Somali sea gangs lure investors at pirate lair
BY Mohamed Ahmed / Dec 1, 2009

In Somalia’s main pirate lair of Haradheere, the sea gangs have set up a cooperative to fund their hijackings offshore, a sort of stock exchange meets criminal syndicate. Heavily armed pirates from the lawless Horn of Africa nation have terrorized shipping lanes in the Indian Ocean and strategic Gulf of Aden, which links Europe to Asia through the Red Sea. The gangs have made tens of millions of dollars from ransoms and a deployment by foreign navies in the area has only appeared to drive the attackers to hunt further from shore. It is a lucrative business that has drawn financiers from the Somali diaspora and other nations — and now the gangs in Haradheere have set up an exchange to manage their investments.

One wealthy former pirate named Mohammed took Reuters around the small facility and said it had proved to be an important way for the pirates to win support from the local community for their operations, despite the dangers involved. “Four months ago, during the monsoon rains, we decided to set up this stock exchange. We started with 15 ‘maritime companies’ and now we are hosting 72. Ten of them have so far been successful at hijacking,” Mohammed said. “The shares are open to all and everybody can take part, whether personally at sea or on land by providing cash, weapons or useful materials … we’ve made piracy a community activity.”

Haradheere, 400 km (250 miles) northeast of Mogadishu, used to be a small fishing village. Now it is a bustling town where luxury 4×4 cars owned by the pirates and those who bankroll them create honking traffic jams along its pot-holed, dusty streets. Somalia’s Western-backed government of President Sheikh Sharif Ahmed is pinned down battling hard-line Islamist rebels, and controls little more than a few streets of the capital. The administration has no influence in Haradheere — where a senior local official said piracy paid for almost everything. “Piracy-related business has become the main profitable economic activity in our area and as locals we depend on their output,” said Mohamed Adam, the town’s deputy security officer. “The district gets a percentage of every ransom from ships that have been released, and that goes on public infrastructure, including our hospital and our public schools.”

In a drought-ravaged country that provides almost no employment opportunities for fit young men, many are been drawn to the allure of the riches they see being earned at sea. Abdirahman Ali was a secondary school student in Mogadishu until three months ago when his family fled the fighting there. Given the choice of moving with his parents to Lego, their ancestral home in Middle Shabelle where strict Islamist rebels have banned most entertainment including watching sport, or joining the pirates, he opted to head for Haradheere. Now he guards a Thai fishing boat held just offshore. “First I decided to leave the country and migrate, but then I remembered my late colleagues who died at sea while trying to migrate to Italy,” he told Reuters. “So I chose this option, instead of dying in the desert or from mortars in Mogadishu.”

Haradheere’s “stock exchange” is open 24 hours a day and serves as a bustling focal point for the town. As well as investors, sobbing wives and mothers often turn up there seeking news of male relatives missing in action. Every week, Mohammed said, gang members and equipment were lost to the sea. But he said the pirates were not deterred. “Ransoms have even increased in recent months from between $2-3 million to $4 million because of the increased number of shareholders and the risks,” he said. “Let the anti-piracy navies continue their search for us. We have no worries because our motto for the job is ‘do or die’.” Piracy investor Sahra Ibrahim, a 22-year-old divorcee, was lined up with others waiting for her cut of a ransom pay-out after one of the gangs freed a Spanish tuna fishing vessel. “I am waiting for my share after I contributed a rocket-propelled grenade for the operation,” she said, adding that she got the weapon from her ex-husband in alimony. “I am really happy and lucky. I have made $75,000 in only 38 days since I joined the ‘company’.”


A basic piracy operation requires a minimum eight to twelve militia prepared to stay at sea for extended periods of time, in the hopes of hijacking a passing vessel. Each team requires a minimum of two attack skiffs, weapons, equipment, provisions, fuel and preferably a supply boat. The costs of the operation are usually borne by investors, some of whom may also be pirates.

To be eligible for employment as a pirate, a volunteer should already possess a firearm for use in the operation. For this ‘contribution’, he receives a ‘class A’ share of any profit. Pirates who provide a skiff or a heavier firearm, like an RPG or a general purpose machine gun, may be entitled to an additional A-share. The first pirate to board a vessel may also be entitled to an extra A-share.

At least 12 other volunteers are recruited as militiamen to provide protection on land of a ship is hijacked, In addition, each member of the pirate team may bring a partner or relative to be part of this land-based force. Militiamen must possess their own weapon, and receive a ‘class B’ share — usually a fixed amount equivalent to approximately US$15,000.

If a ship is successfully hijacked and brought to anchor, the pirates and the militiamen require food, drink, qaad, fresh clothes, cell phones, air time, etc. The captured crew must also be cared for. In most cases, these services are provided by one or more suppliers, who advance the costs in anticipation of reimbursement, with a significant margin of profit, when ransom is eventually paid.

When ransom is received, fixed costs are the first to be paid out. These are typically:
• Reimbursement of supplier(s)
• Financier(s) and/or investor(s): 30% of the ransom
• Local elders: 5 to 10 %of the ransom (anchoring rights)
• Class B shares (approx. $15,000 each): militiamen, interpreters etc.

The remaining sum — the profit — is divided between class-A shareholders.


BY Ryan Hagen / April 20, 2009

The crew of the Maersk Alabama, having survived an attack by pirates in Somalia last week, has returned home for a much-deserved rest. But with tensions ratcheting up between the U.S. and the rag-tag confederation of Somali pirates, it’s worth looking to the past for clues on how to tame the outlaw seas. Peter Leeson, an economist at George Mason University (and an occasional Freakonomics guest blogger), offers a brisk and fascinating look at old-school piracy in his new book The Invisible Hook: The Hidden Economics of Pirates. Leeson agreed to sit down and answer some important piratical questions for us:

Q: The Invisible Hook is more than just a clever title. How is it different from Adam Smith’s invisible hand?
A: In Adam Smith, the idea is that each individual pursuing his own self-interest is led, as if by an invisible hand, to promote the interest of society. The idea of the invisible hook is that pirates, though they’re criminals, are still driven by their self-interest. So they were driven to build systems of government and social structures that allowed them to better pursue their criminal ends. They’re connected, but the big difference is that, for Adam Smith, self-interest results in cooperation that generates wealth and makes other people better off. For pirates, self-interest results in cooperation that destroys wealth by allowing pirates to plunder more effectively.

Q: In the book, you write that pirates had set up their own early versions of constitutional democracy, complete with separation of powers, decades before the American Revolution. Was that only possible because they were outlaws, operating entirely outside the control of any government?
A: That’s right. The pirates of the 18th century set up quite a thoroughgoing system of democracy. The reason that the criminality is driving these structures is because they can’t rely on the state to provide those structures for them. So pirates, more than anyone else, needed to figure out some system of law and order to make it possible for them to remain together long enough to be successful at stealing.

Q: So did these participatory, democratic systems give merchant sailors an incentive to join pirate crews, because it meant they were freer among pirates than on their own ships?
A: The sailors had more freedom and better pay as pirates than as merchantmen. But perhaps the most important thing was freedom from the arbitrariness of captains and the malicious abuses of power that merchant captains were known to inflict on their crews. In a pirate democracy, a crew could, and routinely did, depose their captain if he was abusing his power or was incompetent.

Q: You write that pirates weren’t necessarily the bloodthirsty fiends we imagine them to have been. How does the invisible hook explain their behavior?
A: The basic idea is, once we recognize pirates as economic actors, businessmen really, it becomes clear as to why they wouldn’t want to brutalize everyone they overtook. In order to encourage merchantmen to surrender, they needed to communicate the idea that, if you surrender to us, you’ll be treated well. That’s the incentive pirates give for sailors to surrender peacefully. If they wantonly abused their prisoners, as they’re often portrayed as having done, that would have actually undermined the incentive of merchant crews to surrender, which would have caused pirates to incur greater costs. They would have had to battle it out more often, because the merchants would have expected to be tortured indiscriminately if they were captured.

So instead, what we often see in the historical record is pirates displaying quite remarkable feats of generosity. The other side of that, of course, is that if you resisted, they had to unleash, you know, a hellish fury on you. That’s where most of the stories of pirate atrocities come from. That’s not to say that no pirate ever indulged his sadistic impulses. But I speculate that the pirate population had no higher proportion of sadists than legitimate society did. And those sadists among the pirates tended to reserve their sadistic actions for times when it would profit them.

Q: So they never made anyone walk the plank?
A: There was no walking the plank. There’s no historical foundation for that in 17th- or 18th-century piracy.

Q: You write about piracy as a brand. It’s quite a successful one, having lasted for hundreds of years after the pirates themselves were exterminated. What was the key to that success?
A: There was a very particular type of reputation that pirates wanted to cultivate. It was a very delicate line to walk. They didn’t want to have a reputation for wanton brutality or complete madness. They wanted to be perceived as hair-trigger men, men on the edge, who if you pushed, if you resisted, they would snap and do something horrible to you. That way, the captives they took had an incentive to be very careful to comply with all of the pirates’ demands. At the same time, they wanted a reputation as being very brutal, as meting out these brutal, horrible tortures to captives who didn’t comply with their demands. Stories about those horrible tortures were relayed not only by word of mouth, but by early 18th-century newspapers. When a former prisoner was released, he would oftentimes go to the media and provide an account of his capture. So when colonials read these accounts in the media, that helped institutionalize the idea of pirates as these men on the edge. That worked marvelously for pirates. It was a form of advertising performed by legitimate members of society that again helped pirates reduce their costs.

Q: What kinds of lessons can we draw from The Invisible Hook in dealing with modern pirates?
A: We have to recognize that pirates are rational economic actors and that piracy is an occupational choice. If we think of them as irrational, or as pursuing other ends, we’re liable to come up with solutions to the pirate problem that are ineffective. Since we know that pirates respond to costs and benefits, we should think of solutions that alter those costs and benefits to shape the incentives for pirates and to deter them from going into a life of piracy.

Peter Leeson
email : pleeson [at] gmu [dot] edu






“We don’t consider ourselves sea bandits. We consider sea bandits
those who illegally fish in our seas and dump waste in our seas and
carry weapons in our seas. We are simply patrolling our seas. Think of
us like a coast guard.”

Somalia’s pirates flourish in a lawless nation
BY Jeffrey Gettleman / October 31, 2008

Boosaaso, Somalia: This may be one of the most dangerous towns in
Somalia, a place where you can get kidnapped faster than you can wipe
the sweat off your brow. But it is also one of the most prosperous.
Money changers walk around with thick wads of hundred-dollar bills.
Palatial new houses are rising up next to tin-roofed shanties. Men in
jail reminisce, with a twinkle in their eyes, about their days living
like kings. This is the story of Somalia’s booming, not-so-underground
pirate economy. The country is in chaos, countless children are
starving and people are killing one another in the streets of
Mogadishu, the capital, for a handful of grain. But one particular
line of work – piracy – seems to be benefiting quite openly from all
this lawlessness and desperation. This year, Somali officials say,
pirate profits are on track to reach a record $50 million, all of it
tax free.

“These guys are making a killing,” said Mohamud Muse Hirsi, the top
Somali official in Boosaaso, who himself is widely suspected of
working with the pirates, though he vigorously denies it. More than 75
vessels have been attacked this year, far more than any other year in
recent memory. About a dozen have been set upon in the past month
alone, including a Ukrainian freighter packed with tanks, antiaircraft
guns and other heavy weaponry, which was brazenly seized in September.
The pirates use fast-moving skiffs to pull alongside their prey and
scamper on board with ladders or sometimes even rusty grappling hooks.
Once on deck, they hold the crew at gunpoint until a ransom is paid,
usually $1 million to $2 million. Negotiations for the Ukrainian
freighter are still going on, and it is likely that because of all the
publicity, the price for the ship could top $5 million. In Somalia, it
seems, crime does pay. Actually, it is one of the few industries that

“All you need is three guys and a little boat, and the next day you’re
millionaires,” said Abdullahi Omar Qawden, a former captain in
Somalia’s long-defunct navy. People in Garoowe, a town south of
Boosaaso, describe a certain high-rolling pirate swagger. Flush with
cash, the pirates drive the biggest cars, run many of the town’s
businesses – like hotels – and throw the best parties, residents say.
Fatuma Abdul Kadir said she went to a pirate wedding in July that
lasted two days, with nonstop dancing and goat meat, and a band flown
in from neighboring Djibouti. “It was wonderful,” said Fatuma, 21.
“I’m now dating a pirate.”

This is too much for many Somali men to resist, and criminals from all
across this bullet-pocked land are now flocking to Boosaaso and other
notorious pirate dens along the craggy Somali shore. They have turned
these waters into the most dangerous shipping lanes in the world. With
the situation clearly out of control, warships from the United States,
Russia, NATO, the European Union and India are steaming into Somalia’s
waters as part of a reinvigorated, worldwide effort to crush the
pirates. But it will not be easy. The pirates are sea savvy. They are
fearless. They are rich and getting richer, with the latest high-tech
gadgetry like handheld GPS units. And they are united. The immutable
clan lines that have pitted Somalis against one another for decades
are not a problem here. Several captured pirates interviewed in
Boosaaso’s main jail said that they had recently crossed clan lines to
open new, lucrative, multiclan franchises. “We work together,” said
Jama Abdullahi, a jailed pirate. “Good for business, you know?”

The pirates are also sprinkled across thousands of square miles of
water, from the Gulf of Aden, at the narrow doorway to the Red Sea, to
the Kenyan border along the Indian Ocean. Even if the naval ships
manage to catch pirates in the act, it is not clear what they can do.
In September, a Danish warship captured 10 men suspected of being
pirates cruising around the Gulf of Aden with rocket-propelled
grenades and a long ladder. But after holding the suspects for nearly
a week, the Danes concluded that they did not have jurisdiction to
prosecute, so they dumped the pirates on a beach, minus their guns.
Nobody, it seems, has a clear plan for how to tame Somalia’s unruly
seas. Several fishermen along the Gulf of Aden talked about seeing
barrels of toxic waste bobbing in the middle of the ocean. They spoke
of clouds of dead fish floating nearby and rogue fishing trawlers
sucking up not just fish and lobsters but also the coral and the
plants that sustain them. It was abuses like these, several men said,
that turned them from fishermen into pirates. Nor is it even clear
whether Somali authorities universally want the piracy to stop. While
many pirates have been arrested, several fishermen, Western
researchers and more than a half-dozen pirates in jail spoke of
nefarious relationships among fishing companies, private security
contractors and Somali government officials, especially those working
for the semiautonomous regional government of Puntland.

“Believe me, a lot of our money has gone straight into the
government’s pockets,” said Farah Ismail Eid, a pirate who was
captured in nearby Berbera and sentenced to 15 years in jail. His
pirate team, he said, typically divided up the loot this way: 20
percent for their bosses, 20 percent for future missions (to cover
essentials like guns, fuel and cigarettes), 30 percent for the gunmen
on the ship and 30 percent for government officials. Abdi Waheed
Johar, the director general of the fisheries and ports ministry of
Puntland, openly acknowledged in an interview this spring that “there
are government people working with the pirates.” But, he was quick to
add, “It’s just not us.”

What is happening off Somalia’s shores is basically an extension of
the corrupt, violent free-for-all that has raged on land for 17 years
since the central government imploded in 1991. The vast majority of
Somalis lose out. Young thugs who are willing to serve as muscle get a
job, albeit a low-paying one, that significantly reduces their life
expectancy. And a select few warlords, who have sat down and figured
out how to profit off the anarchy, make a fortune. Take Boosaaso, once
a thriving port town on the Gulf of Aden. Piracy is killing off the
remains of the local fishing industry because export companies are
staying away. It has spawned a kidnapping business on shore, which in
turn has scared away many humanitarian agencies and the food, medicine
and other forms of desperately needed assistance they bring. Reporting
in Boosaaso two weeks ago required no fewer than 10 hired gunmen
provided by the Puntland government to discourage any would-be

Few large cargo ships come here anymore, depriving legitimate
government operations of much-needed port taxes. Just about the only
ships willing to risk the voyage are small, wooden, putt-putt
freighters from India, essentially floating jalopies from another era.
“We can’t survive off this,” said Bile Qabowsade, a Puntland official.
The shipping problems have contributed to food shortages, skyrocketing
inflation and less work for the sinewy stevedores who trudge out to
Boosaaso’s beach every morning and stare in vain at the bright
horizon, their bare feet planted in the hot sand, hoping a ship will
materialize so they will be able to make a few pennies hauling 100-
pound sacks of sugar on their backs.

And yet, suspiciously, there has been a lot of new construction in
Boosaaso. There is an emerging section of town called New Boosaaso
with huge homes rising above the bubble-shaped huts of refugees and
the iron-sided shacks that many fishermen call home. These new houses
cost several hundred thousand dollars. Many are painted in garish
colors and protected by high walls. Even so, Boosaaso is still a
crumbling, broke, rough-and-tumble place, decaying after years of
neglect like so much of war-ravaged Somalia. It is also dangerous in
countless ways. On Wednesday, suicide bombers blew up two government
offices, most likely the work of Islamist radicals trying to turn
Somalia into an Islamist state. Of course, no Somali government
official would openly admit that New Boosaaso’s minicastles were built
with pirate proceeds. But many people, including United Nations
officials and Western diplomats, suspect that is the case.

Several jailed pirates have accused Muse, a former warlord who is now
Puntland’s president, of being paid off. Officials in neighboring
Somaliland, a breakaway region of northwestern Somalia, said they
recently organized an antipiracy sting operation and arrested Muse’s
nephew, who was carrying $22,000 in cash. “Top Puntland officials
benefit from piracy, even if they might not be instigating it,” said
Roger Middleton, a researcher at the Royal Institute of International
Affairs in London. Actually, he added, “all significant political
actors in Somalia are likely benefiting from piracy.” But Muse said he
did not know anything about this. “We are the leaders of this
country,” he said. “Everybody we suspect, we fire from work.”

He said that Puntland was taking aggressive action against the
pirates. And Boosaaso’s main jail may be proof of that. The other day,
a dozen pirates were hanging out in the yard under a basketball hoop.
And that was just the beginning. “Pirates, pirates, pirates,” said
Gure Ahmed, a Canadian-Somali inmate of the jail, charged with murder.
“This jail is full of pirates. This whole city is pirates.” In other
well-known pirate dens, like Garoowe, Eyl, Hobyo and Xarardheere,
pirates have become local celebrities. Said Farah, 32, a shopkeeper in
Garoowe, said the pirates seemed to have money to burn. “If they see a
good car that a guy is driving,” he said, “they say, ‘How much? If
it’s 30 grand, take 40 and give me the key.’ ”

Every time a seized ship tosses its anchor, it means a pirate shopping
spree. Sheep, goats, water, fuel, rice, spaghetti, milk and cigarettes
– the pirates buy all of this, in large quantities, from small towns
up and down the Somali coast. Somalia’s seafaring thieves are not like
the Barbary pirates, who terrorized European coastal towns hundreds of
years ago and often turned their hostages into galley slaves chained
to the oars. Somali pirates are known as relatively decent hosts,
usually not beating their hostages and keeping them well-fed until
payday comes. “They are normal people,” said Said. “Just very, very

Somali Pirates Tell Their Side: They Want Only Money
BY Jeffrey Gettleman / October 1, 2008

Nairobi, Kenya — The Somali pirates who hijacked a Ukrainian freighter
loaded with tanks, artillery, grenade launchers and ammunition said in
an interview on Tuesday that they had no idea the ship was carrying
arms when they seized it on the high seas. “We just saw a big ship,”
the pirates’ spokesman, Sugule Ali, said in a telephone interview. “So
we stopped it.” The pirates quickly learned, though, that their booty
was an estimated $30 million worth of heavy weaponry, heading for
Kenya or Sudan, depending on whom you ask.

In a 45-minute interview, Mr. Sugule spoke on everything from what the
pirates wanted (“just money”) to why they were doing this (“to stop
illegal fishing and dumping in our waters”) to what they had to eat on
board (rice, meat, bread, spaghetti, “you know, normal human-being
food”). He said that so far, in the eyes of the world, the pirates had
been misunderstood. “We don’t consider ourselves sea bandits,” he
said. “We consider sea bandits those who illegally fish in our seas
and dump waste in our seas and carry weapons in our seas. We are
simply patrolling our seas. Think of us like a coast guard.”

The pirates who answered the phone call on Tuesday morning said they
were speaking by satellite phone from the bridge of the Faina, the
Ukrainian cargo ship that was hijacked about 200 miles off the coast
of Somalia on Thursday. Several pirates talked but said that only Mr.
Sugule was authorized to be quoted. Mr. Sugule acknowledged that they
were now surrounded by American warships, but he did not sound afraid.
“You only die once,” Mr. Sugule said.

He said that all was peaceful on the ship, despite unconfirmed reports
from maritime organizations in Kenya that three pirates were killed in
a shootout among themselves on Sunday or Monday night. He insisted
that the pirates were not interested in the weapons and had no plans
to sell them to Islamist insurgents battling Somalia’s weak
transitional government. “Somalia has suffered from many years of
destruction because of all these weapons,” he said. “We don’t want
that suffering and chaos to continue. We are not going to offload the
weapons. We just want the money.” He said the pirates were asking for
$20 million in cash; “we don’t use any other system than cash.” But he
added that they were willing to bargain. “That’s deal-making,” he

Piracy in Somalia is a highly organized, lucrative, ransom-driven
business. Just this year, pirates hijacked more than 25 ships, and in
many cases, they were paid million-dollar ransoms to release them. The
juicy payoffs have attracted gunmen from across Somalia, and the
pirates are thought to number in the thousands. The piracy industry
started about 10 to 15 years ago, Somali officials said, as a response
to illegal fishing. Somalia’s central government imploded in 1991,
casting the country into chaos. With no patrols along the shoreline,
Somalia’s tuna-rich waters were soon plundered by commercial fishing
fleets from around the world. Somali fishermen armed themselves and
turned into vigilantes by confronting illegal fishing boats and
demanding that they pay a tax. “From there, they got greedy,” said
Mohamed Osman Aden, a Somali diplomat in Kenya. “They starting
attacking everyone.”

By the early 2000s, many of the fishermen had traded in their nets for
machine guns and were hijacking any vessel they could catch: sailboat,
oil tanker, United Nations-chartered food ship. “It’s true that the
pirates started to defend the fishing business,” Mr. Mohamed said.
“And illegal fishing is a real problem for us. But this does not
justify these boys to now act like guardians. They are criminals. The
world must help us crack down on them.” The United States and several
European countries, in particular France, have been talking about ways
to patrol the waters together. The United Nations is even considering
something like a maritime peacekeeping force. Because of all the
hijackings, the waters off Somalia’s coast are considered the most
dangerous shipping lanes in the world.

On Tuesday, several American warships — around five, according to one
Western diplomat — had the hijacked freighter cornered along the
craggy Somali coastline. The American ships allowed the pirates to
bring food and water on board, but not to take weapons off. A Russian
frigate is also on its way to the area. Lt. Nathan Christensen, a Navy
spokesman, said on Tuesday that he had heard the unconfirmed reports
about the pirate-on-pirate shootout, but that the Navy had no more
information. “To be honest, we’re not seeing a whole lot of activity”
on the ship, he said.

In Washington, Geoff Morrell, the Pentagon press secretary, declined
to discuss any possible American military operations to capture the
ship. “Our concern is right now making sure that there’s a peaceful
resolution to this, that this cargo does not end up in the hands of
anyone who would use it in a way that would be destabilizing to the
region,” Mr. Morrell told reporters at the Pentagon. He said the
United States government was not involved in any negotiations with the
pirates. He also said he had no information about reports that the
pirates had exchanged gunfire among themselves.

Kenyan officials continued to maintain that the weapons aboard were
part of a legitimate arms deal for the Kenyan military, even though
several Western diplomats, Somali officials and the pirates themselves
said the arms were part of a secret deal to funnel weapons to southern
Sudan. Somali officials are urging the Western navies to storm the
ship and arrest the pirates because they say that paying ransoms only
fuels the problem. Western diplomats, however, have said that such a
commando operation would be very difficult because the ship is full of
explosives and the pirates could use the 20 crew members as human

Mr. Sugule said his men were treating the crew members well. (The
pirates would not let the crew members speak on the phone, saying it
was against their rules.) “Killing is not in our plans,” he said. “We
only want money so we can protect ourselves from hunger.” When asked
why the pirates needed $20 million to protect themselves from hunger,
Mr. Sugule laughed and said, “Because we have a lot of men.”

“The pirates adopt names like the National Volunteer Coast Guard,
which is used by a group that intercepts small boats and fishing
vessels in southern Somalia. Another of the four main piracy groups
along the coast calls itself the Somali Marines. Organized like a
military unit, with admirals, vice admirals and the like, the group
operates around Mogadishu.”

Q. & A. With a Pirate: “We Just Want the Money”
BY Jeffrey Gettleman / September 30, 2008

Somali pirates in small boats hijacked the Faina, a Belize-flagged
cargo ship owned and operated by Kaalbye Shipping Ukraine, on Sept.
25. Sugule Ali, the spokesman for the Somali pirates holding hostage
the Faina, a Ukrainian freighter loaded with weapons, spoke to me by
satellite telephone today from the bridge of the seized ship. In the
holds of the Faina, which the pirates seized on Thursday, are 33
Russian-built battle tanks and crates of grenade launchers, anti-
aircraft guns, ammunition and other explosives. American officials
fear that the weapons could fall into the hands of radical Islamist
insurgents who are battling Somalia’s weak government. My questions
were translated into Somali, and Mr. Ali’s responses into English, by
a translator employed by The New York Times.

Q. Tell us how you discovered the weapons on board.
A. As soon as we get on a ship, we normally do what is called a
control. We search everything. That’s how we found the weapons. Tanks,
anti-aircraft, artillery. That’s all we will say right now.

Q. Were you surprised?
A. No, we weren’t surprised. We know everything goes through the sea.
We see people who dump waste in our waters. We see people who
illegally fish in our waters. We see people doing all sorts of things
in our waters.

Q. Are you going to sell the weapons to insurgents?
A. No. We don’t want these weapons to go to anyone in Somalia. Somalia
has suffered from many years of destruction because of all these
weapons. We don’t want that suffering and chaos to continue. We are
not going to offload the weapons. We just want the money.

Q. How much?
A. $20 million, in cash. We don’t use any other system than cash.

Q. Will you negotiate?
A. That’s deal making. Common sense says human beings can make deals.

Q. Right now, the American Navy has you surrounded. Are you scared?
A. No, we’re not scared. We are prepared. We are not afraid because we
know you only die once.

Q. Will you kill the hostages if attacked?
A. Killing is not in our plans. We don’t want to do anything more than
the hijacking.

Q. What will you do with the money?
A. We will protect ourselves from hunger.

Q. That’s a lot of money to protect yourselves from hunger.
A. Yes, because we have a lot of men and it will be divided amongst
all of us.

Q. [There are 20 crew members, most of them Ukrainian, being held
hostage.] How are you interacting with the hostages? Eating with them?
Playing cards?
A. We interact with each other in an honorable manner. We are all
human beings. We talk to one another, and because we are in the same
place, we eat together.

Q. What if you were told you could leave peacefully, without arrest,
though without any ransom money. Would you do it?
A. [With a laugh] We’re not afraid of arrest or death or any of these
things. For us, hunger is our enemy.

Q. Have the pirates been misunderstood?
A. We don’t consider ourselves sea bandits [”sea bandit” is one way
Somalis translate the English word pirate]. We consider sea bandits
those who illegally fish in our seas and dump waste in our seas and
carry weapons in our seas. We are simply patrolling our seas. Think of
us like a coast guard.

Q. Why did you want to become a pirate?
A. We are patrolling our seas. This is a normal thing for people to do
in their regions.

Q. Isn’t what you are doing a crime? Holding people at gunpoint?
A. If you hold hostage innocent people, that’s a crime. If you hold
hostage people who are doing illegal activities, like waste dumping or
fishing, that is not a crime.

Q. What has this Ukrainian ship done that was a crime?
A. To go through our waters carrying all these weapons without

Q. What is the name of your group? How many ships have you hijacked
A. I won’t say how many ships we have hijacked. I won’t talk about
that. Our name is the Central Region Coast Guard.

“Our crew, who had been well trained and prepared, used water cannon, self-made incendiary bombs [Molotov cocktails or petrol bombs], beer bottles and anything else that could be used to battle with them. Thirty minutes later, the pirates gestured to us for a ceasefire. Then the helicopter from the joint fleet came to help us.”

Somali pirates in stare-down with global powers
BY Elizabeth A. Kennedy / Oct 15, 2008

Nairobi, Kenya — With a Russian frigate closing in and a half-dozen
U.S. warships within shouting distance, the pirates holding a tanker
off Somalia’s coast might appear to have no other choice than to wave
the white flag. But that’s not how it works in Somalia, a failed state
where a quarter of children die before they turn 5, where anybody with
a gun controls the streets and where every public institution has
crumbled. The 11-day standoff aboard the Ukrainian MV Faina begs the
question: How can a bunch of criminals from one of the poorest and
most wretched countries on Earth face off with some of the world’s
richest and well-armed superpowers?

“They have enough guns to fight for another 20 years,” Ted Dagne, a
Somalia analyst in Washington, told The Associated Press. “And there
is no way to win a battle when the other side is in a suicidal mind
set.” In Somalia, pirates are better-funded, better-organized and
better-armed than one might imagine in a country that has been in
tatters for nearly two decades. They have the support of their
communities and rogue members of the government — some pirates even
promise to put ransom money toward building roads and schools. With
most attacks ending with million-dollar payouts, piracy is considered
the biggest economy in Somalia. Pirates rarely hurt their hostages,
instead holding out for a huge payday. The strategy works well: A
report Thursday by a London-based think tank said pirates have raked
in up to $30 million in ransoms this year alone. “If we are attacked
we will defend ourselves until every last one of us dies,” Sugule Ali,
a spokesman for the pirates aboard the Faina, said in an interview
over satellite telephone from the ship, which is carrying 33 battle
tanks, military weapons and 21 Ukrainian and Latvian and Russian
hostages. One Russian has reportedly died, apparently of illness. The
pirates are demanding $20 million ransom, and say they will not lower
the price. “We only need money and if we are paid, then everything
will be OK,” he said. “No one can tell us what to do.”

Ali’s bold words come even though his dozens of fighters are
surrounded by U.S. warships and American helicopters buzz overhead.
Moscow has sent a frigate, which should arrive within days. Jennifer
Cooke of the Center for Strategic and International Studies in
Washington said hostage-taking is the key to the pirates’ success
against any military muscle looming from the U.S. and Russia. “Once
you have a crew at gunpoint, you can hold six U.S. naval warships at
bay and they don’t have a whole lot of options except to wait it out,”
Cooke said. The pirates have specifically warned against the type of
raids carried out twice this year by French commandos to recover
hijacked vessels. The French used night vision goggles and helicopters
in operations that killed or captured several pirates, who are now
standing trial in Paris. But the hostages are not the bandits’ only
card to play. Often dressed in military fatigues, pirates travel in
open skiffs with outboard engines, working with larger mother ships
that tow them far out to sea. They use satellite navigational and
communications equipment and an intimate knowledge of local waters,
clambering aboard commercial vessels with ladders and grappling hooks.

They are typically armed with automatic weapons, anti-tank rocket
launchers and grenades — weaponry that is readily available throughout
Somalia, where a bustling arms market operates in the center of the
capital. They also have the support of their communities and some
members of local administrations, particularly in Puntland, a
semiautonomous region in northeast Somalia that is a hotbed for
piracy, officials and pirates have told the AP. Abdulqadir Muse Yusuf,
a deputy minister of ports in Puntland, acknowledged there were
widespread signs that Puntland officials, lawmakers and government
officials are “involved or benefiting from piracy” and said
investigations were ongoing. He would not elaborate. Piracy has
transformed the region around the town of Eyl, near where many
hijacked ships are anchored brought while pirates negotiate ransoms.
“Pirates buy new luxury cars and marry two, three, or even four
women,” said Mohamed, an Eyl resident who refused to give his full
name for fear of reprisals from the pirates. “They build new homes —
the demand for construction material is way up.” He said most of the
well-known pirates promise to build roads and schools in addition to
homes for themselves. But for now, Mohamed says he has only seen
inflation skyrocket as the money pours in. “One cup of tea is about
$1,” he said. Before the piracy skyrocketed, tea cost a few cents.

Piracy in Somalia is nothing new, as bandits have stalked the seas for
years. But this year’s surge in attacks — nearly 30 so far — has
prompted an unprecedented international response. The Faina has been
the highest-profile attack because of its dangerous cargo. The U.S.
fears the arms could end up in the hands of al-Qaida-linked militants
in a country seen as a key battleground on terror. The United States
has been leading international patrols to combat piracy along
Somalia’s unruly 1,880-mile coast, the longest in Africa and near key
shipping routes. In June, the U.N. Security Council passed a
resolution that would allow countries to chase and arrest pirates
after attacks increased this year. But still, the attacks continue.
Dagne, an analyst in Washington, said that unless the roots of the
problem are solved — poverty, disease, violence — piracy will only
flourish. “You have a population that is frustrated, alienated, angry
and hopeless,” Dagne said. “This generation of Somalis grew up
surrounded by abject poverty and violence.”

Pirates die strangely after taking Iranian ship
BY Andrew Donaldson / Sep 28, 2008

A tense standoff has developed in waters off Somalia over an Iranian
merchant ship laden with a mysterious cargo that was hijacked by
pirates. Somali pirates suffered skin burns, lost hair and fell
gravely ill “within days” of boarding the MV Iran Deyanat. Some of
them died. Andrew Mwangura, the director of the East African
Seafarers’ Assistance Programme, told the Sunday Times: “We don’t
know exactly how many, but the information that I am getting is that
some of them had died. There is something very wrong about that ship.”

The vessel’s declared cargo consists of “minerals” and “industrial
products”. But officials involved in negotiations over the ship are
convinced that it was sailing for Eritrea to deliver small arms and
chemical weapons to Somalia’s Islamist rebels. The drama over the Iran
Deyanat comes as speculation grew this week about whether the South
African Navy would send a vessel to join the growing multinational
force in the region. A naval spokesman, Lieutenant-Commander Greyling
van den Berg, told the Sunday Times that the navy had not been ordered
by the government to become involved in “the Somali pirate issue”.

About 22000 ships a year pass through the Suez Canal and the Gulf of
Aden, where regional instability and “no-questions-asked” ransom
payments have led to a dramatic rise in attacks on vessels by heavily
armed Somali raiders in speedboats. The Iran Deyanat was sailing in
those waters on August 21, past the Horn of Africa and about 80
nautical miles southeast of Yemen, when it was boarded by about 40
pirates armed with AK-47s and rocket-propelled grenades. They were
alleged members of a crime syndicate said to be based at Eyl, a small
fishing village in northern Somalia.

The ship is owned and operated by the Islamic Republic of Iran
Shipping Lines, or IRISL, a state-owned company run by the Iranian
military. According to the US Treasury Department, the IRISL regularly
falsifies shipping documents to hide the identity of end users, uses
generic terms to describe shipments and operates under various covers
to circumvent United Nations sanctions. The ship set sail from
Nanjing, China, at the end of July. According to its manifest, it was
heading for Rotterdam where it would unload 42500 tons of iron ore and
“industrial products” purchased by a German client. At Eyl, the ship
was secured by more pirates — about 50 on board, and another 50 on

But within days those who had boarded the ship developed mysterious
health trouble. This was also confirmed by Hassan Allore Osman,
minister of minerals and oil in Puntland, an autonomous region of
Somalia. He headed a delegation sent to Eyl when news of the toxic
cargo and illnesses surfaced. He told one news publication, The Long
War Journal, that during the six days he had negotiated with the
pirates, a number of them had become sick and died. “That ship is
unusual,” he was quoted as saying. “It is not carrying a normal

The pirates did reveal that they had tried to inspect the ship’s cargo
containers when some of them fell sick — but the containers were
locked. Osman’s delegation spoke to the ship’s captain and its
engineer by cellphone, demanding to know more about the cargo.
Initially it was claimed the cargo contained “crude oil”; later it was
said to be “minerals”. And Mwangura has added: “Our sources say it
contains chemicals, dangerous chemicals.” But IRISL has denied that —
and threatened legal action against Mwangura. The company has
reportedly paid the pirates 200000 — the first of several “ransom
instalments”, but that, too, has been denied.

‘Toxic waste’ behind Somali piracy
BY Najad Abdullahi / October 11, 2008 / 12:21 Mecca time

Somali pirates have accused European firms of dumping toxic waste off
the Somali coast and are demanding an $8m ransom for the return of a
Ukranian ship they captured, saying the money will go towards cleaning
up the waste. The ransom demand is a means of “reacting to the toxic
waste that has been continually dumped on the shores of our country
for nearly 20 years”, Januna Ali Jama, a spokesman for the pirates,
based in the semi-autonomous region of Puntland, said. “The Somali
coastline has been destroyed, and we believe this money is nothing
compared to the devastation that we have seen on the seas.”

The pirates are holding the MV Faina, a Ukrainian ship carrying tanks
and military hardware, off Somalia’s northern coast. According to the
International Maritime Bureau, 61 attacks by pirates have been
reported since the start of the year. While money is the primary
objective of the hijackings, claims of the continued environmental
destruction off Somalia’s coast have been largely ignored by the
regions’s maritime authorities.

Dumping allegations
Ahmedou Ould-Abdallah, the UN envoy for Somalia confirmed to Al
Jazeera the world body has “reliable information” that European and
Asian companies are dumping toxic waste, including nuclear waste, off
the Somali coastline. “I must stress however, that no government has
endorsed this act, and that private companies and individuals acting
alone are responsible,” he said. Allegations of the dumping of toxic
waste, as well as illegal fishing, have circulated since the early
1990s. But evidence of such practices literally appeared on the
beaches of northern Somalia when the tsunami of 2004 hit the country.

The UN Environment Programme (UNEP) reported the tsunami had
washed up rusting containers of toxic waste on the shores of Puntland.
Nick Nuttall, a UNEP spokesman, told Al Jazeera that when the barrels
were smashed open by the force of the waves, the containers exposed
a “frightening activity” that has been going on for more than decade.
“Somalia has been used as a dumping ground for hazardous waste
starting in the early 1990s, and continuing through the civil war
there,” he said. “European companies found it to be very cheap to get
rid of the waste, costing as little as $2.50 a tonne, where waste
disposal costs in Europe are something like $1000 a tonne. “And the
waste is many different kinds. There is uranium radioactive waste.
There is lead, and heavy metals like cadmium and mercury. There is
also industrial waste, and there are hospital wastes, chemical wastes
– you name it.”

Nuttall also said that since the containers came ashore, hundreds of
residents have fallen ill, suffering from mouth and abdominal
bleeding, skin infections and other ailments. “We [the UNEP] had
planned to do a proper, in-depth scientific assessment on the
magnitude of the problem. But because of the high levels of insecurity
onshore and off the Somali coast, we are unable to carry out an
accurate assessment of the extent of the problem,” he said. However,
Ould-Abdallah claims the practice still continues. “What is most
alarming here is that nuclear waste is being dumped. Radioactive
uranium waste that is potentially killing Somalis and completely
destroying the ocean,” he said.

Toxic waste
Ould-Abdallah declined to name which companies are involved in waste
dumping, citing legal reasons. But he did say the practice helps fuel
the 18-year-old civil war in Somalia as companies are paying Somali
government ministers to dump their waste, or to secure licences and
contracts. “There is no government control … and there are few
people with high moral ground … [and] yes, people in high positions
are being paid off, but because of the fragility of the TFG
[Transitional Federal Government], some of these companies now no
longer ask the authorities – they simply dump their waste and leave.”

Ould-Abdallah said there are ethical questions to be considered
because the companies are negotiating contracts with a government that
is largely divided along tribal lines. “How can you negotiate these
dealings with a country at war and with a government struggling to
remain relevant?” In 1992, a contract to secure the dumping of toxic
waste was made by Swiss and Italian shipping firms Achair Partners and
Progresso, with Nur Elmi Osman, a former official appointed to the
government of Ali Mahdi Mohamed, one of many militia leaders involved
in the ousting of Mohamed Siad Barre, Somalia’s former president. At
the request of the Swiss and Italian governments, UNEP investigated
the matter. Both firms had denied entering into any agreement with
militia leaders at the beginning of the Somali civil war. Osman also
denied signing any contract.

‘Mafia involvement’
However, Mustafa Tolba, the former UNEP executive director, told Al
Jazeera that he discovered the firms were set up as fictitious
companies by larger industrial firms to dispose of hazardous waste.
“At the time, it felt like we were dealing with the Mafia, or some
sort of organised crime group, possibly working with these industrial
firms,” he said. “It was very shady, and quite underground, and I
would agree with Ould-Abdallah’s claims that it is still going on…
Unfortunately the war has not allowed environmental groups to
investigate this fully.”

