US Executive Order signals change of approach to payments to terrorists, in contrast to UK’s Counter Terrorism and Security Act.

On 24th June 2015 President Obama issued an Executive Order which set out the conclusions to the recent US review on dealing with hostages. Like the UK, the US had a strict policy against even negotiating with terrorist groups. That has changed. Perhaps not before time. A one-size-fits-all policy has felt flawed. Dealing with every hostage taker (whether they be criminal gangs, domestic terrorists or ISIL) as the same, makes no sense. There are those (including people who have been taken hostage) who say that making a payment creates a market and encourages more kidnappings. Yet many nations do.

Turkey recently secured the release of forty-nine diplomats and their families and other European countries have paid to get their nationals home. After the shocking execution of the Jordanian pilot shot down by ISIL, no other flight crew flying missions in support of Iraq forces could possibly doubt their likley fate if they too were captured. But more recently the families of aid workers and journalists have been threatened with prosecution for dealing with terrorists. Most would rather their day in court than in church. The aim of the US policy is to ensure the safe and rapid recovery of US hostages. This new pragmatic stance leaves the UK seemingly isolated particularly in light of the recent Counter-Terrorism and Security Act 2015 which expressly makes it a criminal act or insurers to indemnify an individual for payment that is made to a terrorism organisation. This article looks at the potential impact on shipping companies and their insurers.

Of concern to the shipping, and indeed, insurance markets, is the apparent change of law to make it clear that that there can be no pay out under an insurance (or indeed reinsurance) policy to cover a ransom paid to a terrorist. In a speech ahead of the Act becoming law, Theresa May pointed to a UN report suggesting that as much as £28 million had been paid to terrorist organizations. There is, however, absolutely no suggestion that these payments have been made by UK insurers or indeed UK entities. In that sense, fingers have long been pointed at foreign governments who have seemingly been much more ready to pay a ransom to secure the release of their nationals. The argument that a stated policy of not paying a ransom somehow gives a state’s nationals a better chance of avoiding kidnapping is controversial and open to debate. A totally utilitarian outlook and a universal ban on ransoms may have a better chance of achieving that, but would be impossible to achieve and assumes a level of rationality on the part of the perpetrators that they hardly deserve.

It is understood that the insurance market made lengthy representation to the Home Office to the effect that new law was not required and that existing laws were adequate and, importantly, were being complied with. It was argued that highlighting this apparent “change” would play into the hands of the rivals of London’s K & R market and the perception would work against what is the world’s leading K & R market. Whilst the US has set up a Hostage Recovery Fusion Cell which will now give active support to hostages and their families the UK will have to rely solely on the private sector.

The question of legality of ransoms is one that the UK government has looked at on a number of occasions and, in 2012, an International Task Force was set up to investigate whether ransoms to Somali pirates should be banned. Industry won the argument in that instance, pointing out that depriving crew of the ability to be released, particularly in the absence of clear policy to rescue abandoned crews, would hardly help in making a sea-going career an attractive proposition. Questions of legality over the payments made and a recognition that ransoms for pirates were not being passed straight onto Al Shabaab came under scrutiny. With the new Act, there was a similar concern around non-governmental organisations (“NGOs”) and aid workers who, assuming they have such insurance, began to question whether they should avoid working in high risk environments.

However, the Act introduces at S. 17A, an amendment to the existing Terrorism Act 2000. By way of a reminder, S 17 of that Act states as follows:

Section 17 of the Terrorism Act 2000
“Funding Arrangements.
A person commits an offence if-
(a) He enters into or becomes concerned in an arrangement as a result of which money or other property is made available or is to be made available to another, and
(b) He knows or has reasonable cause to suspect that it will or may be used for the purposes of terrorism.”

The proposed offence aimed at insurers provides:

“17a Insurance against payments made in response to terrorist demands
(1) The insurer under an insurance contract commits an offence if-
(a) The insurer makes a payment under the contract, or purportedly
under it,
(b) The payment is made in respect of any money or other property
that has been, or is to be, handed over in response to a demand
made wholly or partly for the purposes of terrorism, and
(c) The insurer or the person authorising the payment on the
insurer’s behalf knows or has reasonable cause to suspect that
the money or other property has been, or is to be, handed over
in response to such a demand.”

Indeed, an insurance company or its staff will have committed an offence even they consent to such a payment being made or allow the payment by neglect. The legislation applies equally to a transaction that may have no other connection to the UK and is payable overseas. As matter of English Law, insurers were not permitted to make such payments in any event, so on the face of it the amendment does no more than clarify that but no doubt underwriters and their compliance teams will need to be very sure of where funds are going and who is being paid what.

There is no attempt in the new legislation to prevent a K & R policy being written. Underwriters will clearly not be able to reimburse the ransom itself where that is being paid to a terrorist regardless of the nationality of the insured party. A critical part of any K & R policy is the cover for the additional costs including the negotiators appointed to handle the case and the delivery costs which can be significant. On the face of it these are not affected by the new provision but the complex principles of common law on illegality and public policy may apply. It is clearly the government’s intention to stop payments to terrorists. There is a suggestion that some comfort has been given to insurers on this. However, this is not reflected in the new law. It was always open to insurers to waive certain illegal acts by their assured and whether that is possible in respect of the ancillary costs which do not get paid to the terrorists requires careful thought.

Importantly for shipping, the new law makes no attempt to curb an owner’s ability to pay a ransom to pirates who are acting for “private ends”. Whilst that will not affect the ability to pay a Somali or indeed a Nigerian pirate, the situation could remain more complicated in an attack where a demand is made by a terrorist organisation for example, by Abu Sayef that operates almost exclusively in the Sulu Sea near the Philippines. They have attacked commercial shipping and kidnapped crew. There have been several examples of their hostages being executed.  They have declared an affiliation with ISIS and are on the Foreign Office’s proscribed list of terrorist groups. It sometimes comes as a shock to shipowners with “worldwide” K & R cover that they are not covered by their insurance for the actual ransom.

Outside of shipping and in a world where acts of atrocity have become shockingly routine, UK hostages and their families will find themselves in an almost unique and solitary position.

For further information please contact Partner Stephen Askins.