Insurance Companies in the Cross-Hairs of Terror Funding Crackdown

British legislators are considering a new bill that takes aim at a small, secretive niche in the insurance industry that deals with kidnapping and ransom, the latest money spinner for terrorists.

The new counterterrorism bill, proposed in November and being debated this week in the House of Commons, gives the British government broad powers to address new terrorist threats posed by the rise of the Islamic State.

One of the most controversial provisions would give ministers the ability to block British citizens suspected of fighting for terrorists from returning to the United Kingdom. Another section would require universities to limit the number of “extremist” speakers they host on campus.

But one part of the proposed bill that has gotten less attention would also make it a crime for British insurance companies to reimburse families or companies that pay a ransom to a terrorist in order to secure the release of a hostage. Critics argue that the provision is misguided, that it will do little to stem the flow of money to terrorists, and that it could disrupt the thriving industry of “kidnap and ransom” insurers and negotiators who successfully get people out of hostage situations.

Companies buy this insurance for employees working overseas who are in danger of being taken captive by terrorists, militants, or criminals. If that happens, the insurer connects the company to negotiators to help executives or families make a deal with kidnappers, send payment, and get the hostage back.

Kidnapping and ransom policies have come under scrutiny recently as British and U.S. counterterrorism officials have taken a stronger stance against paying ransoms to terrorists in order to starve Islamist militants of an important new source of funding. The Islamic State has used kidnapping for ransom to underwrite its gory campaigns in Syria and Iraq. A United Nations report in October estimated that the Islamic State had received $35 million to $45 million in ransom payments in the past year.

U.S. officials have long argued that making ransom payments encourages more kidnapping (though that hasn’t stopped Washington from acquiescing to ransom payments). The U.N. passed a resolution in January 2014 to discourage countries from meeting ransom demands, but a New York Times investigation published in July revealed that many European countries have been covertly making payments.

Insurers, for their part, argue that they are already complying with the prohibition on supporting terrorists and that therefore the new law is unnecessary.

“The kidnap-and-ransom market does not pay ransoms to terrorists — this clause relates to the reimbursements of payments by an insured to secure the life of a kidnapped person,” a spokesperson for Lloyd’s, one of the major players in the market, said when the bill was proposed.

One consultant who works on hostage negotiations didn’t want to comment publicly, but suggested that Britain has to talk tough about its own insurance market in order to be able to go after other countries that are paying ransoms.

“The London insurance market is not the problem; the problem is that other countries take a different view than the U.K. and the U.S. on the safety of their citizens,” he said.

There have been no allegations that insurance companies have paid terrorists directly, but the murky nature of kidnap negotiations has drawn the attention of policymakers.

Insurance companies often have no direct interaction with the kidnappers. When someone is taken, the policyholder, usually a large international company, calls an insurance hotline and is put in touch with consultants who guide the policyholder through the process. Advisors determine the veracity of the demands and employ professional hostage negotiators to communicate with the kidnapper.

The negotiating team appointed by the insurance company also has to figure out what kind of criminal it’s dealing with. If the kidnapper is a named terrorist or is affiliated with a listed terrorist group, the negotiation can continue, but no ransom can legally be paid. If negotiators determine that the kidnapper is not a terrorist, then they are allowed to negotiate a ransom between the company and the kidnappers.

While negotiators and lawyers involved in the process say they do their best to ascertain the identity of the kidnapper, it’s not a foolproof process. The line between criminals and terrorists is often blurry. In practice, negotiators tend to steer clear of people who are on blacklists and involve the hostage’s home government if they come across a kidnapper with an apparent terrorist connection.

Once a deal is reached, the money is transferred to the kidnapper. When it’s all over, the insurance company reimburses the payer of the ransom, usually either the family or the employer of the person who was taken hostage. Because insurance companies are involved in the transaction at arm’s length and information about the kidnapper is often murky at best, the new proposal aims to make it clear that insurance companies can’t reimburse a policyholder that pays a ransom to a terrorist group.

“The line between what is right and what is wrong is being definitely firmed up,” said Stephen Askins, a shipping lawyer who has advised on dozens of piracy-for-ransom cases in the Gulf of Guinea and off the coast of Somalia.