The Italian mafia controls an estimated 30 per cent of Italy’s waste
disposal companies, including those that deal with toxic waste. In
1998, Famiglia Cristiana, an Italian weekly magazine, claimed that
although most of the waste-dumping took place after the start of the
civil war in 1991, the activity actually began as early as 1989 under
the Barre government. Beyond the ethical question of trying to secure
a hazardous waste agreement in an unstable country like Somalia, the
alleged attempt by Swiss and Italian firms to dump waste in Somalia
would violate international treaties to which both countries are

Legal ramifications
Switzerland and Italy signed and ratified the Basel Convention on the
Control of Transboundary Movements of Hazardous Wastes and their
Disposal, which came into force in 1992. EU member states, as well as
168 other countries have also signed the agreement. The convention
prohibits waste trade between countries that have signed the
convention, as well as countries that have not signed the accord
unless a bilateral agreement had been negotiated. It is also prohibits
the shipping of hazardous waste to a war zone. Abdi Ismail Samatar,
professor of Geography at the University of Minnesota, told Al Jazeera
that because an international coalition of warships has been deployed
to the Gulf of Aden, the alleged dumping of waste must have been

Environmental damage
“If these acts are continuing, then surely they must have been seen by
someone involved in maritime operations,” he said. “Is the cargo aimed
at a certain destination more important than monitoring illegal
activities in the region? Piracy is not the only problem for Somalia,
and I think it’s irresponsible on the part of the authorities to
overlook this issue.” Mohammed Gure, chairman of the Somalia Concern
Group, said that the social and environmental consequences will be
felt for decades. “The Somali coastline used to sustain hundreds of
thousands of people, as a source of food and livelihoods. Now much of
it is almost destroyed, primarily at the hands of these so-called
ministers that have sold their nation to fill their own pockets.” Ould-
Abdallah said piracy will not prevent waste dumping. “The intentions
of these pirates are not concerned with protecting their environment,”
he said. “What is ultimately needed is a functioning, effective
government that will get its act together and take control of its

‘We consider ourselves heroes’ – a Somali pirate speaks
Asad ‘Booyah’ Abdulahi, 42, describes himself as a pirate boss,
capturing ships in the Gulf of Aden and Indian Ocean.
Interview by Xan Rice and Abdiqani Hassan / November 22 2008

“I am 42 years old and have nine children. I am a boss with boats
operating in the Gulf of Aden and the Indian Ocean. I finished high
school and wanted to go to university but there was no money. So I
became a fisherman in Eyl in Puntland like my father, even though I
still dreamed of working for a company. That never happened as the
Somali government was destroyed [in 1991] and the country became

At sea foreign fishing vessels often confronted us. Some had no
licence, others had permission from the Puntland authorities but did
not want us there to compete. They would destroy our boats and force
us to flee for our lives. I started to hijack these fishing boats in
1998. I did not have any special training but was not afraid. For our
first captured ship we got $300,000. With the money we bought AK-47s
and small speedboats. I don’t know exactly how many ships I have
captured since then but I think it is about 60. Sometimes when we are
going to hijack a ship we face rough winds, and some of us get sick
and some die.

We give priority to ships from Europe because we get bigger ransoms.
To get their attention we shoot near the ship. If it does not stop we
use a rope ladder to get on board. We count the crew and find out
their nationalities. After checking the cargo we ask the captain to
phone the owner and say that have seized the ship and will keep it
until the ransom is paid. We make friends with the hostages, telling
them that we only want money, not to kill them. Sometimes we even eat
rice, fish, pasta with them. When the money is delivered to our ship
we count the dollars and let the hostages go.

Then our friends come to welcome us back in Eyl and we go to Garowe in
Land Cruisers. We split the money. For example, if we get $1.8m, we
would send $380,000 to the investment man who gives us cash to fund
the missions, and then divide the rest between us. Our community
thinks we are pirates getting illegal money. But we consider ourselves
heroes running away from poverty. We don’t see the hijacking as a
criminal act but as a road tax because we have no central government
to control our sea. With foreign warships now on patrol we have
difficulties. But we are getting new boats and weapons. We will not
stop until we have a central government that can control our sea.”

Somali pirates strike again / November 19, 2008 / 09:02 Mecca time

Somali pirates have struck again in the Gulf of Aden, hijacking
another ship a day after seizing a Saudi oil supertanker with a cargo
worth $100m. The Delight, a Hong Kong-registered vessel carrying
33,000 tonnes of wheat, was sailing to Iran with 25 crew members when
it was seized, Chinese state news agency Xinhua said. A spokesman for
the US Navy’s Fifth Fleet in the Gulf confirmed on Tuesday that the
Delight had been hijacked. A Hong Kong government spokesman said
“this could be a serious matter for us. We will deal with it”.

Saudi tanker anchored
News of the latest hijack came as the hijackers of the Saudi Sirius
Star – the biggest vessel ever hijacked – anchored the vessel off
Somalia. The vessel was seized in the Indian ocean off East Africa on
Sunday in the boldest attack by pirates operating from lawless
Somalia. “We can confirm the ship is anchoring off the Somali coast at
Haradheere,” Lieutenant Nathan Christensen, a spokesman for the US
Fifth Fleet, said on Tuesday. Haradheere is situated roughly in the
centre of Somalia’s coastline.

The supertanker had been heading for the US via the Cape of Good Hope
at the southern tip of Africa, instead of heading through the Gulf of
Aden and the Suez Canal. The hijacking occurred despite an
international naval response, including from the Nato alliance and
European Union, to protect one of the world’s busiest shipping areas.
US, French and Russian warships are also off the Somali coast. The
pirates have driven up insurance costs, forced some ships to go round
South Africa instead of through the Suez Canal and secured millions of
dollars in ransoms. Last week, the European Union, in its first-ever
naval mission, launched a security operation off the coast of Somalia
to combat growing piracy and protect ships carrying aid agency

Outrageous act
Prince Saud al-Faisal, Saudi Arabia’s foreign minister called the
hijacking of the Sirius Star an outrageous act and promised to back an
EU-led initiative to step up security in shipping lanes off Africa’s
east coast. “This outrageous act by the pirates, I think, will only
reinforce the resolve of the countries of the Red Sea and
internationally to fight piracy,” he told reporters in Athens. The
vessel owned by Saudi oil giant Aramco was fully loaded when it was
attacked on Sunday more than 450 nautical miles southeast of Mombasa.
The standoff comes as another ship is seized off the coast of Somalia.
According to the International Maritime Bureau (IMB), a Thai fishing
boat with 16 crew members has been hijacked. Noel Choong, head of the
IMB piracy reporting centre, based in Kuala Lumpur, said the ship was
seized in the Gulf of Aden on Monday. Eight ships have now been
hijacked in the past two weeks.

‘Hitting the jackpot’
Andrew Mwangura, co-ordinator of the East African Seafarers’
Association, said: “The world has never seen anything like this …
The Somali pirates have hit the jackpot.” The association, based in
the Kenyan port city of Mombasa, has been monitoring piracy for years.
Mwangura said he thought a hijacked Nigerian tug was a “mother-ship”
for the November 15 seizure. “The supertanker was fully loaded, so it
was probably low in the water and not that difficult to board,” he
said, adding that the pirates probably used a ladder or hooked a rope
to the side.

Pirates are well organised in the Horn of Africa, where Somalia’s
northeastern tip juts into the Indian Ocean. Somalia has had no
effective government since the 1991 overthrow of Mohamed Siad Barre,
the former president, touched off a bloody power struggle that has
defied numerous attempts to restore stability. This year, Somali
pirates have attacked 90 ships, more than double the number in 2007,
according to the International Maritime Bureau, and are still holding
16 ships and more than 250 sailors.

CURRENTLY HELD FOR RANSOM,2933,454124,00.html
Somali Pirates Keep Hundreds of Hostages in Pirate City of Eyl
Heres a list of ten of the biggest vessels still in pirates’ hands.

1. Sirius Star / Hijacked November 17
Cargo: 2 million barrels of oil, value $100 million
Crew: 25 men

2. MV Karagol / Hijacked November 12
Cargo: 4,000 tons of chemicals
Crew: 14 Turks

3. MV Stolt Strength / Hijacked November 10
Cargo: Phosphoric acid
Crew: 23 Filipinos

4. CEC Future / Hijacked November 7
Cargo: Unknown
Crew: 11 Russians, one Georgian, one Lithuanian

5. MV Yasa Neslihan / Hijacked October 29
Cargo: Iron ore
Crew: 20 Turks

6. MT African Sanderling / Hijacked October 15
Cargo: Unknown
Crew: 21 Filipinos

7. MV Faina / Hijacked September 25
Cargo: 33 T-72 Russian battle tanks
Crew: 17 Ukrainians, 2 Latvians, one Russian

8. MV Captain Stefanos / Hijacked September 21
Cargo: Unknown
Crew: 17 Filipinos, two other nationals

9. Centauri / Hijacked September 18
Cargo: 17,000 tons of salt
Crew: 25 Filipinos

10. MV Great Creation / Hijacked September 17
Cargo: Chemical fertilizer
Crew: 24 Chinese, one Sri Lankan

Somali pirates transform villages into boomtowns
BY Mohamed Olad Hassan and Elizabeth Kennedy / 11.19.08

MOGADISHU, Somalia (AP) — Somalia’s increasingly brazen pirates are
building sprawling stone houses, cruising in luxury cars, marrying
beautiful women — even hiring caterers to prepare Western-style food
for their hostages. And in an impoverished country where every public
institution has crumbled, they have become heroes in the steamy
coastal dens they operate from because they are the only real business
in town. “The pirates depend on us, and we benefit from them,” said
Sahra Sheik Dahir, a shop owner in Harardhere, the nearest village to
where a hijacked Saudi Arabian supertanker carrying $100 million in
crude was anchored Wednesday.

These boomtowns are all the more shocking in light of Somalia’s
violence and poverty: Radical Islamists control most of the country’s
south, meting out lashings and stonings for accused criminals. There
has been no effective central government in nearly 20 years, plunging
this arid African country into chaos. Life expectancy is just 46
years; a quarter of children die before they reach 5. But in northern
coastal towns like Harardhere, Eyl and Bossaso, the pirate economy is
thriving thanks to the money pouring in from pirate ransoms that have
reached $30 million this year alone. “There are more shops and
business is booming because of the piracy,” said Sugule Dahir, who
runs a clothing shop in Eyl. “Internet cafes and telephone shops have
opened, and people are just happier than before.”

In Harardhere, residents came out in droves to celebrate as the
looming oil ship came into focus this week off the country’s lawless
coast. Businessmen gathered cigarettes, food and cold bottles of
orange soda, setting up kiosks for the pirates who come to shore to
resupply almost daily. Dahir said she even started a layaway plan for
them. “They always take things without paying and we put them into the
book of debts,” she told The Associated Press in a telephone
interview. “Later, when they get the ransom money, they pay us a lot.”
Residents make sure the pirates are well-stocked in khat, a popular
narcotic leaf, and aren’t afraid to gouge a bit when it comes to the
pirates’ deep pockets. “I can buy a packet of cigarettes for about $1
but I will charge the pirate $1.30,” said Abdulqadir Omar, an Eyl
resident. While pirate villages used to have houses made of corrugated
iron sheets, now, there are stately looking homes made of sturdy,
white stones. “Regardless of how the money is coming in, legally or
illegally, I can say it has started a life in our town,” said Shamso
Moalim, a 36-year-old mother of five in Harardhere. “Our children are
not worrying about food now, and they go to Islamic schools in the
morning and play soccer in the afternoon. They are happy.”

The attackers generally treat their hostages well in anticipation of a
big payday, hiring caterers on shore to cook spaghetti, grilled fish
and roasted meat that will appeal to Western palates. And when the
payday comes, the money sometimes literally falls from the sky.
Pirates say the ransom arrives in burlap sacks, sometimes dropped from
buzzing helicopters, or in waterproof suitcases loaded onto skiffs in
the roiling, shark-infested sea. “The oldest man on the ship always
takes the responsibility of collecting the money, because we see it as
very risky, and he gets some extra payment for his service later,”
Aden Yusuf, a pirate in Eyl, told AP over VHF radio.

The pirates use money-counting machines — the same technology seen
at foreign exchange bureaus worldwide — to ensure the cash is real. All
payments are done in cash because Somalia has no functioning banking
system. “Getting this equipment is easy for us, we have business
connections with people in Dubai, Nairobi, Djibouti and other areas,”
Yusuf said. “So we send them money and they send us what we want.”

Despite a beefed-up international presence, the pirates continue to
seize ships, moving further out to sea and demanding ever-larger
ransoms. The pirates operate mostly from the semiautonomous Puntland
region, where local lawmakers have been accused of helping them and
taking a cut of the ransoms. For the most part, however, the regional
officials say they have no power to stop piracy. Meanwhile, towns that
once were eroded by years of poverty and chaos are now bustling with
restaurants, Land Cruisers and Internet cafes. Residents also use
their gains to buy generators — allowing full days of electricity,
once an unimaginable luxury in Somalia.

“Pirate Jama Shino in the Somali town of Garowe, threw the most lavish
wedding party for his second marriage and invited hundreds of people
from the local authorities and among citizens,” Hussameddin wrote.
“The bride and the young women who attended the party, said: “Marrying
a pirate is every Somali girl’s dream. He has power, money, immunity,
the weapons to defend the tribe and funds to give to the militias in
civil war,” – from an op-ed in the Egyptian paper, Al Ahram.

Somali pirates living the high life
BY Robyn Hunter / 2008/10/28

“No information today. No comment,” a Somali pirate shouts over the
sound of breaking waves, before abruptly ending the satellite
telephone call. He sounds uptight – anxious to see if a multi-million
dollar ransom demand will be met. He is on board the hijacked
Ukrainian vessel, MV Faina – the ship laden with 33 Russian battle
tanks that has highlighted the problem of piracy off the Somali coast
since it was captured almost a month ago. But who are these modern-day
pirates? According to residents in the Somali region of Puntland where
most of the pirates come from, they live a lavish life.

“They have money; they have power and they are getting stronger by the
day,” says Abdi Farah Juha who lives in the regional capital, Garowe.
“They wed the most beautiful girls; they are building big houses; they
have new cars; new guns,” he says. “Piracy in many ways is socially
acceptable. They have become fashionable.” Most of them are aged
between 20 and 35 years – in it for the money. And the rewards they
receive are rich in a country where almost half the population need
food aid after 17 years of non-stop conflict.

Most vessels captured in the busy shipping lanes of the Gulf of Aden
fetch on average a ransom of $2m. This is why their hostages are well
looked after. The BBC’s reporter in Puntland, Ahmed Mohamed Ali, says
it also explains the tight operation the pirates run. They are never
seen fighting because the promise of money keeps them together.
Wounded pirates are seldom seen and our reporter says he has never
heard of residents along Puntland’s coast finding a body washed
ashore. Given Somalia’s history of clan warfare, this is quite a feat.
It probably explains why a report of a deadly shoot-out amongst the
pirates onboard the MV Faina was denied by the vessel’s hijackers.
Pirate spokesman Sugule Ali told the BBC Somali Service at the time:
“Everybody is happy. We were firing guns to celebrate Eid.”

Brains, muscle and geeks
The MV Faina was initially attacked by a gang of 62 men. BBC Somalia
analyst Mohamed Mohamed says such pirate gangs are usually made up
of three different types:
* Ex-fishermen, who are considered the brains of the operation
because they know the sea
* Ex-militiamen, who are considered the muscle – having fought for
various Somali clan warlords
* The technical experts, who are the computer geeks and know how
to operate the hi-tech equipment needed to operate as a pirate –
satellite phones, GPS and military hardware.

The three groups share the ever-increasing illicit profits – ransoms
paid in cash by the shipping companies. A report by UK think-tank
Chatham House says piracy off the coast of Somalia has cost up to $30m
(£17m) in ransoms so far this year. The study also notes that the
pirates are becoming more aggressive and assertive – something the
initial $22m ransom demanded for MV Faina proves. The asking price has
apparently since fallen to $8m.

Calling the shots
Yemen, across the Gulf of Aden, is reportedly where the pirates get
most of their weapons from. A significant number are also bought
directly from the Somali capital, Mogadishu. Observers say Mogadishu
weapon dealers receive deposits for orders via a “hawala” company – an
informal money transfer system based on honour. Militiamen then drive
the arms north to the pirates in Puntland, where they are paid the
balance on delivery. It has been reported in the past that wealthy
businessmen in Dubai were financing the pirates. But the BBC’s Somali
Service says these days it is the businessmen asking the pirates for

Such success is a great attraction for Puntland’s youngsters, who have
little hope of alternative careers in the war-torn country. Once a
pirate makes his fortune, he tends to take on a second and third wife
– often very young women from poor nomadic clans, who are renowned
for their beauty. But not everyone is smitten by Somalia’s new elite.
“This piracy has a negative impact on several aspects of our life in
Garowe,” resident Mohamed Hassan laments.

He cites an escalating lack of security because “hundreds of armed
men” are coming to join the pirates. They have made life more
expensive for ordinary people because they “pump huge amounts of US
dollars” into the local economy which results in fluctuations in the
exchange rate, he says. Their lifestyle also makes some unhappy. “They
promote the use of drugs – chewing khat [a stimulant which keeps one
alert] and smoking hashish – and alcohol,” Mr Hassan says.

The trappings of success may be new, but piracy has been a problem in
Somali waters for at least 10 years – when Somali fishermen began
losing their livelihoods. Their traditional fishing methods were no
match for the illegal trawlers that were raiding their waters. Piracy
initially started along Somalia’s southern coast but began shifting
north in 2007 – and as a result, the pirate gangs in the Gulf of Aden
are now multi-clan operations. But Garowe resident Abdulkadil Mohamed
says, they do not see themselves as pirates. “Illegal fishing is the
root cause of the piracy problem,” he says. “They call themselves

‘Pirates Are Stronger Than Us’ – Eyl Mayor / 23 August 2008
“The mayor of a small coastal town in northeastern Somalia has
declared that local authorities are unable to stop pirates. Abdullahi
Said O’Yusuf, the mayor of Eyl in Puntland region, confirmed Radio
Garowe during a Saturday interview that four hijacked ships are being
held hostage near the town’s shores. “They are stronger than us,”
Mayor O’Yusuf said, while speaking of the pirates. He condemned
continued attacks on foreign ships traveling across the Indian Ocean,
while underlining that local authorities “cannot do anything” to stop
piracy. The Associated Press has reported that four ships – with
owners in Malaysia, Iran, Japan and Germany – and a total crew of 96
people are being held hostage by Somali pirates. Mayor O’Yusuf said
the pirates who hijacked the ships “are the same ones who received
ransom payments before,” referring to previous pirate attacks in the
region. According to the Mayor, pirates use ransom payments to “buy
houses in big cities” in different parts of the country.”

“Eyl is a town in the northern Puntland region of Somalia. The
prominent clans in the Eyl district are the Majeerteen and Leelkase
sub-clans of the Darod. Eyl is near the Hafun peninsula, the location
of most of Somalia’s casualties from the 2004 Indian Ocean Tsunami. As
of 2008 Eyl has become a pirate haven, with more than a dozen ships
being held captive by pirate crews. The Puntland government has
acknowledged that they are relatively powerless to stop pirate
activities. French commandos decided a hostage rescue in Eyl was too
dangerous, and carried out a rescue of two French sailors before they
could be taken there.”

Life in Somalia’s pirate town
BY Mary Harper / 18 September 2008

Whenever word comes out that pirates have taken yet another ship in
the Somali region of Puntland, extraordinary things start to happen.
There is a great rush to the port of Eyl, where most of the hijacked
vessels are kept by the well-armed pirate gangs. People put on ties
and smart clothes. They arrive in land cruisers with their laptops,
one saying he is the pirates’ accountant, another that he is their
chief negotiator.

With yet more foreign vessels seized off the coast of Somalia this
week, it could be said that hijackings in the region have become
epidemic. Insurance premiums for ships sailing through the busy Gulf
of Aden have increased tenfold over the past year because of the
pirates, most of whom come from the semi-autonomous region of
Puntland. In Eyl, there is a lot of money to be made, and everybody is
anxious for a cut.

Entire industry
The going rate for ransom payments is between $300,000 and $1.5m
(£168,000-£838,000). A recent visitor to the town explained how, even
though the number of pirates who actually take part in a hijacking is
relatively small, the whole modern industry of piracy involves many
more people. “The number of people who make the first attack is small,
normally from seven to 10,” he said. “They go out in powerful
speedboats armed with heavy weapons. But once they seize the ship,
about 50 pirates stay on board the vessel. And about 50 more wait on
shore in case anything goes wrong.”

Given all the other people involved in the piracy industry, including
those who feed the hostages, it has become a mainstay of the Puntland
economy. Eyl has become a town tailor-made for pirates – and their
hostages. Special restaurants have even been set up to prepare food
for the crews of the hijacked ships. As the pirates want ransom
payments, they try to look after their hostages. When commandos from
France freed two French sailors seized by pirates off the Somali coast
in September, President Nicolas Sarkozy said he had given the go-ahead
for the operation when it was clear the pirates were headed for Eyl –
it would have been too dangerous to try to free them from there.

The town is a safe-haven where very little is done to stop the pirates
– leading to the suggestion that some, at least, in the Puntland
administration and beyond have links with them. Many of them come
from the same clan – the Majarteen clan of the president of Somalia’s
transitional federal government, Abdullahi Yusuf.

Money to spend
The coastal region of Puntland is booming. Fancy houses are being
built, expensive cars are being bought – all of this in a country that
has not had a functioning central government for nearly 20 years.
Observers say pirates made about $30m from ransom payments last
year – far more than the annual budget of Puntland, which is about
$20m. When the president of Puntland, Adde Musa, was asked about
the reported wealth of pirates and their associates, he said: “It’s more
than true”.

Now that they are making so much money, these 21st Century pirates
can afford increasingly sophisticated weapons and speedboats. This
means that unless more is done to stop them, they will continue to
plunder the busy shipping lanes through the Gulf of Aden. They even
target ships carrying aid to feed their compatriots – up to a third of the
population. Warships from France, Canada and Malaysia, among others,
now patrol the Somali coast to try and fend off pirate attacks.

An official at the International Maritime Organisation explained how
the well-armed pirates are becoming increasingly bold. More than 30%
of the world’s oil is transported through the Gulf of Aden. “It is
only a matter of time before something horrible happens,” said the
official. “If the pirates strike a hole in the tanker, and there’s an
oil spill, there could be a huge environmental disaster”.

It is likely that piracy will continue to be a problem off the coast
of Somalia as long as the violence and chaos continues on land.
Conflict can be very good for certain types of business, and piracy is
certainly one of them. Weapons are easy to obtain and there is no
functioning authority to stop them, either on land or at sea.


“We want pre-emptive action against the mother ships before the
pirates carry out a hijacking,” said Captain Pottengal Mukundan,
director of the London-based International Maritime Bureau, which
monitors international piracy, referring to the ships pirates use as
bases from which to launch attacks. “The positions of the mother ships
are generally known. What we would like to see is the naval vessels
going to interdict them, searching them and removing any arms on
board. That would at least force the pirates to go back to Somalia to
pick up more arms before they could come back again,” he told Reuters
in an interview.

But the laws governing what navies can do to take on the pirates are
complex. Only if pirates are caught in the act of piracy — actually
boarding a ship and seizing it — can a naval ship intervene with the
full force of international law. Arriving 30 minutes after a vessel
has been boarded, when there is a degree of uncertainty over whether
those on board are pirates or not, is often too late, experts say.
Denmark recently had to return some suspected pirates to Somalia
because it couldn’t prove they were pirates after they were seized.

Mr. Mukundan said there were currently about four ‘mother ships’ —
seized dhows or other larger fishing boats anchored near international
waters — being used by pirates. The pirates live on the mother ships,
storing arms, fuel and other supplies on board, and then target ships,
which can include fuel tankers, by catching up to them in high-speed
boats and boarding them with rope ladders while heavily armed. Mr.
Mukundan acknowledged the legalities of taking on ‘mother ships’ were
tricky, but said it could be done if governments gave their naval
forces instructions to do it.”


“Piracy is an international crime consisting of illegal acts of
violence, detention, or depredation committed for private ends by the
crew or passengers of a private ship or aircraft in or over
international waters against another ship or aircraft or persons and
property on board. (Depredation is the act of plundering, robbing, or

In international law piracy is a crime that can be committed only
on or over international waters (including the high seas, exclusive
economic zone, and the contiguous zone), in international airspace,
and in other places beyond the territorial jurisdiction of any nation.
The same acts committed in the internal waters, territorial sea,
archipelagic waters, or national airspace of a nation do not
constitute piracy in international law but are, instead, crimes within
the jurisdiction and sovereignty of the littoral nation.

Sea robbery is a term used to describe attacks upon commercial
vessels in ports and territorial waters. Such attacks are, according
to international law, not true acts of piracy but rather armed
robberies. They are criminal assaults on vessels and vessel crews,
just as may occur to truck drivers within a port area. Such attacks
pose a serious threat to trade. The methods of these attacks have
varied from direct force using heavy weapons to subterfuge in which
the criminals have identified themselves on VHF radio as the national
coast guard.

These maritime criminals are inclined to operate in waters where
government presence is weak, often lacking in both technical resources
and the political will to deal effectively with such attacks.
International law permits any warship or government vessel to repress
an attack in international waters. In a state’s territorial waters,
such attacks constitute an act of armed robbery and must be dealt with
under the laws of the relevant coastal state. These laws seldom, if
ever, permit a vessel or warship from another country to intervene.
The most effective countermeasure strategy is to prevent criminals
initial access to ports and vessels, and to demonstrate a consistent
ability to respond rapidly and effectively to notification of such a
security breach.

Acts of piracy can only be committed by private ships or private
aircraft. A warship or other public vessel or a military or other
state aircraft cannot be treated as a pirate unless it is taken over
and operated by pirates or unless the crew mutinies and employs it for
piratical purposes. By committing an act of piracy, the pirate ship or
aircraft, and the pirates themselves, lose the protection of the
nation whose flag they are otherwise entitled to fly.

To constitute the crime of piracy, the illegal acts must be
committed for private ends. Consequently, an attack upon a merchant
ship at sea for the purpose of achieving some criminal end, e.g.,
robbery, is an act of piracy as that term is currently defined in
international law. Conversely, acts otherwise constituting piracy done
for purely political motives, as in the case of insurgents not
recognized as belligerents, are not piratical.

International law has long recognized a general duty of all
nations to cooperate in the repression of piracy. This traditional
obligation is included in the 1958 Geneva Convention on the High Seas
and the 1982 LOS Convention, both of which provide: “[A]ll States
shall cooperate to the fullest possible extent in the repression of
piracy on the high seas or in any other place outside the jurisdiction
of any State.””


Lucrative Piracy Business Thrives Off Somali Coast / November 18,

The seizure Monday of a supertanker carrying $100 million of crude oil
off the coast of Somalia is one of many ship hijackings by pirates of
late. A cargo ship flying a Hong Kong flag also was taken over in the
Gulf of Aden on Tuesday — the seventh hijacking in the area in 12
days, according to The Associated Press. The magnitude of recent
piracy attacks is rising, and an interactive map maintained by the
International Chamber of Commerce shows where these attacks are
taking place. Many are focused around the eastern Horn of Africa, but
piracy in the waters around Indonesia also has been frequent. J. Peter
Pham, director of the Nelson Institute for International and Public
Affairs at James Madison University, says the recent spikes in piracy are
“a crime of both opportunity and expediency.”

“Somalia has lacked a government, effectively, since 1991 and the
current interim government — the 14th of its kind in a decade and a
half — is tottering on its last legs, so there is very little control
to prevent lawlessness,” he says. “There is also the fact that
increasingly commerce is moving in this direction — the demand for oil
and other resources. Roughly 11 percent of the world’s petroleum flows
through these waters.” For Somalis, Pham says, “this is really the
best thing they have going for them economically. Piracy and ransom
this year will exceed more than $50 million — it’s Somalia’s largest

“The ship owners and insurers have found that it’s more cost-effective
to pay ransoms. They are currently averaging slightly over $1 million
per vessel, and that’s cheaper than buying a new ship,” Pham says.
“The Saudi tanker that was seized [Monday] was just launched six
months ago and cost $150 million to build and the cargo on board is
worth $100 million, so I suspect the ship owners will be willing to
pay some fraction of that to get it back.” Pham says that most tankers
of that size are not armed, or if they are, they have small side arms.
The pirates come in fast speed boats, circle the vessel and threaten
to blow it out of the water with rocket-propelled grenades or shoulder-
launched missiles. “Faced with that prospect, most captains — to save
the life of their crew and save the vessels — will surrender control
of the vessel to the pirates,” Pham says.

The world’s most utterly failed state / Oct 2nd 2008

Tipped off by friends in ports from Odessa to Mombasa, Somali pirates
captured a Ukrainian freighter, the MV Faina, in the Gulf of Aden and
steered it to Somalia’s coast. At first they demanded $20m for the
release of ship and crew. The captain died, apparently of
“hypertension”, and several pirates may have then killed each other
after a quarrel. This recent incident was only the latest in a long
list of similar outrages and highlights the growing menace caused by
the total failure of the state of Somalia, the ultimate cause of the
virus of piracy in the region.

The ship was carrying 33 T-72 Russian tanks, anti-aircraft guns and
grenade launchers. Lighter weapons may have been offloaded on the
Somali shore before an American warship arrived on the scene. Kenya
claimed ownership of the cargo but the manifest suggests its
destination was south Sudan, with Kenya’s co- operation in its
delivery to be rewarded in the future with cheap south Sudanese oil.
At midweek, a Russian warship was steaming to the scene to take
responsibility for its citizens on the ship.

The attack was only one of at least 60 off Somalia this year. Foreign
navies can intercept vessels captured by pirates, but the desolation
and length of Somalia’s coastline give them little chance of stamping
out piracy without much larger and better co-ordinated forces. In
cahoots with gangs in Yemen, Somali pirates look set to go on hitting
vessels heading into or out of the Red Sea or passing through the Gulf
of Aden: about 10% of the world’s shipping.

It is big business. The pirates are increasingly sophisticated,
handsomely bankrolled by Somalis in Dubai and elsewhere. They are not
yet directly tied up with the Islamist insurgents in Somalia, though
they may yet have to pay cash to whoever controls their coastal havens
in return for uninterrupted business, thus assisting the purchase of
weapons and fuelling the violence. The nabbed ships are mostly
anchored off the village of Eyl in Puntland in the north-east or the
pirate town of Haradheere farther south (see map) until a ransom is
paid, which is usually within a month of capture. The average ransom
has tripled since 2007, as has the number of ships taken. Some $100m
may have been paid to pirates this year. By comparison, the United
Nations Development Programme’s annual budget for Somalia is $14m.

Piracy is a symptom of the power vacuum inside Somalia. The country’s
“transitional federal government”, headed by a warlord president,
Abdullahi Yusuf, and a bookish prime minister, Nur Hussein, is
powerless to stop its citizens raising the Jolly Roger, just as it
cannot halt the resurgent jihadists, some with al-Qaeda connections,
who have taken control of much of southern Somalia, including the port
town of Kismayo. Hundreds of thousands have fled street fighting in
the north of Mogadishu to camps outside the city; some head south to
refugee camps in Kenya. About 9,000 civilians have been killed in the
insurgency in the past year, according to human-rights groups.

The UN’s envoy to Somalia, Ahmedou Ould Abdullah, a former foreign
minister of Mauritania, is overseeing peace talks in nearby Djibouti
between the transitional government and the moderate wing of the
Alliance for the Reliberation of Somalia (ARS), an Islamist group
headed by a former teacher, Sharif Ahmed. The aim is to create a
genuine government of national unity before elections next year.

A condition of any agreement is the withdrawal of the 7,000-odd
Ethiopian troops now in Somalia. Mr Ould Abdullah wants to replace
them and a separate 2,200-strong African Union force of Ugandan and
Burundian troops with 8,000 UN peacekeepers. Ethiopia, which is losing
men and money, would be happy with that, if the peacekeepers were
somehow shoehorned in without the jihadists taking advantage of a
hiatus. America agrees, but only if the deployment of blue helmets is
matched by an effort to build a new Somali national army. Mr Ould
Abdullah is also keen for the International Criminal Court in The
Hague to indict some of the worst warlords, to show they cannot murder
their opponents with impunity. But it is unlikely, in present
circumstances, that UN peacekeepers will ever arrive. If the UN cannot
produce half its promised force for Darfur, despite a detailed plan
for one, Somalia stands little chance of getting any blue helmets at

Feuding among Somali leaders makes matters worse. “Somalia is a victim
of its political, business and military elite,” says Mr Ould Abdullah.
“They’ve taken the country hostage.” A slender hope, backed by Britain
and some other EU countries, is that ordinary Somalis will eventually
force their leaders to put national interest above self-interest and
sign the proposed agreement in Djibouti. In any event, says another
diplomat, “There is no Plan B.”

As the peace talks limp on, the insurgency is getting stronger. It is
led by the Shabab (Youth), the armed wing of the Islamic Courts Union,
which ran Somalia with some success for a few months in 2006 until it
was smashed, at the end of that year, by the invading Ethiopians, with
American backing. The Shabab has since reconstituted itself, making
ground with tactics copied from Iraq: roadside bombings, the kidnap
and murder of foreigners, local aid-workers and peace campaigners, and
grenade attacks on video shacks showing films or football.

My enemy’s enemy is my friend
Its fighters come under the leadership of a wily red-bearded 70-year-
old jihadist, Hassan Dahir Aweys, and a former deputy commander of the
Islamic Courts, Mukhtar Robow. They are backed by Eritrea, which has
offered sanctuary to the radical rump of the ARS in its capital,
Asmara. Eritrea’s interest is not to help Somalia but to hurt its
bitter enemy, Ethiopia. The Shabab is also backed by fighters from the
Hawiye clan and by hungry young freelance gunmen who represent
Somalia’s huge lost generation. Half the population, 10m-odd before
the exodus, was born after Siad Barre’s regime fell in 1991. Since
then, it is guessed, only 10% have had even rudimentary education;
health care barely exists.

Few foreign governments have shown much interest in trying to end
Somalia’s woes. Diplomats charged with trying to do so are frustrated
and depressed. Meanwhile the suffering is mounting. The UN reckons
3.2m Somalis now survive on food aid. The piracy means that warships
have to escort ships bringing food. If fighting intensifies, that will
be harder—and manipulating food aid could become a weapon, as it was
during fighting in 1991 and 1992, when 300,000 Somalis starved to

BY Hari Jagannathan Balasubramanian / October 06, 2008

…as I now read Richard Dowden’s Africa: Altered States, Ordinary
Miracles, the political outline is becoming clear: one man rule from
1969-1991; then civil war; a failed American rescue attempt; and then
no government; and more recently, Ethiopia meddling in its affairs.
The excerpts I’ll present here, though, are images of a modernizing
Somalia, of how in the absence of a government, a free market thrived
in the 90s and filled the void.

“In 1999 I went back to Somalia to see what had happened.
Considering there was no state and civil war sputtered on, life was
not as bad as I had expected. In some ways it was a lot better. Those
few aid agencies that stayed on were no longer run by expatriate
overlords but staffed by Somalis. Not many foreign aid workers wanted
to be there. Somalis had also managed to get the economy going –
without a single cent from the World Bank or IMF. The new economy was
largely built around a worldwide telephone banking system – a truly
free market system and , at the time, by far the world’s cheapest and
most efficient. Several Somalis who had worked in telecoms in America
bought dishes and telephone equipment and set up phone booths in small
towns. From here, for a dollar a minute, people could call cousins and
aunts and uncles all over the world.”

And how the cell phone is the perfect device for the wandering Somali
herder wanting to learn market prices:

“Somali herders move around in a yearly pattern. In the dry
season, towards the end of the year, they go down to the coast as they
have done for centuries to sell some of their animals to traders who
take them across the Red Sea to the markets of Saudi Arabia. I have
watched them at the port of Berbera, herds of camels and sheep driven
to holding areas where herders have to buy fodder for them and pay for
water at the trough markets. These herdsmen are at a big disadvantage
while they wait to sell their animals. But the mobile phone has
rescued them. They can call up traders in Jeddah directly to find out
the market price of animals there. They now know when to come down
out of the mountains and sell. A week later I watch a herdsman on the
outskirts of Berbera driving his herd towards the port with herding
stick in one hand and in the other a mobile phone – perfect technology
for the nomad.”’

Telecoms thriving in lawless Somalia
BY Joseph Winter / 2004/11/19

Rising from the ruins of the Mogadishu skyline are signs of one of
Somalia’s few success stories in the anarchy of recent years. A host
of mobile phone masts testifies to the telecommunications revolution
which has taken place despite the absence of any functioning national
government since 1991. Three phone companies are engaged in fierce
competition for both mobile and landline customers, while new internet
cafes are being set up across the city and the entire country. It
takes just three days for a landline to be installed – compared with
waiting-lists of many years in neighbouring Kenya, where there is a
stable, democratic government. And once installed, local calls are
free for a monthly fee of just $10. International calls cost 50 US
cents a minute, while surfing the web is charged at 50 US cents an
hour – “the cheapest rate in Africa” according to the manager of one
internet cafe. But how do you establish a phone company in a country
where there is no government?

No monopoly
In some respects, it is actually easier. There is no need to get a
licence and there is no state-run monopoly which prevents new
competitors being established. And of course there is no-one to demand
any taxes, which is one reason why prices are so low. “The government
post and telecoms company used to have a monopoly but after the
regime was toppled, we were free to set up our own business,” says
Abdullahi Mohammed Hussein, products and services manager of
Telcom Somalia, which was set up in 1994 when Mogadishu was still
a war-zone. “We saw a huge gap in the market, as all previous services
had been destroyed. There was a massive demand.” The main airport
and port were destroyed in the fighting but businessmen have built
small airstrips and use natural harbours, so the phone companies are
still able to import their equipment. Despite the absence of law and
order and a functional court system, bills are paid and contracts are
enforced by relying on Somalia’s traditional clan system, Mr Abdullahi

Mobile target
But in a country divided into hundreds of fiefdoms run by rival
warlords, security is a major concern. While Telcom Somalia has some
25,000 mobile customers – and a similar number have land lines – you
very rarely see anyone walking along the streets of Mogadishu chatting
on their phone, in case this attracts the attention of a hungry
gunman. The phone companies themselves say they are not targeted by
the militiamen, even if thieves occasionally steal some of their
wires. Mahdi Mohammed Elmi has been managing the Wireless African
Broadband Telecoms internet cafe in the heart of Mogadishu, surrounded
by the bustling and chaotic Bakara market, for almost two years. “I
have never had a problem with security,” he says and points out that
they have just a single security guard at the front door. Mr Abdullahi
says the warlords realise that if they cause trouble for the phone
companies, the phones will stop working again, which nobody wants. “We
need good relations with all the faction leaders. We don’t interfere
with them and they don’t interfere with us. They want political power
and we leave them alone,” he says.

Selling goats on the net
While the three phone companies – Telcom, Nationlink and Hormuud – are
engaged in bitter competition for phone customers, they have co-
operated to set up the Global Internet Company to provide the internet
infrastructure. Manager Abdulkadir Hassan Ahmed says that within 1.5km
of central Mogadishu, customers – mostly internet cafes – can enjoy
service at 150Mb/second through a Long Reach Ethernet. Elsewhere, they
can have a wireless connection at 11Mb/s. He says his company is able
to work anywhere in Somalia, whichever faction is in charge locally.
“Even small, remote villages are connected to the internet, as long as
they have a phone line,” he says. The internet sector in Somalia has
two main advantages over many of its Africa neighbours. There is a
huge diaspora around the world – between one and three million people,
compared with an estimated seven million people in Somalia – who
remain in contact with their friends and relatives back home. E-mail
is the cheapest way of staying in touch and many Somalis can read and
write their own language, instead of relying on English or French,
which restricts internet users to a smaller number of well educated
people. Just two days after it was opened, the Orbit internet cafe in
south Mogadishu’s km5 was already pretty busy, with people checking
their e-mail accounts, a livestock exporter sending out his invoices
and two nurses doing medical research.

Video calling
And Somalia’s telecoms revolution is far from over. “We are planning
to introduce 3G technology, including live video calling and mobile
internet, next year,” says Mr Abdullahi. But despite their success,
the telecoms companies say that like the population at large, they are
desperate to have a government. “We are very interested in paying
taxes,” says Mr Abdullahi – not a sentiment which often passes the
lips of a high-flying businessman. And Mr Abdulkadir at the Global
Internet Company fully agrees. “We badly need a government,” he says.
“Everything starts with security – the situation across the country.
“All the infrastructure of the country has collapsed – education,
health and roads. We need to send our staff abroad for any training.”
Another problem for companies engaged in the global telecoms business
is paying their foreign partners. At present, they use Somalia’s
traditional “Hawala” money transfer companies to get money to Dubai,
the Middle East’s trading and financial hub. With a government would
come a central bank, which would make such transactions far easier.
Taxes would mean higher prices but Mr Abdullahi says that Somalia’s
previous governments have kept taxes low and hopes this will continue
under the regime due to start work in the coming months. Somalia’s
telecoms companies are looking forward to an even brighter future with
the support of a functioning government – as long as it does not
impose punitive tax rates or state control in a sector which obviously
needs very little help to thrive.

Ayn Rand Comes to Somalia
In the absence of government bureaucracy and foreign aid, business is
starting to boom in Mogadishu.
BY Peter Maass / The Atlantic Monthly / May 2001

The headquarters of Telecom Somalia is filled with the sights and
sounds of Mogadishu-style success. Customers pour through the
entrance, funneling past machine-gun positions that flank the front
doors. After a pat-down by security guards, who take temporary
possession of any guns and knives, they enter the lobby and line up at
the appropriate counters to pay their bills or order new service.
Clocks on a wall display the time in New York, Paris, London, Sydney,
and Karachi—reminders of an outside world that has pretty much left
Somalia for dead. Computer keyboards clatter as workers punch in
information. Customers chat and argue with one another in a gregarious
manner that makes the lobby feel like a town square—all the more so if
a goat that’s being herded down the street happens to stray inside.

Telecom Somalia is the largest company in Mogadishu. It has 700
employees, and it offers some of the best and cheapest phone service
in Africa. It also provides a clue to the possible resuscitation of
the world’s most famous failed state. In 1995, when the international
community decided to wash its hands of Somalia and the last United
Nations peacekeepers left the country, Mogadishu was a Hobbesian
horror show. It remains a miserable and unstable place, a city where
taxi drivers ruin their own vehicles, denting the body work and
smashing the windows, so that thieves will not bother to steal them.
But it is less dismal than it used to be, and better times may be on
the way, owing to a new generation of businessmen who are determined
to bring the lawless capital back to life.

Prime among the city’s entrepreneurial leaders is Abdulaziz Sheikh,
the chief executive of Telecom Somalia. When I visited him last
summer, in a small office on the fourth floor of the company’s
headquarters, he was being blasted by a hurricane-force air-
conditioner that nearly drowned out the constantly ringing phones on
his desk. “You need to be here twenty-four hours a day,” he said,
explaining that he lives as well as works on the premises. Sheikh had
the running-on-fumes look of a campaign chairman in a never-ending
race, but at least he appeared to be winning. Anyone can walk into the
lobby of his building, plunk down a $100 deposit, and leave with a
late-model Nokia that works throughout the city, in valleys as well as
on hilltops, at all hours. Caller ID, call waiting, conference
calling, and call forwarding are available. There are two other
cellular-phone firms in town, and the three recently entered into a
joint venture and created the first local Internet-service provider.
Not all battles here are resolved by murder.

