the role of insurers in helping crime victims to conduct business transactions across the ragged edge between the legal economy and the economic underworld. Her 2019 book Kidnap: Inside the Ransom Business studies how the market for hostages functions, while her recent book Lost Art analyses how people resolve competing ownership claims over valuable artworks. You can read more about Anja Shortland at: https://www.kcl.ac.uk/people/anja-shortland-1

The International Risk Podcast interview transcript with Anja Shortland

Harriet Tyler – 00:02

Hi, you’re listening to the International Risk Podcast. This podcast is for CEOs, board members, risk and compliance officers, security advisors, and anyone interested in improving operations. On this podcast we hear from the traditional to the wacky. From renowned corporate risk experts to former spies and special forces soldiers. There is something to learn about the way we perceive, manage and mitigate risk from all of our guests. Your host, Dominic Bowen will ask the questions that you will want the answers to. If you know, Dominic, then you know that he is well acquainted with risk. Dominic has successfully established operations in most of the major war zones and disaster affected countries over the last 20 years. He is no stranger to risk and uncertainty, and joined by our excellent guests, he’ll reveal innovative ideas on how you can ensure your organization thrives in areas with high risk.

01:55 – Good morning. I’m Dominic and I’m the host of the International Risk Podcast. Today we’re joined by Anja Shortland, who’s a professor of Political Economy at King’s College London. Her teaching is on the economics of crime, and she researches the world’s trickiest trades, the resolution of hostage crises and piracy incidents as well as stolen and looted art and ransomware. She’s particularly interested in the role insurers have in helping crime victims to conduct business transactions across the edges between the legal economy and of course, the underworld. Her 2019 book “Kidnap: Inside the ransom business” studies how the market for hostages actually functions, while her recent book “Lost Art” analyzes how people are resolving the competing ownership claims over valuable artworks. I’m really excited about the conversation with Anja today. Welcome to the podcast. 

02:52 Anja – Thank you very much for having me on. 

Dominic – 2:54 Your books are just fantastic. I really encourage the readers to find them and read them and purchase a copy. But how did you get involved in this trade? It’s so unique and so interesting. 

Anja – 03:04 I started getting interested in underworld transactions when I was studying piracy in Somalia. At first I was interested in the interaction between counter-piracy and piracy and whether counter-piracy was effective. But after a while, I got much more interested in the question of how you actually conduct a trade with a criminal enterprise. Having studied civil wars and political violence, I was surprised by how well ordered the trade in hijacked ships seemed to be. That surprised me because I thought, ‘this is presumably the trickiest thing that you could possibly do’. And yet, everyone from the ship owners, the cruise and the pirates seem to assume that this was just a business transaction that would resolve itself positively for everyone. So I got really interested in how that worked. 

Dominic 04:04 – And studying piracy in Somalia alone is a really interesting area, we hear a lot about some of the high profile hostage incidents off the coast of Somalia. But we hear very little about the hundreds of hijack boats over the last decade, that really don’t get any attention, and even less discussed about the cruise, often from developing countries that can often sit as victims for many, many years. Have you had much involvement with that?

Anja 04:34- Most of the action now seems to be in the Gulf of Guinea and piracy emanating from the Niger Delta. There is a little bit here and there, but generally doesn’t make the news unless it is that high profile hijacking of entire ships holding them for ransom for weeks, months and unnecessary years. But to me the interesting thing is how strangely non-violent piracy has been, how ordered it is how people come home on the payment of a ransom, even though there is very little that you can do to compel the counter-party to release the hostages if they don’t want to. 

Dominic – 05:18 And you entered a few things just then, part of it being the relocation or the cessation of piracy off the coast of Somalia, but more common, perhaps off the West coast of Africa. What do you think some of the driving forces behind that are?