“And in this day and age when insurance companies are so worried about falling afoul of sanctions, people get very cautious, and if people get very cautious, then ransoms don’t get paid,” Askins, who is a partner with law firm Ince & Co, said on the phone from London.

That’s a dangerous proposition not just for the insurance industry, but also for companies that operate in violent places all over the world. Although there are no publicly available data on kidnappings, there are far more cases involving opportunistic criminals than terrorists, according to experts. And the payouts are lower than in the high-profile terrorism cases. The U.N. estimates that ransoms paid for hostages taken by al Qaeda in the Islamic Maghreb averaged more than $5 million in 2012, while criminal kidnappings covered by insurance in the same geographical region were often resolved for about $80,000.

The new bill “puts at risk the legitimate, lawful and necessary business of securing the release of hostages where terrorism is not involved, which is fully recognised as being permissible under English law,” lawyer James Gosling and his colleagues wrote when the proposal was unveiled.

Kidnap-and-ransom insurance has evolved since the 1970s from a boutique product for very wealthy individuals and top executives into a common part of the insurance package purchased by most big multinational companies. Insiders estimate that hundreds of millions of dollars in premiums are paid every year, making the business a small part of the overall insurance market. It’s impossible to know the exact size because holders of policies are often forbidden from disclosing that they have them, for fear that it might make them more attractive to potential kidnappers. Insurers and companies also don’t disclose numbers of kidnappings or how much money it takes to resolve them.

The British bill under consideration isn’t the first time governments have gone after the private payers of ransom, rather than the kidnappers. Colombia and Italy both outlawed ransom payments in the 1990s, but it had little effect on the number of kidnappings. The notion floated back into prominence when Somali piracy was at its peak in 2011 but was ultimately nixed by the shipping industry, which argued that ransoms were the only way of getting back their ships, sailors, and millions of dollars’ worth of cargo. (Somali pirate attacks have since fallen, largely as a result of increased navy patrols, armed guards on ships, and other preventive measures.)

In the United States, it is illegal to pay ransom to terrorists, but it’s unclear whether anyone has ever been prosecuted for doing it. The family members of freelance journalist Steven Sotloff, who was killed by the Islamic State in September, said they were threatened with prosecution by a White House official when they were considering paying off Sotloff’s captors. In November, Barack Obama’s administration announced that it would review its hostage policy, but wouldn’t consider changing its no-ransom policy.

It’s hard to imagine family members being prosecuted for making a payment to free a kidnapped brother or daughter, but if the new British proposal becomes law, insurance companies could be prosecuted for reimbursing a family member who pays a ransom. Negotiators and lawyers involved in the process say this could push the negotiations underground.

“Even if the U.K. bans these ransom payments, it will not stop; they can find another company based elsewhere not subject to the specific law and pay the ransom,” said Ioannis Chapsos, an expert on maritime security at Coventry University and a former captain in the Greek Navy.

More broadly, it’s not even clear that cracking down on the payment of ransoms reduces the incidence of kidnapping.

“We simply don’t have convincing evidence that outlawing the payment of ransom is an effective deterrent,” said Brian Jenkins, a senior advisor to Rand Corp.’s president who has studied terrorism since the 1970s. Jenkins’s prior research concluded that the no-ransom policy did not lead to fewer Americans being nabbed. What does seem to work, on the other hand, is the long arm of the law.

“The research showed a strong correlation of apprehension and punishment with a lack of further kidnappings,” said Jenkins, who after his research went on to work for security firm Kroll in the 1990s, when he said the company consulted on an average of one hostage case every two weeks.

Jenkins said the British proposal to crack down on insurance companies could “add more gray” to the already complex, delicate work of hostage negotiation, where it’s impossible to know all of a kidnapper’s connections and motivations. The negotiator’s motivation, Jenkins said, is clear.

“When we succeeded in bringing home a hostage and reconnecting them with their family, I felt pretty good and didn’t really have any moral qualms about that,” Jenkins said.

Photo by ANDREW COWIE/AFP/Getty Images