Mogadishu also has new radio and television stations (one night I
watched the Somali equivalent of Larry King Live, in which the
moderator and his guest, one of the city’s leading Islamic clerics,
fielded questions from callers), along with computer schools and an
airport that serves several airlines (although these fly the sorts of
airplanes that Americans see only in museums). The city’s Bekara
market offers everything from toilet paper, Maalox, and Colgate
toothpaste to Viagra, sarongs, blank passports (stolen from the
Foreign Ministry a decade ago), and assault rifles. The international
delivery company DHL has an office in Mogadishu, where its methods can
be unorthodox: if a client has an urgent package that cannot wait for
a scheduled flight out of the country, the company will dispatch it on
one of the many planes that arrive illegally from Kenya every day
bearing khat, a narcotic leaf that is chewed like tobacco but has the
effect of cocaine.

Mogadishu has the closest thing to an Ayn Rand-style economy that the
world has ever seen—no bureaucracy or regulation at all. The city has
had no government since 1991, when the much despised President
Mohammed Siad Barre was overthrown; his regime was replaced not by
another one but by civil war. The northern regions of Somaliland and
Puntland have stabilized under autonomous governments, but southern
Somalia, with Mogadishu at its core, has remained a Mad Max zone
carved up by warlords for whom fighting seems as necessary as oxygen.
The prospect of stability is a curious miracle, not simply because the
kind of business development that is happening tends to require the
presence of a government, but because the very absence of a
government may have helped to nurture an African oddity—a lean
and efficient business sector that does not feed at a public trough
controlled by corrupt officials.

Similarly, the lack of large-scale (and often corrupting) foreign aid
might have benefits as well as drawbacks. Somali investors are making
things happen, not waiting for them to happen. For example, on the
outskirts of town, on a plot of land the size of several football
fields and surrounded by twenty-foot-high walls, workers recently
completed a $2 million bottling plant. Everyone refers to it as “the
Pepsi factory,” even though Pepsi is not involved. The project’s
investors say the plant will become a Pepsi factory: they figure that
if they begin producing soft drinks, Pepsi or some other international
company will want to get in on the market.

Many of the larger companies in Mogadishu, including the bottling
plant, have issued shares, although there is of course no stock
exchange or financial authority of any sort in the city. Everything is
based on trust, and so far it has worked, owing to Somalia’s tightly
woven clan networks: everyone knows everyone else, so it’s less likely
that an unknown con man will pull off a scam. In view of Somalia’s
history, this ad hoc stock market is not as implausible as it may
sound. Until a century ago, when Italy and Britain divided what is
present-day Somalia into colonial fiefdoms, Somalis got along quite
well without a state, relying on systems that still exist: informal
codes of honor and a means of resolving disputes, even violent ones,
through mediation by clan elders.

Of course, the lack of a government poses problems, especially with
respect to the warlords. Sheikh and his fellow businessmen have kept
them at bay by paying them protection money and by forming their own
militias. Those manning the machine guns outside Telecom Somalia are
employees of the company, and when the firm’s linemen go out to lay
new cables (they used to string overhead lines, but those got shot up
by stray gunfire), they, too, are protected by company gunmen. All of
this is costly, so the business leaders have taken steps to bring
about a new government—one that will keep its hands out of their
pockets and focus on providing security and public services. The
process began two years ago, when Sheikh and other entrepreneurs got
fed up with the blight of checkpoints, at which everyone was required
to pay small tributes to armed teenagers affiliated with various
warlords. The businessmen decided collectively to fund a militia to
get rid of the checkpoints, resulting in an armed force that is
overseen by the city’s Islamic clerics. Having succeeded in its main
mission, the militia now serves as an informal sort of police force,
patrolling the streets in an effort to stop petty crime.

With the checkpoints gone and the warlords weakened by the loss of a
key source of income, the business elite is bankrolling a transitional
government that was appointed at a peace conference last August. The
government does not yet control much more than the heavily guarded
buildings that are its temporary headquarters, but it has begun
deploying its own policemen in some parts of the city. The businessmen
are pooling their company security forces to bolster the government
and are trying to lure the warlords’ gunmen to its side with cash
incentives. In February one of the leading warlords, Mohamed Qanyareh,
agreed to support the government in exchange for ministerial posts for
himself and his allies.

If the business community succeeds in returning Mogadishu to something
resembling normalcy, it will have shown that a failed state, or at
least its capital city, can get back on its feet without much help
from the outside world. This would constitute not an argument against
outside intervention but, rather, a lesson that intervention doesn’t
have to be of the UN-led, billion-dollar variety. Before leaving the
city I met with Hussein Abdullahi, a well-educated businessman who
fled Mogadishu in 1991 and wound up in Toronto, driving a taxi. Three
years ago, during a return visit, he was struck by the fact that his
Somali friends were living better at home than he was in Canada, at
the bottom of the immigrant ladder. He decided to move back and now
manages a thriving pasta factory, a bread factory, and a medical
clinic. Sipping an ice-cold Coke in his office, Abdullahi offered to
share a secret that, he promised, could make me rich. A chubby man
with a beatific smile, he leaned forward conspiratorially. “Everything
is possible in Mogadishu now, everything,” he said. “If you have the
money and the knowledge, you can do whatever you want. It is virgin
here.” Perhaps so, but only in the way of scorched earth.

BY Tatiana Nenova and Tim Harford / 11/1/2004

Telecommunications: networks link up
Many local companies have teamed up with international giants such as
Sprint (U.S.) and Telenor (Norway), providing mobile phones and
building new landlines. Vigorous competition has pushed prices well
below typical levels in Africa, and Somalia now has 112,000 fixed
lines and 50,000 mobile subscribers, up from 17,000 lines before 1991.
Yet not all is well. Calling every phone subscriber in Hargeisa, in
the Northwest, would require connections from four telephone firms.
But firms in Mogadishu have now agreed on interconnection standards,
and those in Hargeisa appear to be following suit. The negotiations
were brokered by the Somali Telecom Association, set up with the help
of the United Nations and International Telecommunication Union (ITU)
and head-quartered in Dubai.[1]

Electricity: simple solutions yield results
Entrepreneurs have worked around Somalia’s lack of a functioning
electricity grid, payment systems, and metering. They have divided
cities into manageable quarters and provide electricity locally using
secondhand generators bought in Dubai. They offer households a menu of
choices (daytime, evening, or 24-hour service) and charge per

Water: access but not cheap or safe
Public water provision is limited to urban areas, but a private system
extends to all parts of the country as entrepreneurs build cement
catchments, drill private boreholes, or ship water from public systems
in the cities. Prices naturally rise in times of drought.
Traditionally, destitute families have not had to pay for water, while
the slightly better-off borrow funds from relatives. Nevertheless,
after several years of drought the United Nations estimates that many
families in the Eastern Sanaag have debts of US$50–100 for water.
Moreover, access to safe water is low even by African standards
because neither regulators nor the market have been able to persuade
merchants to purify their water.

Air travel: outsourcing safety
In 1989 the national carrier (partly owned by Alitalia) operated just
one airplane and one international route.[2] Today the sector boasts
about 15 firms, more than 60 aircraft, 6 international destinations,
more domestic routes, and many more flights. But safety is a concern.
Airports lack trained air traffic controllers, fire services, runway
lights, and a sealed perimeter against stray animals, and checks on
aircraft and crew are inadequate. The makeshift solution:
international outsourcing. Somali carriers lease planes, often with
crews from Eastern Europe (the largest, Daallo Airlines, leases a
Boeing from the United Kingdom, to boost customer confidence). And
they operate out of Djibouti, Dubai, and Nairobi, using the facilities
there to check aircraft safety.

Private courts: quick but limited
A recent effort to endow Mogadishu with a functioning court collapsed
when the court tried to levy taxes and take over the privately run
port of El Ma’an. In any case Somalia lacks contract law, company law,
the concept of limited liability, and other key pillars of commercial
law. In some cases Somalis have used offshore registration of
businesses to import legal concepts and services. More commonly,
disputes are settled at the clan level, by traditional systems run by
elders and with the clan collecting damages. Such measures are free—
and fast by international standards. In a case involving the
oppression of minority shareholders in a large livestock company, out-
of-court talks were preferred, the company continued to operate
successfully, and the dispute was settled amicably. But clan-based
systems deal poorly with disputes outside the clan. In a dispute
involving the telecommunications company Aerolite, the interclan
committee of elders awarded the plaintiff from a weaker clan an
unfairly small settlement, and since it was not enforced, he received

Currency: perfect competition for dollars [2001]
Sharp inflation in 1994–96 and 2000–01 destroyed confidence in three
local currencies. U.S. dollars are harder to forge, do not need to be
carried around in large fragile bundles, and, most important, retain
their value. The feeble capabilities of the central bank have allowed
free entry into the currency exchange business, which is as close to
perfectly competitive as is ever likely to be possible.

International fund transfers: hawala system
The hawala system, a trust-based money transfer system used in many
Muslim countries, moves US$0.5–1 billion into Somalia every year. A
person in New York wishing to send money to his family in Tog-waajale
gives the hawala agent in New York the sum in cash, paying a 5 percent
commission. The agent deposits the cash in a local bank account to be
transferred to the company bank account in Djibouti or Dubai, then
alerts the clearinghouse in Hargeisa, which passes details on to Tog-
waajale. When the recipient shows up, the local agent quizzes him
about his clan lineage using questions provided by the relative
overseas as security against fraud. The transaction is usually
completed within 24 hours. Hawala networks are unregulated and do not
always keep records of transactions, but they are coming under
pressure from efforts to combat money laundering.[3]

Savings accounts and traveler’s checks
Somalia has adopted the widespread African institution of rotating
credit associations, which rely on clan links for enforcement and
provide a safe haven for savings. More innovative is the system of
traveler’s checks for the pilgrimage to Mecca, or hajj. Nobody would
accept Somali checks, so Somali firms set up accounts in Saudi banks
and write checks to pilgrims that can be cashed in any branch.

Gaps in private sector provision
In some areas the private sector has made little progress. The Somali
road system, for example, is limited and in poor condition. For a
private supplier to build a road and collect fees to cover the costs
is apparently too hard, partly because of prohibitive transaction
costs and partly because fee-paying users are not the only ones who
benefit from roads. Primary education is another disappointing story.
Some 71 percent of primary schools are privately owned (typically by
parents or communities), but enrollment is just 17 percent. By
contrast, it is 82 percent in West Africa, where countries are richer
and more stable and the government is much more heavily involved in
the economy. Ideally, benevolent government would sort out both
problems. But government that is merely stronger might not help. Where
municipal governments along the Berbera–Hargeisa road have the power
to collect tolls, they do not spend them on maintenance. The failings
of the education system are partly because half of Somalis are nomads.
It is not clear that government would do much better, especially since
the private schools are locally acknowledged to be superior to those
run by local government. Rather than try to create a government system
from scratch, a better policy would be to improve the network of
higher-quality private schools.

The achievements of the Somali private sector form a surprisingly long
list. Where the private sector has failed—the list is long here too—
there is a clear role for government interventions. But most such
interventions appear to be failing. Government schools are of lower
quality than private schools. Subsidized power is being supplied not
to the rural areas that need it but to urban areas, hurting a well-
functioning private industry. Road tolls are not spent on roads.
Judges seem more interested in grabbing power than in developing laws
and courts. A more productive role for government would be to build on
the strengths of the private sector. Given Somali reliance on clan and
reputation, any measures allowing these mechanisms to function more
broadly would be welcome; credit and land registries would be a good
start. And since Somali businesses rely heavily on institutions
outside the economy, international and domestic policies supporting
such connections would help. For governments and aid agencies, the
capability of some business sectors to cope under the most difficult
conditions should give hope and guidance in other reconstruction
efforts. It may take less encouragement than is commonly thought for
stripped-down systems of finance, electricity, and telecommunications
to grow.

1. “Somalia Telecoms Boom without Government,” Somaliland Times, July
22, 2004.
2. United States Institute for Peace, Removing Barricades in Somalia:
Prospects for Peace(Washington, D.C., 1998).
3. Abdusalam Omer, “Supporting System and Procedures for the Effective
Regulation and Monitoring of Somali Remittance Companies
(Hawala)” (United Nations Development Programme, Nairobi, 2003).

Somaliland’s addict economy
BY Tristan McConnell / July 17, 2009

Somalia’s economy is dominated by trade in khat, a narcotic banned in the U.S. and much of Europe. Eye-popping, head-buzzing khat is loved by Somali men who chew the leaves for their stimulant effect. While most of war-torn Somalia’s economy is moribund, khat does a bustling trade estimated at well over $50 million annually. Doctors warn, however, that the drug is not only a drain on limited Somali resources but is also destroying lives.

Hargeisa is the capital of Somaliland, the northern territory nominally independent from Somalia which maintains peace and economic activity, especially the khat trade. Lounging on a rug on the second floor of an ostentatious glass and stone mansion overlooking Hargeisa, Mohamed Yusuf Moge, aptly known as “The Fat Mohamed,” lit up another cigarette. In front of him was a pile of leafless khat twigs. His eyes were wide and red-rimmed, a symptom of the leaves that have been chewed. “We bring in 80-tons of khat every day,” he said. “We have many vehicles and two airplanes for transporting our produce. We control the market: We are the De Beers of the khat industry!”

“We” is “571 Allah Amin,” a family business started 15 years ago that has grown to become Somaliland’s biggest khat importer. Moge is 571’s country rep. Although he would not reveal how much the company makes, it is estimated that its revenue is $320,000 a day. Downtown at the company depot, the second of the day’s trucks arrives from the highland farms of neighboring Ethiopia mid-morning. Thursday is the busiest day of the week because, as one man explained, Friday is the Muslim day of rest so everyone can sleep off their khat hangover.

As the khat truck pulled in, barrow boys and vendors crowded round the tailgate to unload the 70 kg sacks of khat wrapped in hay to keep it fresh. Inside are small bundles of shoots that are bought wholesale for $1 and sold retail for $1.50. “Business is good!” shouted Omar Hersi Warfa, 571’s depot manager, over the clamor. “We are working hard and people are chewing!” Khat vendor Shamis Abdullahi Nur, 50, squatting on the ground nearby, agreed. “Business is very good because of our security and peace,” she said as she directed a sack of khat to be loaded into the back of a beat-up station wagon for the drive across town to her stall. Others pushed smaller consignments away in wheelbarrows. “I’ve been selling khat for over 30 years and now is the best time. There was a time of war, a time when I was a refugee, but now you can see I am sitting here eating my mango,” she said with a sticky, happy smile

Street prices are highest in the early afternoon because this is gayiil time when most men chew the khat and shoot the breeze. They can be found sitting on carpets in shady spots close to khat kiosks, with an ashtray, a flask of sweet tea and a jug of water at their feet. Women often sell khat but are not invited to chew. But increasingly men are also chewing in the morning, the evening and throughout the night. The stoned man in a cotton wrap tottering in a daze along a crumbling potholed road with a fistful of green stems is a common sight. Some warn the national habit does psychological damage. In the mental wing of Hargeisa’s main hospital, a staff member walked past the patients, many of whom were chained to a bed or a post or sat staring vacantly on the floor. “The majority of the men here are affected by chewing khat, most are schizophrenic,” said Faisal Ibrahim.

Dr. Yassin Arab Abdi, the hospital’s chief doctor, said: “Chewing is part of it although there are many reasons for mental illness. Before they used to chew at a certain time for a few hours now there are four sessions 24-hours a day. These people are addicts.” Back at the khat mansion, “Fat Mohamed” Moge and his colleagues, however, extolled the virtues of the drug. “Khat plays a great role in our society. If there’s conflict people have to sit down, chew, talk about it,” Moge said. “It is not like a drug which destroys the mind. It is a stimulant. If you chew khat in the right manner it doesn’t affect you.” But, he admitted, “There are some guys who are addicted, this is because they are jobless and have nothing to do.”

Unfortunately this description applies to many Somali men. The last national government — a military dictatorship — collapsed in 1991. Since then the unrecognized state of Somaliland has declared itself independent while Somalia has descended deeper into war and chaos. Isolation on the one hand and war on the other have left the formal economy shattered with many surviving on remittances sent from relatives abroad. Yet it is not unusual for men to spend $5 or $10 a day on khat, making the habit a huge drain on very limited resources. The government’s entire annual budget is less than $50 million, around $14 a head for each of Somaliland’s 3.5 million citizens. Such is the love of khat that to outlaw it would be political suicide. Nevertheless a senior Somaliland politician, Musa Behe of the opposition Kulmiye party, said, “The Somali man works less because he chews khat. We won’t ban it but we need to raise awareness of the harm khat does.”

Profile : Somalia

Somalia has been without an effective central government since
President Siad Barre was overthrown in 1991. The self-proclaimed state
of Somaliland and the region of Puntland run their own affairs.
* Population: 8.7 million (UN, 2007)
* Capital: Mogadishu
* Area: 637,657sq km (246,201 sq miles)
* Major languages: Somali, Arabic, Italian, English
* Major religion: Islam
* Life expectancy: 47 years (men), 49 years (women)
* Monetary unit: 1 Somali shilling = 100 cents
* Main exports: Livestock, bananas, hides, fish
* GNI per capita: n/a

President: Abdullahi Yusuf Ahmed
Abdullahi Yusuf Ahmed, a former leader of the semi-autonomous Somali
region of Puntland, was chosen by Somalia’s interim parliament as
president of the Transitional Federal Government in October 2004. The
election took place in Kenya because the Somali capital was regarded
as being too dangerous. A former army officer and faction leader, Mr
Yusuf led a guerrilla movement in the 1970s aimed at ousting the
Somali dictator Siad Barre. In the 1990s he emerged as the pre-eminent
leader of his native Puntland region; he declared the territory
autonomous in 1998. He is said to have an authoritarian approach to

Somalia’s disintegration is reflected in its media, which is
undeveloped, fragmented and often partisan. Broadcasters and
journalists operate in an atmosphere which is hostile to free
expression, and often dangerous. In spite of this, diverse and more
professional media outlets have emerged in recent years – in
particular, FM radio stations with no explicit factional links. The TV
and press sectors are weak and radio is the dominant medium. There are
around 20 radio stations, but no national, domestic broadcaster. Many
listeners tune to Somali-language media based abroad, in particular
the BBC Somali service. In secessionist Somaliland and Puntland the
authorities maintain a tight hold on broadcasting.




“Due to its unrecognized status, The Republic of Somaliland has no
official contacts with any other nation. The current foreign policy of
Somaliland is to try to secure international recognition as a
sovereign, stable country, so that international aid can be more
readily secured. Somaliland was independent for a 3 day period in
1960, between the end of British colonial rule and its union with the
former Italian colony of Somalia which status then continued until the
unilateral declaration reestablishing its independence in 1991.
Somaliland’s claims to sovereignty rests on its former independent
status. In addition, the fact that the rest of Somalia is in a state
of chaos while Somaliland is under stable government also lends
credence to its claim. The attitude of the United Nations and the
African Union on the preservation of existing national borders has so
far prevented recognition of Somaliland, despite the examples of the
former status of British Somaliland, and the fact that Eritrea
successfully broke away from Ethiopia and became a recognized country.
An African Union fact-finding mission that visited Somaliland in early
2005 recently published a report that recommended favorable
consideration for recognizing Somaliland’s independence.”

“The population of Somaliland is estimated at around 3.5 million. The
average population growth rate is 3.1%. Population density is
estimated at approximately 25 persons per sq. kilometre. Fifty-five
percent of the population is either nomadic or semi-nomadic, while 45%
live in urban centres or rural towns. The average life expectancy for
the male is 50 and for females it is 55.

The Republic of Somaliland known as the Somaliland Protectorate under
the British rule from 1884 until June, 26th 1960 when Somaliland got
its independence from Britain. On July 1st 1960 it joined the former
Italian Somalia to form the Somali Republic. The union did not work
according to the aspirations of the people, and the strain led to a
civil war from 1980s onwards and eventually to the collapse of the
Somali Republic. After the collapse of the Somali Republic, the people
of Somaliland held a congress in which it was decided to withdraw from
the Union with Somalia and to reinstate Somaliland’s sovereignty.

The country has a republican form of government. The legislative
assembly is composed of two chambers – an elected elder’s chamber, and
a house of representatives. An elected President and an elected Vice-
president head the government. The President nominates the cabinet
which is approved by the legislature. There is an independent

One of the provisions of the National Constitution of the Republic of
Somaliland is the establishment of a Bank to carry out Central Banking
functions. The bank of Somaliland (Baanka Somaliland) was thus
inaugurated in 1994 together with appropriate Banking Laws, to insure
that Banking regulations are carried out to the letter. Board of
Directors has accordingly been appointed together with a Governor of
the Bank, Vice-governor, and a Director General. In addition, the Bank
of Somaliland besides its functions as Central Bank, runs the
activities of Commercial sector.

The Bank’s main objectives are detailed in Article 3 of the
Constitutive Law of Somaliland Bank as follows: Fostering Monetary
stability maintaining the internal and external values of the
Somaliland Currency and promoting credit and exchange conditions
conductive to the balanced growth of the economy of the Republic and
within the limits of its powers, it shall contribute to the financial
and economic policies of the state.”





“Our foreign service hang-ups about recognition are getting in the way
of us… to build adequately on the efforts of the Government of
Somaliland to create a modern, democratic state. In effect, we are
putting the interests of the warmongers in the south ahead of those of
the peace-builders in the north.”

Democracy comes of age in Somaliland
BY Stefan Simanowitz / Contemporary Review / Dec 2005

The rising sun reveals two long lines of people snaking towards a
small concrete polling station in Gabiley, a town in rural Somaliland.
Many of them have walked considerable distances and queued all night
in order to vote in these, the first parliamentary elections held in
the territory for nearly forty years. But although voters across the
country have turned out in force, and although the election is deemed
free and fair by international observers, the result will not be
officially recognised beyond its territorial borders. Indeed, in the
eyes of the international community, Somaliland is a country that does
not exist.

Since its unilateral proclamation of independence in 1991, Somaliland,
an area the size of England and Wales in the north of Somalia, has
struggled to gain international recognition. Whilst neighbouring
Somalia has all but ceased to function as an administrative, judicial
and territorial entity, Somaliland has taken important steps towards
creating a stable working democracy in one of the poorest and most
dangerous regions of the world. A new constitution was adopted in 2001
following a referendum. In 2002 local elections passed off peacefully,
and in 2003 free and fair presidential elections took place. Having
thus laid the foundations of a functioning democracy, the
parliamentary elections of 29th September 2005 were seen as the final
step in the democratisation process and an important milestone in the
transition from a traditional clan-based, single-party-dominated
political structure to a stable multi-party democracy. Many
Somalilanders also regarded them as the final prerequisite for
international recognition.

However, despite the fact that Somaliland may fulfil the requirements
necessary for recognition as a sovereign state, the question of
recognition will be determined by a number of external geo-political
factors. These factors include the African Union’s position on the
sanctity of colonial borders and Somaliland’s role in the so-called
‘war on terror’.

Somaliland was a British Protectorate for over eighty years during the
colonial period. In 1960, it gained independence but formed a hasty
union with the former Italian Somaliland to create the Somali
Republic. In 1969 Mohamed Siad Barre’s military coup brought Somalia’s
flirtation with democracy to an end and planted the seeds of a
secessionist struggle in Somaliland. This struggle culminated in a
brutal three-year civil war in which 50,000 people were killed and
half a million refugees fled. Between 1988 and 1991, Barre’s forces
massacred civilians, laid over two million mines and reduced cities to

In 1991, the overthrow of Barre’s regime plunged Somalia into a state
of anarchy from which it is yet to emerge. Somaliland, however, was
quick to declare independence and, over the years, it has managed to
establish itself as a model of stability, good governance and economic
discipline. Rival militias have been demobilised, mines have been
cleared and refugees have been repatriated. The war-ravaged
infrastructure has been rebuilt and Somaliland now boasts modern
airports, hospitals, ports, power plants and universities. There is a
free press and the central bank manages an official currency with
relatively stable exchange rates. An unarmed police force and
independent judiciary maintain order.

What is most remarkable about this progress is that it has been
achieved with virtually no external help. Whilst economic development
has been heavily supported by Somalilanders in the Diaspora, lack of
international recognition has meant that Somaliland does not qualify
for bilateral aid or support from international financial
institutions. This international isolation has not, however, resulted
in isolationism. Lack of access to external aid has forced this
country of 3.5-million people to become more self-reliant than many
other African states. This self-reliance is reflected in what is
perhaps the most significant of Somaliland’s achievements: its system
of government.

Rather than having a Western democratic model of governance imposed
on them from outside, Somaliland has managed to fuse Western-style
institutions of government with its own traditional forms of social
and political organisation. Its bi-cameral parliament reflects this
fusion of traditional and modern, with the Senate consisting of
traditional elders, and the House of Representatives consisting of
elected representatives.

However, with its history of ‘tribalism’ and internecine fighting, the
key challenge for Somaliland’s new parliament is to try and replace
clan-based politics with party politics. For its first twelve years,
Somaliland had no political parties but instead followed more
traditional clan-based forms of political organisation. Political
parties were introduced during the presidential elections and it was
hoped that the recent parliamentary elections would help to usher in a
representative system without allowing representation to be overtly
clan-based. Clearly, if clan loyalties were to take precedence over
party loyalties, parliament would be seriously weakened. The
traditional clan-based political system had resulted in an under-
representation of some clans and it was hoped that having just three
non-clan-based parties would reduce the extent to which clan
allegiance affected the selection of candidates and the way in which
people voted. A limited number of political parties would force
alliances between clans to develop thereby increasing integration and

In the traditional clan system it is the male elders who make
decisions, and during the nomination process, many candidates were
indeed selected by elders along clan lines. The male-dominated nature
of the selection process was reflected in the fact that only seven of
the 246 candidates were female. There was also evidence that political
parties often chose candidates based on their perceived popularity and
support base. Whilst the absence of voter registration makes it hard
to analyse voter patterns, it would seem from the results that there
is some evidence that regional voting patterns reflect clan
preferences. There is also evidence however, that alliances were
sought between subgroups of different major clans across regions under
the different party umbrellas. This would indicate that, although
tribalism inevitably played some part in the election, it has been

The election itself was very tightly fought. At one stage it seemed
inevitable that the president’s Democratic United National Party
(UDUB) would lose to the Solidarity Party (Kulmiye). However, UDUB was
able to use its powerbase as the governing party to maintain its
percentage of the popular vote, while Kulmiye lost considerable ground
to the Justice and Welfare Party (UCID). The close nature of the
result means that parliament will not be dominated by clan or party,
but will require much greater consensus-building coalitions. It will
nevertheless be interesting to see how party loyalties will be
negotiated against clan interests in the new parliament.

Election Day
Lack of international recognition meant that Somaliland was not able
to access forms of governance support commonly received by post-
conflict areas such as Iraq and Afghanistan. Nevertheless, the
elections were well organised and successfully conducted with over
800,000 voters turning out to the country’s 985 polling stations to
elect 82 members of parliament. This represents a turnout of over 90
per cent.

Like all elections in infant democracies there were some inevitable
teething problems of a practical, administrative and logistical
nature. The absence of a census and voter register meant that a
decision was made to allow voters to vote in any of Somaliland’s six
regions: the only requirements for voting being that voters were 16
years of age and spoke Somali. Inevitably, this led to widespread
attempts at underage and multiple voting. Due to the tradition of
women decorating their hands with henna it was decided that invisible
ink (and black lamps) should be used instead of indelible ink. This
generally proved an effective barrier to multiple voting; however
punishment for those caught varied. In some polling stations those
attempting to vote more than once were merely turned away, often only
to rejoin the queues. In other polling stations people had their shoes
and belts taken away and were made to sit outside the polling station
awaiting detention by the police. Whilst the fact that 30 per cent of
the population are nomadic makes census taking and voter registration
more difficult, there is confidence that both will be in place before
the local elections in 2007.

With illiteracy rates as high as 80 per cent and with many people
having had little or no experience of voting, substantial voter
education was attempted prior to the elections. In addition, ballot
papers had symbols beside the name of each candidate to make it easier
for those that could not read. On the day however, many voters, not
even knowing which way up to hold the ballot paper, chose to announce
their choice to the local chairperson, who marked the paper for them.
Whilst this compromised the secrecy of the voting process, it did not
seem to bother voters who were generally eager to talk about whom they
had voted for.

Shadow of Terror
The shadow that hung over the elections and continues to darken
Somaliland’s future is that cast by the threat of terrorism. On 25th
September the atmosphere in Hargeisa, Somaliland’s impoverished but
relaxed capital, changed. With the elections only days away, several
suspected Islamic militants were arrested following a shoot-out with
police. The following day a cache of arms, including heavy anti-tank
weapons, was discovered in the city. According to the Interior
Minister, one of the men arrested was a senior al-Qaeda operative
allegedly in the region to organise attacks on local leaders and
foreigners. This incident heightened fears of violence especially as
it coincided with the arrival of 76 international election observers
including potentially high-profile targets such as parliamentarians
from South Africa and Europe as well as a former US Ambassador. It
also provided a stark reminder of Somaliland’s precarious position in
the global war on terror.

Whilst Somaliland has managed to avoid the violent lawlessness and
extremism of Somalia, the discovery of Islamic militants in Hargeisa
does not come as a great surprise. Over the last two years, extremists
have murdered four foreign aid workers in Somaliland. Last month four
men were sentenced to death for murdering a British couple in 2003 in
a school they had built. Although the predominantly Sufi form of Islam
practised in Somaliland does not lend itself to extremism, concerns
have been raised by the presence of an increasing number of radical
clerics as well as the porous nature of the border with Somalia.
Mogadishu has become something of a haven for al-Qaeda-affiliated
fighters and Somalia was used as a transit point for the terrorists
who carried out the 1998 attacks on the US embassies in Kenya and
Tanzania, as well as the 2002 suicide bombing in Mombasa.

Whilst the threat of terrorism is clearly a problem for Somaliland, it
also presents an opportunity. Ironically, the discovery of al-Qaeda
operatives in the territory might do more to make Western governments
take notice of Somaliland than the free and fair conduct of their
elections. Somaliland is strategically positioned on the Gulf of Aden
and is also home to what could be an important navel base in Berbera.
Currently the only location in Africa where the US has a military base
is neighbouring Djibouti, and Somaliland is seen by the Americans as a
potentially important ally against the spread of extremism.

Somaliland is conscious that too close a relationship with the
Americans might not be popular with its population, but it also
recognises the advantages that collaboration with the US could bring
in terms of finance, security and long-term stability. By promoting
itself as a non-threatening strategic partner in the ‘war on terror’,
Somaliland could fast-track its entry into the international

Recognition and beyond
Even if the US were to support Somaliland’s right to self-
determination, it is unlikely that they or any other country will
recognise Somaliland without the approval of the Organisation of
African Unity. One of the OAU’s central principles is that African
colonial borders should not be redrawn. This is based on a well-
grounded fear that recognition of ‘separatist’ states could cause the
continent to descend into chaos. However, there is a strong argument
that by breaking a union that it had entered into as an independent
state, Somaliland would be reverting to, rather than redrawing its
colonial borders. It is also worth noting that despite its reluctance
to acknowledge secessionist states, the OAU has recently recognised
the newly formed nations of Eritrea and Western Sahara. It is also
important to note that thirty new countries have been internationally
recognised since 1990, although most of these emerged from the
dissolution of the USSR and Yugoslavia.

Despite OAU intransigence, Somalilanders remain optimistic about the
possibility of recognition and the benefits it will bring. As well as
giving Somaliland access to bilateral aid, recognition would finally
give access to the mining and oil companies eager to exploit
Somaliland’s proven natural resources. Large-scale extraction of oil,
coal, gemstones and minerals could transform this country where 43 per
cent of the population are living in extreme poverty. Whilst
international recognition is not a panacea that will lift Somaliland
out of poverty or eradicate its problems with health, education, food
insecurity, water supply, and HIV/AIDS, it would undoubtedly speed

Although there is still a distance to travel, Somaliland’s
accomplishments are impressive. It has created effective institutions
of state and attained a level of political maturity well beyond its
years. Somaliland provides a useful model of democracy that offers
lessons to us all. It reminds us that democracy is not a static,
prescriptive system but a living idea that is constantly adapting and
taking new forms. In Hargeisa, reminders of how far this small nation
has come are all around. When the rains come, a mass grave beside the
river is exposed. Bones protrude from the red earth, some still tied
at the wrist. Beside the airport road, a rusting Russian tank is
plastered with election posters: a reminder of Somaliland’s war-
ravaged past and a symbol of hope for a democratic future.

{Stefan Simanowitz is a writer and researcher. He was part of the
International Election Observer mission to Somaliland in September


“Following the pattern of the Booroma National Charter, which
formalized the birth of Somaliland during 1993, a new entity – the
Puntland State of Somalia – was established in July 1998 out of a long
Constitutional process that lasted more than two months. The
institutional recognition of the role played by the traditional
leadership in Puntland in the seven-year period of peaceful self-
government in a stateless situation, has come only at the end of this
process. However, the mediation role of the elders has not been so
successful in other regions of Somalia for several reasons. Generally
speaking, outside the Majeerteen context, Somali society lacks a
stable hierarchy of paramount chiefs, and it follows that mediation
can achieve only a local dimension. Nevertheless, in the northwestern
regions (Somaliland) a regionalist feeling has widely spread in the
last thirty years. In this part of Somalia, after the collapse of the
State, the elders have collectively expressed this feeling better than
the SNM, frequently paralyzed by leadership competition.

The local concept of State sovereignty does not naturally match with
the rigid concept of State territory. Instead, it should expand in the
‘official’ territory of other countries in a flexible way and wherever
members of its community are found. This is exactly one of the options
offered to end the conflict and to reconstruct Somalia by the LSE
consultant to the European Union during 1995. Today, is effectively
put into effect in all Somali regions without respect of internal and
external borders. From another point of view, it is a slide back to a
legal status of the community group, confirmed by a citizenship which
corresponds to kinship. These are new elements of extreme importance
to those who are directly or indirectly committed to developing
alternative solutions in the African context, split up between State
sovereignty and ethnic allegiance. What is advancing in Somalia is a
more flexible and a more restricted idea of what the State is and
means in Africa (and elsewhere).”


Badhan, Somaliland, August 18, 2007 – The semi-autonomous regional
state of Puntland (Majeerteenya) declared this week that the recent
formation of `Makhir state’ by eastern Sanag residents is `a load of
hoo ha and a dream’. In a press statement, The Puntland Minister of
Information, Mr Abdirahman Banga in recent press statement strongly
condemned last week’s declaration of a new state in eastern Sanag. Mr
Banga said that the people behind the declaration of Makhir State are
dreaming because it doesn’t exist.

The minister stressed that this area is 100% in the hands and control
of Puntland, though the area recently saw bloody clashes between
forces loyal to Puntland and Somaliland. Soon after the minister’s
statement, the self-appointed President of `Makhir’ state, Mr Jibril
Ali Salad, who used to be a Somaliland parliamentarian, spoke to the
local media in response to the minister’s statements. Mr Salad said,
“Puntland has no business to talk about our new state, and they are
powerless to stop us, and do not have the ability to even come here”.

“Makhir state is acknowledged by its people as a fully-fledged state
independent of Puntland and Somaliland,” added Jibril Ali Salad.
Makhir state was established last week in the Badhan district of
eastern Sanag and its president is Jibril Ali Salad, who up to early
this year was a member of Somaliland’s parliament House of
Representatives. Somaliland’s government has not made any comment
regarding this newly-established enclave inside its border.

Environmental Protection Corps in Maakhir State of Somalia

The roots of the destructive nature of the charcoal trade in Sanaag
region was due to lack of rules and regulations stemmed from the
collapse of the central Somali Government. This finally came to an end
since the declaration of Maakhir State. The Environmental Protection
Corps (EPC) of Maakhir State is growing in numbers and contributing to
a larger slowdown of charcoal trade and illegal gaming of wild

The authority in Maakhir State has banned charcoal trade because of
the environmental destruction and desertification that it does to the
fragile Somali environment. Traders drastically cut entire swaths of
forests, and as a result the trade was flourishing due to the high
demand for charcoal in the Arab Gulf States and other countries in
Asia. These are the reasons why the Environment Protection Corps are
confronting the charcoal profiteers and their militia that have been
menacing the Gebi Valley and Sool Plateau.

It is important to highlight that the newly established Maakhir
Authority did not receive any international aid for this effort. This
largely local effort has made an immediate impact on preserving and
protecting the environment in the Gebi Valley and Sool Plateau. As
indicated by the President of Maakhir Jibril Salad in last Thursday’s
press release; ” Maakhir Administration used traditional conflict
resolution methods to stop the traders and their militia, however
these militia are heavily equipped with automatic firearms who would
not cooperate, but the most effective and successful method for
limiting the harmful distress of our environment was creating and
using the EPC forces.”

The EPC in Maakhir apprehended more than 80 criminals over the past 4
months and jailed them in the district of Dhahar. The administration
constructed a new program of materials, structures, and training to
educate militia while they are held in jail. Jama Dahir Kodah, one of
the program directors of the EPC, told the media that their next
sustainable occurring project is to implement a plantation program in
the region.

The EPC is divided into three forces in the following areas of Maakhir
State and the main base is in city of Dhahar, the capital city of
Boharo region, the new region in Sanaag that Maakhir created:
1) The first battalion is responsible for the protection in vast areas
which stretches from Baragaha-Qol in Southern Sanaag to Eilbuh in
Central Sanaag.
2) The Second Battalion is responsible for an area which stretches
from Dhahar to Western Part of Bari region of Somalia near Boosaaso.
3) The Third and most important battalion have bases along the highway
that links Maakhir to Puntland and does stop and search in suspected




African Union replaces dictators’ club
BY Paul Reynolds / 8 July, 2002

A new wind of change is blowing through Africa. The move from OAU
(Organisation of African Unity) to AU (African Union) is supposed to
be more than the dropping of one letter. It is supposed to represent a
shift from a “dictators’ club” to a people-based grouping. Everything
of course depends on implementation. And given the sad record – and
current problems, such as AIDS – there must be doubts about how much
can be achieved. AIDS alone is reducing life in some countries,
especially in southern Africa, to nothing more than an existence. Life
expectancies are being cut to levels unknown since the 19th Century.
The OAU was set up to develop Africa after colonialism – and to help
liberate Southern Africa from white rule.

The African Union reflects the developments in many parts of Africa in
recent years, as democracy has started to take hold and a new emphasis
has emerged which concentrates less on the battles of the past and
more on the need to improve the lives of ordinary people. The key
shift is that the principle of state sovereignty has been abandoned.

It was the central belief of the OAU that nobody should interfere in
anyone else’s business. That was especially convenient for dictators.
Now the AU has as one of its aims the promotion of “democratic
principles and institutions, popular participation and good
governance.” It will have the right to initiate a so-called “peer
review” of a country’s record, intervene if there is genocide and war
crimes and impose sanctions. Everything of course depends on

High hopes
Nobody is mourning the end of the OAU. Yet when it was founded in
Addis Ababa in 1963, Africa was full of pride and hope. Its leaders
were giants of their day. Africa was coming out of colonial rule and
many had led their nations to independence. It was a time to be bold.
One of the key figures was Dr Kwame Nkrumah, President of Ghana which
became independent (and dropped its colonial name the Gold Coast) in
1957. He believed that the African continent should be “united.” But
defining that unity was the problem. The OAU solved the problem by
praising unity in its language, but avoiding it in its practice. The
differences across the continent were just too many and the principle
which the OAU adopted, of non-interference and non-intervention,
simply meant that member states turned a blind eye to their

When one of the founding members, Emperor Haile Selassie of Ethiopia
gave a speech to the OAU, he was praised in its formal thanks for his
“wisdom.” When the man who overthrew him in 1974 (and later murdered
him and buried him under a latrine), Colonel Mengistu Haile Mariam,
subsequently welcomed delegates back to Addis Ababa, he was thanked
for his “warm and generous hospitality.” Colonel Mengistu went on to
declare his “red terror” in which tens of thousands of opponents were
slaughtered by his neighbourhood committees. It was one of the
tragedies of the OAU that all that happened in the city where it was
founded. There were coups all over the place – including Nigeria
(which had been the jewel in the British colonial crown in Africa and
the hope for parliamentary democracy), Libya (which brought Colonel
Gaddafi to power) and Uganda (in which Idi Amin rose to fame). Kwame
Nkrumah was overthrown in a coup himself. It symbolised the problems
Africa was having in developing stable government. The OAU could say
little and did nothing.

Even after the recent elections in Zimbabwe, it was still bringing
forth its usual kind of statement when it objected to possible
American sanctions: “We are dismayed by this report, which amounts to
interference in the internal affairs of a member state.” It was more
successful over the years in trying to mediate in conflicts between
states. It helped mediate a border dispute between Algeria and Morocco
and between Somalia, Ethiopia and Kenya. One of the ironies was that
the OAU insisted on preserving the borders drawn by the colonial
rulers which often reflected spheres of influence rather than natural
divisions. The view at the time was also that Africa needed time to
settle down. And after all, it was achieving good economic growth of
about 5% a year in the 1960s. And the crisis in Southern Africa, where
white rule was being confronted, was regarded as more of a priority
for the OAU.

Faith lost
But Africa began to fail. Economic growth gave way to debt repayments;
the pioneering efforts to improve public health were swamped by AIDS,
wars were unending and famine stalked the land. The people lost faith
in governments and governments lost interest in the people. According
to Bernard Otabil of West Africa magazine: “The people did not feel
that the OAU satisfied their aspirations. It did not involve people on
the ground. It was top heavy.” The Secretary General of the OAU, Amara
Essy, who has helped to bring the new African Union about, was
scathing about the old grouping: “The OAU is the most difficult
organisation I have ever seen”, he told New African magazine. Mr
Otabil believes that the African Union is on the right course because
it is less grandiose and hopes to be more community based. It is also
offering an economic dimension and seeks African integration into the
world economy. One of the main tasks for the AU will be to push
forward with Nepad, the New Partnership for Africa’s Development. This
offers a bargain with the West – you give us aid and we will put our
house in order. It is a long way from 1963.

African Union supports Somali split
BY Jean-Jacques Cornish / Feb 10 2006

Hopes of recognition for Somaliland’s 15-year independence have been
raised by the favourable report of an African Union mission that
visited the territory last year. The report, a copy of which the Mail
& Guardian has obtained, comes at a time when signs of a new
flexibility in African thinking on boundary issues are emerging. It
suggests that official African aid be tapped by this country of
3,5million people that was effectively destroyed by the Somali
dictator Siad Barre. With the fall of Barre in 1991, the former
British colony broke its union with southern neighbour, the former
Italian colony of Somalia. Since Barre’s departure, Somalia has been
without an effective government.