Anja 05:32 – With piracy off the coast of Somalia, the game changer were private security guards, the licensing of private security guards, then made it very risky for Somali pirates to attack merchant ships. And so far, that new equilibrium has held even though the naval presence has been continuously drawn down. But generally, it’s really difficult to patrol very large sea areas. And what I’ve been interested in is the question of what do you do with the ship, once you’re on board? It’s not that difficult to hijack a ship. I mean, it’d be easy for me to hijack a bus but what am I going to do with it? How am I going to turn it into money? It’s that question that I find fascinating. And for that you need somewhere to take your prey, your hostages, your ship, your bus and start a negotiation, you need to be safe. It’s all about in the case of piracy, the land base, who’s going to give you protection, who’s going to let you feed and supply your hostages, who’s going to make sure that there is not going to be any liberation attempt. So I’ve been interested in the community support or otherwise of piracy. 

Dominic 06:52 – And we see within most industries, whether it’s the Airbnb and short term rentals, or whether it’s the Ubers, we see lots of other entrepreneurs piggybacking on the back of great ideas. Now, I think what you’re saying about the kidnapping, of course, is a sea based activity, but then it very quickly requires lands based supporting elements. How difficult has it been to be able to track the flow and the support and the network between the land based operations and the sea based piracy? 

Anja 07:19 – Well, it’s not been that difficult from the AIAS vessel tracks, we know exactly where the ships are. And then we have satellite images to see what is happening on land. So one of my projects, I was looking at nighttime light emissions from Somalia thinking, well, is there something that we can track here? Where’s the pirate party? Where do we see the investments being made? Where is the money going, looking at lights wasn’t that informative, because the lights are very low, at least on the coast. And then looking at satellite images of building activity, we saw a bit more and with a World Bank project, we then went into Somalia to conduct some interviews and say, well, how do you spend the money? The interesting thing about the way that Somali pirates spent the money was that it was very broadly spread. So they had to spend a lot of money trying to get community support for their enterprise, making donations to political entities, buying protection from various militias, making sure they wouldn’t be attacked by them, but also distributing food and having parties in the local communities. 

Dominic – 08:35 Yeah, that’s quite interesting. And we’ve got so many actors, I think you refer to it as strangely non-violent. When you’ve got so many different actors, many actors of which do carry weapons, and in many locations where there is a very low level of rule of law, how do you think it is that many of these kidnappings and piracy activities are resolved non-violently?

Anja 08:57 Violence is extremely costly, and if you shoot a hostage, then you’re selling a body and not a live hostage and a body isn’t worth all that much. If you sink a ship, you can’t give it back. If you spill the cargo, nobody is going to pay for it. It doesn’t make sense to run a criminal business on very violent lines. What is important is to have a credible threat of violence. If you have a credible threat of violence, and people believe that you would carry out the violence then they’re better off conceding early and gracefully, and in the case of piracy proceeding to ransoming rather than trying to contest possession of a ship. Piracy has always worked on the principle of building reputations for the ability and the willingness to inflict considerable pain. But then if people come voluntarily, then to treat them as well as possible and make sure that the ransoming succeeds.

10:00 Dominic – And of course, we know that insurance companies play a huge role and it’s a very complex role within the kidnap and ransom industry. What’s been your research focusing on when it comes to the role of insurers before and after a kidnapping or piracy or ransom event?

10:22 Anja – The first thing that I found really fascinating was that insurance exists at all, because that implies a number of things. It implies that you can somehow forecast how many kidnaps are going to happen, it implies that you know what the resolution cost is going to be, and somehow that that cost and that frequency of the activity isn’t so high that the insurance premium is unaffordable to the vast majority of people. Then, of course, the fact that by providing insurance and paying ransom, you don’t inadvertently incentivize people to kidnap your customers. This is actually a really tricky thing to insure in the first place, so it felt a little bit like magic that it exists. I held a lot of interviews with people around kidnap for ransom insurance, and the associated companies that are part of the package. So on the one hand security consulting, to make sure it doesn’t happen and on the other hand, crisis response, for the very rare cases that something bad happens that you have a plan B for how you’re going to resolve it.

Dominic 12:25 – That’s very interesting points you talk about, especially about the incentivizing of kidnapping. And I’ve worked on a lot of kidnapping cases. You certainly see particularly in parts of the Middle East, where there’s been a huge amount of kidnappings over the last 10 years. You can see different nationalities and how they are handled by groups like Jabhat al-Nusra and different al-Qaeda affiliates, and particularly ISIS, there’s an instant changing, and certainly when we debrief the survivors, about how different nationalities are treated when they’ve been kidnapped, has been markedly different. But on the topic of incentivizing kidnapping, how do we have insurance? And how do the insurers try and not incentivize kidnapping, when kidnappers will realize that many companies do have kidnap and ransom insurance for their employees?

