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Paying The Pirates

This month’s online edition of Foreign Policy magazine has an article (here) saying Somali pirates are handing over part of their proceeds to the regional Puntland government in exchange for being allowed to operate in areas it controls.

So what? Stay with us a minute.

The State of Puntland is a semi-autonomous region in northeastern Somalia that’s been self-governing since 1998. With 2.4 million people, Puntland has a president and cabinet, a house of representatives and a court system. It has a website. It deals directly with other countries and with international institutions such as the World Bank. It levies taxes and spends money on public projects — it’s operating one airport, for example, and developing another. In other words, it’s an actual government.

With the connection between the pirates and the Puntland government in mind, the author of the Foreign Policy article, J. Peter Pham, thinks there’s an opportunity to choke off the supply of funds to the bad guys. His idea is to use various anti-terrorism and anti-corruption laws already in place to stop all ransom payments. A case to do that, he says, can be made under the Foreign Corrupt Practices Act.

Is that possible? Let’s take a look.

First, not everyone has to obey the FCPA. Issuers and domestic concerns and those acting for them are subject to the law. That probably means some but not all of the shipping companies, insurers and security firms that are dealing with the pirates are covered. A fuller discussion about the reach of the law can be found in our post here.

Next, the FCPA outlaws corrupt payments directly or indirectly to a “foreign official.” That’s a human being, not a government entity. Payments to a government entity do not violate the FCPA. So even if the pirates are known to be paying the government of the State of Puntland for operating rights, that doesn’t mean payments to the pirates violate the FCPA. As we’ve said before — no foreign official, no FCPA offense. For more on this, see our post here.

But what if some of the ransom money is known to be going directly into the pockets of members of the Puntland government? They’re foreign officials under the FCPA. So wouldn’t there be a violation? The answer is still no.

Under American law, a payment that’s extorted is not a bribe. Judge Shira Scheindlin, in a ruling in U.S. v. Kozeny last year, explained it this way: The legislative history makes clear that while the FCPA would apply to a situation in which a “payment [is] demanded on the part of a government official as a price for gaining entry into a market or to obtain a contract,” it would not apply to one in which payment is made to an official “to keep an oil rig from being dynamited.” Quoting from S.Rep. No. 95-114, at 10-11 (1977), reprinted in 1977 U.S.C.C.A.N. 4098, 4108.

Judge Scheindlin said the difference is that in the former situation, the bribe payer made the conscious decision to pay the bribe. So he cannot argue that he lacked the intent. “In other words,” she said, “in the first example, the payer could have turned his back and walked away — in the latter example, he could not.” See generally United States v. Gonzalez, 407 F.3d 118, 122 (2nd Cir. 2005).

When pirates hold crews hostage and threaten to kill them and destroy their ships and cargo, it’s extortion. Where there’s duress, there cannot be a voluntary decision “to enter a market or obtain a contract.” So the ransom payments — no matter where they end up — aren’t illegal under the FCPA or any other United States criminal law.

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