But Somaliland has pulled itself up by its bootstraps. It has had a
referendum to adopt a democratic Constitution and has organised
presidential and parliamentary elections. Independent international
observers have endorsed all of these. The Organisation of African
Unity refused to recognise Somaliland’s independence, citing the maxim
that there would be chaos if colonial boundaries were not observed in
post-independence Africa.

Unions between Senegal and Gambia, and Egypt and Sudan, among
others, have been broken without affecting the recognition of these
countries. The AU mission accepts this, stating in its report that
Somaliland’s “case should not be linked to the notion of ‘opening a
Pandora’s box’. As such, the AU should find a special method for
dealing with this outstanding case. “The lack of recognition ties the
hands of the authorities and people of Somaliland, as they cannot
effectively and sustainably transact with the outside to pursue the
reconstruction and development goals.

“Furthermore, given the acute humanitarian situation prevailing in
Somaliland, the AU should mobilise financial resources to help
alleviate the plight of the affected communities, especially those
catering for the internally displaced persons and the returnees.
Finally, given also the high potential for conflict between Mogadishu
and Hargeisa, the AU should take steps to discuss critical issues in
the relations between the two towns. That initiative should be taken
at the earliest possible opportunity.”

Iqbal Jhazbhay, an Africa analyst at the University of South Africa,
says the report illustrates a new mood in the AU, an organisation
Somaliland has officially applied to join. “The AU-sponsored peace
deal in Sudan allows for a referendum, five years from now, on whether
the south wants to go it alone. This could not have happened if it
were business as usual. The AU now goes for results, and takes account
of subjective facts and practical realities,” says Jhazbhay. “The AU
clearly recognises the stability created in Somaliland and the
infrastructural development. It is determined to bring peace to the
horn. It is looking at post-conflict reconstruction and it has the
capacity to handle these issues.”


Shortage of coins in Argentina causes problems for consumers and merchants
BY Anil Mundra / June 17, 2009

Think you’ve got cash problems? Just be glad you’re not in Argentina. No one knows the inconveniences of the peso better than Buenos Aires’s convenience store owners. Walter Teich and his wife opened one right in the center of town three years ago. He’s seen a lot of coins come and go, but never so few as right now. “There’s no coins, they don’t exist,” said Teich, standing next to a hand-written sign taped to the cash register telling his customers as much. “And it’s getting worse all the time.” The coin scarcity has created a strange predicament: Merchants regularly refuse to sell their goods or services if it means they’ll have to give coins back as change. For small transactions, they’d rather lose the revenue than spare the change. Teich, for example, won’t make a photocopy — and earn his 20 cents — for anyone who doesn’t offer exact change. He simply doesn’t have the coins, even after he and his wife make separate trips to the bank to buy the daily 20-peso coin ration that the government guarantees. And even the guarantees don’t always work. Many of the banks are as loath to let go of their coins as the small businesses are. A spokesman for the Central Bank of Argentina says that 14 of the largest banks in the country have already been fined 10,000 pesos — about $2,700 each — for failing to change bills into coins. Advertisements can be seen all over the city promoting hotlines for complaints against banks.

The scarcity has prompted everyone to overvalue coins. Black markets have reportedly cropped up for the resale of coins at more than 7 percent above their face value. And starting in June in Buenos Aires, more than half of the 3,200 members of the Chamber of Chinese Supermarkets (ubiquitous small groceries run by immigrants from China, not markets of Chinese food) will start issuing their own special bonds as change for purchases, worth 10 percent more than the coins they would otherwise give customers. The move is expected to cost the groceries less than the 450 to 600 pesos ($120 to $160) they spend weekly buying coins on the black market, according to chamber estimates. The cause of the coin scarcity isn’t clear. The Central Bank says it’s supplying enough: a record 524 million new coins in 2008, up 13 percent from 2007. This year will likely bring a new record, and there are supposedly 5 billion Argentine coins currently in circulation — about 125 per person. Many blame coin hoarders and black-marketeers, several of whom have been caught. But they seem to be effects, rather than causes, of the shortage. Another scapegoat is the city buses, which until now have only accepted coins. The role of buses may soon be seen, once a promised electronic card system takes effect. But history makes it hard to blame the buses too much: The city bus was introduced in Argentina almost a century ago, while the coin problem is new.

The shortage might have been precipitated by the rise in commodity prices in the last few years, said Dardo Ferrer, chief economist at the Market Foundation. There have been reports of people inside Argentina and across its borders melting coins for their metal, which became worth more than coins’s face value when the price of raw materials rose. But even high-rollers who manage to avoid small change face another perennial problem: counterfeit bills. Argentina’s economy is, in Ferrer’s words, a “propitious climate” for banknote forgery. Compared to most of its neighbors, Argentina has enough money going around to support this moderately high-tech crime, but not enough to combat it with all the security measures that richer countries have.

The omnipresence of counterfeit bills here is almost as apparent as the absence of coins. The same small business owners that refuse to give change scrutinize all bills over 20 pesos, rubbing them and tilting them and holding them up to the light, sometimes even under an ultra-violet lamp. New arrivals at the international airport receive leaflets about how to spot fake banknotes. “Everyone I’d spoken to about Buenos Aires added an aside about keeping an eye out for bogus notes,” said U.S. citizen Season Butler on a visit to Buenos Aires from her home in London. But she never thought to check what she got from an ATM at a large bank in a posh section of town. She only discovered later that she had gotten not one but two false bills from the machine, leaving her stuck with 150 non-pesos — about 40 non-dollars — and no recourse. “Generally, counterfeit money circulates through institutional routes,” Ferrer said . “There are very weak controls in the banks. Counterfeit notes are practically permitted.” Which leaves peso users between a rock and a hard place — or, more concretely, between fake paper and no metal at all.

Argentina Is Short of Cash – Literally
By George Selgin / January 5, 2009

Want change for a five-peso (about $1.70) note? Don’t try getting it at a store, unless you plan to buy something — and be ready in that case to have the merchant refuse your business rather than part with precious centavos, or to have him hand you bon-bons instead of coins. Banks aren’t much help either. The law says they’re supposed to give you up to 20 pesos worth of change; but most openly flout that rule, supplying just a few pesos worth, or even hanging out “No Change” signs, like the ones at retailers’ kiosks.

Why the shortage? Argentina’s central bank blames it on “speculators,” meaning everyone from ordinary citizens, who stockpile coins, to Maco, the private cash-transport company (think of Brinks) that repackages change gathered from bus companies to resell at an 8% premium. But those explanations ring false. “Black marketeering” would not exist if coins were easy to get in the first place. After all, Argentines could just as easily hoard razor blades or matchbooks. Yet there’s no shortage of those. What’s so special about coins? The answer is that coins are supplied by the government alone. “Put the federal government in charge of the Sahara desert,” Milton Friedman said, “and in five years there’d be a sand shortage.” If Argentina wants to end the coin shortage, it ought to give up its monopoly.

Crazy? Not if history is the guide. Over two centuries ago, Great Britain faced a coin shortage more severe than Argentina’s — so severe that it threatened to stop British industrialization in its tracks. People struggled to get coins for everyday use. The average worker was lucky to make 10 shillings a week, while the smallest banknotes were for 10 times as much. So the coin shortage even prevented factories from paying wages. Like Argentina’s government today, the British government wasn’t able to end the shortage. Yet the shortage did end — thanks to private-sector action. Fed up with the government’s inaction, British firms started minting their own coins. Within a decade a score of private mints struck more coins than the Royal Mint had issued in half a century — and better ones: heavier, more beautiful, and a lot harder to fake. Yet they were also less expensive, since private coiners sold their products at cost plus a modest markup, like other competitive firms, instead of charging the coins’ face value, as governments like to do. Finally, when those who had accepted the private coins for payment went back to the issuer to redeem them, issuers offered to exchange their coins for central bank notes at no cost.

Armed with this history, it takes no great flight of fancy to imagine Argentine firms today, including supermarket and retail chains like Carrefour and Wal-Mart, reputable banks like HSBC Bank Argentina, and transport companies like Metrovias, issuing their own centavos and one peso coins. By doing so they’d no longer be at the mercy of the government, or of private coin distributors with their hefty commissions. Ordinary citizens would benefit too. So why hasn’t private coinage already taken hold? Most likely because private firms don’t expect the government to put up with it. In Great Britain, despite all the good they had done, private coins were banned in 1817, and issuers were confronted by a mass rush to redeem their coins. This happened, by the way, when official British coins were still in very short supply.

If Argentina wants to end the shortage, it ought, not only to tolerate private coinage, but to sanction it. It can do so, while eliminating any risk that such coinage would be abused, through very simple legislation. It should allow any private firm to issue distinctly marked coins, perhaps subject to some minimal capital requirements, while making it clear that no one need ever accept any privately issued coins, even as change for purchases. Such a law may be all that’s needed to solve the coin shortage, while also preventing anyone from forcing people to accept money they didn’t trust. Anyone, that is, except the Central Bank of Argentina.

Inside the world’s most annoying economic crisis
BY Joe Keohane / Dec. 3, 2008

It was no surprise that the cab driver tried to rip us off. We’re in Buenos Aires, Argentina, after all, and we’d made the rookie error of requesting a vague destination instead of giving a precise address—naturally he interpreted this as a license to take us from La Boca to the Plaza de Mayo by way of southern Nicaragua. What we hadn’t expected was the predicament the driver found himself in when it came time to pay. The fare had come to 14 pesos and 6 centavos. I proffered a 20-peso note (worth about $6.70), and he handed back 50 centavos, suggesting that I was going to be shorted 44 centavos. Then he realized that continuing on this course would require him to give me two 2-peso notes and a 1-peso coin. He sighed dramatically and gave me three 2-peso notes instead. Factoring in the 50 centavos he had already handed over, this effectively reduced the fare to 13.50 pesos, which, for reasons I’ll get to in a moment, is actually more than 14.50 pesos.

Welcome to the world’s strangest economic crisis. Argentina in general—and Buenos Aires in particular—is presently in the grip of a moneda, or coin, shortage. Everywhere you look, there are signs reading, “NO HAY MONEDAS.” As a result, vendors here are more likely to decline to sell you something than to cough up any of their increasingly precious coins in change. I’ve tried to buy a 2-peso candy bar with a 5-peso note only to be refused, suggesting that the 2-peso sale is worth less to the vendor than the 1-peso coin he would be forced to give me in change. When my wife went to buy a 10-trip subway pass, which retails for 9 pesos, she offered a 20-peso note and received 12 pesos in bills as change. This is commonplace—a daily, if not hourly, occurrence. It’s taken for granted that the peso coin is more valuable than the 2-peso note.

No one can say what’s causing this absurd situation. The government accuses Argentines of hoarding coins, which is true, at least to some extent. When even the most insignificant purchase requires the same order of planning and precision as a long-range missile strike, you can hardly blame people for keeping a jar of monedas safe at home. The people, in turn, fault the government for not minting enough coins. In fact, the nation’s central bank has produced a record number of monedas this year, and the problem has gotten even worse. Everyone blames the bus companies, whose buses accept only monedas. (Buenos Aires’ 140-plus bus routes are run by a number of separate, private companies.) These companies, exploiting a loophole in the law, run side businesses that will exchange clients’ bills for monedas for a 3 percent service fee. This is legal, but the business community also routinely complains of being forced into the clutches of a thriving moneda black market—run by the local mob, or the bus companies, or both—in which coins sell for a premium of between 5 percent and 10 percent. The bus companies steadfastly deny any involvement in this racket, but their claims were undercut by the discovery of a hoard of 13 million coins, amounting to 5 million pesos, in one company’s warehouse this October.

Those coins were confiscated, but the 5 million pesos were returned to the company—in bills—which could be seen as a fine of sorts. The government has also passed laws requiring banks to provide customers with 100 pesos’ worth of change on demand. (The banks ignored this because, they said, their precious monedas would then wind up on the black market.) The government recently lowered that figure to 20 pesos (which the banks still ignore) and demanded that the bus lines adopt a pass system, like the subway’s, to keep more change in circulation. (All this did was create a stalemate over who would pay for the new equipment.)

The history of Argentina in the last 100 years is a story of great potential overwhelmed by a genius for acts of pointless economic self-destruction, but even for the Argentines, this is an exasperating state of affairs. The economy is still growing at a robust clip of around 8 percent year over year, but out-of-control inflation, estimated by independent analysts to be around 25 percent, has effectively devalued the currency, making it ironic that coins have become such an obsession. But an obsession they are, worthy of Argentine writer Jorge Luis Borges’ story “The Zahir,” about a man driven mad by contemplating a single coin.

Nowadays, without exact change, porteños also spend their days haunted by the specter of metal money. They are casually shortchanged by waiters or pushed to buy more produce in order to bring the total closer to a figure that won’t require the vendor to provide change. People with a keen strategic sense maintain a well-diversified hoard of coins and painstakingly build alliances with local shopkeepers or bank tellers, conspicuously proffering coins for one purchase or deposit in the hopes of being indulged when they’re short of change at some point in the future. Street musicians, like one we talked to in the San Telmo neighborhood, have to preface their performances by announcing that they have change, or they risk starving to death. Subway employees are occasionally forced to wave commuters through because they are out of coins.

Stranger still, change mania doesn’t end at coins. The moneda shortage has produced a rising disinclination to provide change at all, even in bill form, at least not without histrionic sighs and eye-rolling. Last night, for instance, in a very crowded bar, I handed the waitress a 100-peso note to pay a 20-peso bill, and I was made to wait 30 minutes for change. The 2-peso note is thrown around with a contemptuous disregard usually reserved for metal money, at least in countries where less money isn’t occasionally worth more than more money. But 5s and 10s are harder to come by, because they’re actually worth something. In many cases, they’re more worth more than 20s, because you can buy things with them, which isn’t always true with a 20. In some cases, 5s and 10s are effectively worth more than 100s—which, unless you want to take out the equivalent of $20 at a time, are pretty much the only bills ATMs here dispense. Save for large purchases, 100-peso notes are functionally useless—imagine trying to trade a bar of platinum bullion for a sandwich and a coffee. In several instances, I’ve found myself buying an expensive lunch, costing, say, 60 pesos, just to break a 100 into more useful constituent parts so I can buy something I need, like beer.

Until someone figures out how to solve the crisis, money, at least money of a certain form, will remain like the painted lanes on the grand chaotic avenues of Buenos Aires: merely a set of loose guidelines to be interpreted by the individual, depending on the circumstances. It’s exasperating, but there are signs of hope. Every once in a while, something happens that suggests the cosmos has decided to intervene and even things out. Last week, at the ferry terminal, I handed a cashier a 10-peso note for a 10.50 tab. He just shrugged and took it without a word of complaint. Not without a twinge of guilt, I wordlessly returned a precious 50-centavo coin to my hoard. A hoard I plan to release, in one spectacular all-moneda purchase, the day I leave the country.

Argentine inflation means daily scramble for coins / October 17th 2008

A kiosk owner bribes a bank worker with cookies to break bills. Subway workers let commuters ride free because they can’t change their cash. Bus companies resell the coins they collect at a steep black market markup.
Argentines are increasingly scrambling to get their hands on pocket change for everyday transactions, as soaring inflation makes the copper and aluminum that coins are made of worth more than their face value. Many suspect profit-seeking hoarders are scooping them up to stow away.

Argentine annual inflation officially hit 8.7 percent in September, but independent economists say the government is lowballing that rate, which they claim is closer to 25 percent. One peso — worth about US$0.31 — now buys so little, it makes more sense to melt down its metal than to save the 20 pesos it would take to buy an average box of chocolates, said economist Diego Giacomini, a consultant at Economia & Regiones in Buenos Aires. “If there were a 100 peso coin, it wouldn’t disappear like we see happening now with smaller coins, because the currency’s value would be greater than the value of the metal,” Giacomini said.

Argentines love a good conspiracy theory, and there is little evidence that people are dealing in coin scrap just yet. But the scarcity of coins has triggered a black market, with dealers collecting and illegally reselling them at a hefty markup of up to 10 percent. That only takes more coins out of circulation, and the government is struggling to keep up with demand. The Central Bank says it injects new currency into the market every few months, making sure there are about 125 coins per person in circulation.

The Justice Ministry is meanwhile investigating Buenos Aires currency distributor Maco S.A., for allegedly withholding nearly 5 million pesos in change to resell on the black market. The company denies the allegations.
An anonymous Central Bank hot line has meanwhile received 5,000 complaints about black market coin sales since it opened in February, according to the bank. Each 50 cent coin contains about 5.3 grams of copper and 0.5 grams of aluminum, together worth about a sixth of the coin’s monetary value.

But inflation is rising so fast that in a few years, the coins will be worth less than the metal they are made of. Unless, that is, the global financial crisis lasts so long, and pushes Argentine growth rates and copper prices so low, that the coin regains its monetary value and hoarders return it to circulation. In other words, global financial calamity just might make it easier for Argentines to find pocket change. Meanwhile, Maxi Rosa has his own plan. To keep his busy kiosk running in downtown Buenos Aires, he gives weekly cookies and chocolates to a banker friend who changes his bills into coins.

It’s a more reliable source than he had before, when he said he paid a bus company 310 pesos in paper to get back 300 pesos-worth of coins. “We’re really lucky to have the contact, and because we always have change, we have a lot of regular customers,” said 20-year-old Rosa. The capitals’ subway system had no such backup plan: last weekend attendants ran out of change, forcing them to let passengers ride free for two days. On Oct. 7, Buenos Aires’ state government passed a law to levy bus companies that resell coins with a 2,000-peso (US$624) fine and indefinitely suspend their service. The Central Bank has also opened stands at three major train stations to dispense up to 20 pesos of coins per person. But passengers complain they don’t have time to wait in long lines two or three times a week to get change. What the government really needs to do, economist Giacomini said, is confront the root cause that’s driving people to hoard the metal coins and worsen the shortage. “First, they need to deal with inflation,” he said.

“In the years immediately following the dissolution of the Soviet Union, many pay phones were still operating on kopeck coins, even though the calls themselves were priced much higher. Would-be callers would have to go buy “tokens”—in actuality, old kopeck coins—to be able to operate the phones. A poster on Marginal Revolution muses that while he was at a conference in Moscow in 1992, his “wife wanted to call somebody, and had to give three roubles to obtain two kopeks to make the call. That would be like paying three dollars to get two pennies in the US.”

Sharp practice of melting coins
BY Subir Bhaumik / 26 June 2007

Millions of Indian coins are being smuggled into neighbouring Bangladesh and turned into razor blades. And that’s creating an acute shortage of coins in many parts of India, officials say. Police in Calcutta say that the recent arrest of a grocer highlights the extent of the problem. They seized what they said was a huge coin-melting unit which he was operating in a run-down shack. The grocer confessed to melting down tens of thousands of Indian coins into razor blades which were then smuggled into Bangladesh, police said. “Our one rupee coin is in fact worth 35 rupees, because we make five to seven blades out of them,” the grocer allegedly told the police. “Bangladeshi smugglers take delivery of the blades at regular intervals.”

Out of circulation
Police say that initially the smugglers took coins into Bangladesh and then melted them down, but as the scale of the operation has increased, more and more criminals in India are melting them down first, and then selling them as razor blades. To deal with the coin shortage, some tea gardens in the north-eastern state of Assam have resorted to issuing cardboard coin-slips to their workers. The denomination is marked on these slips and they are used for buying and selling within the gardens. The cardboard coins are the same size as the real ones and their value is marked on them. “We will commit an offence if these cardboard slips go out, but we have to use them in our gardens because there are hardly any Indian coins in circulation here,” said a manager of a tea garden in northern Assam. He is not willing to be named because the disclosure could cause legal complications for the estate.

‘Do our best’
Indian revenue intelligence officials say millions of coins are finding their way into Bangladesh. They say they have alerted the paramilitary Border Security Force (BSF) – which is deployed on the India-Bangladesh border – to check the smuggling. “We are aware of our coins going across the border in some quantities and we will do our best to stop it,” senior BSF official SK Datta told the BBC. Revenue intelligence officials, who do not wish to be named, say criminals can make five to six blades from a five-rupee coin. “We are investigating this closely,” said one official posted in north-eastern India. Earlier, Indian coins were being melted in huge quantities in places like Calcutta. The mints took corrective action – scaling down the metal content of the coins – but that has not stopped the shortages.

Distributing coins
The authorities have taken various steps to deal with the problem. In Calcutta alone, India’s central bank – the Reserve Bank of India – has distributed coins worth nearly six million rupees ($150,000) to overcome the shortage in the last two weeks, bank treasurer Nilanjan Saha said. Long queues form outside the bank’s regional office in the city centre every time this happens. Unscrupulous touts set up makeshift shops and collect as many of the coins as they can, only to sell them later at a premium. “We stand in long queues but the coins are finished within no time. Those in front pick them up and we can see some of them later selling the coins at a big margin,” complained small trader Nitai Banik, who needs a lot of coins for his retail trade in small garments.

Begging coins
Shopkeepers ask customers to buy more to make it a round figure so that small change does not have to be given out. “The shopkeepers give us toffees or cigarettes to make it a round figure,” said student Debolina Sen. In desperation, some shopkeepers have even turned to beggars to maintain their coin supplies. The beggars get given coins by passers-by and then sell them on at a profit. “They charge a smaller premium, much less compared to the touts outside the Reserve Bank,” says businessman Tarun Jain. The coin shortage is most acute in the north-eastern frontier town of Agartala, right on the border with Bangladesh and believed to be a major centre for contraband trade with Bangladesh. Here, rickshaw pullers tell you that they cannot provide any coins in change because they have none left. “So we have to accept very soiled notes of one or five rupees, so soiled that the banks will not change it,” says Agartala resident Sushil Choudhury. In Guwahati, Assam’s capital and the business hub of India’s northeast, small coins like 50 paisa have completely dropped out of circulation.

They’re horrid and useless. Why do pennies persist?
BY David Owen / March 31, 2008

One problem with pennies is that their metal value exceeds their face value. Several years ago, Walter Luhrman, a metallurgist in southern Ohio, discovered a copper deposit of tantalizing richness. North America’s largest copper mine—a vast open-pit complex in Arizona—usually has to process a ton of ore in order to produce ten pounds of pure copper; Luhrman’s mine, by contrast, yielded the same ten pounds from just thirty or forty pounds of ore. Luhrman operated profitably until mid-December, 2006, when the federal government shut him down.

The copper deposit that Luhrman worked wasn’t in the ground; it was in the storage vaults of Federal Reserve banks, and, indirectly, in the piggy banks, coffee cans, automobile ashtrays, and living-room upholstery of ordinary Americans. A penny minted before 1982 is ninety-five per cent copper—which, at recent prices, is approximately two and a half cents’ worth. Luhrman, who had previously owned a company that refined gold and silver, devised a method of rapidly separating pre-1982 pennies from more recent ones, which are ninety-seven and a half per cent zinc, a less valuable commodity. His new company, Jackson Metals, bought truckloads of pennies from the Federal Reserve, turned the copper ones into ingots, and returned the zinc ones to circulation in cities where pennies were scarce. “Doing that prevented the U.S. Mint from having to make more pennies,” Luhrman told me recently. “Isn’t that neat?” The Mint didn’t think so; it issued a rule prohibiting the melting or exportation of one-cent and five-cent coins. (Nickels, despite their silvery appearance, are seventy-five per cent copper.) Luhrman laid off most of his employees and implemented his corporate Plan B: buying half-dollars from banks and melting the silver ones (denominations greater than five cents aren’t covered by the Mint’s rule); mining Canadian five-cent coins (which were a hundred per cent nickel most years from 1946 to 1981); and lobbying Congress.

Luhrman’s experience highlights a growing conundrum for the Mint and for U.S. taxpayers. Primarily because zinc, too, has soared in value, producing a penny now costs about 1.7 cents. Since the Mint currently manufactures more than seven billion pennies a year and “sells” them to the Federal Reserve at their face value, the Treasury incurs an annual penny deficit of about fifty million dollars—a condition known in the coin world as “negative seigniorage.” The fact that the Mint loses money on penny production annoys some people, because one-cent coins no longer have much economic utility. More than a few people, upon finding pennies in their pockets at the end of the day, simply throw them away, and many don’t bother to pick them up anymore when they see them lying on the ground. (Breaking stride to pick up a penny, if it takes more than 6.15 seconds, pays less than the federal minimum wage.)

Various people have proposed various remedies, one of which is to get rid of pennies altogether. This is a step that many countries have taken with their least valuable coins—among them the United States, which stopped making half-cents in 1857, when a half-cent, by almost any measure, had significantly more purchasing power than a dime does today. There are problems, though. One is that many people are quite attached to one-cent coins. Another is that some people fear that merchants in a penny-free economy, when making change on cash purchases, might be more inclined to round up than to round down, thus penalizing consumers. A third is that eliminating pennies would increase our reliance on nickels, which now cost almost ten cents to manufacture and so generate even more negative seigniorage, per coin, than pennies do. What is to be done?

America’s assortment of circulating pocket change is anything but immutable. Colonial-era settlers initially had no coins (or bills) of their own. They therefore depended heavily on barter, and conducted cash transactions with British coppers and other foreign coins, especially Spanish reals. (The “dollars” mentioned in Article I of the Constitution were actually eight-real coins, also known as pieces of eight.) British silver coins were scarce in America because Britain, which had little domestic access to precious metals and hoped its colonists would soon get busy shipping treasure in the opposite direction, forbade their export. In 1702, the alchemy-obsessed master of the British Royal Mint, Isaac Newton, melted down and minutely analyzed the coins of a number of countries to determine their exact content. The results of Newton’s assay were used, among other things, to set the bewildering, constantly shifting exchange rates that were a part of daily commercial life in England and America in the early eighteenth century.

Congress created the Mint in 1792, and its original headquarters, in Philadelphia, was the first government building to be erected under the authority of the Constitution. The first U.S. coins, produced that year, were silver “half dismes,” or half-dimes. They were worth a twentieth of a dollar and may have been manufactured, at least in part, from silverware donated by President and Mrs. Washington. The first U.S. coins to circulate widely were probably one-cent pieces struck in 1792 or 1793. They were made of pure copper, and were slightly larger in diameter than a Sacagawea dollar and about half again as heavy. The first Lincoln cent was minted in 1909, on the hundredth anniversary of Lincoln’s birth. It replaced the Indian-head cent, and was the first circulating American coin to be stamped with the likeness of a real, identifiable person. It was made of bronze and weighed about twenty-five per cent more than the cent we use today.

The scarcity of one metal or another has prompted sporadic crises in American coin production. In 1943, the Mint, hoping to preserve copper for military uses, experimented with a number of materials, including Bakelite, before settling on galvanized steel. These coins were prone to rust, especially near the edges, and were so unpopular that in 1944 the Mint went back to using copper, much of it from spent shell casings. Enough steel cents were made, however, that they were still turning up twenty years later, when I made a brief go at coin collecting. (I had all three versions—from the Mints in Denver, Philadelphia, and San Francisco.) In the early seventies, when the value of the copper in a penny had risen to almost a penny, the Mint produced about a million and a half Lincoln cents made of aluminum. Congress rejected that idea, and the Mint destroyed all the aluminum coins, except for a dozen samples that were kept by congressmen and others. Possessing these coins, which are dated 1974, is against the law, since they are considered by the Mint to be purloined government property; one of them—which numismatists refer to, ominously, as the Toven Specimen—is thought to be held by heirs of a Capitol police officer.

The most significant shift in the metal content of American coins occurred in 1965. The price of silver had risen so high that some bank employees were asking to be paid in change, and Congress passed a law that required the Mint to stop using silver in almost all coins. The new, silver-free coins were of the “sandwich” variety still used today; they have a pure-copper core and thin top and bottom layers made of a copper-nickel alloy. Sacagawea dollars and the new Presidential dollars also have copper cores, with a coating of manganese brass.

Coin denominations higher than five cents don’t present the same seigniorage challenge that pennies and nickels do, at least for the time being; a dollar coin, for example, costs only about twenty cents to make. In 2006, the Mint cleared $750 million on revenues of $2.3 billion, so it’s in no immediate danger of violating its obligation not to spend more on manufacturing coins than it receives, from the Federal Reserve and other coin consumers, for manufacturing them. (Last year, the Mint sold some eight hundred and seventy-two million dollars’ worth of non-circulating coins and medals to collectors and to people who like to keep savings in precious metals.) Nevertheless, Edmund Moy, the Mint’s director since 2006, worries about long-term trends in metals prices, and he and his staff have asked Congress to allow the Mint to periodically adjust the content of coins on its own, without going through the time-consuming process of seeking specific legislation. Congress probably won’t give Moy everything he wants, but the problem is unlikely to go away, since demand for base metals is strong all over the world.

n January, I fulfilled a long abandoned schoolboy ambition by taking a field trip to watch coins being manufactured, at the Mint in Philadelphia. On arrival, I was required to empty my pockets of change, to make it easier for the Mint’s police force to determine later whether I had tried to smuggle anything out. Then I met John M. Mercanti, a substantial, bearded middle-aged man, who is the Mint’s supervisory design and master tooling development specialist, and is identified by a sign on his office door as the Big Cheese. “My wife laughs at me, but I pick up pennies,” he said. “To me, a penny is a work of art that a lot of time and effort have gone into, and I’m not just going to let it lie on the sidewalk. It becomes a personal thing.”

New coins begin in Congress, which sets the themes, the metal content, and other details in consultation with the Mint and various interested parties, including coin collectors and historians. Next, the designs are created by Mercanti’s staff of six in-house artists and a larger group of freelancers. For about a century, the Mint’s sculptors have made eight-inch prototypes from clay and other materials, after which a machine called a Janvier transfer engraver has rendered those images onto coin-size metal dies. Now the Mint is moving toward an entirely digital system. I met Joseph Menna, a young staff artist who earned a master’s degree at the New York Academy Graduate School of Figurative Art, and he let me try his virtual-engraving tool, which looked like a dentist’s drill and gave realistic tactile feedback as I slashed away, on a computer tablet, at the face of James Madison. One of the biggest challenges of coin design is portraying realistic-looking three-dimensional facial features on a metal surface that is nearly flat. This difficulty explains why the faces on coins are almost always shown in profile: doing so keeps noses recognizable. The 2006 nickel, which features a likeness of Jefferson and was sculpted by Menna’s former colleague Donna Weaver, is the first circulating U.S. coin to have a forward-facing portrait; it is considered by coin aficionados to be an engraving tour de force.

After I had finished defiling Madison’s face, Tim Grant, the Mint’s public-affairs manager, led me down a staircase to the production floor, which was vast, clean, and noisy. Once specialists have turned coin designs into working dies, coin manufacturing proceeds much as it did in President Washington’s day, adjusted for technology. A machine punches coin-size blanks, called planchets, from long coils of sheet metal, and another machine, in a process called upsetting, gives each planchet a raised rim. (All coins have this rim; without it their surface features would make them unstackable.) Another machine then stamps designs onto both sides simultaneously, one planchet at a time. “To make a penny takes thirty-five tons per strike,” Grant said, as I ran my hand through a bin of warm, new coins. “We can make about a million pennies from one set of dies.” All this happens very quickly. The U.S. Mint took more than two years to manufacture its first million coins; the Philadelphia Mint now makes that many every forty-five minutes or so.

Conveyor belts feed finished coins into large, box-shaped bags made of white-and-blue plastic webbing. Grant and I watched as workers loaded a number of these bags, each of which weighed more than a ton, onto trucks, for shipment to Federal Reserve banks. The trucks had nondescript markings—a superfluous precaution, probably, since robbing one would be a chore: a typical Mint bag full of pennies contains only about four thousand dollars’ worth, yet you’d need a forklift to move it to the back of your getaway vehicle.

As I watched new pennies spewing from the Mint’s stamping machines, I couldn’t help wondering about the fate of all the pennies that had gone before them. The average life span of American pocket change is thirty years. During the past thirty years, the U.S. Mint has produced something like a half trillion coins, most of them cents, yet the Mint estimates that only about three hundred billion coins are currently in circulation. This estimate is probably high, since it includes coins that haven’t budged from their coffee cans in years. Even so, the missing change is worth billions. Where is it? Except in rare cases, old coins, unlike old banknotes, aren’t withdrawn from circulation by the Federal Reserve. People simply mislay them, eventually, in one way or another, and in most cases they disappear as permanently as if they had been dropped into the sea. Pocket change leaks from the economy the way air leaks from a balloon, and most of what leaks is pennies.

n November, 1989, Representatives James A. Hayes, of Louisiana, and Jim Kolbe, of Arizona, having had just about enough of all this, introduced the Price Rounding Act. Its purpose was to phase out the penny by requiring that all cash transactions be rounded to the nearest five cents. The bill was actively opposed by Americans for Common Cents, a lobbying organization that had been founded specifically to defeat the legislation. A.C.C.’s main funding came from Jarden Zinc Products, which is one of the nation’s largest producers of zinc, and which has supplied the U.S. Mint with penny planchets since 1982.

In 1990, A.C.C. enlisted Raymond E. Lombra, an economics professor at Pennsylvania State University, to make an academic case for preserving one-cent coins at a Senate Banking Committee hearing on the Price Rounding Act. Lombra, after studying prices at a retail store, had concluded that rounding cash transactions would be more likely to raise consumer expenditures than to lower them. He testified that eliminating pennies would “impose a significant and regressive rounding ‘tax’ on the American public”—about six hundred million dollars annually, or, at the time, a little more than two dollars per American. He also said that any putative productivity gains from eliminating cent coins were “an illusion,” since “cash-register clerks would not suddenly be free to stock shelves or clean stores if the penny were no longer in circulation.”

Lombra and A.C.C. prevailed, and the Price Rounding Act was tabled out of existence. In July, 2001, Kolbe—this time alone, Hayes having retired—tried again. His new bill, the Legal Tender Modernization Act, played a supporting role in an episode of “The West Wing”: Sam Seaborn, the White House deputy communications director (played by Rob Lowe) is given the task of coming up with a plausible-sounding excuse that President Bartlet (played by Martin Sheen) can use in declining to support the Legal Tender Modernization Act (played by the actual bill), and he settles on the fact that the Speaker of the House is from Abraham Lincoln’s native state. The bill’s opponents in real life also included Lincoln-loving people from Illinois, along with people who hold “penny drives” for charity, people who would prefer that everything remain the way it is now, and, of course, Americans for Common Cents. The bill went nowhere. Kolbe tried one more time, in 2006, when the price of zinc was at a record high and inflation had further eroded the penny’s minimal purchasing power—again without success. He retired the following year, leaving Congress without an active penny-hater.
In 2001, Lombra published a paper in the Eastern Economic Journal, in which he elaborated on a number of the ideas that he had introduced in his congressional testimony a decade before. The direct and indirect effects of the “rounding tax,” he wrote, would be “no less than $1.5 billion over five years and $2.5 billion over a decade,” estimates that he described as “conservative.” Yet Lombra’s analysis was highly selective. Consider, after all, the opportunity cost of storing billions of dollars’ worth of small coins in dresser drawers, often for decades, and then losing track of them entirely. This taxlike penalty is self-imposed, since no law prevents anyone from filling his pockets with pennies before leaving the house, but even people who do use small change bear the burden of lugging it around and sifting through it—the old-lady-with-a-coin-purse problem, which has doubtless been slowing checkout lines since the Lydians invented coinage, in 500 B.C. or so. Nor is it clear that merchants, who have to cover the considerable cost of handling, sorting, transporting, and redeeming excess change, would invariably abuse a rounding system. When I was in Washington visiting the executive director of A.C.C., I made three small purchases in the gift shop of my hotel and noticed that the cashier avoided handling pennies on all three occasions, and twice rounded in my favor. We were both happy to keep bothersome metal disks out of the transaction.

Even if retailers consistently fudged in their own favor, rounding’s impact on individual consumers today would be imperceptible. For one thing, rounding would apply only to the final five cents, no matter how high the price: a $1.98 purchase would be rounded up two cents; so would a $1001.98 purchase. Americans have taken this sort of thing in stride for years. Sales taxes are rounded when assessing them results in fractional cents, and most consumers don’t even try very hard to avoid A.T.M. fees, which are far more costly than any form of rounding. Besides, the growing percentage of transactions that are handled by credit card, PayPal, and other non-cash media wouldn’t be subject to rounding at all.

A modern penny simply isn’t worth enough to worry about. In 1940, an average one-pound loaf of bread sold for eight cents, according to the U.S. Census Bureau. That means that a penny in those days bought enough bread to make a good-sized sandwich. These days, a penny doesn’t buy much more than a bit of crust. Accurately comparing monetary values (and bread loaves) across decades is impossible, but by almost any economic measure a 1940 penny had more purchasing power than a modern quarter does; in 1940, then, consumers got by, quite contentedly, without the equivalent of our penny, nickel, or dime. And many people continue to get by without these coins today, since in the actual marketplace consumers tend to treat the quarter as the smallest meaningful denomination.

In that 2001 episode of “The West Wing,” the Sam Seaborn character states that the only coin-operated machines that accept pennies anymore (apart from automated tollbooths on highways in Illinois) are “those coin-wrapping machines people buy to get rid of pennies.” Since 1992, there has actually been one more: change-redeeming machines owned by the company Coinstar—which people also use to get rid of pennies. Coinstar’s founder, Jens Molbak, got the idea for his company while considering his own mounting collection of unredeemable change, in his dormitory room at the Stanford Graduate School of Business. A senior vice-president at Coinstar—Molbak himself retired in 2001—told me, “Jens interviewed some people outside supermarkets, and realized that a ton of them had hordes of coins sitting at home in jars or shoeboxes, too, and nobody really wanted to deal with them. He needed a project for a class, so he did some research and discovered a business. Now, everybody always says, Why didn’t I think of that?” Today, Coinstar’s kiosks can be found in more than fifteen thousand supermarkets and other locations, including the lobbies of some banks.

Coinstar charges most of its customers 8.9 per cent of any amount they feed into a machine. The fact that consumers happily pay this considerable fee suggests that they wouldn’t be bothered by the vastly smaller penalty that rounding to the nearest nickel might entail. Of course, eliminating cents would also eliminate the middleman—in this case Coinstar, which annually processes about forty billion coins, more than half of which are pennies. Not surprisingly, therefore, Coinstar has been an advocate of preserving pennies. Since 1998, the company has conducted an annual currency poll, which always shows that Americans still love pennies and would prefer to continue getting rid of them by collecting them for months or years and then paying Coinstar to put them back into circulation, instead of getting rid of them once and for all by having the Mint stop making them.
hether or not the United States ever does drop the penny, Congress will presumably have to do something about the nickel, which now costs almost a dime to make. That won’t be easy. Tinkering with the metal content of the nickel is more challenging than tinkering with that of the penny, because nickels are used in vending machines and vending machines distinguish real coins from slugs by measuring size and weight. The modern five-cent piece was introduced in 1866, and was made of the same copper-nickel alloy that is used today. Its weight was set at exactly one gram per cent, and it therefore memorializes a moment in American history when the United States was thinking somewhat seriously about adopting the metric system. The nickel still weighs five grams—nearly as much as a quarter, and heavy enough that it is almost guaranteed to generate negative seigniorage, no matter what alloy it’s made from.

One solution to this problem would be to replace the nickel with an updated version of the coin that the nickel itself replaced, back in 1866. Frank Lucas, who is a Republican congressman from Oklahoma, a lifelong coin collector, and a potential inheritor of Jim Kolbe’s anti-penny mantle, told me, “I think we need to assess stepping back from the nickel, the five-cent piece, and consider readopting the traditional five-cent coin, the old half-dime.” Lucas’s version would be smaller in diameter than a dime, and weigh half as much—not light enough to blow away in a strong breeze, though almost.

An even simpler solution might be to get rid of five-cent coins altogether—along with the penny, of course. This idea may not be as radical as it sounds. In 2006, in an initiative called Change for the Better, New Zealand eliminated its five-cent coins, and dramatically reduced the size and weight of its ten-, twenty-, and fifty-cent coins. It had already stopped making one- and two-cent coins, in 1989, and had replaced one-dollar and two-dollar notes with coins, in 1991. This total transformation of the country’s currency was received with calm pragmatism by most New Zealanders—even though the lowest-denomination coin in the new system, the redesigned ten-cent piece, is worth about eight American cents at the current rate of exchange.

Canada, too, has streamlined its currency. It has stopped printing one- and two-dollar notes, and officials are considering further changes. Last year, economists at the Desjardins Group, an association of Canadian credit unions, published a study that strongly advocated the elimination of the Canadian one-cent coin, which would most likely be followed by the elimination of the five-cent coin as well. The study makes many references to the experience of New Zealanders. It also gets in several digs at foot-dragging Americans: “Canada does not have to follow their example. After all, American society is very conservative, particularly with its symbols (for example, the U.S. did not adopt the metric system and has not replaced the dollar bill with a dollar coin).” This sort of slur from an (alleged) ally probably isn’t worth going to war over, especially now that its money is sometimes worth more than ours. But we could still strike back, by doing Canada—and New Zealand—one better: we could get rid of dimes, too.



The Melt Value of U.S. Nickel Coins Is Still Increasing

“I have mentioned several times that I am collecting U.S. nickel coins and copper pre-1982 pennies because the value of the physical base metals from which they are formed (i.e., the “melt value”) exceeds their respective face values. Back on December 14, 2006, I mentioned that the metal value of pre-1982 pennies was 2.0752 cents (207.52% of face value), post-1982 zinc pennies had a metal value of 1.1257 cents (112.57% of face value), and nickels had a metal value of 6.9879 cents (139.75% of face value).

The value of zinc (the primary component of post-1982 pennies) has decreased about 13% since then. However, the values of raw copper and nickel metal have risen substantially since mid-December, with copper increasing about 22% and nickel increasing almost 49%. These metals have been soaring during the U.S. commodities boom that has been going on during the past several years. The cause of this boom is most likely due to a continuing weak U.S. dollar and rising demand for raw materials from fast-growing emerging markets such as China and India.