Anja – 12:17 Well, the first thing when you’re underwriting a kidnap risk is to make sure that you don’t have an adverse selection problem. That means that you have to be sure that the activity that somebody is proposing actually makes sense, that it is not something that’s incredibly risky or just stupid to do. So I’m quite happy for there to be some missing markets in insurance, because there’s some activities that should just not be encouraged, in any way. When you’ve decided to give people insurance for a particular activity, you then need to worry about moral hazard. Moral hazard means that people change their behavior because they know they’re insured. And there’s two types of moral hazard here. There is first party moral hazard, where the insured become a little bit more careless about putting their employees at risk, because they know that if something happens, they’re going to be kind of okay and it will be resolved. The other moral hazard problem is what we call third party moral hazard, where you’re encouraging kidnapping in this case, by saying, well, here’s a pot of money that is available in the case of a kidnap so if you really advertise that somebody has got insurance, and that they’ve got X million dollars in insurance for each employee that you can kidnap, that’s clearly a massive problem. The way kidnap for ransom insurance works is that whether or not it’s been bought by the company is held at the board level. It’s not common knowledge which companies have it and which companies don’t have it, you don’t know who in the company is insured. Surely, if you get the chief executive officer of Shell, you can assume that they have insurance, but that’s also going to be the hardest target in the company. There is much less information about whether they would have insured the chauffeur or the porter or their suppliers, etc. There’s a lot of uncertainty as to who exactly is insured. Also if somebody knows that they’re insured, and they tell their kidnapper that they’re insured, their insurance is invalidated, so the kidnapper does not know that whether a person is in charge.

Dominic 15:36 – And there’s certainly a lot of things that risk professionals and security providers do to work with high net individuals and as CEOs, executive levels, people that are potentially at a higher risk or an increased risk of being kidnapped, and this is some of the work that now I’m able to work with clients on every day, but from what you’ve seen, how are insurers helping people or helping their customers retrieve kidnap victims?

Anja 16:00 – First thing is that it almost never happens. You structure the insurance contract in such a way that you say, yes, you can do this activity, but you need to talk to a risk consultancy, to make absolutely sure you’re doing everything you can to not make it happen. That makes sense, both for the insurance company but also for the employers because they’ve got a duty of care towards their employees. If they get something wrong, if they put people in harm’s way, then the amount of legal problems they’re going to have afterwards, when the hostages or their surviving families sue them, they don’t want to get in trouble either. On both sides, there is a very strong incentive to keep people as safe as possible, to have good protection in place to make sure that people don’t run around doing stupid things after dark, etc, etc. If it happens, then what insurers have created is a series of companies that are called crisis responders, and these crisis responders are specialized in taking charge of negotiations. On the one hand, making sure that the hostages are kept safe, very clear incentives to say, well, if you want to deal with us, you need to make sure that we can talk to the hostage and that they’re well, that he don’t torture them. But also to make sure that kidnappers don’t push the stakeholders such as as the family or or or the firm, that the kidnappers don’t push them absolutely towards the limit of affordability on the ransom.

Dominic 17:58 – Yeah, I certainly find that that’s often one of the critical components. It was actually just yesterday, I was speaking to someone who we’re working with to build up his capacity about a family focal point for these crises. Because it’s so vital, and I think the family focal point during a crisis, like a kidnapping, and many other types of crisis, it’s just critical, because many professional kidnapping organizations will be aware that there’ll be professionals like me, and then colleagues from other companies, whose job is to resolve these, to take charge of negotiations to to keep the prices down to resolve it as positively as possible in as reasonable time as possible. But you often find that the families, you know, will understandably and it would be exactly the same case, if it was you know, my son that was kidnapped, it’s so so vital to be able to keep the families in a healthy spot. And I think that’s where roles like the family focal point are just critical to make sure that you know, you really do have that united front, when you’re dealing with dealing with these sensitive issues.