As shown in the chart below, the metal value of pre-1982 pennies is now 2.5237 cents (252.37% of face value), post-1982 zinc pennies have a metal value of 0.9953 cents (99.53% of face value), and nickels have a metal value of 9.7226 cents (194.45% of face value). With the melt values of these metal substantially exceeding the face value for nickels and at about parity with face value for post-1982 pennies, the U.S. Mint is losing many millions of dollars each year by making these coins with their current compositions. As such, it is practically a guarantee that the U.S. Mint will change the base metals of these coins within the next couple years, at which point the current pennies and nickels in circulation will become collectors’ items hoarded just like old silver coins were hoarded when the U.S. Mint abandoned the use of silver in its coins.”

U.S. Mint Implementing New Rule Abolishing Melting of Pennies and Nickels
December 14, 2006

“I have mentioned several times over the past year that I am hording pennies and nickels. We are currently in the midst of a commodities boom and the value of precious metals and non-precious metals (such as those used in current U.S. coins) has soared for the past 2 or 3 years. There are several reasons for the soaring prices that I will not discuss in detail here in this post (although I may discuss it in a future post), but among the chief reasons for this boom is the strong global demand for metals due to strong worldwide economic growth, as well as a devaluation of the U.S. dollar by the Federal Reserve that has increase the U.S. dollar value of commodities.

The value of the metals within several U.S. coins, including pennies and nickels, now exceeds the face value of the coins, as shown in the picture below that I acquired from, the best website I’ve seen for determining the intrinsic metal of various coins (click on the picture for a larger view). As one can see, the metal value of pre-1982 pennies is now 2.0752 cents (207.52% of face value), post-1982 zinc pennies have a metal value of 1.1257 cents (112.57% of face value), and nickels have a metal value of 6.9879 cents (139.75% of face value).

To realize the intrinsic metal value of these coins, one would need to melt them down to separate out the respective valuable metals. Up until yesterday, my understanding was that this practice was not illegal. I’ve never done so myself or heard of anyone actually doing so, but I read somewhere that this practice would not be prohibited.

The U.S. Mint has apparently been losing money by making pennies and nickels over the past year as it pays more for the metals used to make the coins that it receives in return when it sells the coins at face value to banks, etc. As of today, the U.S. Mint has made it illegal to melt down pennies and nickels. It is also illegal to transport more than $100 worth of pennies and/or nickels out of the country unless it is for legitimate coinage purposes. The penalty for violation of this new rule is a penalty of up to five years in prison and a fine of up to $10,000 for people convicted of violating the rule.

In case anyone had any doubts about whether collecting pennies and nickels is worthwhile, the U.S. Mint’s implementation of the new rule should quell such doubts. It’s only a matter of time until the U.S. Mint changes the metal composition of pennies and nickels to include less expensive metals, a move that would likely increase the collectible value of current pennies and nickels.

New rules outlaw melting pennies, nickels for profit
By Barbara Hagenbaugh / 12/14/2006

People who melt pennies or nickels to profit from the jump in metals prices could face jail time and pay thousands of dollars in fines, according to new rules out Thursday. Soaring metals prices mean that the value of the metal in pennies and nickels exceeds the face value of the coins. Based on current metals prices, the value of the metal in a nickel is now 6.99 cents, while the penny’s metal is worth 1.12 cents, according to the U.S. Mint. That has piqued concern among government officials that people will melt the coins to sell the metal, leading to potential shortages of pennies and nickels. “The nation needs its coinage for commerce,” U.S. Mint director Ed Moy said in a statement. “We don’t want to see our pennies and nickels melted down so a few individuals can take advantage of the American taxpayer. Replacing these coins would be an enormous cost to taxpayers.”

There have been no specific reports of people melting coins for the metal, Mint spokeswoman Becky Bailey says. But the agency has received a number of questions in recent months from the public about the legality of melting the coins, and officials have heard some anecdotal reports of companies considering selling the metal from pennies and nickels, she says. Under the new rules, it is illegal to melt pennies and nickels. It is also illegal to export the coins for melting. Travelers may legally carry up to $5 in 1- and 5-cent coins out of the USA or ship $100 of the coins abroad “for legitimate coinage and numismatic purposes.”

Violators could spend up to five years in prison and pay as much as $10,000 in fines. Plus, the government will confiscate any coins or metal used in melting schemes. The rules are similar to those enacted in the 1960s and 1970s, when metals prices also rose, the Mint said. Ongoing regulations make it illegal to alter coins with an intent to commit fraud. Before today’s new regulations, it was not illegal to melt coins.

Metals prices have skyrocketed worldwide in recent years in response to rising demand, particularly in rapidly growing China and India. Prices for zinc, which accounts for nearly all of the metal in the penny, have risen 134% this year, according to the London Metal Exchange. Even accounting for a recent decline, the price of copper is up 50% since the start of 2006. Nickels are produced from 75% copper and 25% nickel.

Although the Mint’s new rules are immediately going into effect, the Mint will take comments from the public for a month. The government has changed the composition of coins in response to rising metal prices. The penny, which was pure copper when it was introduced in 1793, was last changed in 1982.

House OKs Bill to Keep Pennies From Costing More Than One Cent / May 08, 2008

The House voted for cheaper change Thursday, the kind that would make pennies and nickels worth more than they cost to make and save the country $100 million a year. The unanimous vote advances the legislation to the Senate, but it’s prospects are muddled by objections from the Bush administration and some lawmakers. The bill would require the U.S. Mint to switch from a zinc and copper penny, which costs 1.26 cents each to make, to a copper-plated steel penny, which would cost .7 cents to make, according to statistics from the Mint and Rep. Zack Space, D-Ohio, one of the measure’s sponsors. It also would require nickels, now made of copper and nickel and costing 7.7 cents to make, to be made primarily of steel, which would drop the cost to make the five-cent coin below its face value. Advocates say that such actions would push back against surging metal prices and save taxpayers about $1 billion over a decade. But even the Mint opposes the House-passed measure. The legislation directs the Treasury secretary to “prescribe” — suggest — a new, more economical composition of the nickel and the penny. Unsaid is the Constitution’s requirement that Congress have the final say. The administration, like others before, chafes at the thought that Congress still clings to that authority.

Mint Director Edmund Moy said this week that the bill as “too prescriptive,” in part because it does not explicitly delegate to the Treasury secretary the power to decide the new coin composition. The bill also gives the public and the metal industry too little time to weigh in on the new coin composition, he said. Sen. Wayne Allard, R-Colo., is expected to introduce another version of the legislation in the Senate. In 2007, the Mint produced 7.4 billion pennies and 1.2 billion nickels, according to the House Financial Services Committee. Other coins still cost less than their face value, according to the Mint. The dime costs a little over 4 cents to make, while the quarter costs almost 10 cents. The dollar coin, meanwhile, costs about 16 cents to make, according to the Mint.

Coin shortage could turn pennies to nickels
BY Kevin Plumberg / Jan 22, 2007

A potential shortage of coins in the United States could mean all those pennies in your piggy bank could be worth five times their current value soon, says an economist at the Federal Reserve Bank of Chicago. Sharply rising prices of metals such as copper and nickel have meant the face value of pennies and nickels are worth less than the material that they are made of, increasing the risk that speculators could melt the coins and sell them for a profit. Such a risk spurred the U.S. Mint last month to issue regulations limiting melting and exporting of the coins. But Francois Velde, senior economist at the Chicago Fed, argued in a recent research note that prohibitions by the Mint would unlikely deter serious speculators who already have piled up the coinage. The best solution, Velde said, would be to “rebase” the penny by making it worth five cents rather than one cent. Doing so would increase the amount of five-cent coins in circulation and do away with the almost worthless one cent coin. “History shows that when coins are worth melting, they disappear,” Velde wrote. “Rebasing the penny would … debase the five-cent piece and put it safely away from its melting point,” he added.

Raw material prices in general have skyrocketed in the last five years, sending copper prices to record highs of $4.16 a pound in May. Copper pennies number 154 to a pound. Prices have since come down from that peak but could still trek higher, Velde said. Since 1982, the Mint began making copper-coated zinc pennies to prevent metals speculators from taking advantage of lofty base metal prices. Though the penny is losing its importance — it is worth only four seconds of the average American’s work time, assuming a 40-hour workweek — the Mint is making more and more pennies. Velde said that since 1982 the Mint has produced 910 pennies for every American. Last year there were 8.23 billion pennies in circulation, according to the Mint. “These factors suggest that, sooner or later, the penny will join the farthing (one-quarter of a penny) and the hapenny (one-half of a penny) in coin museums,” he said.

Francois Velde
email : fvelde [at] frbchi [dot] org

BY Anna J. Schwartz / July 2002
“What was the big problem? After 1200, when throughout Europe coins of larger denominations than the silver penny — the sole constituent of Charlemagne’s monetary system from 800 on — became common, a puzzling phenomenon was the recurrence of shortages of small denomination coins, depreciations of small coins relative to large ones, and small coin debasements. Why would a shortage coincide with a fall in value of small coins?

In a commodity monetary system, the value of a coin was based on its metal content, with an upper limit determined by the production cost and seigniorage charge for minting a coin from the raw metal, and a lower limit determined by the price level at which it paid to melt the coin and use the metal for payments. At a price level below the lower bound, the coin would be minted. At a price level above the upper bound, the coin would be melted. The government set the limits by choosing the metal content of each denomination and the price the mint would pay as measured by the number of coins it offered for the metal brought to it.”

by David Warsh / June 9, 2002

“it was only in 1964 that the US stopped minting coins containing 90 percent silver. Nearly 15 billion circulating dimes, quarters, half- and silver dollars (face value $2.6 billion) then quickly disappeared from circulation in the late 1960s, melted down for ingots by (felonious) entrepreneurs or squirreled away by collectors as the price of silver rose during the inflation associated with the Vietnam War. By 1970 they were gone.

Just as quickly — and virtually unnoticed by almost everybody who wasn’t minting or melting money at the time — they had been replaced by today’s “clad” coins, composed mostly of copper and zinc, whose intrinsic value as commodity metal is far less than their value in trade. As coins overnight became mere tokens, their hoarding finally ceased altogether in the US. Periodic buying and selling of household silver and gold has continued to be an important fact of life in India and Saudi Arabia to the present day. It is easy to forget that experience with coins, not banks, drove monetary policy for many centuries. Combining different metals of varying relative values in one unified system was government’s central monetary problem for hundreds of years.”

Now That a Penny Isn’t Worth Much, It’s Time to Make It Worth 5 Cents
BY Austan Goolsbee / February 1, 2007

How dumb do you have to be to mint money at a loss? In the latest only-in-Washington episode, we find that the government may have lost as much as $40 million coining pennies and nickels last year. The metal in them — the zinc, copper and nickel — has soared in value in the last few years, making the coins more valuable as raw materials than they are as currency. The government reaction has been to ban the melting of the coins to get the metal. But there is a good chance that we will find ourselves in an outright coin shortage of a form we have not seen in four decades and one that harks back to the monetary problems of medieval times. In their landmark book on monetary history, “The Big Problem of Small Change,” two economists, Thomas J. Sargent of New York University and François R. Velde of the Federal Reserve Bank of Chicago, point out that before the 20th century, the value of coins came from the material they contained: silver or gold. In the words of economics, it was “commodity money.” But as the price of silver or gold increased, people pulled the coins from circulation. These shortages are a basic problem with commodity money and began almost as early as Charlemagne’s minting of the first silver penny around 800 A.D.

The United States doesn’t have commodity money anymore. Our coins are just tokens now. They are valuable only because the government says they are — because the government is willing to trade them for dollars. And making tokens that cost more to manufacture than they are worth is monetary insanity. We could make them out of any material we want, so why in the world would we lose money? To stop this senselessness, we would seem to have only two choices: debase the coins (i.e., make them out of something cheaper) or abolish pennies (and, perhaps, even nickels).

The United States has debased money in the past. In World War II, we made steel pennies to save copper. In the 1960s, the high value of silver caused a run on quarters and dimes and led to a full-blown coin shortage until we substituted copper and nickel. We also took most of the copper out of pennies in 1982 for the same reason. But debasement only puts off the inevitable for a short time. Because the penny is fixed in value at 1 cent, no matter what the penny is made of, the cost of its material will rise with inflation and eventually be worth more than a cent.

Most economists, then, argue that we should use this opportunity to abolish pennies the way Australia, Britain, Finland and the Netherlands abolished their smallest coins. Because of inflation, a penny isn’t half the coin it once was. Indeed, the United States ended the half-cent in 1857 when it was still worth about 8 cents in today’s terms, so we’re probably well overdue to retire some coins.

But polls show that a majority of Americans like their pennies, and abolition might lead people in Illinois — the land of Lincoln, where pennies still work at tollbooths — to outright currency rebellion. On top of that, Raymond Lombra, an economist at Pennsylvania State University, claims that the rounding of prices — a $6.49 bill would cost you $6.50 — might not be evenly distributed and might cost consumers as much as $600 million a year, a cost that would be paid disproportionately by the poor who use cash more often. Others counter that retail stores could not get away with such shenanigans. But, clearly, the case for abolishing pennies is not universally believed.

So what to do?
Mr. Velde, in a Chicago Fed Letter issued in February, has come up with a solution that would abolish the penny, solve the excess costs of making nickels, help the poor, keep the Lincoln buffs happy and save hundreds of millions of dollars for taxpayers.

As Mr. Velde explained in an interview, “We face a very medieval problem so I took inspiration from the medieval practice of rebasing.” He would rebase the penny by having the government declare it to be worth 5 cents. At first that sounds impossible. But our coins are just tokens the government gives a value to. We can say they are worth whatever we like. Indeed, Mr. Velde observes that the United States did something similar in 1834, when it changed the gold-silver ratio and suddenly the half-eagle $5 coin was actually worth $5.625.

Pennies would then cost a little over 1 cent to make and would be worth a nickel, so the government would again be making a profit on money. We would have plenty of new Lincoln nickels so we could stop minting our current nickels at a heavy loss. The Jefferson nickels would stay in circulation, just as the old wheat pennies do now. Because metal in nickels is valuable, though, they would probably be melted down.

Rebasing pennies is printing money. But don’t get too worried about inflation. With about 140 billion pennies in circulation ($1.4 billion) — counting the ones in your couch and your kids’ piggy banks — this rebalance would make them worth $7 billion, adding about $5.6 billion to the money supply. For comparison, at the start of 2007 there was about $1.4 trillion in currency and money available for purchases, to say nothing of credit cards.

Plus, the money would go disproportionately to the poor (and to people getting allowances from their parents), more than offsetting any “rounding tax” from eliminating the penny.

COPPER SCAVENGERS–Homes-Are-Sold-for-Scrap.html
Copper thieves cause havoc for commuters
BY Dan Milmo and Mark Milner / 28 May 2007

Soaring global demand for copper is a growing threat to the British railway network leading to a surge in trackside metal theft, police have warned. Copper theft caused more than 240,000 minutes of delays for train passengers last year after a near-fivefold rise in robberies at tracks and depots. Rail customers are the victims of an economic crime that is being driven by the insatiable demand for industrial material in China and India, said Andy Trotter, deputy chief constable of the British Transport police. “It is a growing problem,” he said. “You have only got to look at the rising copper price on the metal market and the theft of copper matches that rise almost absolutely. Unfortunately, the impact on the infrastructure is beginning to bite.”

Copper theft is a major problem in north-east England, accounting for nearly two-thirds of the delays related to metal thieves in the UK and wreaking havoc with the Northern Trains franchise. Mr Trotter said the regional bias of the problem may reflect the north-east’s industrial heritage. “The north-east has a tradition of heavy industry and of people who know how to deal with copper and metals,” he said. “There are also lots of people who know how to trade in it.”

Police also blamed copper thieves for the demolition of a bungalow in Bradford yesterday. The unoccupied house exploded after copper gas pipes on the outer walls were fractured, apparently by someone trying to rip them out. Police are looking for two boys, aged 10 and 11, in relation to the explosion. “The copper is going through larger scrapyards, then to smelters and then by ship to China, which has an incredible demand for copper, particularly with the Beijing Olympics coming and the demand for telecoms infrastructure,” Mr Trotter said.

The global price of copper has risen fivefold since 2001 and has risen above $8,000 (£4,000) a tonne this year, driven by demand for its use in car production, building and power grids. China accounts for about 20% of global copper consumption and the US for 13%. Such is the demand that 2p pieces are more valuable if they are melted down for their copper.

The British Transport police have launched Operation Drum to crack down on cable theft and are liaising with Network Rail to ensure that copper is not left unguarded at the side of tracks, as used to be the case, and is not stored in easily accessible parts of depots. The clampdown has also led to stakeouts at suspect scrapyards, which have emerged as key outposts in the cable crime food chain. A Network Rail spokesperson said the railways were “increasingly falling victim” to cable theft, but the organisation was working hard with the transport police to stop the trend. “In the fight against cable thieves, we use CCTV, lineside patrols and the Network Rail helicopter. All our people at work on the railway network remain vigilant for cable thieves – and many have foiled thefts and helped the British Transport police catch offenders,” the spokesperson said.

The delays caused by copper thieves contributed to a reduction in the annual bonuses for Network Rail’s 32,000 employees last year, after the infrastructure company failed to meet targets on reducing the number of minutes of delays in services. Stripping cable from railways causes delays by activating a fail-safe system that turns all signals in the area to red, bringing all trains to a halt. Network Rail had set a benchmark of 9.1m delay minutes for the year to March 31, but missed the mark by some distance and recorded 10.5m delay minutes, the same level as the previous year.

Copper theft is also spreading to other industries. Earlier this month, Northumbrian Water said it had stepped up security after a spate of thefts from some of its sewage works in the north-east which it said would cost the company £100,000. It said it was introducing round-the-clock patrols and increased CCTV coverage of rural works in County Durham to try to combat the losses. The company said thieves had targeted 15 sewage works, taking heavy equipment, plant, steel plates, safety covers and hatches, screens, troughs and metal ladders. It added that it believed much of the equipment was being stolen for its scrap value. The company warned that not only were the thefts costly and inconvenient, they were also creating a threat to health and safety and the environment.

Fear, Greed, and Crisis Management:
A Neuroscientific Perspective
BY Andrew W. Lo  /  January 9, 2009

The alleged fraud perpetrated by Bernard Madoff is a timely and powerful microcosm of the current economic crisis, and it underscores the origin of all financial bubbles and busts: fear and greed. Using techniques such as magnetic resonance imaging, neuroscientists have documented the fact that monetary gain stimulates the same reward circuitry as cocaine — in both cases, dopamine is released into the nucleus accumbens. Similarly, the threat of financial loss activates the same fight-or-flight circuitry as physical attacks, releasing adrenaline and cortisol into the bloodstream, which results in elevated heart rate, blood pressure, and alertness.

These reactions are hardwired into human physiology, and while some of us are able to overcome our biology through education, experience, or genetic good luck, the vast majority of the human population is driven by these “animal spirits” that John Maynard Keynes identified over 70 years ago.

From this neuroscientific perspective, it is not surprising that there have been 17 banking-related national crises around the globe since 1974, the majority of which were preceded by periods of rising real-estate and stock prices, large capital inflows, and financial liberalization. Extended periods of prosperity act as an anesthetic in the human brain, lulling investors, business leaders, and policymakers into a state of complacency, a drug-induced stupor that causes us to take risks that we know we should avoid.

In the case of Madoff, seasoned investors were apparently sucked into the alleged fraud despite their better judgment because they found his returns too tempting to pass up. In the case of subprime mortgages, homeowners who knew they could not afford certain homes proceeded nonetheless, because the prospects of living large and benefiting from home-price appreciation were too tempting to pass up. And investors in mortgage-backed securities, who knew that the AAA ratings were too optimistic given the riskiness of the underlying collateral, purchased these securities anyway because they found the promised yields and past returns too tempting to pass up.

If we add to these temptations a period of financial gain that anesthetizes the general population — including C.E.O.’s, chief risk officers, investors, and regulators — it is easy to see how tulip bulbs, internet stocks, gold, real estate, and fraudulent hedge funds could develop into bubbles. Such gains are unsustainable, and once the losses start mounting, our fear circuitry kicks in and panic ensues, a flight-to-safety leading to a market crash. This is where we are today.

Like hurricanes, financial crises are a force of nature that cannot be legislated away, but we can greatly reduce the damage they do with proper preparation.

Because the most potent form of fear is fear of the unknown, the most effective way to combat the current crisis is with transparency and education. In the short run, one way to achieve transparency is for our president-elect to convene a “crisis summit” once in office, in which all the major stakeholders involved in this crisis, and their most knowledgeable subordinates, are invited to an undisclosed location for an intensive week-long conference.

During this meeting, detailed information about exposures to “toxic assets,” concentrations of risky counterparty relationships, and other systemic weaknesses will be provided on a confidential basis to regulators and policymakers, and various courses of action can be proposed and debated in real time. Afterward, a redacted summary of this meeting should be provided to the public by the president, along with a specific plan for addressing the major issues identified during the conference. This process would go a long way toward calming the public’s fears and restoring the trust and confidence that are essential to normal economic activity.

In the long run, more transparency into the “shadow banking” system; more education for investors, policymakers, and business leaders; and more behaviorally oriented regulation will allow us to weather any type of financial crisis. Regulation enables us to restrain our behavior during periods when we know we will misbehave; it is most useful during periods of collective fear or greed and should be designed accordingly. Corporate governance should also be revisited from this perspective; if we truly value naysayers during periods of corporate excess, then we should institute management changes to protect and reward their independence.

If “crisis is a terrible thing to waste,” as some have argued, then we have a short window of opportunity — before economic recovery begins to weaken our resolve — to reform our regulatory infrastructure for the better. The fact that time heals all wounds may be good for our mental health, but it may not help maintain our economic wealth.

Andrew Lo
email : alo [at] mit [dot] edu

Brian Knutson
email : knutson [at] psych.stanford [dot] edu

Sex, drugs, money: The pleasure principle
Theory of ‘neurofinance’ draws doubts on Wall St.
BY Adam Levy  /  February 2, 2006

Palo Alto, California: Late at night, in a basement laboratory at Stanford University, Brian Knutson was sending his students through a high-power imaging machine called an fMRI. Deep inside each volunteer’s head, electrical currents danced through a bundle of neurons about the size and shape of a peanut. Blood was rushing to the brain’s pleasure center as the students executed mock stock and bond trades. On Knutson’s screen, this region of the brain, the core of human desire, flashed canary yellow.

The pleasure of orgasm, the high from cocaine, the rush of buying Google at $450 a share – the same neural network governs all three, Knutson, a professor of neuroscience and psychology, concluded. What’s more, our primal pleasure circuits can, and often do, override our seat of reason, the brain’s frontal cortex, the professor said. In other words, stocks, like sex, sometimes drive us crazy.

That is something those in the world of finance need to know, according to Andrew Lo, a professor of finance and investment at the Sloan School of Management, at the Massachusetts Institute of Technology, who thinks conventional financial analysis fails to take into account human behavior. “Finance and economic research has hit a wall,” said Lo, who runs AlphaSimplex Group, a hedge fund firm based in Cambridge, Massachusetts. “We can’t answer any more questions by running another regression analysis. Now, we need to get inside the brain to understand why people make decisions.”

Still, Knutson said he knew how heretical his findings were. Wall Street is dedicated to the principle that when it comes to money, logic prevails, that intellect matters in investing. The idea is enshrined in the economic theory of rational expectations, for which Robert Lucas was awarded the Nobel Prize in Economic Sciences in 1995. Lucas, a professor of economics at the University of Chicago, maintains that people make economic choices based on all the information available to them and learn from their mistakes. As a result, their expectations about the future – from the price of Citigroup stock next week to the earnings of General Motors next quarter – are, on average, accurate.

Or so the theory goes. In practice, of course, investors do foolish things all the time. Some gamble away fortunes on money-losing investments, doubling down when logic tells them to fold, or letting winnings ride when the rational person would cash out.

Others seem to have an uncanny knack for knowing when to buy and sell. In the 1970s, Richard Dennis parlayed an initial stake of several thousand dollars into a $200 million fortune trading commodities in the Chicago futures pits. In the 1980s, the hedge fund icon Paul Tudor Jones made $80 million by betting against U.S. stocks just before the market crashed. In the 1990s, the billionaire investor George Soros, the man who beat the Bank of England, made $1 billion in an afternoon by shorting the British pound.

The question that keeps nagging Knutson is this: Why do some traders get rich while others walk away losers? The answer, he said, may lie somewhere in the 96,000 kilometers, or 60,000 miles, of neural wiring inside our brains. The results of the Stanford study, conducted in 2004 and published in September’s issue of Neuron magazine, have caused a stir among the small group of neuroscientists and psychologists who are mapping the human brain in hopes of understanding investor behavior.

This controversial field, called neurofinance, may represent the next great frontier on Wall Street, said Daniel Kahneman, the 2002 Nobel laureate in Economic Science for his pioneering work in behavioral finance, which fuses classical economic theory and studies of human psychology. “The brain scientists are the wave of the future in the financial world,” Kahneman said. “If you seek to maximize understanding, whether you’re in academia or in the investment community, you’d better pay very serious attention to them.”

To proponents like Kahneman, the potential of neurofinance seems virtually limitless. One day, brain science may help money managers spot shifts in investor sentiment, said David Darst, chief investment strategist for the individual investor group at Morgan Stanley. Armed with brain scans, psychotherapists may be able to hone traders’ natural impulses of fear and greed.

Neuroscientists may even develop psychoactive drugs, or neuroceuticals, that make people better, more-profitable traders, Knutson and other psychologists say. Look at Prozac. In the space of a few years, Prozac and other drugs have not only revolutionized the treatment of depression but also profoundly changed the way we view the mind.

People recognize that chemistry drives their brains, moods and behavior – and that chemistry can change them. Similar drugs, ones that improve a trader’s decision making by 20 percent to 30 percent, may be just a few years away, said Zack Lynch, managing director of NeuroInsights, a consulting firm based in San Francisco that tracks the $100 billion neurotechnology industry. If these neuroceuticals work, they could rock Wall Street. “The whole investment community will be scrambling to get these things,” Lynch said.

So far, the hopes and claims of neurofinance have far outpaced its science. Few investment professionals have even heard of the field. Many who have dismiss it as hokum. “It’s the latest malarkey,” said Richard Michaud, president of New Frontier Advisors, based in Boston. Michaud, who has a doctorate in mathematics from Boston University, said neurofinance and its forerunner, behavioral finance, have no place on Wall Street.

“I find these so-called disciplines to be more of a marketing tool, a way of taking an ages-old market valuation problem and calling it something space-age,” Michaud said. “I doubt it will be fruitful.” Knutson’s response: Just wait. “Investors want to beat the market and become better traders,” he said. “The first step is to know how the machinery works. The applications to exploit the machinery will soon follow.”

For Wall Street, brain science eventually could mean big money, said Darst of Morgan Stanley. Securities firms spend millions of dollars annually researching companies and crunching numbers in an attempt to predict the financial future. “Meanwhile, we spend peanuts on human psychology,” said Darst, author of “The Complete Bond Book: A Guide to All Types of Fixed-Income Securities.” “We have to take account of the deep atavistic and visceral traits and instincts that are triggering the buying and selling of securities.”

Knutson’s Stanford study caused a buzz in September at the third annual conference of the Society for Neuroeconomics, held at the Kiawah Island Golf Resort in South Carolina. The three-day event drew 115 people, mostly from academia. The sole Wall Streeter was Arnold Wood from Martingale Asset Management in Boston, who said he was confident neurofinance would catch on.

Food Dance Gets New Life When Bees Get Cocaine
BY Pam Belluck  /  January 6, 2009

Buzz has a whole new meaning now that scientists are giving bees cocaine. To learn more about the biochemistry of addiction, scientists in Australia dropped liquefied freebase cocaine on bees’ backs, so it entered the circulatory system and brain. The scientists found that bees react much like humans do: cocaine alters their judgment, stimulates their behavior and makes them exaggeratedly enthusiastic about things that might not otherwise excite them.

What’s more, bees exhibit withdrawal symptoms. When a coked-up bee has to stop cold turkey, its score on a standard test of bee performance (learning to associate an odor with sugary syrup) plummets. “What we have in the bee is a wonderfully simple system to see how brains react to a drug of abuse,” said Andrew B. Barron, a senior lecturer at Macquarie University in Australia and a co-leader in the bees-on-cocaine studies. “It may be that when we know that, we’ll be able to stop a brain reacting to a drug of abuse, and then we may be able to discover new ways to prevent abuse in humans.”

The research, published in The Journal of Experimental Biology, advances the knowledge of reward systems in insects, and aims to “use the honeybee as a model to study the molecular basis of addiction,” said Gene E. Robinson, director of the neuroscience program at the University of Illinois at Urbana-Champaign and a co-author with Dr. Barron, and Ryszard Maleszka and Paul G. Helliwell at Australian National University.

The researchers looked at honeybees whose job is finding food — flying to flowers, discovering nectar, and if their discovery is important enough, doing a waggle dance on a special “dance floor” to help hive mates learn the location. “Many times they don’t dance,” Professor Robinson said. “They only dance if the food is of sufficient quality and if they assess the colony needs the food.”

On cocaine the bees “danced more frequently and more vigorously for the same quality food,” Dr. Barron said. “They were about twice as likely to dance” as undrugged bees, and they circled “about 25 percent faster.” The bees did not dance at the wrong time or place. Cocaine only made them more excited about the food they found. That’s like “when a human takes cocaine at a low dose,” Dr. Barron said. “They find many stimuli, but particularly, rewarding stimuli, to be more rewarding than they actually are.”

Now, scientists are studying whether bees begin to crave cocaine and need more for the same effect, like humans. The testing occurred in Australia, and, Dr. Barron said, “my dean got extremely twitchy about holding cocaine on campus. It’s in a safe bolted to a concrete floor within a locked cupboard in a locked room in a locked building with a combination code not known even to me. A technician from the ethics department has to walk across campus to supervise the release of the cocaine.”

That, Dr. Barron said, for a bee-size supply of “one gram, which has lasted me two years. One gram, a human would go through in one night. I’m not like the local drug lord.”

Dancing Honeybee Using Vector Calculus to Communicate


BY Kathryn Knight  /  December 26, 2008

Since its discovery in the 18th century, cocaine has been a scourge of western society. Strongly stimulating human reward centres in low doses, cocaine is extremely addictive and can be fatal in high doses. But this potent compound did not evolve to ensnare humans in addiction. Andrew Barron from Macquarie University, Australia, explains that cocaine is a powerful insect neurotoxin, protecting coca bushes from munching insects without rewarding them. Knowing that foraging honey bees are strongly motivated by rewards (they dance in response to the discovery of a rewarding nectar or pollen supply) and that this behaviour is controlled by similar mechanisms to the ones that leave humans vulnerable to cocaine addiction, Barron and Gene Robinson from the University of Illinois at Urbana-Champaign wondered whether bees may be vulnerable to cocaine’s allure at the right dose. Teaming up with Ryszard Maleszka at the Australian National University, Barron set about testing how honey bees respond to cocaine (p. 163).

Setting up his hives on a farm just outside Canberra, Barron trained the insects to visit a feeder stocked with a sugar solution. Then he gently applied a tiny drop of cocaine solution to the insect’s back, and waited to see how enthusiastically the foraging insects danced when returning to the hive. Amazingly, low doses of the drug stimulated the insects to dance extremely vigorously. They behaved as if the sucrose solution was of a much higher quality than it really was. The cocaine seemed to be hitting the insects’ reward centres, but were they really responding to the drug like humans or was the drug stimulating some other aspect of the insects’ behaviour to look as if they were becoming addicted?

Working with a team of undergraduate students, Barron tested whether cocaine stimulated the insects’ locomotion centres by monitoring their movements after a dose of the drug. The insects behaved normally, so the drug probably doesn’t affect their movements. However, when Paul Helliwell tested the bees’ sensitivity to sugar solutions, the drugged bees responded more strongly than the undrugged insects, so cocaine was increasing their sugar sensitivity. But was it only increasing their sensitivity to sugar, or increasing their response to all rewards? Barron offered the drugged insects pollen to see if cocaine increased their sensitivity to other floral rewards and found that the foragers were equally overenthusiastic, dancing as if the pollen quality was much better than it really was.

Finally Barron and Helliwell wondered whether bees that had been on cocaine for a few days had become dependent and went into withdrawal when the drug was withheld. Testing the insects’ ability to learn to distinguish between lemon and vanilla scents, they found that the bees were fine so long as their cocaine supply was maintained. But as soon as the drug was withdrawn the bees had difficulty learning the task, just like humans going into withdrawal.

Barron is confident that honey bees are as susceptible to cocaine’s allure as humans, and is keen to find out more about the drug’s effects. He hopes to identify the neural pathways that it targets to find out more about the mechanisms involved in human addiction and to find out whether the drug has as devastating an effect on honey bee society as it does on human society.

Andrew Barron
email : andrew.barron [at] [dot] au

Gene Robinson
email : generobi [at] uiuc [dot] edu

Effects of cocaine on honey bee dance behaviour
BY Andrew B. Barron, Ryszard Maleszka, Paul G. Helliwell, and Gene E.
Robinson  /  22 November 2008
“The role of cocaine as an addictive drug of abuse in human society is hard to reconcile with its ecological role as a natural insecticide and plant-protective compound, preventing herbivory of coca plants (Erythroxylum spp.). This paradox is often explained by proposing a fundamental difference in mammalian and invertebrate responses to cocaine, but here we show effects of cocaine on honey bees (Apis mellifera L.) that parallel human responses. Forager honey bees perform symbolic dances to advertise the location and value of floral resources to their nest mates. Treatment with a low dose of cocaine increased the likelihood and rate of bees dancing after foraging but did not otherwise increase locomotor activity. This is consistent with cocaine causing forager bees to overestimate the value of the floral resources they collected. Further, cessation of chronic cocaine treatment caused a withdrawal-like response. These similarities likely occur because in both insects and mammals the biogenic amine neuromodulator systems disrupted by cocaine perform similar roles as modulators of reward and motor systems. Given these analogous responses to cocaine in insects and mammals, we propose an alternative solution to the paradox of cocaine reinforcement. Ecologically, cocaine is an effective plant defence compound via disruption of herbivore motor control but, because the neurochemical systems targeted by cocaine also modulate reward processing, the reinforcing properties of cocaine occur as a `side effect’.”


Town where cocaine is the only currency
Guerima, a remote Colombian settlement, wants its Marxist rebels back.
With the national army deployed in a stranglehold around the town,
there is nobody to traffic the town’s only commodity – drugs.
BY Jeremy McDermott  /  15 Jun 2008

More than 1,000 people live in Guerima, carved out of the Amazonian rainforest. Its clearings are filled with coca bushes, the basis for cocaine. This was once the heartland of the 16th Front of the Revolutionary Armed Forces of Colombia (Farc), the Marxist guerrilla movement that has fought in Colombia’s jungles for the past 44 years. But now the troops of the 58th Counter-Guerrilla Battalion patrol the dirt streets.

Their presence has stirred deep resentment, revealing the complexities of Colombia’s war against Left-wing rebels and drug lords. Countless ordinary people depend on the coca trade. “We are sitting on a mountain of coca and a series of Farc ‘IOUs’ “, said one local. “We need the rebels back to pay the debts and buy the coca, otherwise the town will die.”

No money has reached Guerima for months and transactions are conducted in coca, with one gram enough to buy a soft drink.

Major Edgar Gomez, who commands the troops, knows the community feels under siege. He also knows that most locals have friends or family among the rebels. But the major is also aware that his presence in Guerima is hitting the guerrillas’ finances. The rebels here once earned £10 million a month from cocaine. Now they will be lucky to get £1 million.

But the local people would prefer a return to the days when their fate was in the hands of the Farc. Tomas Medina, the local guerrilla commander, was seen as a Robin Hood-style hero, maintaining the drug economy and imposing law and order. “Before the army came there was no crime,” said one man. “Now the soldiers steal from us. Two girls have been raped. “This would not have happened before and if it did the criminals would have been punished, perhaps shot.”

There was no confirmation of the man’s claims and Major Gomez said that winning over the locals was more important than driving out the rebels. “I know these people live on coca,” he said. “The government has to offer them a viable alternative and we are just the first presence of the state. “Healthcare, education and economic investment must follow.”


Cocaine users are destroying the rainforest – at 4 square metres  gram
BY Sandra Laville  /  19 November 2008

Four square metres of rainforest are destroyed for every gram of cocaine snorted in the UK, a conference of senior police officers as told yesterday.

Francisco Santos Calderón, the vice-president of Colombia, appealed to British users of the class A drug to consider the impact on the environment. He said that while the green agenda would not persuade addicts to give up, the middle-class social user who drove a hybrid car and was concerned about the environment might not take the drug if they knew its impact. Santos said 300,000 hectares of rainforest were destroyed each year in Colombia to clear land for coca plant cultivation, predominantly controlled by illegal groups, including the Revolutionary Armed Forces of Colombia, known as Farc. Officers were told cocaine and heroin use cost the British economy around £15bn a year in health and crime bills.

Santos outlined to the Association of Chief Police Officers how lives were lost in the illegal cocaine trade in Colombia. He said landmines that were used to protect crops and processing labs killed almost 900 civilians this year. Farc and other groups funded by narcotics production were also involved in kidnapping. The Colombian-French politician Ingrid Betancourt was held for more than six years before her release earlier this year, and Santos himself was kidnapped and held by a cocaine gang for 18 months in the 1990s. He told the Belfast conference: “If you snort a gram of cocaine, you are destroying four square metres of rainforest and that rainforest is not just Colombian – it belongs to all of us who live on this planet, so we should all be worried about it. Not only that, the money that you use to buy the cocaine goes into the hands of Farc, of illegal groups that plant mines, that kidnap, that kill, that use terrorism to protect their business.”

Santos said many middle-class Britons who used cocaine were unaware of its environmental impact. “For somebody who drives a hybrid, who recycles, who is worried about global warming – to tell him that that night of partying will destroy 4m square of rainforest might lead him to make another decision.” Santos said Europe was experiencing a boom in cocaine use among more affluent people that was comparable with that seen in the USA 25 years ago. Everyone, he said, had a duty to change their behaviour to halt a rise in demand that was destroying his country. “We call it shared responsibility, We can’t do it on our own. We need everybody’s action; police here, police in Colombia, the authorities in both countries and the consumers too. If there is no consumption, there will be no production.

“There is a sense of frustration, because here drug use is seen as a personal choice and to some extent cocaine is seen as the champagne of drugs which causes no effect and is a victimless crime. It is not victimless.” Bill Hughes, the director general of the Serious and Organised Crime Agency, told the conference that the UK was a very attractive market for drug traffickers. “There is still a lot of disposable income; the risk compared to the US if you are caught is felt to be much less,” he said.

The £15bn cost to the economy reduced the amount of money available for schools, teachers and police officers. He said traffickers moved their drugs from South America to west Africa, and then to the EU and Britain, often operating through insecure countries with poor law enforcement. Spain, Portugal and the Netherlands were major staging posts on the trafficking routes and much of the synthetic drug market was supplied from the Netherlands. Hughes said the proceeds of crime were undermining or corrupting governments globally, with the trade worth £4bn-£6.6bn in the UK.

The World; Where a Little Coca Is as Good as Gold
BY Juan Forero  /  July 8, 2001

The Drug Center, the only pharmacy in the stiflingly hot jungle town of Camelias, deep in southern Colombia, looks ordinary, with wide glass counters and shelves stacked high with medicines. Then the customer pays the bill. The customer produces one of the clear plastic bags in which people here carry around coca paste. The pharmacist, Socrates Solis, scoops out a bit of the paste, weighs it on a digital scale and gives back change — the excess he had ladled out.

Welcome to the Caguan River valley, a swath of jungle towns and coca fields in far-flung Caqueta province, a part of Colombia with no government presence, only guerrillas. The economy is built on coca production, and coca paste has become a main currency. In the pharmacy, for example, everything is priced in grams. Expensive antibiotics retail for 45 grams, worth roughly $36; a bottle of aspirin costs a little more than a gram, or $1; medical exams are given to prostitutes for 12 grams, or $10.

”I was speechless when people would drop by the pharmacy and pay for the doctor’s bills or their medicines with coca instead of money,” Mr. Solis, 35, told the photographer Carlos Villalon when he visited the town. ”The first three months I worked here we collected six and a half kilos of base.”

In this part of Colombia, the Revolutionary Armed Forces of Colombia run things, patrolling roads, punishing law breakers, even building bridges over creek beds. Perhaps most controversially, the rebels regulate and tax a thriving trade in coca leaves and coca paste. Traffickers buy the paste, process it into cocaine and ship it by the ton to quench the United States’ insatiable appetite for the drug. It is a business that President Andrés Pastrana’s government says fortifies the rebel army and helps fuel Colombia’s brutal civil conflict.

But in a dozen towns in the region, coca paste is seen in much less nefarious terms. Paper money is in short supply, since conventional businesses are few. Instead, everything revolves around coca, as evidenced by thousands of acres of coca fields and the coca-processing laboratories in the jungles.

It is not unusual for people to be paid for their work in coca. They, in turn, pay for necessities with the paste, which is soft and powdery like flour. Need a pair of shoes for the little one? El Combate general store in Sante Fe takes coca paste. Groceries at Los Helechos in the village of Peñas Coloradas? Just drop the powder on the scale, the merchant says with a smile.

It feels quite normal for Wilber Rozas, 34, of Peãs Coloradas to spend 1.08 grams (worth 90 cents), for a large glass of juice at the Peñas Juicery. Or for villagers at the annual festival in Santa Fe to lug bags of coca paste to buy clothing from traveling salesmen or to bet in the cock fights. ”I would like to always take cash, but if I do not receive coca base I might as well shut down my restaurant,” said Selmira Vasquez, who owns the Buenos Aires restaurant in Peñas Coloradas.

As a currency, the coca paste is as good as gold. When traffickers arrive every few weeks to buy coca paste, they pay with a wad of bills — and soon money is flowing again. The merchants have cash. So do workers. The value of the paste, however, is unpredictable. ”The price of paste can go up or down, like having money in the bank,” explained Ms. Vasquez. ”When the dealers show up, the prices could be lower or higher than when I bought, so it is like gambling.”

The region’s bartering system does not mean the inhabitants themselves are cocaine addicts or gang members. The rebels keep the peace by prohibiting drug consumption. Those who violate the ban end up on road-paving or bridge-building duty.

The guerrillas also forbid those most susceptible to drug use — the young, single men who have come from across Colombia to pick coca leaves — to be paid in coca paste. They receive coupons they can cash once the traffickers arrive with money. ”That is the way it works in the Caguan river region,” explained Jose Sosias, 28, a villager. ”We are a coca culture. Our money, some times during the year, is coca base but we just use it as currency. No one here consumes the drug.”

From the archive, originally posted by: [ spectre ]






“Working first with the D.E.A. and then with the State Department,
Wankel helped create the Afghan Eradication Force, with troops of the
Afghan National Police drawn from the Ministry of the Interior. Last
year, an estimated four hundred thousand acres of opium poppies were
planted in Afghanistan, a fifty-nine-per-cent increase over the
previous year. Afghanistan now supplies more than ninety-two per cent
of the world’s opium, the raw ingredient of heroin. More than half the
country’s annual G.D.P., some $3.1 billion, is believed to come from
the drug trade, and narcotics officials believe that part of the money
is funding the Taliban insurgency.”


New research chal­lenges tradi­tional accounts of why we wallow in
chemical gratification / March 21, 2008

Why do peo­ple abuse drugs? It’s not only a ques­tion wor­ried par­
ents ask their way­ward, sub­stance-dab­bling teenagers. It’s al­so a
deeper ques­tion asked by bi­ol­o­gists. In gen­er­al, na­ture has de­
signed all crea­tures as ex­quis­ite machines for their own pro­tec­
tion and propaga­t­ion. Yet we’re easily and of­ten drawn in­to self-
destruction by noth­ing more than life­less chem­i­cal lures. This
weak­ness seems such a jar­ring ex­cep­tion, such a dis­mal Achilles’
heel, that it calls out for ex­plana­t­ion.

Sci­en­tists typ­ic­ally of­fer the fol­low­ing one. Drugs are chem­i­
cals that in­ap­pro­pri­ate­ly trig­ger ac­ti­vity in brain cir­cuits
de­signed for very dif­fer­ent pur­poses: to pro­vide a sense of re­
ward for hav­ing sat­is­fied or­di­nary needs, health­fully.  The
brain has few de­fenses against this chem­i­cal de­cep­tion, the stand­
ard ac­count goes, be­cause drugs were un­known in the nat­u­ral en­vi­
ron­ment that shaped hu­man ev­o­lu­tion.

This tra­di­tion­al view, though, is com­ing un­der at­tack. A new
study pro­poses the brain evolved to ac­count for and even ex­ploit
drugs. Al­though their abuse is still un­healthy, the au­thors sug­
gest it’s wrong to think they cheat the brain in the sense tra­di­tion­
ally theo­r­ized.

“Ev­i­dence strongly in­di­cates that hu­mans and oth­er an­i­mals
have been ex­posed to drugs through­out their ev­o­lu­tion,” wrote the
sci­en­tists in the stu­dy. The re­search, by an­thro­po­lo­g­ist Rog­
er Sul­li­van of Cal­i­for­nia State Uni­ver­s­ity and two col­
leagues, ap­peared March 19 on­line in the jour­nal Pro­ceed­ings of
the Roy­al So­ci­e­ty B: Bi­o­log­i­cal Sci­ences.

The most pop­u­lar drugs of abuse are plant tox­ins that evolved to
pro­tect plants from preda­tors, as ev­o­lu­tion­ary bi­ol­o­gists
have “con­vinc­ingly ar­gued,” Sul­li­van and col­leagues wrote. For
ex­am­ple, nic­o­tine, the key ad­dic­tive in­gre­di­ent of
cigarettes, helps ward off an ar­ray of in­sects, mam­mals and other
creat­ures from munch­ing on to­bacco plants. Fur­ther ev­i­dence of
the fun­da­men­tally poi­son­ous na­ture of drugs of abuse, the three
sci­en­tists ar­gued, is that first-time users of­ten re­port un­pleas­
ant re­ac­tions.

Since plants long pre­date hu­mans, the pres­ence of these sub­stances
in plants would seem to in­di­cate we and our an­ces­tors have long
dealt with them, the re­search­ers con­tin­ued. But fur­ther ev­i­
dence of this, they added, is in our own make­up. All an­i­mals pro­
duce mo­le­cules known as cy­to­chromes, whose func­tions in­clude de­
tox­i­fy­ing in­gested plant poi­sons. Cy­to­chromes that spe­cif­ic­
ally neu­tral­ize brain-affecting plant tox­ins have re­mained a con­
sist­ent fea­ture of hu­man ev­o­lu­tion, Sul­li­van and col­leagues

All this shows “our an­ces­tors were reg­u­larly ex­posed to plant
neurotox­ins,” they added, so the view of our brains as un­sus­pect­
ing vic­tims of the new chem­i­cal threat is un­ten­able. It remains
unclear what might be the true ev­o­lu­tion­ary ex­plana­t­ion of drug
abuse, they wrote: the “para­dox” stays of why sub­stances de­signed
as poi­sons, are pleas­ur­a­ble to so many.

One pos­si­bil­ity, the sci­en­tists sug­gested, is that an­i­mals co-
opted some plant tox­ins and used them for their own de­fenses against
para­sites. If this is true, then ev­o­lu­tion, the pro­cess by which
spe­cies adapt and change to meet en­vi­ron­men­tal de­mands, might
have de­signed our brains to en­cour­age some drug use. This could in­
volve shap­ing our brains to as­so­ci­ate drug in­take with feel­ings
of re­ward. “But there are, of course, oth­er pos­si­bil­i­ties,” the
re­searchers wrote.

Researchers stumped by drug addiction paradox
BY Lisa Zyga  /  April 16, 2008

Throughout history, plants have created their toxins by mimicking
their own molecules that regulate metabolism, growth and reproduction.
When ingested by herbivores, some of these molecules can interfere
with nearly every step in the animal’s neural signaling process.

In current evolutionary interpretations of drug addiction, these toxic
substances trigger the brain’s reward center by rewiring the brain’s
natural reward circuits, and falsely indicating a fitness benefit and
blocking painful feelings. But, as Sullivan, Hagen, and Hammerstein
show, this explanation makes several assumptions that contradict
evidence from previous studies. Most significantly, it assumes that
humans evolved in environments without exposure to drugs, and that the
brain never evolved to protect itself from plant toxins.

However, the researchers point to several other studies which show
that the detoxification enzymes developed by animals (and which
originally evolved in bacteria about 3.5 billion years ago) expanded
in animals about 400 million years ago – about the same time that
plants were evolving their own toxins. In other words, animals and
plants seemed to have coevolved competitive genes in response to each
other, which contradicts the evolutionary interpretation.

As the researchers investigated further, they compiled other studies
showing evidence that humans inherited these detox genes from their
mammalian ancestors. Interestingly, although many modern animal
species can tolerate plant toxins, different species possess different
detox function levels. Even among humans from different geographic
locations, these functions differ. Often, human populations with
greater numbers of toxin-metabolizing genes originate from parts of
the world that contain an abundance of those plants. For example,
human populations in and near Turkey have a very high frequency of
enzymes that can metabolize opiates, and the opiate poppy is native to
the Turkish region.

To conclude their argument against the evolutionary interpretation,
the researchers explain that (pre-human) animals and plants did appear
to have evolved the relevant genes simultaneously. If that’s the case,
then the brain shouldn’t treat drugs as if they contained a fitness
benefit, giving strong support to the paradox.

“We have been surprised by how robust the paradox is – that is, in
presenting the arguments at scientific meetings for several years now,
no one has been able to refute the basic argument that plant
ecological models and neurobiological models of drug use are in direct
conflict,” Sullivan said.

Many more questions also remain unanswered, but they may contain clues
to an explanation. For example, there is contradictory evidence for
whether commonly used drugs have become more or less potent as they’ve
been domesticated. Also, as the researchers point out, current models
explaining drug reward mechanisms don’t differentiate between
different drugs – even though the pathways taken by opiates, cannabis,
or any other drug are vastly different. Models of multiple-drug
pathways might better explain drug appeal, the scientists suggest.

Based on evidence from previous studies, Sullivan, Hagen, and
Hammerstein note that plant toxins may actually have some kind of
benefit for animals. For instance, because plant toxins are more
harmful to some species than to others, the less affected species
might actually consume levels of toxin that are tolerable to
themselves but much worse for the parasites or pathogens that feed on
them in order to protect themselves. For example, earlier humans that
consumed nicotine (in much smaller amounts than today) could have
received the benefit of fewer parasitic infections. Of course, the
benefits also come with trade-offs.

“The main implications for future research are that neurobiological
theorists must consider facts emerging from plant ecology,” Sullivan
said. “We are also planning field studies looking for relationships
between human drug use and protection from helminth parasites.”

“Neurobiological models of drug abuse propose that drug use is
initiated and maintained by rewarding feedback mechanisms. However,
the most commonly used drugs are plant neurotoxins that evolved to
punish, not reward, consumption by animal herbivores. Reward models
therefore implicitly assume an evolutionary mismatch between recent
drug-profligate environments and a relatively drug-free past in which
a reward centre, incidentally vulnerable to neurotoxins, could evolve.
By contrast, emerging insights from plant evolutionary ecology and the
genetics of hepatic enzymes, particularly cytochrome P450, indicate
that animal and hominid taxa have been exposed to plant toxins
throughout their evolution. Specifically, evidence of conserved
function, stabilizing selection, and population-specific selection of
human cytochrome P450 genes indicate recent evolutionary exposure to
plant toxins, including those that affect animal nervous systems.
Thus, the human propensity to seek out and consume plant neurotoxins
is a paradox with far-reaching implications for current drug-reward
theory. We sketch some potential resolutions of the paradox, including
the possibility that humans may have evolved to counter-exploit plant
neurotoxins. Resolving the paradox of drug reward will require a
synthesis of ecological and neurobiological perspectives of drug
seeking and use.”

Roger Sullivan
e-mail : sullivar [at] csus [dot] edu

Edward Hagen
email : hagen [at] vancouver [dot] wsu [dot] edu

Peter Hammerstein
email : p [dot] hammerstein [at] biologie [dot]







YES, #1 IS NEW YORK,1518,450078,00.html,1518,384456,00.html
Quiet Spanish city is Europe’s coke capital
Miranda de Ebro second only to New York says UN
Study of waste water is mistaken, say residents
BY Dale Fuchs  /  June 29 2007

Miranda de Ebro, a small industrial city in northern Spain, was once
known for small blood sausages, a three-day fiesta after Holy Week and
its strategic location as highway stopover – on the way to somewhere
else. But now the city has a new distinction: cocaine capital of

The United Nations World Drug Report this year ranks Miranda de Ebro
as the city with the highest incidence of cocaine use in Europe and
second in the world after New York, with a rate nearly five times as
high as in St Moritz, London, Zurich and Madrid. The city’s 40,000
residents, mostly factory workers and small shopkeepers, are
astonished by the findings. They can not understand how the UN study
of waste water could have found a consumption rate of 97 lines a day
for every 1,000 people, in a city whose big event is the traditional
Sunday evening stroll. “It’s absolutely absurd,” the mayor, Fernando
Campo, told the Guardian. “This is a tranquil, working-class city.
What the people like to do is have a little glass of wine with their
tapas, not white lines.”

With no large discos and few other clubs to attract a party crowd,
Miranda de Ebro had little in common with the wild atmosphere of
Ibiza, Mr Campo insisted. He suggested the findings were an error
possibly caused by a nearby chemical plant. City waste is purified
before reaching the river, he said. Miranda de Ebro may be in denial,
but nobody in Spain disputes the rest of the UN report, which ranks
Spaniards as the most avid cocaine users in the world. Of the
population aged 15 to 64, 3% inhales the white powder, compared with
2.4% in England and 2.8% in the US. The percentage of youths aged 14
to 18 using the drug has roughly quadrupled in the past decade.

The UN report blames Spain’s avid use of cocaine partly on cultural
and linguistic ties to cocaine-producing countries of Latin America,
and its expansive coastline, especially the dangerous and hard-to-
patrol coves of northern Galicia, which invite smugglers. The UN
report dubs Spain a drug-trafficker’s “gateway to Europe”. The number
of police seizures of the drug far surpasses any other Mediterranean
country. Sociologists also point to the liberal, feel-good youth
culture that blossomed since the end of the Franco dictatorship – now
coupled with historically high purchasing power that keeps suburban
mega-discos and chic city bars doing a lucrative business until dawn.

Parents who came of age under the repressive Franco years are also
generally wary of imposing too many restrictions on their teenagers
and young adults who live at home, sociologists say, allowing generous
budgets for once unthinkable luxuries, such as a breast implants or
trips to Ibiza. The health ministry, alarmed by the trends, announced
this week a €7m (£5m) campaign to take the glamour out of cocaine so
young people no longer associated sniffing with success. The ministry
is also trying to persuade hotel owners to fight against drug use in
their establishments.

Miranda de Ebro, meanwhile, is battling to clear its name. The mayor
has sent a letter to the UN asking for an explanation of the findings.
Police are investigating to see if the river, at a transport
crossroads, could be used by smugglers passing through. Many
residents, though, have taken the report as a joke. “I laughed when I
heard about,” said a youth hostel worker. “There is no nightlife here.
You can run through the town in 10 minutes. Everyone is joking, ‘Who’s
the person sniffing the 97 lines each day’.”










Gary Slutkin
e-mail : gslutkin [at] uic [dot] edu

Blocking the Transmission of Violence
BY Alex Kotlowitz  /  May 4, 2008

Last summer, Martin Torres was working as a cook in Austin, Tex.,
when, on the morning of Aug. 23, he received a call from a relative.
His 17-year-old nephew, Emilio, had been murdered. According to the
police, Emilio was walking down a street on Chicago’s South Side when
someone shot him in the chest, possibly the culmination of an ongoing
dispute. Like many killings, Emilio’s received just a few sentences in
the local newspapers. Torres, who was especially close to his nephew,
got on the first Greyhound bus to Chicago. He was grieving and
plotting retribution. “I thought, Man, I’m going to take care of
business,” he told me recently. “That’s how I live. I was going
hunting. This is my own blood, my nephew.”

Torres, who is 38, grew up in a dicey section of Chicago, and even by
the standards of his neighborhood he was a rough character. His
nickname was Packman, because he was known to always pack a gun. He
was first shot when he was 12, in the legs with buckshot by members of
a rival gang. He was shot five more times, including once through the
jaw, another time in his right shoulder and the last time — seven
years ago — in his right thigh, with a .38-caliber bullet that is
still lodged there. On his chest, he has tattooed a tombstone with the
name “Buff” at its center, a tribute to a friend who was killed on his
18th birthday. Torres was the head of a small Hispanic gang, and
though he is no longer active, he still wears two silver studs in his
left ear, a sign of his affiliation.

When he arrived in Chicago, he began to ask around, and within a day
believed he had figured out who killed his nephew. He also began
drinking a lot — mostly Hennessey cognac. He borrowed two guns, a .38
and a .380, from guys he knew. He would, he thought, wait until after
the funeral to track down his nephew’s assailants.

Zale Hoddenbach looks like an ex-military man. He wears his hair
cropped and has a trimmed goatee that highlights his angular jaw. He
often wears T-shirts that fit tightly around his muscled arms, though
he also carries a slight paunch. When he was younger, Hoddenbach, who
is also 38, belonged to a gang that was under the same umbrella as
Torres’s, and so when the two men first met 17 years ago at Pontiac
Correctional Center, an Illinois maximum-security prison, they became
friendly. Hoddenbach was serving time for armed violence; Torres for
possession of a stolen car and a gun (he was, he says, on his way to
make a hit). “Zale was always in segregation, in the hole for fights,”
Torres told me. “He was aggressive.” In one scuffle, Hoddenbach lost
the sight in his right eye after an inmate pierced it with a shank.
Torres and Hoddenbach were at Pontiac together for about a year but
quickly lost touch after they were both released.

Shortly after Torres arrived in Chicago last summer, Hoddenbach
received a phone call from Torres’s brother, the father of the young
man who was murdered. He was worried that Torres was preparing to seek
revenge and hoped that Hoddenbach would speak with him. When
Hoddenbach called, Torres was thrilled. He immediately thought that
his old prison buddy was going to join him in his search for the
killer. But instead Hoddenbach tried to talk him down, telling him
retribution wasn’t what his brother wanted. “I didn’t understand what
the hell he was talking about,” Torres told me when I talked to him
six months later. “This didn’t seem like the person I knew.” The next
day Hoddenbach appeared at the wake, which was held at New Life
Community Church, housed in a low-slung former factory. He spent the
day by Torres’s side, sitting with him, talking to him, urging him to
respect his brother’s wishes. When Torres went to the parking lot for
a smoke, his hands shaking from agitation, Hoddenbach would follow.
“Because of our relationship, I thought there was a chance,”
Hoddenbach told me. “We were both cut from the same cloth.” Hoddenbach
knew from experience that the longer he could delay Torres from
heading out, the more chance he’d have of keeping him from shooting
someone. So he let him vent for a few hours. Then Hoddenbach started
laying into him with every argument he could think of: Look around, do
you see any old guys here? I never seen so many young kids at a
funeral. Look at these kids, what does the future hold for them? Where
do we fit in? Who are you to step on your brother’s wishes?

THE STUBBORN CORE of violence in American cities is troubling and
perplexing. Even as homicide rates have declined across the country —
in some places, like New York, by a remarkable amount — gunplay
continues to plague economically struggling minority communities. For
25 years, murder has been the leading cause of death among African-
American men between the ages of 15 and 34, according to the Centers
for Disease Control and Prevention, which has analyzed data up to
2005. And the past few years have seen an uptick in homicides in many
cities. Since 2004, for instance, they are up 19 percent in
Philadelphia and Milwaukee, 29 percent in Houston and 54 percent in
Oakland. Just two weekends ago in Chicago, with the first warm
weather, 36 people were shot, 7 of them fatally. The Chicago Sun-Times
called it the “weekend of rage.” Many killings are attributed to gang
conflicts and are confined to particular neighborhoods. In Chicago,
where on average five people were shot each day last year, 83 percent
of the assaults were concentrated in half the police districts. So for
people living outside those neighborhoods, the frequent outbursts of
unrestrained anger have been easy to ignore. But each shooting, each
murder, leaves a devastating legacy, and a growing school of thought
suggests that there’s little we can do about the entrenched urban
poverty if the relentless pattern of street violence isn’t somehow

The traditional response has been more focused policing and longer
prison sentences, but law enforcement does little to disrupt a street
code that allows, if not encourages, the settling of squabbles with
deadly force. Zale Hoddenbach, who works for an organization called
CeaseFire, is part of an unusual effort to apply the principles of
public health to the brutality of the streets. CeaseFire tries to deal
with these quarrels on the front end. Hoddenbach’s job is to suss out
smoldering disputes and to intervene before matters get out of hand.
His job title is violence interrupter, a term that while not artful
seems bluntly self-explanatory. Newspaper accounts usually refer to
the organization as a gang-intervention program, and Hoddenbach and
most of his colleagues are indeed former gang leaders. But CeaseFire
doesn’t necessarily aim to get people out of gangs — nor interrupt the
drug trade. It’s almost blindly focused on one thing: preventing

CeaseFire’s founder, Gary Slutkin, is an epidemiologist and a
physician who for 10 years battled infectious diseases in Africa. He
says that violence directly mimics infections like tuberculosis and
AIDS, and so, he suggests, the treatment ought to mimic the regimen
applied to these diseases: go after the most infected, and stop the
infection at its source. “For violence, we’re trying to interrupt the
next event, the next transmission, the next violent activity,” Slutkin
told me recently. “And the violent activity predicts the next violent
activity like H.I.V. predicts the next H.I.V. and TB predicts the next
TB.” Slutkin wants to shift how we think about violence from a moral
issue (good and bad people) to a public health one (healthful and
unhealthful behavior).

EVERY WEDNESDAY AFTERNOON, in a Spartan room on the 10th floor of the
University of Illinois at Chicago’s public-health building, 15 to 25
men — and two women — all violence interrupters, sit around tables
arranged in a circle and ruminate on the rage percolating in the city.
Most are in their 40s and 50s, though some, like Hoddenbach, are a bit
younger. All of them are black or Hispanic and in one manner or
another have themselves been privy to, if not participants in, the
brutality of the streets.

On a Wednesday near the end of March, Slutkin made a rare appearance;
he ordinarily leaves the day-to-day operations to a staff member. Fit
at 57, Slutkin has a somewhat disheveled appearance — tie askew, hair
uncombed, seemingly forgetful. Some see his presentation as a
calculated effort to disarm. “Slutkin does his thing in his
Slutkinesque way,” notes Carl Bell, a psychiatrist who has long worked
with children exposed to neighborhood violence and who admires
CeaseFire’s work. “He seems kind of disorganized, but he’s not.”
Hoddenbach told me: “You can’t make too much of that guy. In the
beginning, he gives you that look like he doesn’t know what you’re
talking about.”

Slutkin had come to talk with the group about a recent high-profile
incident outside Crane Tech High School on the city’s West Side. An 18-
year-old boy was shot and died on the school’s steps, while nearby
another boy was savagely beaten with a golf club. Since the beginning
of the school year, 18 Chicago public-school students had been killed.
(Another six would be murdered in the coming weeks.) The interrupters
told Slutkin that there was a large police presence at the school, at
least temporarily muffling any hostilities there, and that the police
were even escorting some kids to and from school. They then told him
what was happening off the radar in their neighborhoods. There was the
continuing discord at another high school involving a group of girls
(“They’d argue with a stop sign,” one of the interrupters noted); a 14-
year-old boy with a gang tattoo on his forehead was shot by an older
gang member just out of prison; a 15-year-old was shot in the stomach
by a rival gang member as he came out of his house; and a former
CeaseFire colleague was struggling to keep himself from losing control
after his own sons were beaten. There was also a high-school
basketball player shot four times; a 12-year-old boy shot at a party;
gang members arming themselves to counter an egging of their freshly
painted cars; and a high-ranking gang member who was on life support
after being shot, and whose sister was overheard talking on her
cellphone in the hospital, urging someone to “get those straps
together. Get loaded.”

These incidents all occurred over the previous seven days. In each of
them, the interrupters had stepped in to try to keep one act of enmity
from spiraling into another. Some had more success than others. Janell
Sails prodded the guys with the egged cars to go to a car wash and
then persuaded them it wasn’t worth risking their lives over a stupid
prank. At Crane Tech High School, three of the interrupters fanned
out, trying to convince the five gangs involved in the conflict to lie
low, but they conceded that they were unable reach some of the main
players. Many of the interrupters seem bewildered by what they see as
a wilder group of youngsters now running the streets and by a gang
structure that is no longer top-down but is instead made up of many
small groups — which they refer to as cliques — whose members are
answerable to a handful of peers.

For an hour, Slutkin leaned on the table, playing with a piece of
Scotch tape, keenly listening. In some situations, Slutkin can appear
detached and didactic. He can wear people down with his long
discourses, and some of the interrupters say they sometimes tune him
out. (On one occasion, he tried to explain to me the relationship
between emotional intelligence and quantum physics.) But having seen a
lot of out-of-control behavior, Slutkin is a big believer in
controlling emotions. So he has taught himself not to break into
discussions and to digest before presenting his view. The interrupters
say he has their unqualified loyalty. Hoddenbach told me that he now
considers Slutkin a friend.

It became clear as they delivered their reports that many of the
interrupters were worn down. One of them, Calvin Buchanan, whose
street name is Monster and who just recently joined CeaseFire, showed
the others six stitches over his left eye; someone had cracked a beer
bottle on his head while he was mediating an argument between two men.
The other interrupters applauded when Buchanan told them that, though
tempted, he restrained himself from getting even.

When Slutkin finally spoke, he first praised the interrupters for
their work. “Everybody’s overreacting, and you’re trying to cool them
down,” he told them. He then asked if any of them had been
experiencing jitteriness or fear. He spent the next half-hour teaching
stress-reduction exercises. If they could calm themselves, he seemed
to be saying, they could also calm others. I recalled what one of the
interrupters told me a few weeks earlier: “We helped create the
madness, and now we’re trying to debug it.”

IN THE PUBLIC-HEALTH field, there have long been two schools of
thought on derailing violence. One focuses on environmental factors,
specifically trying to limit gun purchases and making guns safer. The
other tries to influence behavior by introducing school-based
curricula like antidrug and safe-sex campaigns.

Slutkin is going after it in a third way — as if he were trying to
contain an infectious disease. The fact that there’s no vaccine or
medical cure for violence doesn’t dissuade him. He points out that in
the early days of AIDS, there was no treatment either. In the short
run, he’s just trying to halt the spread of violence. In the long run,
though, he says he hopes to alter behavior and what’s considered
socially acceptable.

Slutkin’s perspective grew out of his own experience as an infectious-
disease doctor. In 1981, six years out of the University of Chicago
Pritzker School of Medicine, Slutkin was asked to lead the TB program
in San Francisco. With an influx of new refugees from Cambodia, Laos
and Vietnam, the number of cases in the city had nearly doubled.
Slutkin chose to concentrate on those who had the most active TB; on
average, they were infecting 6 to 10 others a year. Slutkin hired
Southeast Asian outreach workers who could not only locate the
infected individuals but who could also stick with them for nine
months, making sure they took the necessary medication. These outreach
workers knew the communities and spoke the languages, and they were
able to persuade family members of infected people to be tested.
Slutkin also went after the toughest cases — 26 people with drug-
resistant TB. The chance of curing those people was slim, but Slutkin
reckoned that if they went untreated, the disease would continue to
spread. “Gary wasn’t constrained by the textbook,” says Eric Goosby,
who worked in the clinic and is now the chief executive of the Pangaea
Global AIDS Foundation. Within two years, the number of TB cases, at
least among these new immigrants, declined sharply.

Slutkin then spent 10 years in Africa, first in refugee camps in
Somalia and then working, in Uganda and other countries, for the World
Health Organization to curtail the spread of AIDS. During his first
posting, in Somalia, a cholera epidemic spread from camp to camp.
Slutkin had never dealt with an outbreak of this sort, and he was
overwhelmed. The diarrhea from cholera is so severe that patients can
die within hours from dehydration. According to Sandy Gove, who was
then married to Slutkin and was also a doctor in the camps, infection
rates were approaching 10 percent; in one camp there were 1,000
severely ill refugees. “It was desperate,” she told me. Slutkin drove
a Land Cruiser two and a half days to an American military base along
the coast to the closest phone. He called doctors in Europe and the
United States, trying to get information. He also asked the soldiers
at the base for blue food coloring, which he then poured into the
water sources of the bacteria, a warning to refugees not to drink.
“What Gary is really good about is laying out a broad strategic plan
and keeping ahead of something,” Gove told me. There were only six
doctors for the 40 refugee camps, so Slutkin and Gove trained birth
attendants to spot infected people and to give them rehydration
therapies in their homes. Because the birth attendants were refugees,
they were trusted and could persuade those with the most severe
symptoms to receive aid at the medical tent.

After leaving Africa, Slutkin returned to Chicago, where he was raised
and where he could attend to his aging parents. (He later remarried
there.) It was 1995, and there had been a series of horrific murders
involving children in the city. He was convinced that longer sentences
and more police officers had made little difference. “Punishment
doesn’t drive behavior,” he told me. “Copying and modeling and the
social expectations of your peers is what drives your behavior.”

Borrowing some ideas (and the name) from a successful Boston program,
Slutkin initially established an approach that exists in one form or
another in many cities: outreach workers tried to get youth and young
adults into school or to help them find jobs. These outreach workers
were also doing dispute mediation. But Slutkin was feeling his way,
much as he had in Somalia during the cholera epidemic. One of
Slutkin’s colleagues, Tio Hardiman, brought up an uncomfortable truth:
the program wasn’t reaching the most bellicose, those most likely to
pull a trigger. So in 2004, Hardiman suggested that, in addition to
outreach workers, they also hire men and women who had been deep into
street life, and he began recruiting people even while they were still
in prison. Hardiman told me he was looking for those “right there on
the edge.” (The interrupters are paid roughly $15 an hour, and those
working full time receive benefits from the University of Illinois at
Chicago, where CeaseFire is housed.) The new recruits, with strong
connections to the toughest communities, would focus solely on
sniffing out clashes that had the potential to escalate. They would
intervene in potential acts of retribution — as well as try to defuse
seemingly minor spats that might erupt into something bigger, like
disputes over women or insulting remarks.

As CeaseFire evolved, Slutkin says he started to realize how much it
was drawing on his experiences fighting TB and AIDS. “Early
intervention in TB is actually treatment of the most infectious
people,” Slutkin told me recently. “They’re the ones who are infecting
others. So treatment of the most infectious spreaders is the most
effective strategy known and now accepted in the world.” And, he
continued, you want to go after them with individuals who themselves
were once either infectious spreaders or at high risk for the illness.
In the case of violence, you use those who were once hard-core, once
the most belligerent, once the most uncontrollable, once the angriest.
They are the most convincing messengers. It’s why, for instance,
Slutkin and his colleagues asked sex workers in Uganda and other
nations to spread the word to other sex workers about safer sexual
behavior. Then, Slutkin said, you train them, as you would
paraprofessionals, as he and Gove did when they trained birth
attendants to spot cholera in Somalia.

The first step to containing the spread of an infectious disease is
minimizing transmission. The parallel in Slutkin’s Chicago work is
thwarting retaliations, which is precisely what Hoddenbach was trying
to do in the aftermath of Emilio Torres’s murder. But Slutkin is also
looking for the equivalent of a cure. The way public-health doctors
think of curing disease when there are no drug treatments is by
changing behavior. Smoking is the most obvious example. Cigarettes are
still around. And there’s no easy remedy for lung cancer or emphysema.
So the best way to deal with the diseases associated with smoking is
to get people to stop smoking. In Uganda, Slutkin and his colleagues
tried to change behavior by encouraging people to have fewer sexual
partners and to use condoms. CeaseFire has a visible public-
communications campaign, which includes billboards and bumper stickers
(which read, “Stop. Killing. People.”). It also holds rallies — or
what it calls “responses” — at the sites of killings. But much
research suggests that peer or social pressure is the most effective
way to change behavior. “It was a real turning point for me,” Slutkin
said, “when I was working on the AIDS epidemic and saw research
findings that showed that the principal determinant of whether someone
uses a condom or not is whether they think their friends use them.”
Daniel Webster, a professor of public health at Johns Hopkins
University who has looked closely at CeaseFire, told me, “The guys out
there doing the interruption have some prestige and reputation, and I
think the hope is that they start to change a culture so that you can
retain your status, retain your manliness and be able to walk away
from events where all expectations were that you were supposed to
respond with lethal force.”

As a result, the interrupters operate in a netherworld between
upholding the law and upholding the logic of the streets. They’re not
meant to be a substitute for the police, and indeed, sometimes the
interrupters negotiate disputes involving illicit goings-on. They
often walk a fine line between mediating and seeming to condone
criminal activity. At one Wednesday meeting this past December, the
interrupters argued over whether they could dissuade stickup artists
from shooting their victims; persuading them to stop robbing people
didn’t come up in the discussion.

LAST DECEMBER, at the first Wednesday meeting I attended, James
Highsmith came up to introduce himself. At 58, Highsmith is one of the
older interrupters. He wears striped, collared shirts, black
rectangular glasses and often a black Borsalino, an Italian-made
fedora. He reminded me that I had mentioned him in my book, “There Are
No Children Here,” about life in a Chicago public-housing project in
the late 1980s. I wrote about a picnic that some Chicago drug kingpins
gave in a South Side park. There was a car show, a wet T-shirt contest
and softball games for the children. About 2,000 people attended,
dancing to a live band while the drug lords showed off their Mercedes
Benzes, Rolls-Royces and Jaguars. Highsmith was the key sponsor of the
event. He controlled the drug trade on the city’s South Side. He owned
a towing business, an auto-mechanic’s shop and a nightclub, as well as
a 38-foot boat. In January 1994, he was sentenced to 14 years in
federal prison on drug-conspiracy charges; he was released in 2004.
Highsmith was just the kind of recruit CeaseFire looks for: an older
man getting out of the penitentiary who once had standing on the
streets and who, through word of mouth, appears ready, eager even, to
discard his former persona. “I’m a work in progress,” Highsmith told

One evening we were sitting in Highsmith’s basement apartment when the
phone rang. It was Alphonso Prater, another interrupter. The two had a
reunion of sorts when they joined CeaseFire; they shared a cell in the
county jail 34 years ago. Prater’s voice is so raspy it sounds as if
he has gravel in his throat. He told me that he became permanently
hoarse after a long stint in segregation in prison; he had to shout to
talk with others. When Prater called the night I was there, all
Highsmith could make out was: “There’s some high-tech stuff going on.
I need you to talk to some folks.” Highsmith didn’t ask any questions.

We drove to a poorly lighted side street on the city’s West Side.
Empty beer bottles littered the side of the road. Prater, who is short
and wiry and has trouble keeping still, was bouncing on the sidewalk,
standing next to a lanky middle-aged man who had receded into his
oversize hooded sweatshirt. Highsmith, Prater and another interrupter
joined the man in a parked car, where they talked for half an hour.
When they were done, the car peeled away, two other sedans escorting
it, one in front, the other in the rear. “Protection,” Highsmith
commented. Apparently, the man in the hooded sweatshirt, whom I would
meet later, had been an intermediary in a drug deal. He had taken an
out-of-town buyer holding $30,000 in cash to a house on the South Side
to buy drugs. But when they got there, they were met by six men in the
backyard, each armed with a pistol or an automatic weapon, and robbed.
The out-of-town buyer believed he’d been set up by the intermediary,
who, in turn, was trying to hunt down the stickup artists. In the car,
Prater, who knew the intermediary, had worked to cool him down, while
Highsmith promised to see if he could find someone who might know the
stickup guys and could negotiate with them. The intermediary told
Prater and Highsmith, a bit ominously, “Something got to give.”

After the intermediary drove off, Prater joked that there was no way
he was getting back in a car with him, that he was too overheated and
too likely to be the target or the shooter. “I’m not sure we can do
anything about this one,” Highsmith told Prater.

RELYING ON HARDENED TYPES — the ones who, as Webster of Johns Hopkins
says, have some prestige on the streets — is risky. They have prestige
for a reason. Hoddenbach, who once beat someone so badly he punctured
his lungs, is reluctant to talk about his past. “I don’t want to be
seen as a monster,” he told me. Hoddenbach’s ethnicity is hard to
pinpoint. His father was Dutch and his mother Puerto Rican, and he’s
so light-skinned his street name was Casper. He has a discerning gaze
and mischievous smile, and can be hardheaded and impatient. (At the
Wednesday meetings, he often sits near the door and whispers
entreaties to the others to speed things up.) Hoddenbach’s father had
an explosive temper, and to steal from Slutkin’s lingo, he seems to
have infected others. Two of Hoddenbach’s older brothers are serving
time for murder. His third brother has carved out a legitimate life as
a manager at a manufacturing firm. Hoddenbach always worked. He did
maintenance on train equipment and towed airplanes at a private
airport. But he was also active in a Hispanic street gang and was
known for his unmitigated aggression. He served a total of eight years
in the state penitentiary, the last stay for charges that included
aggravated battery. He was released in 2002.

In January, I was with Slutkin in Baltimore, where he spoke about
CeaseFire to a small gathering of local civic leaders at a private
home. During the two-hour meeting, Slutkin never mentioned that the
interrupters were ex-felons. When I later asked him about that
omission, he conceded that talking about their personal histories “is
a dilemma. I haven’t solved it.” I spent many hours with Hoddenbach
and the others, trying to understand how they chose to make the
transition from gangster to peacemaker, how they put thuggery behind
them. It is, of course, their street savvy and reputations that make
them effective for CeaseFire. (One supporter of the program admiringly
called it “a terrifying strategy” because of the inherent risks.) Some
CeaseFire workers have, indeed, reverted to their old ways. One
outreach worker was fired after he was arrested for possession of an
AK-47 and a handgun. Another outreach worker and an interrupter were
let go after they were arrested for dealing drugs. Word-of-mouth
allegations often circulate, and privately, some in the police
department worry about CeaseFire’s workers returning to their old

Not all the interrupters I talked to could articulate how they had
made the transition. Some, like Hoddenbach, find religion — in his
case, Christianity. He also has four children he feels responsible
for, and has found ways to decompress, like going for long runs. (His
brother Mark speculated that “maybe he just wants to give back what he
took out.”) I once asked Hoddenbach if he has ever apologized to
anyone he hurt. We were with one of his old friends from the street,
who started guffawing, as if I had asked Hoddenbach if he ever wore
dresses. “I done it twice,” Hoddenbach told us — quickly silencing his
friend and saving me from further embarrassment. (One apology was to
the brother of the man whose lungs he’d punctured; the other was to a
rival gang member he shot.) Alphonso Prater told me that the last time
he was released from prison, in 2001, an older woman hired him to gut
some homes she was renovating. She trusted him with the keys to the
homes, and something about that small gesture lifted him. “She seen
something in me that I didn’t see,” he told me.

Though the interrupters may not put it this way, the Wednesday
meetings are a kind of therapy. One staff member laughingly compared
it to a 12-step program. It was clear to me that they leaned on one
another — a lot. Prater once got an urgent call from his daughter, who
said her boyfriend was beating her. Prater got in his car and began to
race to her house; as he was about to run a stop sign, he glimpsed a
police car on the corner. He skidded to a halt. It gave him a moment
to think, and he called his CeaseFire supervisor, Tio Hardiman, who
got another interrupter to visit Prater’s daughter. Not long ago,
three old-timers fresh out of prison ruthlessly ridiculed Hoddenbach
for his work with CeaseFire. They were relentless, and Hoddenbach
asked to sit down with them. But when it came time to meet, he
realized he was too riled, and so he asked another interrupter, Tim
White, to go in his place. “I was worried I was going to whip their
asses, and wherever it went from there it went,” Hoddenbach told me.
“They were old feelings, feelings I don’t want to revisit.”

Recently I went out to lunch with Hoddenbach and Torres. It had been
four months since Torres buried his nephew. Torres, who looked worn
and agitated (he would get up periodically to smoke a cigarette
outside), seemed paradoxically both grateful to and annoyed at
Hoddenbach. In the end, Hoddenbach had persuaded him not to avenge his
nephew’s murder. Torres had returned the guns and quickly left town.
This was his first visit back to Chicago. “I felt like a punk,” he
told me, before transferring to the present tense. “I feel shameful.”
He said he had sought revenge for people who weren’t related to him —
“people who weren’t even no blood to me.” But he held back in the case
of his nephew. “I still struggle with it,” he said. On the ride over
to the restaurant, Torres had been playing a CD of his nephew’s
favorite rap songs. It got him hyped up, and he blurted out to
Hoddenbach, “I feel like doing something.” Hoddenbach chided him and
shut off the music. “Stop being an idiot,” he told Torres. “Something
made me do what Zale asked me to do,” Torres said later, looking more
puzzled than comforted. “Which is respect my brother’s wishes.”

When Slutkin heard of Hoddenbach’s intervention, he told me: “The
interrupters have to deal with how to get someone to save face. In
other words, how do you not do a shooting if someone has insulted you,
if all of your friends are expecting you to do that? . . . In fact,
what our interrupters do is put social pressure in the other

He continued: “This is cognitive dissonance. Before Zale walked up to
him, this guy was holding only one thought. So you want to put another
thought in his head. It turns out talking about family is what really
makes a difference.” Slutkin didn’t take this notion to the
interrupters; he learned it from them.

ONE JANUARY NIGHT at 11 p.m., Charles Mack received a phone call that
a shooting victim was being rushed to Advocate Christ Medical Center.
Mack drove the 10 miles from his home to the hospital, which houses
one of four trauma centers in Chicago. Two interrupters, Mack and
LeVon Stone, are assigned there. They respond to every shooting and
stabbing victim taken to the hospital. Mack, who is 57 and has a
slight lisp, is less imposing than his colleagues. He seems always to
be coming from or going to church, often dressed in tie and cardigan.
He sheepishly told me that his prison term, two years, was for bank
fraud. “The other guys laugh at me,” he said. LeVon Stone is 23 years
younger and a fast talker. He’s in a wheelchair, paralyzed from the
waist down as a result of being shot when he was 18.

Advocate Christ has come to see the presence of interrupters in the
trauma unit as essential and is, in fact, looking to expand their
numbers. “It has just given me so much hope,” Cathy Arsenault, one of
the chaplains there, told me. “The families would come in, huddle in
the corner and I could see them assigning people to take care of
business.” Mack and Stone try to cool off family members and friends,
and if the victim survives, try to keep them from seeking vengeance.

The victim that night was a tall 16-year-old boy named Frederick. He
was lying on a gurney just off the emergency room’s main hallway. He
was connected to two IVs, and blood was seeping through the gauze
wrapped around his left hand. Mack stood to one side; Stone pulled up
on the other. “You know, the most important thing is —” Mack ventured.
“You’re alive,” Stone chimed in. Stone then asked Frederick if he had
heard of CeaseFire. The boy nodded and told them that he had even
participated in a CeaseFire rally after a killing in his neighborhood.
“We try to stop violence on the front end,” Stone told Frederick.
“Unfortunately, this is the back end. We just want to make sure you
don’t go out and try to retaliate.”

The boy had been shot — one bullet shattered his thigh bone and
another ripped the tendons in two fingers. Nonetheless, he seemed
lucid and chatty. “My intention is to get in the house, call my
school, get my books and finish my work,” he told Mack and Stone. He
mentioned the school he attends, which Mack instantly recognized as a
place for kids on juvenile-court probation. Frederick told his story.
He was at a party, and a rival clique arrived. Frederick and his
friends sensed there would be trouble, so they left, and while
standing outside, one of the rival group pulled a gun on them.
Frederick’s friend told him earlier he had a gun. It turned out to be
braggadocio, and so when his friend took off running, so did
Frederick, a step behind. As he dashed through a narrow passageway
between buildings, he heard the shots.

“Can I ask why you’re in the wheelchair?” Frederick asked Stone. “I
got shot 15 years ago,” Stone told him. Stone didn’t say anything more
about it, and later when I asked for more detail, he was elusive. He
said simply that he had gotten shot at a barbecue when he tried to
intervene in a fistfight. “You doing good,” Stone assured him. “You
got shot. You’re here. And you’re alive. What you do when you get out
of here?”