Anja 17:58 – You absolutely have to keep the family front and center and ideally front of the negotiation as well, because what you’re trying to do is manage the expectations of the kidnappers. And if they understand that there is a family that has to resolve the kidnap on their own, then it’s clear that when probably not looking at hundreds of thousands of dollars in ransom, but maybe tends of thousands of dollars in ransom. It’s a really difficult job to try and manage the family’s anxieties, but keep them onboard. Say it’s gonna be okay, we know what we’re doing, we’ve got the experience of running this kind of negotiations, you’ve got to keep firm. You cannot throw money at the problem, expect it to go away. You’re just gonna make it worse if you given to kidnappers demand.

Dominic 19:57 – Do you think it’s problematic that the market for hostages works so well? And does that in some way incentivize kidnapping?

Anja 20:09 -Well, if you’ve got an insurance product that says well, 50% of your employees are going to come back home if you buy my insurance then it’s not a product that anybody is going to buy. It is in the interest of insurance to have a plan B for the rare occasion that a kidnap happens, the expectations are justifiably that people will come home, that murder is not part of the process. Indeed, if you’re insured for kidnap for ransom, then 97.5% of hostages come back alive. The large majority of that because there has been a successful ransom negotiation, a price has been agreed, that price has been paid, and the kidnappers decided to let the hostage go. There are lots and lots of things that have to go right for that transaction to succeed, it’s not just agreeing the price, but it’s making all of that transaction work. Of course, if you’ve got a really smooth system in place that delivers ransom to people with a minimum of fuss and risks themselves, you’d say that encourages further kidnappings. However, what insurers have done is to create a resolution protocol that encourages the families and the firms to not give into the demands of the hijackers or kidnappers particularly fast. It’s all about making the kidnappers work for the ransom. So if you want a quick ransom, you have to go for really, really low ransom. If you want to have a high ransom, you might be stuck for months or years with hostages on your hand having the risk of being detected or somebody coming in or more people needing to be bought in to make the thing work. The idea is that there are no supernormal profits in kidnapping. If the system works, as it ought and it generally does, then for the average kidnapper, the expectation should be you might as well drive a taxi. Even if there is a million dollar ransom, that will then have to be split between 150 people who were involved and keeping the hostages safe and mounting the attack, etc. We will have done a lot of this on credit, so your bankers will want to cut off it. In the end, the money will just be dissipated and will be just not quite worth it. And that is how insurance balances on this knife edge of making it work well enough, but not making it work well– well enough for the families and the companies but not well enough for the kidnappers. Certainly this form of disruptive bargaining where we say, yes, we will give you money, but it’s not going to be very much, and it’s gonna take us quite some time to raise it, and it’s not going to get any more. If you try and push us with some sort of psychological games that actually works surprisingly well. 

Dominic 23:19 – Yeah, no, that’s not that’s not too surprising. I think that knife edge is so difficult to achieve, I think the benefits we have now is we’ve had so much data and so many case studies, and the insurers have obviously a very significant incentive to be tracking that and finding the right edge. But you talked about making the entire transaction work. And that’s obviously critical to make sure that it is a success. In your experience, what are the most complex elements of the transaction?

Anja 23:45 – Oh, where do you start? I mean, the first thing, are you talking to the right people? Do they have possession of the hostage? Is the hostage still alive? And how do you agree a price? There’s presumably some range between the maximum that stakeholders could afford and the minimum that the that the kidnappers will settle for. You need to establish that range and then you have to find somewhere within that range that that works and that ideally, given that you’re talking to some fairly nasty people and not exactly running soup kitchens, you’re trying to push them down as far as possible, because every ransom that you give is going to feed into further crime and misery for others. There’s a social obligation to drive this down as much as anything else. If you’ve got a price, then you need to think about how you’re going to pay it probably going to be cash cash that needs to be delivered into the tiger country. And you can’t just send anybody into tiger country, if you do. And if you do send a middleman to go and deliver a large ransom that is 100 times their annual salary, then you’ve got a problem. How are you going to keep the middleman straight? How can you trust somebody to do that? How do you stop anybody intercepting that ransom? How do you make sure that the other side acknowledges that you’ve tried to send it? And then once you’ve accepted that they’ve got the ransom and then they start to release a potential future witness against them. So how do you persuade them to deliver the goods given that you’ve already paid them? I mean, as far as they’re concerned, they now would be better off keeping the hostage. Lots of things that need to go right. And the only way of making that kind of relational contract, where you don’t have an enforcement, because if you had enforcement, then the hostage wouldn’t have been with them in the first place. Given that you don’t have enforcement, how do you make a contract that is in their interest to fulfill? The only way of doing that is a reputational solution, but reputations don’t work in this one-off hostage scenario. That’s where insurance and that’s where crisis response comes in. We do know how these people behave. We do know that there are honest kidnappers that do deliver healthy and hearty hostages once you’ve agreed to price with them, but also then that you say, ‘okay, these are people always kill the hostages who never give them back, we might as well send in the SAS straightaway’. If you misbehave as a kidnapper, it’s got to be understood that your hostages no longer work as human shields. Insurance really helps to create that time horizon that makes reputational solutions work.