“You got to stop hanging with the wrong person, thinking you’re a
Wyatt Earp,” Frederick said, speaking in the third person as if he
were reciting a lesson. At that point, Frederick’s sister arrived. She
explained that she was bringing up her brother. She was 18. “He just
wants to go to parties, parties, parties,” she complained. “But it’s
too dangerous.” She started to cry. “Don’t start that, please,”
Frederick pleaded. Mack left a CeaseFire brochure on Frederick’s chest
and promised to visit him again in the coming weeks.

LAST MAY, after a 16-year-old boy was killed trying to protect a girl
from a gunman on a city bus, Slutkin appeared on a local public-
television news program. He suggested CeaseFire was responsible for
sharp dips in homicide around the city. Slutkin, some say, gives
CeaseFire too much credit. Carl Bell, the psychiatrist, was on the
program with Slutkin that night. “I didn’t say anything,” he told me.
“I support Slutkin. I’m like, Slutkin, what are you doing? You can’t
do that. Maybe politically it’s a good thing, but scientifically it’s
so much more complex than that. Come on, Gary.”

Last year, CeaseFire lost its $6 million in annual state financing —
which meant a reduction from 45 interrupters to 17 — as part of
statewide budget cuts. One state senator, who had ordered an audit of
CeaseFire (released after the cuts, it found some administrative
inefficiencies), maintained there was no evidence that CeaseFire’s
work had made a difference. (The cuts caused considerable uproar: The
Chicago Tribune ran an editorial urging the restoration of financing,
and the State House overwhelmingly voted to double CeaseFire’s
financing; the State Senate, though, has yet to address it.)

It can be hard to measure the success — or the failure — of public-
health programs, especially violence-prevention efforts. And given
Slutkin’s propensity to cite scientific studies, it is surprising that
he hasn’t yet published anything about CeaseFire in a peer-reviewed
journal. Nonetheless, in a report due out later this month,
independent researchers hired by the Justice Department (from which
CeaseFire gets some money) conclude that CeaseFire has had an impact.
Shootings have declined around the city in recent years. But the study
found that in six of the seven neighborhoods examined, CeaseFire’s
efforts reduced the number of shootings or attempted shootings by 16
percent to 27 percent more than it had declined in comparable
neighborhoods. The report also noted — with approbation — that
CeaseFire, unlike most programs, manages by outcomes, which means that
it doesn’t measure its success by gauging the amount of activity (like
the number of interrupters on the street or the number of
interruptions — 1,200 over four years) but rather by whether shootings
are going up or down. One wall in Slutkin’s office is taken up by maps
and charts his staff has generated on the location and changes in the
frequency of shootings throughout the city; the data determine how
they assign the interrupters. Wes Skogan, a professor of political
science at Northwestern (disclosure: I teach there) and the author of
the report, said, “I found the statistical results to be as strong as
you could hope for.”

BALTIMORE, NEWARK and Kansas City, Mo., have each replicated
components of the CeaseFire model and have received training from the
Chicago staff. In Baltimore, the program, which is run by the city,
combines the work of interrupters and outreach workers and has been
concentrated in one East Baltimore neighborhood. (The program recently
expanded to a second community.) Early research out of the Johns
Hopkins Bloomberg School of Public Health shows that in the East
Baltimore neighborhood there were on average two shootings a month
just before the program started. During the first four months that
interrupters worked the streets, there had not been a single incident.

“My eyes rolled immediately when I heard what the model was,” says
Webster of Johns Hopkins, who is studying the Baltimore project.
Webster knew the forces the interrupters were up against and
considered it wishful thinking that they could effectively mediate
disputes. “But when I looked closer at the data,” Webster continues,
“and got to know more about who these people were and what they were
doing, I became far less skeptical and more hopeful. We’re going to
learn from it. And it will evolve.” George Kelling, a Rutgers
professor of criminal justice who is helping to establish an effort in
Newark to reduce homicide, helped develop the “broken window” theory
of fighting crime: addressing small issues quickly. He says a public-
health model will be fully effective only if coupled with other
efforts, including more creative policing and efforts to get gang
members back to school or to work. But he sees promise in the
CeaseFire model. “I had to overcome resistance,” Kelling told me,
referring to the introduction of a similar program in Newark. “But I
think Slutkin’s on to something.”

Most of the police officials I spoke with, in both Chicago and
Baltimore, were grateful for the interrupters. James B. Jackson, now
the first deputy superintendent in Chicago, was once the commander of
the 11th district, which has one of the highest rates of violent crime
in the city. Jackson told me that after his officers investigated an
incident, he would ask the police to pull back so the interrupters
could mediate. He understood that if the interrupters were associated
with the police, it would jeopardize their standing among gang
members. “If you look at how segments of the population view the
police department, it makes some of our efforts problematic,”
Baltimore’s police commissioner, Frederick H. Bealefeld III, told me.
“It takes someone who knows these guys to go in and say, ‘Hey, lay
off.’ We can’t do that.”

Like many new programs that taste some success, CeaseFire has
ambitions that threaten to outgrow its capacity. Slutkin has put much
of his effort on taking the project to other cities (there’s interest
from Los Angeles, Oakland and Wilmington, Del., among others), and he
has consulted with the State Department about assisting in Iraq and in
Kenya. (CeaseFire training material has been made available to the
provincial reconstruction teams in Iraq.) Meanwhile, their Chicago
project is underfinanced, and the interrupters seem stressed from the
amount of work they’ve taken on.

THE INTERRUPTERS have certain understandings. At the Wednesday
meetings, no one is ever to mention anyone involved in a dispute by
name or, for that matter, mention the name of the gang. Instead they
refer to “Group A” or “Group B.” They are not investigators for the
police. In fact, they go out of their way to avoid knowing too much
about a crime. When Highsmith and Prater left me the night of the
failed drug deal, they began working their contacts. Highsmith found
someone who knew one of the stickup men and who, at Highsmith’s
request, negotiated with them. Highsmith’s contact persuaded the
robbers to return enough of the money to appease the drug-buyer’s
anger. When I met with the intermediary a few weeks after things were
resolved, he was still stirred up about the robbery. “I was mad enough
to do anything,” he told me, making it clear that he and his friends
had been hunting for the stickup guys. “This could’ve been a hell of a
lot worse than it was.” To this day, neither Highsmith nor Prater know
the identities of anyone except the intermediary — and they want to
leave it that way.

The interrupters often operate by instinct. CeaseFire once received a
call from the mother of a 15-year-old boy who wanted out of a gang he
joined a few weeks earlier. The mother told Hoddenbach and another
interrupter, Max Cerda, that the gang members chased her son home
every day from school threatening to beat him. They had shot at him
twice. Hoddenbach found the clique leaders and tried to talk sense to
them. If the boy didn’t want to be in the gang, he told them, he’d be
the first one to snitch. The gang members saw the logic behind that
but insisted on giving him a beating before releasing him. Hoddenbach
then tried another tack: he negotiated to let him leave the gang for
$300 — and no thrashing. The family, though, was only able to come up
with $50, so Hoddenbach, Cerda and another interrupter came up with
the rest. At their next Wednesday meeting, some interrupters were
critical of Hoddenbach for paying what they considered extortion
money. “It was kind of a messed-up way, but it was a messed-up way
that works,” Hoddenbach said.

It was nearly three months before Charles Mack could find time to
visit Frederick, the young shooting victim. Frederick had since moved
in with his great-grandmother in a different part of town. In his old
neighborhood, he told Mack, “there always somebody who knows you. And
I had a reputation.” He complained to Mack that he had never been
interviewed by the police but then declared he would never identify
the person who shot him anyway. “I’m going to leave it alone,” he
said. As is so often the case, Frederick couldn’t remember the genesis
of the disagreement between his clique and the other. Mack promised to
stay in touch, and as we dropped him off, Mack turned to me and said,
“I think he’s going to be all right.” It sounded like both a
proclamation as well as hopeful aside.

Not long ago, I stopped by to visit with Hoddenbach at the Boys and
Girls Club, where he holds down a second job. It was a Friday evening,
and he was waiting for an old associate to come by to give him an
introduction to a group of Hispanic kids on the far North Side.
Apparently, earlier in the week, they bashed in the face of an African-
American teenager with a brick. From what Hoddenbach could make out,
it was the result of a long-simmering dispute — the equivalent of a
dormant virus — and the victim’s uncle was now worried that it would
set off more fighting. As we sat and talked, Hoddenbach seemed
unusually agitated. His left foot twitched as if it had an electric
current running through it. “If these idiots continue,” he told me,
“somebody’s going to step up and make a statement.”

Hoddenbach also worried about Torres, who had recently gone back to
Texas and found a job working construction. Hoddenbach says he
originally hoped Torres would stay in Chicago and establish some
roots, but then decided he’d be better off in another town. “I kept
him out of one situation, but I can’t keep him out of all of them,”
Hoddenbach said. This may well speak to CeaseFire’s limitations.
Leaving town is not an option for most. And for those who have walked
away from a shooting, like Torres, if there are no jobs, or lousy
schools, or decrepit housing, what’s to keep them from drifting back
into their former lives? It’s like cholera: you may cure everyone, you
may contain the epidemic, but if you don’t clean up the water supply,
people will soon get sick again.

Slutkin says that it makes sense to purify the water supply if — and
only if — you acknowledge and treat the epidemic at hand. In other
words, antipoverty measures will work only if you treat violence. It
would seem intuitive that violence is a result of economic
deprivation, but the relationship between the two is not static.
People who have little expectation for the future live recklessly. On
the other side of the coin, a community in which arguments are settled
by gunshots is unlikely to experience economic growth and opportunity.
In his book “The Bottom Billion,” Paul Collier argues that one of the
characteristics of many developing countries that suffer from
entrenched poverty is what he calls the conflict trap, the inability
to escape a cycle of violence, usually in the guise of civil wars.
Could the same be true in our inner cities, where the ubiquity of guns
and gunplay pushes businesses and residents out and leaves behind
those who can’t leave, the most impoverished?

In this, Slutkin sees a direct parallel to the early history of
seemingly incurable infectious diseases. “Chinatown, San Francisco in
the 1880s,” Slutkin says. “Three ghosts: malaria, smallpox and
leprosy. No one wanted to go there. Everybody blamed the people.
Dirty. Bad habits. Something about their race. Not only is everybody
afraid to go there, but the people there themselves are afraid at all
times because people are dying a lot and nobody really knows what to
do about it. And people come up with all kinds of other ideas that are
not scientifically grounded — like putting people away, closing the
place down, pushing the people out of town. Sound familiar?”

From the archive, originally posted by: [ spectre ]

From The Sunday Times  /  January 6, 2008
For sale: West’s deadly nuclear secrets

A WHISTLEBLOWER has made a series of extraordinary claims about how
corrupt government officials allowed Pakistan and other states to
steal nuclear weapons secrets.

Sibel Edmonds, a 37-year-old former Turkish language translator for
the FBI, listened into hundreds of sensitive intercepted conversations
while based at the agency’s Washington field office.

She approached The Sunday Times last month after reading about an Al-
Qaeda terrorist who had revealed his role in training some of the 9/11
hijackers while he was in Turkey.

Edmonds described how foreign intelligence agents had enlisted the
support of US officials to acquire a network of moles in sensitive
military and nuclear institutions.

Among the hours of covert tape recordings, she says she heard evidence
that one well-known senior official in the US State Department was
being paid by Turkish agents in Washington who were selling the
information on to black market buyers, including Pakistan.

The name of the official – who has held a series of top government
posts – is known to The Sunday Times. He strongly denies the claims.

However, Edmonds said: “He was aiding foreign operatives against US
interests by passing them highly classified information, not only from
the State Department but also from the Pentagon, in exchange for
money, position and political objectives.”

She claims that the FBI was also gathering evidence against senior
Pentagon officials – including household names – who were aiding
foreign agents.

“If you made public all the information that the FBI have on this
case, you will see very high-level people going through criminal
trials,” she said.

Her story shows just how much the West was infiltrated by foreign
states seeking nuclear secrets. It illustrates how western government
officials turned a blind eye to, or were even helping, countries such
as Pakistan acquire bomb technology.

The wider nuclear network has been monitored for many years by a joint
Anglo-American intelligence effort. But rather than shut it down,
investigations by law enforcement bodies such as the FBI and Britain’s
Revenue & Customs have been aborted to preserve diplomatic relations.

Edmonds, a fluent speaker of Turkish and Farsi, was recruited by the
FBI in the aftermath of the September 11 attacks. Her previous claims
about incompetence inside the FBI have been well documented in

She has given evidence to closed sessions of Congress and the 9/11
commission, but many of the key points of her testimony have remained
secret. She has now decided to divulge some of that information after
becoming disillusioned with the US authorities’ failure to act.

One of Edmonds’s main roles in the FBI was to translate thousands of
hours of conversations by Turkish diplomatic and political targets
that had been covertly recorded by the agency.

A backlog of tapes had built up, dating back to 1997, which were
needed for an FBI investigation into links between the Turks and
Pakistani, Israeli and US targets. Before she left the FBI in 2002 she
heard evidence that pointed to money laundering, drug imports and
attempts to acquire nuclear and conventional weapons technology.

“What I found was damning,” she said. “While the FBI was
investigating, several arms of the government were shielding what was
going on.”

The Turks and Israelis had planted “moles” in military and academic
institutions which handled nuclear technology. Edmonds says there were
several transactions of nuclear material every month, with the
Pakistanis being among the eventual buyers. “The network appeared to
be obtaining information from every nuclear agency in the United
States,” she said.

They were helped, she says, by the high-ranking State Department
official who provided some of their moles – mainly PhD students – with
security clearance to work in sensitive nuclear research facilities.
These included the Los Alamos nuclear laboratory in New Mexico, which
is responsible for the security of the US nuclear deterrent.

In one conversation Edmonds heard the official arranging to pick up a
$15,000 cash bribe. The package was to be dropped off at an agreed
location by someone in the Turkish diplomatic community who was
working for the network.

The Turks, she says, often acted as a conduit for the Inter-Services
Intelligence (ISI), Pakistan’s spy agency, because they were less
likely to attract suspicion. Venues such as the American Turkish
Council in Washington were used to drop off the cash, which was picked
up by the official.

Edmonds said: “I heard at least three transactions like this over a
period of 2 1/2 years. There are almost certainly more.”

The Pakistani operation was led by General Mahmoud Ahmad, then the ISI

Intercepted communications showed Ahmad and his colleagues stationed
in Washington were in constant contact with attachés in the Turkish

Intelligence analysts say that members of the ISI were close to Al-
Qaeda before and after 9/11. Indeed, Ahmad was accused of sanctioning
a $100,000 wire payment to Mohammed Atta, one of the 9/11 hijackers,
immediately before the attacks.

The results of the espionage were almost certainly passed to Abdul
Qadeer Khan, the Pakistani nuclear scientist.

Khan was close to Ahmad and the ISI. While running Pakistan’s nuclear
programme, he became a millionaire by selling atomic secrets to Libya,
Iran and North Korea. He also used a network of companies in America
and Britain to obtain components for a nuclear programme.

Khan caused an alert among western intelligence agencies when his
aides met Osama Bin Laden. “We were aware of contact between A Q
Khan’s people and Al-Qaeda,” a former CIA officer said last week.
“There was absolute panic when we initially discovered this, but it
kind of panned out in the end.”

It is likely that the nuclear secrets stolen from the United States
would have been sold to a number of rogue states by Khan.

Edmonds was later to see the scope of the Pakistani connections when
it was revealed that one of her fellow translators at the FBI was the
daughter of a Pakistani embassy official who worked for Ahmad. The
translator was given top secret clearance despite protests from FBI

Edmonds says packages containing nuclear secrets were delivered by
Turkish operatives, using their cover as members of the diplomatic and
military community, to contacts at the Pakistani embassy in

Following 9/11, a number of the foreign operatives were taken in for
questioning by the FBI on suspicion that they knew about or somehow
aided the attacks.

Edmonds said the State Department official once again proved useful.
“A primary target would call the official and point to names on the
list and say, ‘We need to get them out of the US because we can’t
afford for them to spill the beans’,” she said. “The official said
that he would ‘take care of it’.”

The four suspects on the list were released from interrogation and

Edmonds also claims that a number of senior officials in the Pentagon
had helped Israeli and Turkish agents.

“The people provided lists of potential moles from Pentagon-related
institutions who had access to databases concerning this information,”
she said.

“The handlers, who were part of the diplomatic community, would then
try to recruit those people to become moles for the network. The lists
contained all their ‘hooking points’, which could be financial or
sexual pressure points, their exact job in the Pentagon and what stuff
they had access to.”

One of the Pentagon figures under investigation was Lawrence Franklin,
a former Pentagon analyst, who was jailed in 2006 for passing US
defence information to lobbyists and sharing classified information
with an Israeli diplomat.

“He was one of the top people providing information and packages
during 2000 and 2001,” she said.

Once acquired, the nuclear secrets could have gone anywhere. The FBI
monitored Turkish diplomats who were selling copies of the information
to the highest bidder.

Edmonds said: “Certain greedy Turkish operators would make copies of
the material and look around for buyers. They had agents who would
find potential buyers.”

In summer 2000, Edmonds says the FBI monitored one of the agents as he
met two Saudi Arabian businessmen in Detroit to sell nuclear
information that had been stolen from an air force base in Alabama.
She overheard the agent saying: “We have a package and we’re going to
sell it for $250,000.”

Edmonds’s employment with the FBI lasted for just six months. In March
2002 she was dismissed after accusing a colleague of covering up
illicit activity involving Turkish nationals.

She has always claimed that she was victimised for being outspoken and
was vindicated by an Office of the Inspector General review of her
case three years later. It found that one of the contributory reasons
for her sacking was that she had made valid complaints.

The US attorney-general has imposed a state secrets privilege order on
her, which prevents her revealing more details of the FBI’s methods
and current investigations.

Her allegations were heard in a closed session of Congress, but no
action has been taken and she continues to campaign for a public

She was able to discuss the case with The Sunday Times because, by the
end of January 2002, the justice department had shut down the

The senior official in the State Department no longer works there.
Last week he denied all of Edmonds’s allegations: “If you are calling
me to say somebody said that I took money, that’s outrageous . . . I
do not have anything to say about such stupid ridiculous things as

In researching this article, The Sunday Times has talked to two FBI
officers (one serving, one former) and two former CIA sources who
worked on nuclear proliferation. While none was aware of specific
allegations against officials she names, they did provide overlapping
corroboration of Edmonds’s story.

One of the CIA sources confirmed that the Turks had acquired nuclear
secrets from the United States and shared the information with
Pakistan and Israel. “We have no indication that Turkey has its own
nuclear ambitions. But the Turks are traders. To my knowledge they
became big players in the late 1990s,” the source said.

How Pakistan got the bomb, then sold it to the highest bidders

1965 Zulfikar Ali Bhutto, Pakistan’s foreign minister, says: “If India
builds the bomb we will eat grass . . . but we will get one of our

1974 Nuclear programme becomes increased priority as India tests a
nuclear device

1976 Abdul Qadeer Khan, a scientist, steals secrets from Dutch uranium
plant. Made head of his nation’s nuclear programme by Bhutto, now
prime minister

1976 onwards Clandestine network established to obtain materials and
technology for uranium enrichment from the West

1985 Pakistan produces weapons-grade uranium for the first time

1989-91 Khan’s network sells Iran nuclear weapons information and

1991-97 Khan sells weapons technology to North Korea and Libya

1998 India tests nuclear bomb and Pakistan follows with a series of
nuclear tests. Khan says: “I never had any doubts I was building a
bomb. We had to do it”

2001 CIA chief George Tenet gathers officials for crisis summit on the
proliferation of nuclear technology from Pakistan to other countries

2001 Weeks before 9/11, Khan’s aides meet Osama Bin Laden to discuss
an Al-Qaeda nuclear device

2001 After 9/11 proliferation crisis becomes secondary as Pakistan is
seen as important ally in war on terror

2003 Libya abandons nuclear weapons programme and admits acquiring
components through Pakistani nuclear scientists

2004 Khan placed under house arrest and confesses to supplying Iran,
Libya and North Korea with weapons technology. He is pardoned by
President Pervez Musharraf

2006 North Korea tests a nuclear bomb

2007 Renewed fears that bomb may fall into hands of Islamic extremists
as killing of Benazir Bhutto throws country into turmoil


Shopping for Bombs
Nuclear Proliferation, Global Insecurity, and the Rise and Fall of the
A.Q. Khan Network
Author: Gordon Corera

“A.Q. Khan was the world’s leading black market dealer in nuclear
technology, described by a former CIA Director as “at least as
dangerous as Osama bin Laden.” A hero in Pakistan and revered as the
Father of the Bomb, Khan built a global clandestine network that sold
the most closely guarded nuclear secrets to Iran, North Korea, and

Here for the first time is the riveting inside story of the rise and
fall of A.Q. Khan and his role in the devastating spread of nuclear
technology over the last thirty years. Drawing on exclusive interviews
with key players in Islamabad, London, and Washington, as well as with
members of Khan’s own network, BBC journalist Gordon Corera paints a
truly unsettling picture of the ultimate arms bazaar. Corera reveals
how Khan operated within a world of shadowy deals among rogue states
and how his privileged position in Pakistan provided him with the
protection to build his unique and deadly business empire. It explains
why and how he was able to operate so freely for so many years.
Brimming with revelations, the book provides new insight into Iran’s
nuclear ambitions and how close Tehran may be to the bomb.

In addition, the book contains startling new information on how the
CIA and MI6 penetrated Khan’s network, how the U.S. and UK ultimately
broke Khan’s ring, and how they persuaded Pakistan’s President
Musharraf to arrest a national hero. The book also provides the first
detailed account of the high-wire dealings with Muammar Gadaffi, which
led to Libya’s renunciation of nuclear weapons and which played a key
role in Khan’s downfall.

The spread of nuclear weapons technology around the globe presents the
greatest security challenge of our time. Shopping for Bombs presents a
unique window into the challenges of stopping a new nuclear arms race,
a race that A.Q. Khan himself did more than any other individual to


“Shopping for Bombs tells a disturbing tale…. From the 1970s through
the 1990s, Khan secretly disseminated nuclear technology to a number
of rogue states around the world. The full story of Khan’s activities
cannot yet be fully told–much information is under lock and key in
Pakistan, if it has been preserved at all–but a persuasive
preliminary account has been prepared by Gordon Corera.”–Wall Street



Deception: Pakistan, the United States, and the Secret Trade in
Nuclear Weapons
Authors: Levy, Adrian / Scott-Clark, Catherine

“The shocking, three-decade story of A. Q. Khan and Pakistan’s nuclear
program, and the complicity of the United States in the spread of
nuclear weaponry.

On December 15, 1975, A. Q. Khan–a young Pakistani scientist working
in Holland–stole top-secret blueprints for a revolutionary new
process to arm a nuclear bomb. His original intention, and that of his
government, was purely patriotic–to provide Pakistan a counter to
India’s recently unveiled nuclear device. However, as Adrian Levy and
Catherine Scott-Clark chillingly relate in their masterful
investigation of Khan’s career over the past thirty years, over time
that limited ambition mushroomed into the world’s largest clandestine
network engaged in selling nuclear secrets–a mercenary and illicit
program managed by the Pakistani military and made possible, in large
part, by aid money from the United States, Saudi Arabia, and Libya,
and by indiscriminate assistance from China.

Most unnerving, the authors reveal that the sales of nuclear weapons
technology to Iran, North Korea, and Libya, so much in the news today,
were made with the clear knowledge of the American government, for
whom Pakistan has been a crucial buffer state and ally–first against
the Soviet Union, now in the “war against terror.” Every successive
American presidency, from Jimmy Carter to George W. Bush, has turned a
blind eye to Pakistan’s nuclear activity–rewriting and destroying
evidence provided by its intelligence agencies, lying to Congress and
the American people about Pakistan’s intentions and capability, and
facilitating, through shortsightedness and intent, the spread of the
very weapons we vilify the “axis of evil” powers for having and fear
terrorists will obtain. “Deception” puts our current standoffs with
Iran and North Korea in a startling new perspective, and makes clear
two things: that Pakistan, far from being an ally, is a rogue nation
at the epicenter of world destabilization; and that the complicity of
the United States has ushered in a new nuclear winter.

Based on hundreds of interviews in the United States, Pakistan, India,
Israel, Europe, and Southeast Asia, “Deception” is a masterwork of
reportage and dramatic storytelling by two of the world’s most
resourceful investigative journalists. Urgently important, it should
stimulate debate and command a reexamination of our national


Pakistan Loosens Reins on A.Q. Khan
BY Mike Nizza  /  July 2, 2007

Pakistan Loosens Reins on A.Q. KhanAbdul Qadeer Khan, founder of
Pakistan’s nuclear program. (Photo: Associated Press)

A.Q. Khan, the Pakistani scientist who ran an arms bazaar that spread
nuclear technology to Libya, Iran and North Korea, is starting to feel
freedom again after three and a half years of what amounted to house
arrest. The Associated Press quoted two unnamed Pakistani officials on
the details:

”He is virtually a free citizen,” said one of the officials, who
is attached to the nuclear program.

However, the second official said Khan was only allowed to meet
associates and relatives on a list approved by authorities, who would
continue to provide him with a security detail that will restrict his

The news emerged two days after a Pakistani newspaper reported that
one of Dr. Khan’s lawyers “appealed to the nation to come on the
streets and voice protest against the detention of Dr A.Q. Khan just
like it has shown solidarity with the chief justice.” That chief
justice says he was driven from office by the country’s president,
Gen. Pervez Musharraf, on trumped-up corruption charges, and is waging
an intense challenge to Gen. Musharraf’s leadership.

Many Pakistanis revere Dr. Khan as a national hero for creating the
country’s nuclear weapons, and have long viewed his detention at home,
after a presidential pardon, as punishment enough. (Another recent
home detention case in Los Angeles was, by contrast, not seen as
“punishment enough”, to say the least.)

”Who has not proliferated?” said Tasnim Aslam of Pakistan’s foreign
ministry. ”What about all those U.S. scientists who proliferated?
Where do you think the Manhattan Project comes from?”

Another sign of the Pakistani desire to put this whole saga behind
them were the articles in local newspapers last week highlighting a
State Department spokesman’s boilerplate statement that A.Q. Khan’s
nuclear network was closed for good.

Congressman Gary Ackerman, a Democrat from the New York City borough
of Queens whose district is home to many Asian immigrants,
emphatically disagreed during a subcommittee hearing he led, entitled
“A.Q. Khan’s Nuclear Wal-Mart: Out of Business or Under New

“The Administration can believe whatever convenient fiction it likes,”
he said in opening remarks. But “the Khan network is more likely to be
open under new management rather than truly out of business.”

The hedging is due to the small amount of information that is actually
known about Dr. Khan’s network. Pakistan has refused to allow American
officials to interview him, and has released few details otherwise.

Apparently, the A.P. is still on the list, though. A reporter’s call
to Dr. Khan’s home in a wealthy part of Islamabad may be “his first
public comment in about three years,” the wire service said.
Unfortunately, he would only break the sort of news that comes from
Aunt Millie, not international nuclear villains.

”I am feeling much better, though I can’t say I am 100 percent fit,”
he said.

The Bush administration has not yet formally responded to the easing
of restrictions on Dr. Khan. It will be interesting to see how the
administration balances the stability of a crucial ally, Gen.
Musharraf, with the desire to see someone who has provided crucial
help to the nuclear ambitions of at least two members of the
president’s “axis of evil” held to greater account.


‘A Wrong Must Be Righted’
An interview with Benazir Bhutto
BY Gail Sheehy  /  December 27, 2007

Editor’s note: The assassination of Pakistan’s Benazir Bhutto on Dec.
27 occurred after PARADE’s Jan. 6 issue went to press.

Bhutto’s murder adds more danger and confusion to the already chaotic
situation in this region. Pakistan is vital to U.S. security interests
and the global fight against terrorism. In late November, PARADE sent
Contributing Editor and best-selling author Gail Sheehy to Pakistan to
interview former Prime Minister Bhutto as she campaigned through the
country. Bhutto told Sheehy that she had long been a target of
terrorists as well as the Musharraf government. She knew she could be
murdered at any time.

PARADE’s interview with Bhutto is one of the last interviews of her
complex life.

After her assassination, PARADE immediately posted the entire
interview online, and Sheehy appeared on network and cable TV news
shows to discuss her face-to-face conversations with Bhutto.

. . .

Dust spirals from village to village across the countryside of
Pakistan. Drums lead men to dance in the streets as they witness the
reappearance of their revered leader. No matter how long and hard I
look, there are no women. Except her.

Ben-a-zir, zindabd! the men chant. Long live Benazir!

Benazir Bhutto has returned to her fractured country to run for prime
minister this Tuesday. She has ruled twice before–and twice been
overthrown. Her caravan continually switches direction to foil suicide
bombers. Only a few weeks earlier, she narrowly escaped blasts that
slaughtered 170 of her supporters. Now I watch her stand tall atop a
truck, waving, white-scarved. Serenely smiling.

That evening, Bhutto invites me to her ancestral home in Larkana,
where she still presides over several thousand acres of feudal lands.
Meeting me alone on the men’s side, she is ready to let down her veil.

Today I saw you campaigning essentially unprotected, I say. How do you
do it?

In answer, she invokes her late father, Zulfikar Bhutto, a populist
reformer and the nation’s first democratic prime minister. “From the
day my father was hanged–I was 25–whenever there is a crisis, I go
into a kind of detachment. ‘What should I be doing?’ I just start
ticking off steps. I don’t feel.”

Like her country, Bhutto is a riddle. Brilliant, beautiful, fearless,
she is also ruthlessly ambitious, devious and corrupt. The first
question that perplexes an American: How could Bhutto — Harvard- and
Oxford-educated, unapologetically secular — have become the first
woman elected to lead a Muslim country? In part, the answer is that in
dynastic Pakistan, she is effectively royalty. The second question:
Why should this election matter so much to America? That answer is
simpler. Pakistan has nuclear weapons. Also, the most dangerous place
in the world is Pakistan’s lawless border with Afghanistan. It is a Ho
Chi Minh Trail of terrorism where Osama bin Laden is believed to enjoy

Bhutto maintains that the Pakistani army’s decision to overthrow her
in 1996 came after she announced plans to crack down on terrorism. “I
am what the terrorists most fear,” she tells me, “a female political
leader fighting to bring modernity to Pakistan. Now they’re trying to
kill me.”

Talat Masood, a retired general who has advised Bhutto, foresees his
nation breaking in half. ” The only option left to the people of
Pakistan,” he says, “is the military or the militants.”

Or another try at democracy under Bhutto.

. . .

During our talk in Larkana, Bhutto weeps in describing her struggles
after being ousted 12 years ago on charges of plundering the treasury.
Her husband was jailed without charges. She faced constant harassment
by the courts. Even while living with her three children in self-
imposed exile in London and Dubai, she could not open a bank account
or use a credit card because of the charges against her in Pakistan.
“I didn’t have the press, I didn’t have the judiciary, I was all
alone,” she whimpers. As if on cue, tears fall. “I only had God,” she

Bhutto still insists that there are no foreign bank accounts in her
name. I suggest that most are in the names of her mother or of
friends. She feigns surprise–what could others’ finances have to do
with her? “I’m an independent legal entity!” she protests. “What’s the
difference between you and me?”

“One point five billion dollars,” I reply–the amount the Pakistani
government contends that she and her husband pocketed while in power.
She also allegedly siphoned funds from the U.N. Oil for Food program.
Her defense: “Six other companies in Pakistan did it. Nobody
investigated them.”

Beneath the theatrics Bhutto uses to such effect is an ominous
reality. “She’s the No. 1 target of the terrorists right now,” says
Humayun Gauhar, a confidant of Pakistani President Pervez Musharraf.

Bhutto says she first heard the name Osama bin Laden in 1989, when he
sent $10 million to the ISI, Pakistan’s infamous intelligence service,
to help it overthrow her first government. The ISI has close ties to
radical Islamists and was responsible for the Taliban’s rise to power
in Afghanistan. America’s CIA, which also supported the Afghan holy
warriors in their guerrilla struggle against the Soviet Union in the
1980s, continues to work with the ISI today–theoretically in
suppressing the very terrorist legions it helped to create.

“Benazir tried to push the intelligence service out of politics in her
first term,” acknowledges America’s ambassador to Pakistan at the
time, Robert Oakley. “It was a bold move, but it failed.”

“I was ignorant of the extremist war of these new radical Islamists
until my second term,” Bhutto tells me. Upon re-election in 1993, she
learned of more attempts to assassinate her from the interrogation of
a Pakistani terrorist named Ramzi Yousef–the mastermind of the 1993
bombing of New York’s World Trade Center. That investigation also
revealed to her the existence of madrassas, or Islamic schools,
preaching jihad against the West.

Bhutto tried once more to break the ISI. Again, she failed and was
overthrown–and, with ISI support, Taliban-controlled Afghanistan
became the staging ground for 9/11.

. . .

To understand why Bhutto is so driven, one must imagine her huddling
with her mother in a cold jail cell through a long April night in
1979, waiting for her father to be hanged by the military strongman
who had overthrown him. The young woman and her mother subsequently
lived through repeated raids, arrests and solitary confinement.

Have you healed? I ask this 54-year-old survivor. Or is avenging your
father your solace?

“I feel that a wrong must be righted,” she says. She recalls her
father’s parting words: “You can walk away. You’re young. You can go
to live in London or Paris or Geneva.”

“No,” she told him. “I have to keep up this mission of yours, of

Bhutto’s own family dismisses her little-girl-lost script. “Her
father’s death was enormously convenient for her politically,” her
American-educated niece, Fatima Bhutto, tells me. “She has no legacy
of her own except for corruption and violence, so she rests on her
father’s laurels.” Fatima blames her aunt for her own father’s
assassination in 1996.

Reflecting on the lessons of her two terms as prime minister, Bhutto
tells me, “It’s only now that America has awakened to what we were
already fighting–Islamic jihadis.” Fortunately for her, the West’s
urgent fear of Pakistan as a breeding ground for terrorists has given
Bhutto the chance to redefine herself. During most of her exile, she
was considered irrelevant by Washington. Then she hired Hillary
Clinton’s image-maker, Mark Penn, and began playing up to Musharraf.

When Musharraf’s popularity dove in 2007 after his jailing of judges,
lawyers and journalists, Bhutto suddenly emerged as America’s “ideal.”
U.S. politicians needed her–progressive, secular, female, willing to
compromise–to put a face of democracy on their support for Musharraf’s
autocratic rule.

True to form, Bhutto manipulated Musharraf to erase the charges
against her, promising not to return to Pakistan until after national
elections. She then broke that promise. But once she sensed that even
her stalwarts were appalled at an arranged political marriage to a
dictator, she spurned Musharraf and became her own woman again.

I sense a dark reflection in both Bhutto’s psychological history and
her country’s constant turmoil–a compulsion to repeat past traumas. A
prime example is the way she returned to her country on Oct. 18.

Ignoring warnings of terrorist cells plotting to kill her, Bhutto
presided from atop a caravan over a parade that took 10 hours to snake
through Karachi. Near midnight, the streetlights went out. The police
disappeared. Her feet swollen from standing, Bhutto ducked below into
a steel command center to remove her sandals. Moments later, a bomb
went off. “I had a sickening, sickening feeling,” she tells me. She
now believes the bomb was wired to an infant that a man had been
trying to hand to her. She recalls saying to the people with her,
“Don’t go outside–another blast will follow.” It did.

When she finally emerged, Bhutto saw bits of brain and flesh and
fingers from 20 members of Benazir’s Brigade–the young guards who wear
red shirts proclaiming “I Give My Life for Bhutto” — decorating the
platform from which she had waved. All told, 170 of her supporters
died. Tellingly, the Musharraf government has mounted no

Her friend Abida Hussain, a former Pakistani ambassador to the U.S.,
tells me that Bhutto later felt sad and asked, “How many lives did I
risk?” Bhutto herself indignantly protests this anecdote to me. “I
said no such thing! We must be out on the streets, or the terrorists

Such is politics in Pakistan.

. . .

Musharraf called the attempt on Bhutto a suicide attack by Islamic
extremists. Bhutto believes it was the work of Musharraf’s allies.
“There are rogue elements within ISI that are ideologically jihadist
and less than enthusiastic about Benazir Bhutto becoming prime
minister a third time,” says a Bhutto adviser. However, Musharraf’s
confidant Gauhar argues to me: “We don’t want a dead Benazir on our
hands! She’d be just another unlikely martyr that we don’t need.”

If Bhutto returns to power this week, Gauhar predicts the U.S. will
finally get what Musharraf has refused it: “She will allow NATO boots
on the ground in our tribal areas and a chance to neuter our nuclear
weapons.” Yet President Bush remains reluctant to give up on
Musharraf, despite the fact that two-thirds of Pakistanis want him to
resign immediately. If the election is rigged, as expected, public
outrage is likely to erupt. Bhutto says she won’t join an illegitimate
government. But her niece, Fatima Bhutto, says, “She’ll work with
anyone to get back into power.”

Despite the corrosion of her reputation by corruption and compromise,
Bhutto appears to be America’s strongest anchor in the effort to turn
back the extremist Islamic tide threatening to engulf Pakistan. What
would you like to tell President Bush? I ask this riddle of a woman.

She would tell him, she replies, that propping up Musharraf’s
government, which is infested with radical Islamists, is only
hastening disaster. “I would say, ‘Your policy of supporting
dictatorship is breaking up my country.’ I now think al-Qaeda can be
marching on Islamabad in two to four years.”


A Letter from the Editors:

Dear PARADE Readers,

PARADE publishes more than 32 million copies of each issue and
distributes them to 415 newspapers across the country. In order to
meet our printing, distribution and insertion deadlines, we must send
the issue to the printer three weeks before the cover date. Our
Benazir Bhutto issue, for example, went to press on Dec. 19. By the
time Ms. Bhutto was slain on Dec. 27, this issue of PARADE was already
printed and shipped to our partner newspapers. Recalling, reprinting
and redistributing our January 6 issue was not an option.

As soon as the news of Ms. Bhutto’s murder broke, we contacted our
distributing newspapers, explained the logistical realities and urged
each of them to run a prominent story on Jan. 6 explaining the
situation. We also posted the article on our Web site with a note from
our editor acknowledging the tragic news.

Our decision to allow distribution of the issue was not taken lightly.
We made the call to go forward because of the importance of the story–
an interview with the only woman ever elected to lead a Muslim nation,
on the eve of an election that could dramatically affect the war on
terror and worldwide nuclear proliferation. We hoped that our
interview would help readers learn more about this brave and
complicated woman.

We hope we¹ve addressed your concerns. We appreciate you taking the
time to write and share your comments.

READER COMMENTS | 401 Comments

Advertisers Wake Up
By hepcat2 [at] comcast [dot] net on 1/8/2008 5:58:PM

Greed will only get you so far Parade Magazine. I hope the few of you
advertisers who put your diet pill ads and your novelty kitty plate
ads in this rag will finally figure out how little the educated public
actually thinks of this thing called Prade. Yuck.
Incompetent, Insulting, and Indifferent. What trash!
By seamjadali [at] aol [dot] com on 1/8/2008 4:51:PM

I am utterly appalled by the complete lack of responsibility you have
showed, first in making no reference to her death anyware in your
magazine, second in not putting up any kind of apology to your readers
on the website (although you did put up an explanation, and thirdly in
the complete lack of remorse in the letter you posted in this comment
section. I would like to see an apology on the front page of next
week’s edition before I throw it in the trash, but frankly given your
obvious indifference to the outrage of your readers (over 19 pages of
comments at last count!) and the three week lag time that you
apparently work with, I highly doubt I will see it. Further, if you
function on a three week publication schedule you have no business
commenting on any political story, let alone one about the extremely
volatile situation in P akistan. (The fact that one has to put an
extra space in the name of the country is further evidence, were it
required, of your complete incompetence, since even your filter cannot
differentiate between an ethnic slur which is only four letters long,
and the name of a country which is four letters longer. It is
absolutely insulting to the country in question.)
Stick to what you do best–light, mindless journalism
By dlkbc [at] hotmail [dot] com on 1/8/2008 2:57:PM

I am a Canadian who buys the Sunday Seattle Times every week and
enjoyed Parade magazine. When I grabbed it this Sunday and saw the
Parade magazine, I thought I had bought an obviously old paper and
cursed my newstand for keeping it on hand. I think of Parade as light
journalism–celebrity gossip/interviews, recipes, diet/health,
puzzles, which I think you do reasonably well. So when I see a serious
political article that is so woefully outdated (notwithstanding
holiday publishing challenges), I think that you should stick to what
you do best–which is not serious political journalism. I do not take
issue with the author’s article itself. I’m looking forward to your
first issue on your newly elected president–maybe to appear in 2010?


From the archive, originally posted by: [ spectre ],1000002000,39291463,00.htm

Cracking open the cybercrime economy  /  Dec 12 2007

Hacking for fun has evolved into hacking for profit, and created a
business model that is nearly as sophisticated as that of legal

“Over the years, the criminal elements, the ones who are making money,
making millions out of all this online crime, are just getting
stronger and stronger. I don’t think we are really winning this war.”

As director of antivirus research for F-Secure, you might expect Mikko
Hypponen to overplay the seriousness of the situation. But according
to the Finnish company, during 2007 the number of samples of malicious
code on its database doubled, having taken 20 years to reach the size
it was at the beginning of this year.

There seems to be some serious evidence then for the idea of an
evolution from hacking and virus writing for fun to creating malicious
code for profit. Security experts are increasingly pointing to the
existence of a “black” or “shadow” cyber-economy, where malware
services are sold online using the same kinds of development methods
and guarantees given by legitimate software vendors.

It is difficult to establish exactly how organised this malware
economy is but, according to David Marcus, security research manager,
McAfee Avert Labs, it’s relatively straightforward to buy not only the
modules to build malware, but also the support services that go with

“From Trojan creation sites out of Germany and the Eastern bloc, you
can purchase kits and support for malware in yearly contracts,” says
Marcus. “They present themselves as a cottage industry which sells
tools or creation kits. It’s hard to tell if it’s a conspiracy or a
bunch of autonomous individuals who are good at covering their

As well as kits and support, legions of compromised computers, or
botnets, can be hired for nefarious purposes — usually for spam runs,
or to perpetrate denial of service attacks. One of the most successful
botnets of 2007 has been “Storm”, so-called due to the hook-line used
to trick victims into opening emails containing the Trojan. In January
this year, the first malware was sent out with the tagline “230 dead
as storm batters Europe”.,1000000189,39285555,00.htm,1000000189,39290540,00.htm
The Storm botnet, estimated now to contain millions of compromised
computers, has advanced defences. The servers that control the botnet
use so-called fast-flux Domain Name System (DNS) techniques to
constantly change their location and names, making them difficult to
locate and shut down. And security researchers who have attempted to
find the command and control servers have suffered denial of service
attacks launched by the controllers of the botnet.