Dominic 26:50 – I was working with some client on some analysis about the different actors in Pakistan and the different criminal versus terrorist groups, and then, of course, criminal groups, kidnapping and then selling them on to terrorist groups. What’s been your experience on the different negotiating techniques, whether we’re dealing with a purely criminal enterprise versus a group with a political agenda?

Anja 27:12 – That’s a super interesting question. I’ve not been able to study very much with a terrorist angle, given that insurance of ransoms is illegal. It’s a completely different system if you’re dealing with a terrorist group. And it’s a system that’s highly dysfunctional because you can’t have families or firms with a credible budget constraint, organizing and negotiating a ransom, you’ve got governments that are in charge of negotiating ransoms. They don’t have credible budget constraints, they don’t have the long time horizon, they’re very vulnerable to threats of torture. Those terrorists kidnapped-for-ransom work on a completely different system from the one from the criminal side that are supported by highly experienced negotiators as organized through insurance. I think of them as sort of comparison cases of what private governance can do versus what public governments can do. Public governance is extremely problematic and that’s also completely understood by businesses. Therefore it becomes a highly politicized question whether some group is listed as a terrorist organization. Being a terrorist organization is always being a prescribed group on the UN list. Indeed, there were questions about whether the Somali pirates should go on to that list and the ship owner said under no circumstances can you put Somali pirates on this list because we will never see our cruise again. The ships will be served, the cargo will be lost. Just keep it criminal because of its criminal paying a ransom is legal and we can do everything that keeps everybody safe. I’ve got a lot of issues around around putting governments in charge of resolving kidnap for ransom and hijack for ransom

Dominic 29:15 – Definitely. No, I totally agree with you. It is much easier when it’s kept as a business transaction. And I think that was particularly interesting with some groups. And I think ISIS is a classic example where they will treat different victims differently. So for example, American and British hostages were treated as political tools, whereas victims from other nationalities were seen as business bargaining chips there used for income generation, which I think was was quite interesting that the same terrorist or criminal enterprise would treat their victims even if they were kidnapped in the same vehicle or from the same building, they would treat them as different types of commodities to put it quite quickly.

Anja 29:54 – That’s absolutely right. I said before, if you’ve only got a body to sell, then that’s not great business, and therefore in general, criminal groups will keep the hostages alive. But that reasoning was turned on its head with terrorist groups because if you do have a British hostage or an American hostage for whom you can’t get very much at all, if anything, if you can use that hostage to double or triple the price on a French or Swiss or Danish or German hostage by torturing and killing them, then again, torture and maiming and killing hostages makes good business sense and that’s exactly what we saw. Terrorists did not lose out from killing hostages from countries that refuse to negotiate with them.

Dominic 30:45 – Very scary and very sad, definitely, for everyone involved. Just a couple of questions to draw our conversation to a close, I’d love to unpack your book about stolen art. As a teaser to our listeners today, can you draw the link between your book and our conversations about lost art and how that relates to kidnap for ransom?

Anja – 31:12 – What the Art Lost Register does is to create a record of everything, of every artwork that has gone missing, that has been stolen, looted, where people say ‘we have issues about the ownership that is encumbered’. And every reputable dealer in the art world checks that register before selling or buying something, they will check whether they can sell it in good faith and whether their next customer can buy it in good faith. So if something is stolen and is matched to a record on the Art Lost Register, what you’ve effectively created is a hostage situation where the current holder of the artwork will have to come to some sort of agreement with the former owner of that artwork and ask for compensation, maybe have it seized, maybe bring the police in, but very often these are stories of either someone trying to retrieve something from the underworld or also of trying to resolve some muddled property rights of something that was stolen decades ago and has been sold in good faith several times and and has now ended up in some unsuspecting innocent hands who are suddenly forced into making a deal with the former owner. As you can imagine, it’s an interesting thing to resolve. 

Dominic 31:52 – So interesting, and due diligence and providence checks are so relevant in the business world and we talk about it everyday when we consider third party due diligence and monitoring, and it’s great to hear this is equally applicable in the art world. I can imagine how complex and confusing it might be. 

Anja 32:04 – There’s a completely new risk there, as well, in that the legal situation is often quite clear. Our social norms and our moral stance and some transactions are changing. There are things that would have been ok twenty or thirty years ago, which now make us feel really queasy. If you bought something that was sold in Paris in 1942, it’s quite likely that it was taken, looted or expropriated from a Jewish family. We don’t think that’s a legitimate transfer of ownership but if you’ve bought it in 1985, it’s yours– except it isn’t quite. It’s trying to find a resolution between the law that says ‘you’ve bought it, it’s yours’ and the moral standards of today which say ‘yes yo bought it but really it should never have been for sale’.

Dominic 33:13 – Well, I’ll certainly keep it in mind next time I buy some artwork.

Anja 33:16 – Please do! You definitely should

Dominic 33:18 – I’m sure it will be sometime before I buy something that needs that sort of consideration. It’s fascinating work. 

Anja 33:25 – But again, it’s a private governance solution that comes out of the need of the art world that says ‘we need to deal with this risk, we cannot be reputable dealers and land our customers with this kind of problem’. Therefore, we need to have a solution which shows we’ve done our due diligence, we have done our duty of care, we’ve done the best that we could

Dominic 33:51 – Now, there’s a lot of interesting information on the Art Lost Register and being the largest private database of stolen art, I think some would enjoy reading the information on that website. But Anja, it wouldn’t be the International Risk Podcast if I didn’t ask you when you look forward to 2022, what are the main risk that worry you?

Anja 34:11 – I’ve started a really interesting project on ransomware, I’m fascinated by how insurers are going to resolve the issues of keeping cybercrime insurable, making sure we get a good balance between risk exposure and facilitating enterprise. I think hard markets are such wonderful opportunities for institutional innovation, for realizing that something has gone wrong and trying something different and seeing what works. I’m interested in this idea of evolutionary competition, people are trying something out, they have got skin in the game and bad ideas will be deselected and good ideas will go forward. I’m quite excited to see what’s going to happen in that area of cybersecurity.

Dominic 35:15 – Certainly, and I think that’s an item that should be on every board member’s agenda and it’s a topic that everyone needs to become more acquainted with. Last week, we had the CEO of a large company on the phone at 2AM almost in tears. This man is a very experienced CEO, he runs a great company with good systems in place and their entire network had been shut down because of ransomware. It’s such a difficult and painful area, so your research will be interesting to many people. 

Anja 35:48 – And if anyone wants to give me a story of what happened to them and how they dealt with it, I’m all ears. 

Dominic 35:57 – Fantastic. Well, I’m sure after this podcast we’ll get some people reaching out with painful stories but hopefully that we can learn something from. Well, thank you for today’s conversation Anja, it’s been really interesting

Anja 36:18 – That’s wonderful!

Dominic 36:20 – And we’ll definitely have to have you back on the podcast to talk about lost and stolen art. 

Anja 36:23 – And eventually ransomware! 

36:34 Harriet Tyler – You’ve been listening to the International Risk Podcast hosted by Dominic Bowen. Please go to wherever you download your podcasts and give this podcast a five star review. Your positive reviews on this podcast and subscribing to future downloads is critical for our success. If you enjoyed the show, tell a friend about this podcast. Consider if you know someone that would appreciate or benefit from today’s conversation and send them this podcast right now. Thank you for listening. And join us again next week for your effects of risk related stories.

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