“Storm has been exceptionally successful,” says McAfee’s Marcus. “It’s
used for spam runs, and researchers attempting to locate Storm command
and control servers have come under attack. The hardest part is
finding the key to those channels. They’re not always easy to detect
and find. Some of the communications are encrypted, while some are
difficult to detect from a network point of view. I hate to use the
word evolution, but they’re certainly learning from their successes
and failures. If it weren’t for Storm, bots would be in significant
recession. Some days we’re seeing 1,000 different variants a day.”

Weathering the Storm
Joe Telafici, director of operations at McAfee’s Avert labs, says
Storm is continuing to evolve. “We’ve seen periodic activity from
Storm indicating that it is still actively being maintained. They have
actually ripped out core pieces of functionality to modify the
obfuscation mechanisms that weren’t working any more. Most people keep
changing the wrapper until it gets by [security software] — these guys
changed the functionality.”

In the past year, the development of illegal malware has reached the
point where it is almost as sophisitcated as the traditional software-
development and sales channel, according to Telafici.

“We’ve seen platform development, middleware, solutions sellers and
hosting — all types of software and companies, with the same level of
breakdown,” says Telafici.

One indication of the maturity of the black economy, according to
Telafici, was the recent case of a hacker who wrote a packer [software
used to bypass antivirus protection], “threw in the towel recently as
it wasn’t profitable enough — there’s too much competition. They
opened the source code and walked away.”

Security vendors seem to be powerless to take any action against the
groups in control of botnet networks, especially those who use fast-
flux techniques to move the location of command and control servers.

“With botnets, we are unlikely to make a dent unless we find the guy
who controls the command and control server,” says Telafici.

While law-enforcement agencies have a headstart in tracking
cybercriminals, due to their experience of dealing with…

…economic crimes such as fraud, many of the crimes are seemingly
small, not warranting police attention.

“The majority of cybercriminals are small players for small dollars
and short bursts of traffic,” says Telafici. “On the flip side you see
the amount of effort and money spent protecting spam relays [as in
Storm]. If [security researchers] aren’t careful they get Ddossed
[distributed denial of service attack] by a chunk of the spam network.
That the guys are protecting their turf indicates that in aggregate
the amount of money that is changing hands is significant.”

Game theory, a branch of applied mathematics that models how
adversaries maximise their gains through adapting to each other’s
strategies, features heavily in security assessments of the black
economy. As one player becomes stronger, the other increases its
efforts to gain the upper hand.

“I view it as we’re locked in a Darwinian power struggle,” says
Telafici. “As we up the ante, the black economy adjusts to that, and
it in turn ups the ante.”

Anatomy of the 2007 black economy

Peter Gutmann, a security researcher at the University of Auckland,
says that malware via the affiliate model — where you pay others to
infect users with spyware and Trojans — has become more prevalent in

The affiliate model was pioneered by the site in
2005, which paid webmasters six cents per infected site. Since then
this has been extended to a “vast number of adware affiliates”, says
Gutmann. For example, one adware supplier pays 30 cents for each
install in the US, 20 cents in Canada, 10 cents in the UK, and one or
two cents elsewhere.

Hackers also piggyback malware on legitimate software. According to
the researcher, versions of coolwebsearch co-install a mail zombie and
a keystroke logger, while some peer-to-peer and file-sharing
applications come with bundled adware and spyware.

While standard commercial software vendors sell software as a service,
malware vendors sell malware as a service, which is advertised and
distributed like standard software. Communicating via internet relay
chat (IRC) and forums, hackers advertise Iframe exploits, pop-unders,
click fraud, posting and spam. “If you don’t have it, you can rent it
here,” boasts one post, which also offers online video tutorials.
Prices for services vary by as much as 100-200 percent across sites,
while prices for non-Russian sites are often higher: “If you want the
discount rate, buy via Russian sites,” says Gutmann.

In March the price quoted on malware sites for the Gozi Trojan, which
steals data and sends it to hackers in an encrypted form, was between
$1,000 (£500) and $2,000 for the basic version. Buyers could purchase
add-on services at varying prices starting at $20.

In the 2007 black economy, everything can be outsourced, according to
Gutmann. A scammer can buy hosts for a phishing site, buy spam
services to lure victims, buy drops to send the money to, and pay a
cashier to cash out the accounts. “You wonder why anyone still bothers
burgling houses when this is so much easier,” says Gutmann.

Anti-detection vendors sell services to malware and botnet vendors,
who sell stolen credit-card data to middlemen. Those middlemen then
sell that information to fraudsters who deal in stolen credit-card
data and pay a premium for verifiably active accounts. “The money
seems to be in the middlemen,” says Gutmann.

One example of this is the Gozi Trojan. According to reports, the
malware was available this summer as a service from iFrameBiz and, who bought the Trojan from the HangUp team, a group of
Russian hackers. The Trojan server was managed by, and
hosted by the Russian Business Network, which security vendors allege
offered “bullet-proof” hosting for phishing sites and other illicit

According to the University of Auckland, there are many independent
malware developers selling their wares online. Private releases can be
tailored to individual clients, while vendors offer support services,
often bundling anti-detection. For example, the private edition of Hav-
rat version 1.2, a Trojan written by hacker Havalito, is advertised as
being completely undetectable by antivirus companies. If it does get
detected then it will be replaced with a new copy that again is
supposedly undetectable.

Hackers can buy denial of service attacks for $100 (£50) per day,
while spammers can buy CDs with harvested email addresses. Spammers
can also send mail via spam brokers, handled via online forums such

… and One dollar buys 1,000 to 5,000
credits, while $1,000 (£500) buys 10,000 compromised PCs. Credit is
deducted when the spam is accepted by the target mailserver. The
brokers handle spam distribution via open proxies, relays and
compromised PCs, while the sending is usually done from the client’s
PC using broker provided software and control information.

“This is a completely standard commercial business,” says Gutmann.
“The spammers even have their own trade associations.”

Ready-made tools for creating phishing emails, such as fake requests
for bank details, are fairly easy to buy, with many independent
vendors selling them. Bulletproof hosting is also easily available,
while phishers engage spam services to lure users to their sites.

Carders, who mainly deal in stolen credit-card details, openly publish
prices, or engage in private negotiations to decide the price, with
some sources giving bulk discounts for larger purchases. The rate for
credit-card details is approximately $1 for all the details down to
the Card Verification Value (CVV); $10 for details with CVV linked to
a social security number; and $50 for a full bank account.

How is the money laundered?

Scammers use a variety of ways to launder cash. Compromised bank
accounts can be used to launder funds, or struggling companies can be
bribed to turn the money into ready cash. Scammers can find businesses
with a debt of $10,000 (£5,000), and agree to pay them $20,000
(£10,000) if they agree to cash out 50 percent of the funds. Dedicated
cashiers, also known as “money mules”, can also take up to 50 percent
of the funds to move the money via transfer services.

Money can also be laundered by buying and selling merchandise on the
wider black market. Shipper rings can ship PCs to scammers via
intermediaries, which can then be resold.

What is the cost to legitimate business?

As the malware economy grows in sophistication, so do the losses
sustained by legitimate businesses. According to the 2007 Computer
Security Institute computer crime and security survey, these losses
have seen a sharp increase this year.

Robert Richardson, director of the CSI, says the average annual loss
among US businesses due to cybercrime has shot up to $350,424, from
$168,000 in 2006. “Not since the 2004 report have average losses been
this high,” says Richardson.

This year’s survey results are based on the responses of 494 computer
security practitioners in US corporations, government agencies,
financial institutions, medical institutions and universities.

Almost one-fifth (18 percent) of those respondents who suffered one or
more kinds of security incident said they had suffered a targeted
attack aimed exclusively at their organisation, or organisations
within a small subset. Khalid Kark, a principal security analyst at
Forrester, says targeted attacks against companies and institutions
are becoming more common.

“As banks and companies have increased security levels, the hacker
community is casting a much wider net,” says Khalid. “Instead of
hacking into something right away, now it’s low and slow. They’re
determining attack avenues, taking their sweet time to find holes, and
then using stealth [to steal data].”

Financial services companies are being attacked more and more, says
the analyst, while the attacks are increasing in number and

But while the black cyber-economy is maturing, at the moment its main
practitioners seem to be individuals or small groups acting within a
loose web of affiliations that can be quickly established and broken
to evade detection.

F-Secure’s Hypponen blames a lack of international co-operation and
political and social problems for the current situation. “In many
cases these are people with skills but without opportunities,” says
Hypponen. “What if you are born with IT skills in rural China, or in
the middle of Siberia? There is no legal way of making use of the
skills they have.”

While law-enforcement co-operation with government and the IT
community is paramount in addressing the problem in the short term,
longer-term solutions must be found. One way to address the issue of
the growth of the “black cyber-economy” in the long term is to harness
the IT talent in developing countries that otherwise might be co-opted
into illegal activity.

“We have to make it more attractive to be in the white economy than in
the black — when that happens we will turn a corner. We’re starting to
see that happen as companies look to less expensive economies as
places to put people. In Eastern Europe and Asia there are highly
skilled people where there are less opportunities — this is where the
black economy is fuelled now,” says McAfee’s Telafici.

German and Chinese researchers have just released a study that
explores the world of Chinese commercial cybercrime. The researchers
set up virtual PCs running Internet Explorer, then visited nearly
15,000 Chinese websites, deliberately infecting their virtual systems
with whatever crapware happened to be running on the system. Then they
carefully analyzed the infections as they unfurled and encrappified
the virtual instances of Windows, and used the results to reverse-
engineer the way that the malware economy runs.

“The Virus Writers take care of implementing Web-based and
conventional Trojans, and use evasion methods to create covert
Trojans, and then they sell the malware and evasion service,” the
paper says. “Website Masters/Crackers betray their customers or crack
unsafe websites, and sell the visitor traffic of their own or
harvested web sites. Envelope Stealers construct a Web-based Trojan
network by hosting the bought Web-based and conventional Trojans on
compromised computers, and redirect the web site visitors to their Web-
based Trojans. When the Web-based Trojan network is ready, the victims
who visit the malicious web sites will be redirected to and exploited
by the Web-based Trojans, and infected with further conventional
Trojans. These Trojans then steal envelopes and virtual assets from
the victim’s machine.” ”,computer-crime-is-slicker-than-you-think.aspx

Computer crime is slicker than you think
BY David Raikow  /  16 August 2007

If the public’s image of the online criminal–the brilliant but
maladjusted teen breaking into systems just to prove he can–were ever
true, those days are long gone.

Not long after people first figured out how to break into computer
systems, they started creating tools to make it easier for themselves;
not long after that, those tools made their way into the hands of
people who could use them without really understanding how they

Today, few malware developers use their own code. They write it for
the same reason commercial software developers do: to sell it for a
healthy profit. If you’ve ever bought anything online, buying from
them may be disconcertingly familiar. If you want to break into a
computer or steal credit card numbers, you can buy the necessary
software online, just like almost anything else. More than that, you
can find user friendly, point-and-click attack applications that have
been pre-tested and reviewed by experts, and read through customer
feedback before making your purchase.

You might even be able to buy technical support or get a money back
guarantee. Some developers offer their malware through a software-as-a-
service model. If you prefer an even more hands-off approach, you can
simply buy pre-screened credit card numbers and identity information
itself, or sign a services agreement with someone who will do the
dirty work for you. As in many other industries, money has given rise
to professionalism.

Online crime and malware development has become a full-blown and
extremely profitable commercial enterprise that in many ways mirrors
the legitimate software market. “We’re in a world where these guys
might as well just incorporate,” says David Parry, Trend Micro’s
Global Director of Security Education. “There’s certainly more money
in the cybercrime market than the antivirus market. The internet
security industry is a drop in the bucket; we’re talking about
hundreds of billions of dollars.”

“The general dynamics within this market are just like any other
business model,” says to Thomas Holt of the University of North
Carolina at Charlotte’s Department of Criminal Justice. “You have to
offer a good price, you have to be readily able to communicate with
your customers, you have to give them reliable products, because
nobody’s going to buy something if it doesn’t quite work like you say
it can.” According to Shane Coursen, Senior Technical Consultant at
Kaspersky Labs, malware development is easily profitable enough to
attract professional talent.

“The financial model is absolutely huge. The amount of money that a
developer could make at least matches what they can make at a software
company. You could even set it up as a legitimate business, reporting
earnings and everything.” Go To Market Holt leads a team of
researchers that tracks the online marketplaces where malware
developers, brokers, and criminal “service providers” sell their
wares. Starting with nothing more than Google searches, they have
identified a network of approximately 30 publicly accessible sites of
surprising sophistication, with features that rival eBay and Amazon.

The particular marketplaces Holt’s team tracks are generally
incorporated into hacker community forum sites hosted in Russia,
Eastern Europe, and other regions where criminal prosecution and
extradition are difficult or impossible. Prospective sellers post
detailed descriptions of their products and services. Those selling
malware will often including screenshots, claims about resistance to
antivirus or other countermeasures, and penetration capabilities.
Those selling stolen account data will often specify the nationality
of the account, the bank, the type of account (Visa v. Mastercard,
gold v. platinum), and the total value of each account. In many cases,
they will also have complex pricing models, including purchase
minimums and volume discounts.

At the same time, the purchaser sends a sample their product to a
forum moderator — a copy of the malware code or a sample of the
stolen data — who will then review and test it. If the moderator
finds that the product does not work as advertised or that the data is
invalid, they will block the seller from posting; otherwise, they will
post a detailed review alongside the seller’s product description.
Moderators may also block products or services they consider too

VPN services, for example, have been widely turned away by various
site moderators after law enforcement tracked down a particularly well-
known online gang through their VPN connections. Next: A Buyers’
Market Prospective buyers are then free to ask detailed questions
about the product, and actual buyers will post their own feedback and
reviews. “Thank you for a FreeJoiner, is the best program in its class
I have ever seen,” wrote a satisfied customer wrote on one of these
sites. “Purchased a freejoiner 2 and left very happy,” wrote another.

Over time, moderators use their own reviews and customer feedback to
track each seller’s reputation, and maintain rankings ranging from
“Verified Seller” (good) to “Ripper” (bad). Sites will often develop
“blacklists” and “whitelists” to block out or provide quicker access
to specific sellers, and a number of “ripper databases” are
distributed throughout these communities. These “open forum” sites
represent only one subset of the cybercrime market; other models may
look very different, but can be just as sophisticated. Some malware
developers, for example, maintain what amounts to their own channel

“There are programmers who are working for brokers, and the brokers
are selling the malware to other criminals, who are then reselling the
malware to other criminals,” says Trend Micro’s Parry. “When they
capture a bunch of systems, they resell those systems to another
criminal, and another criminal. The actual hacker types don’t want to
get their hands dirty with something that would actually send them to
prison.” Other groups build affiliate networks that tap into
legitimate and semi-legitimate businesses. In a presentation at the
Defcon hacking conference this year, Peter Gutmann of the University
of Auckland’s Department of Computer Science described networks in
which businesses would pay affiliates up to 30 cents for each machine
they infect with spyware or adware.

Some of these companies claim to terminate unethical affiliates and
include user licensing agreements in their software, while the
software itself is hidden and often includes keystroke loggers and
measures to render it difficult or impossible to delete. Customer
Service Just like their go-to-market strategies, the array of services
offered by malware developers and other online criminals have grown in
sophistication alongside their legitimate counterparts. Extensive
customer service, technical support, and update subscriptions have all
become standard practice. “They have to provide good customer support
to compete,” notes Holt.

“If you buy 50 dumps [credit card or bank account records] from
somebody, and 25 of them are invalid, the ‘good’ sellers are the ones
who are going to say, “You know what, here’s 25 dumps in return.’ The
malware writers will say, ‘You know what, if you’re having a problem,
just contact me. I’m always around. I’ll be happy to help you with
whatever I can.'” Some of these vendors focus entirely on services.

They may offer technical support or customisation contracts on
existing malware packages, for example. Others offer to conduct
attacks or spam campaigns on your behalf. One group advertises an hour-
long denial of service attack for $20, and 24 hours for $100, noting
that their botnet is distributed across multiple time zones and can
therefore launch and maintain attacks at any time, day or night. “One
group in particular says, kind of like Dominoes Pizza, ‘if the first
hour of our denial service attack doesn’t work, you get your money
back’,” notes Holt. “That’s pretty common.”

Other operations mirror legitimate software as a service providers.
These “malware-as-a-service” providers rent out access to botnets or
Web-based attack tools. Gutmann noted one example in which a Russian
group rented out its malicious Website. A prospective buyer could get
the 100 visitors for free, but then had to pay US$4 per 1,000 visitors
up to 5,000, US$3.80 per 1000 up to 10000, and US$3.50 per 1,000 if
they bought 10,000 or more. “Software rental is just another way to
get money out of this market,” says Oliver Friedrichs, Symantec’s
Director of Security Response. “It’s common to see authors who write
keyloggers and botnetworks, and then rent them out to people
ultimately who may launch a phishing campaign or a spam campaign.”

Next: Quality Product Given the competition for the enormous sums of
money in the cybercrime market, it is not surprising that the quality
of the products and services available to the would-be cybercriminal
are increasing along with the sophistication of the markets and
vendors. The most recent versions of many malware applications are
extremely user-friendly, with point-and-click graphical interfaces and
a wide range of functionality. They tout their ability to evade
detection and defeat antivirus software and other countermeasures.
Most importantly, they require little or no expertise to use.

“Code has had to become much, much more sophisticated and very
professional in quality in order to turn a profit,” says Friedrichs.
“We’ve certainly seen spyware, for example, that leverages very
advanced rootkit capabilities in order to hide and stay resident on a
system once it’s installed itself.” The availability of cracked
versions of older software and low-cost applications created in
developing countries forces malware writers to polish their product if
they want to compete.

Nevertheless, quality software can command a healthy premium. “Nuclear
Grabber goes for $3,000 because this is a fantastic product that has
multiple functionalities in multiple environments,” Holt says of one
popular attack tool. “So, if you want to do phishing, you can use it
for phishing. If you want a keylogger, you can use it for keylogging.
It’s up to you.” According to Gutmann, some vendors have hired
professional linguists to craft spam messages that bypass filters
while remaining meaningful to the recipient, while phishers use
psychology graduate students to develop scams that will lure victims
into giving up their personal data.

“They have better experts than we do!” he said in his Defcon
presentation. Malware applications are even beginning to incorporate
their own security measures, both to outmaneuver competitors and avoid
detection. A trojan, for example, might update a computer’s antivirus
signatures to block subsequent infection attempts by competing
malware, while server attack tools might install patches or fix
misconfigurations to protect a Web host delivering malicious code to
unsuspecting visitors. “It’s ironic, but the bad guys need security
too,” notes Parry.

“They hack each other, and they want to keep us from getting access to
their backend mechanics.” The bottom line is that the good guys are
facing more and better equipped opponents. ” “Anything that you want
to find, you can buy at these markets,” Holt concludes. “It’s so deep
that you don’t have to have a technical background to really get into
identity theft and credit card fraud and hard core kinds of computer

{Damon Poeter contributed to this article.}


A Layman’s Glossary of Malware Terms
BY Scott Berinato  /  October 08, 2007

76service – A group that orchestrated attacks using the Gozi Trojan
and pioneered a service used to provide clients with subscriptions to
stolen data feeds provided by those attacks.

Blind Drop – A drop that is well hidden and is designed to run while
unattended, until an attacker comes to collect the data. In the case
of remote access Trojans, can also refer to file hidden locally.

Bot – A computer infected with software that allows it to be
controlled by a remote attacker. Also used to refer to the malware
itself which allows that control.

Carder – Someone who trades in stolen credit card and cardholder data.

Downloader – A small piece of code, usually a single instruction, used
in the payload of an exploit to silently fetch a malicious EXE file
from the attacker’s server.

Drop – A clandestine computer or service [such as e-mail account] that
collects data stolen by a Trojan.

Dump – As a noun, used interchangeably with “drop.” As a verb it means
to transfer data onto a machine for analysis, or to discard an exe
after reverse engineering.

exe – A Windows executable program. In a malware attack, the “exe”
refers to the malicious progam which infects the victim’s PC.

Exploit – Code used to take advantage vulnerabilities in software code
and configuration, usually to install malware.

Form-grabber – A program that steals information submitted by a user
to a web site. (Originally forms were the only way to submit user
input to a web server, but now the meaning has changed to encompass
any HTTP communication using a POST request.)

Gozi – One of a family of Trojans written by Russian RATs known as the
HangUp Team, used in a string of attacks orchestrated by a group known
as 76service.

iFrame – A special tag used to load one web page into a part of
another webpage. Used by iFramers to load malicious code, often
JavaScript, onto an otherwise trusted page.

iFramer – A person who places a malicious IFRAME (in-line frame) tag
into web pages, usually on compromised web sites, and then charges
malware developers for access to those iFrames as a distribution
method for Trojans.

Keylogger – A program that logs user input from the keyboard, usually
without the user’s knowledge or permission.

Malware – Any executable code that uses a computer in a way not
authorized by it’s owner. Includes Trojans that install backdoors,
spyware, bot clients, keyloggers, worms, viruses, or other malicious

Packer – A tool used to compress and scramble an EXE file. Used to
hide the malicious nature of malware and thwart analysis by

Padonki – A kind of Russian hacker slang in which words, often obscene
ones, are purposefully misspelled or bastardized.

Pesdato – English transliteration of a Padonki interjection.

RAT – Remote Access Trojan, malware that allows an attacker to
remotely control a infected PC or “bot”.

RATs – The nickname for people who write remote access trojans.

RBN – The Russian Business Network. An infamous ISP used by primarily
Russian malware groups to host malware and drops. The ISP is
reportedly run out of Panama and owned a company operating from the
islands of Seychelles, off the eastern coast of Africa. Variously
described as “opaque,” “dubious,” and “shady.”

Redirect – A feature of HTTP used to automatically forward someone
from one web site to another. In the case of malware, redirects are
done invisibly, sometimes inside iFrames.

Rootkit – Code that plugs into and changes the low-level functions of
an operating system. Used by malware to hide itself from users and
even the operating system itself.

Torpig – A relatively new family of Trojans representing the latest in
malware capabilities, including the ability to hide itself and provide
backdoor access for installing other configurations, components, or
even other Trojans.

Trojan – A program that attempts to hide its malicious code by
masquerading as an innocuous program most commonly through the use of
a “packer.”

Variant – Malware that is produced from the same code base (or
“family”) as a previous version but is different enough to require new
signatures for detection by anti-virus and anti-malware products.

VXer – Originally, a virus writer. Now refers to anyone involved in
the production or use of malware.




Who’s Stealing Your Passwords? Global Hackers Create a New Online
Crime Economy
BY Scott Berinato  /  September 17, 2007

By 2003, online banking was not yet ubiquitous but everyone could see
that, eventually, it would be. Everyone includes Internet criminals,
who by then had already built software capable of surreptitiously
grabbing personal information from online forms, like the ones used
for online banking. The first of these so-called form-grabbing Trojans
was called Berbew.

Inside an Identity Theft Site

Berbew’s creator is believed to be a VXer, or malware developer, named
Smash, who rose to prominence by co-founding the IAACA–International
Association for the Advancement of Criminal Activity-after the Feds
busted up ShadowCrew, Smash’s previous hacking group.

Berbew was wildly effective. Lance James, a researcher with Secure
Science Corp., believes it operated undetected for as long as nine
months and grabbed as much as 113GB of data–millions of personal

Like all exploits, Berbew was eventually detected and contained, but,
as is customary with malware, strands of Berbew’s form-grabbing code
were stitched into new Trojans that had adapted to defenses. The
process is not unlike horticulturalists’ grafting pieces of one plant
onto another in order to create hardier mums.

Thus, Berbew code reappeared in the Trojan A311-Death, and A311- Death
in turn begat a pervasive lineage of malware called the Haxdoor
family, authored by Corpse, who many believe was part of a well-known,
successful hacking group called the HangUp Team, based in the port
city of Archangelsk, Russia, where the Dvina River empties into the
White Sea, near the Arctic Circle.

By 2006, online banking was ubiquitous and form-grabbers had been
refined into remarkably efficient, multi-purpose bots. Corpse himself
was peddling a sophisticated Haxdoor derivative called Nuclear Grabber
for as much as $3,200 per copy. Nordea Bank in Sweden lost 8 million
kronor ($1.1 million) because of it.

But by last October, despite his success, Corpse decided that it was
time to lay low. A message appeared on a discussion board at, a site that sold yet another Haxdoor relative called

“Corpse does cease development spyware? news not new, but many do not
know” reads a post by “sash” translated using Babelfish. It then
quotes Corpse: “I declare about the official curtailment of my
activity of that connected with troyanami [trojans]”

This past January, a reporter for Computer Sweden chatted with Corpse,
pretending to be a potential customer. Corpse tried to sell him
Nuclear Grabber for $3,000 and crowed that banks sweep 99 percent of
online fraud cases under the rug. After Computerworld Australia
published the chat, Corpse disappeared. He hasn’t been heard from

But his form-grabbing code resurfaced, when a friend of Don Jackson
asked him to look at a file he found on his computer, as a favor.

That file led Jackson behind the curtain to find hacking with a level
of sophistication he’d never seen before.

January: Discovery

Don Jackson is a security researcher for SecureWorks, one of dozens of
boutique security firms that have emerged to deal with the inherently
insecure, crime-ridden, ungovernable Internet. Jackson’s company and
others like it usually sell security products, but their real value is
in the research they do. With law enforcement overtaxed by and under-
trained for electronic crime, these firms have become a primary source
of intelligence on underground Internet activity and VXers’ latest

Seems like an expensive hobby for a small company but the expense
associated with the hardcore intel and technically arduous research is
more than paid for by its value as a marketing tool. Being the first
to market, even when your product is bad news about security, wins
press attention and, it’s hoped, customers. As such, the little
security startups stock up on researchers like Jackson who have a
working, or sometimes intimate, knowledge of the criminal hacker
underground. All day, every day, security researchers at these small
companies are dissecting malware that they discover, chatting with bad
guys and poking around their domains.

Still, neither the sheer number of firms and jobs like Jackson’s
created in the past five years, nor the fact that larger companies
like Verizon, Symantec, IBM, and BT are acquiring those companies, are
signs that the good guys are catching up. It’s more a sign of how much
money can be made trying to catch up. Internet crime is profitable for
everyone, except of course its victims.

Jackson’s friend was a victim, but of what he wasn’t sure. All he
could say was that several of his online accounts had been hijacked
and that a scan of his computer turned up a conspicuous executable, or
exe, file, one that wasn’t detected as malware, but wasn’t recognized
as something legitimate either. The friend asked Jackson if, as a
favor, he’d take a look.

Jackson obliged and discovered that the file had been on the system
since December 13, 2006, almost a month. If it turned out to be
something new and malicious, then Jackson had discovered a 0-day
exploit. It would be a publicity boon for SecureWorks.

Jackson downloaded the exe to a lab computer. “Generally, the exe is
not all that exciting to researchers who see hundreds of samples each
month,” says Jackson. “There are some exceptions.” This was not an
exception. Jackson found a derivative of Corpse’s Haxdoor form
grabber, just a new cultivar of an old species, albeit a reasonably
well-crafted one Like several form grabbers before it, this one
intercepted form data before it was SSL-encrypted, meaning that the
little glowing lock in the corner of the browser, the one that online
merchants will tell you ensures you that you’re on a safe page, meant
nothing of the sort.

Jackson named his discovery after the transliteration of a Russian
word he found inside the source code: Pesdato. Later, when he learned
what that word meant in Padonki, a kind of Russian hacker slang, he
changed its name, instead choosing the moniker of a cartoon character
that he made up in grade school: Gozi.

The process of fully deconstructing Gozi took Jackson three days. On
the third day, as he pored over the source code, Jackson noticed that
the sample on his lab computer was communicating with an IP address
that he thought was owned by the Russian Business Network. RBN is a
notorious service provider out of St. Petersburg, Russia that Jackson
and others say is an ISP with a reputation for accommodating spam and
other malware outfits. Normally, Jackson thought, bots would be
stealthier about communicating with RBN. Maybe this was a mistake.
Curious, he decided to poke his head in and look around on the RBN
server that Gozi was talking to.

And what he found stunned him. As he sailed off through the servers
and in and out of files and almost over a database to where Gozi’s
home base was, Jackson found a full-fledged e-commerce operation. It
was slick and accessible, with comprehensive product offerings and a
strong customer focus. Jackson, no one really, had ever seen anything
like it. So business-like. So fully conceived. So professional.

It was early February by the time he found a 3.3 GB file containing
more than 10,000 online credentials taken from 5,200 machines–a stash
he estimated could fetch $2 million on the black market. He called the
FBI as he prepared to go undercover to learn more. If he had known at
the time what pesdato, that Padonki slang word meant, he might have
uttered it under his breath when he realized what he had stumbled on

He had stumbled on to the next phase of Internet crime. Gozi was
significant not because the Gozi Trojan was innovative or hard to
detect. It wasn’t. It was in many ways no different than its four-year
old ancestor Berbew. No, Gozi was significant, Jackson thought,
because it wasn’t really a product at all. It was a service.

The Golden Age

Gozi represents the shift taking place in Internet crime, from
software-based attacks to a service-based economy. Electronic crime
has evolved, from an episodic problem, like bank robberies carried out
by small gangs, to a chronic one, like drug trafficking run by

Already every month, Lance James’ company Secure Science discovers 3
million compromised login credentials–for banks, for online email
accounts, anything requiring a username and password on the Internet–
and intercepts 250,000 stolen credit cards. On an average week, Secure
Science monitors 30-40GB of freshly stolen data, “and that’s just our
company,” says James.

Given that, you think you’d have heard more about Gozi, or about this
chronic condition in general. But you haven’t. Beyond the research
community, Gozi and the other Trojans stealing all this data have been
largely ignored. A half-dozen CSOs and CISOs contacted for this story,
including some representing banks and online merchants, had either
never heard of Gozi or vaguely recalled the name and not much else.
And why would they? Gozi made it through a news cycle and it was
reported without context, with a tally of the known damage, like a
traffic accident. And yet, Gozi wasn’t that at all. It was an idea, a
business model.

Even after it fell out of the news, and despite the fact that Don
Jackson and the FBI believed they knew how it worked, and who was
running it, the Gozi Trojan continued to adapt to defenses, infect
machines and grab personal information.

“Do you have a credit card? They’ve got it,” states another researcher
who used to write malware for a hacking group and who now works
intelligence on the Internet underground and could only speak
anonymously to protect his cover. “I’m not exaggerating. Your numbers
will be compromised four or five times, even if they’re not used yet.”

“I take for granted everything I do on the Internet is public and
everything in my wallet is owned,” adds Chris Hoff, the security
strategist at Crossbeam and former CISO of Westcorp, a $25 billion
financial services company. “But what do I do? Do I pay for everything
in cash like my dad? I defy you to do that. I was at a hotel recently
and I couldn’t get a bottle of water without swiping my credit card.
And I was thirsty! What was I gonna do?”

That’s the thing about this wave of Internet crime. Everyone has
apparently decided that it’s an unavoidable cost of doing business
online, a risk they’re willing to take, and that whatever’s being lost
to crime online is acceptable loss. Banks, merchants, consumers,
they’re thirsty! What are they gonna do?

The cops lack resources and jurisdiction. And in some cases, security
companies are literally shifting their strategies away from trying to
secure machines connected to the Internet; they’re giving up because
they don’t believe it can be done.

It’s a conspiracy of apathy. For the criminals, this is great news.
They stand blinking into the dawn of a golden age of criminal
enterprise. Like Barbary Pirates in the 18th century, and like
Colombian drug cartels in the 1970s, malicious hackers will run amok,
unfettered, unafraid and perhaps even protected. Only they won’t use
muskets or mules. They’ll use malicious code to run syndicates that
will be both less violent and more scalable than in the past.

Now is the criminal hacker’s time. In Archangelsk, Russia, it is the
HangUp Team’s time.

February: Access

What Don Jackson found when he followed Gozi back to the RBN server
was called The home page was pretty and simple, just a
stylized login box.

But how this service worked wasn’t yet clear, so Jackson went
undercover. On carders forums, the online hangouts for people who run
credit card rackets, he found some members who knew about Gozi and
76service. He recognized their avatars–online personas usually marked
by a picture that gets posted with their comments on discussion boards–
as ones that belonged to members of the HangUp Team. “It confirmed to
me they were involved,” Jackson says, “but how still wasn’t clear. For
all I knew, they just sold the bot to someone.”

In response to requests he posted, one of these HangUp Team members e-
mailed Jackson at an anonymous account. The e-mail told
Jackson to log on to a specific IRC chat room with a specific name at
a specific time. Jackson, using a machine configured to hide its
location, did so.

The room was virtually crowded. “I get there, and there’s lots of
conversation. Lots of Russian that’s flying by me,” Jackson says.
Everyone spoke freely. Jackson did not sense any fear of law
enforcement, or curious researchers, snooping. . In fact, Jackson
thinks that a kind of show bidding was taking place. The channel
moderator was offering preview accounts to 76service such that the
users could tour the site. The hope was they’d come back saying
Pesdato! and offer a good price for access.

Jackson asked if he could take a test run, too. If he seemed nervous
and unpracticed about doing business here, it was because he was. “The
moderator says, ‘You don’t speak Russian. Where are you from?’ I say,
‘The UK.’ He says, ‘Only people we know get test runs.'” A few others
derided Jackson for his ignorance and, in so many words, told him to
go away. And that was that.

Plan B: Jackson called on a friend who followed the HangUp Team
closely, almost the way a CIA analyst builds up expertise. He figured
this friend may know how to get access. It was a stab in the dark but
remarkably it worked. One colleague knew all about 76service, which he
said had been online for several months, and he lent Jackson login
credentials to

The 76service Business Model

When Jackson logged in, the genius of 76service became immediately
clear. 76service customers weren’t weren’t paying for already-stolen
credentials. Instead, 76service sold subscriptions or “projects” to
Gozi-infected machines. Usually, projects were sold in 30-day
increments because that’s a billing cycle, enough time to guarantee
that the person who owns the machine with Gozi on it will have logged
in to manage their finances, entering data into forms that could be

Subscribers could log in with their assigned user name and password
any time during the 30-day project. They’d be met with a screen that
told them which of their bots was currently active, and a side bar of
management options. For example, they could pull down the latest drops–
data deposits that the Gozi-infected machines they subscribed to sent
to the servers, like the 3.3 GB one Jackson had found.

A project was like an investment portfolio. Individual Gozi-infected
machines were like stocks and subscribers bought a group of them,
betting they could gain enough personal information from their
portfolio of infected machines to make a profit, mostly by turning
around and selling credentials on the black market. (In some cases,
subscribers would use a few of the credentials themselves).

Some machines, like some stocks, would under perform and provide
little private information. But others would land the subscriber a
windfall of private data. The point was to subscribe to several
infected machines to balance that risk, the way Wall Street fund
managers invest in many stocks to offset losses in one company with
gains in another.

Grabbing forms provides several advantages to both buyer and seller
compared with the old model of pulling account numbers out of
databases and selling them. For the seller, it’s safer. He becomes a
broker; a middle man. He barely handles stolen data. For the buyer,
it’s the added value of an identity compared to a a credential. For
example, a credit card number alone might be worth $5, but add the
three- or four-digit security code associated with that card and the
value triples. Add billing address, phone number, cardholder names and
so forth which allow a buyer to create new lines of credit and the
value can reach into the hundreds of dollars.

Grab the primary and secondary authentication forms used for financial
services login in addition to all that, and you’ve hit the jackpot: a
real person’s full financial identity. Everything that person had
entered into forms online would create an avatar that could be used in
the real world to buy goods, apply for credit and passports, buy cell
phones, open new bank accounts and manipulate old ones. A dossier like
that would be one of the most valuable commodities available on the
information black market.

That’s why the subscription prices were steep. “Prices started at
$1,000 per machine per project,” says Jackson. With some tinkering and
thanks to some loose database configuration, Jackson gained a view
into other people’s accounts. He mostly saw subscriptions that bought
access to only a handful of machines, rarely more than a dozen.

The $1K figure was for “fresh bots”–new infections that hadn’t been
part of a project yet. Used bots that were coming off an expired
project were available, but worth less (and thus, cost less) because
of the increased likelihood that personal information gained from that
machine had already been sold. Customers were urged to act quickly to
get the freshest bots available.

This was another advantage for the seller. Providing the self-service
interface freed up the sellers to create ancillary services. 76service
was extremely customer-focused. “They were there to give you services
that made it a good experience,” Jackson says. You want us to clean up
the reports for you? Sure, for a small fee. You want a report on all
the credentials from one bank in your drop? Hundred bucks, please. For
another $150 a month, we’ll create secure remote drops for you.
Alternative packaging and delivery options? We can do that. Nickel and
dime. Nickel and dime.


Hacker Economics 2: The Conspiracy of Apathy
BY Scott Berinato  /  October 08, 2007

March: Containment

SecureWorks researcher Don Jackson was focused on his technical
analysis of form-grabbing software, but he continued correspondence
with the source who gave him access to After several
email exchanges with Jackson, the source decided that he could trust
him enough to share what he knew about the people behind 76service.
This is part of what he shared.

He told Jackson that the operation was run by just two people, known
as 76 and Exoric. 76 was in Russia. Exoric seemed to be based out

76 was a member of the HangUp Team who broke off to launch this
service. He probably bought the Haxdoor form-grabbing code grafted
onto Gozi from his old crew. He might have traded for it. He also
probably had a relationship with the RBN form his HangUp Team days.
The lack of manpower beyond the two of them might also explain some of
the mistakes 76service made, such as the direct connection to RBN
servers and the site configuration that allowed Jackson to view other
people’s projects. It appears 76 recruited Exoric for his server-side
knowledge, whereas 76 was coding the actual Trojan.

Jackson was sharing all of this with a field agent from the local FBI
office, who sent it up to agents in DC, who in turn coordinated with
Russian authorities on an investigation, according to Jackson. (The
FBI has refused to comment specifically on the case). Meanwhile
Jackson contacted Infraguard which in turn shared his findings with
financial institutions. Jackson wrote an exhaustive technical report,
one of the most detailed ever created, that covered both how Gozi
worked and how the service did, too. After he published it, and his PR
team spread the word, the press pounced: “Gozi Trojan leads to Russian
Data Hoard.”

Gozi had been known to be in the wild for at least three months. But
Jackson also believed that the “Winter Edition” of 76service was by no
means the first edition. He suspected that 76service had been
operating undetected for perhaps as long as 9 months.

But by mid-March, the good guys seemed to be getting ahead of it. Anti-
virus and anti-spyware vendors were adding Gozi signatures to their
products to detect the bot. 76service servers had been sent on the run
as the FBI and ISPs detected and blocked the IP addresses that Gozi
connected to, forcing 76 and Exoric to move the site around
constantly. Around March 12, the loose coalition of FBI, researchers,
ISPs and others finally seemed to get the 76service shut down.

This spurred a fire sale of whatever data had been left unsold at
76service. Jackson says that after March 12, some banks saw hundreds
of accounts opened each day that were traced back to Gozi-grabbed
data. Some of those account holders managed to make several cash
transfers up to $49,000. “They’re playing with limits on fraud,” says
Jackson. That is, they know the banks won’t flag 5 transfers under 50
grand, but will flag one $250,000 transfer. Jackson says many of these
transfers were wired to, of all places, Belgium, though he didn’t know
if anyonehad been caught picking up the cash there. Some other
accounts were detected and blocked from activity before transfers were
made. Jackson says the United States Secret Service was briefed. (The
USSS declined to comment). Gozi and 76service finally seemed to be

But it hardly mattered. By this time, another form-grabbing Trojan had
been discovered.

The new Trojan was called Torpig. Its technical architecture and its
service were nearly identical to Gozi and 76service, including links
to RBN servers. But Torpig was engineered to target bank forms
specifically–excluding less useful (read: valuable) credentials like
email logins or logins for newspaper sites. Torping shipped with a
database of financial Web sites’ URLs and when it recognized one of
these URLs in the browser’s address bar, it woke up and added a
redirect command to the URL.

Jackson says that intelligence suggested that the criminals had set up
real accounts at the banks on Torpig’s hit list and then captured
their own legitimate transaction traffic to see what “normal”
transactions looked like at each bank. This way, they could tailor
each banks’ redirect command to mimic a normal transaction, so that
filters wouldn’t register anomalous activity. Jackson called it “Gozi
on steroids.” It has proven much more problematic to researchers,
banks and law enforcement. Shutting it down has been far more
difficult than taking out Gozi, too, because Torpig communicated with
a network of servers. Gozi had only connected to the one RBN server.

That is, until March 21, when 76service was discovered back online,
running off of a new server in Hong Kong. By March 27, Jackson had
confirmed that it used a new variant of Gozi, undetected by filters.
It was the “spring edition.”

Distributed Pain/Concentrated Gain

The HangUp Team’s online art gallery is populated with a disturbing
mishmash of images and messages like “Fraud 4ever” and “In Fraud We
Trust” (One picture, for example, combines a picture of Hitler, a
Cannibas leaf and the head of Eugene Kaspersky, who owns a Russian-
based anti-virus company, on a platter.) And yes, pictures of its
members often include what have come to be hackneyed criminal hacker
clichés, with members posing with their cash, for example.

But do not mistake this culture for incompetence. HangUp Team is one a
number of highly successful businesses that some researchers claim
earn their members millions of dollars per month. “As a security
professional you don’t want to say you’re impressed by them,” says
“John” (not his real name), the security professional at a large bank
who agreed to talk only if he could remain anonymous, because he
didn’t have permission from his bank to speak. “But they’re better run
and managed than many organizations. They’re properly funded, they
have a clear goal, they’re performance driven, focused on a single
mission. It’s like an MBA case study of success.”

There are two key tenets underscoring that success: Distributed pain
with concentrated gain, and distributed risk.

The more important of these is distributed pain with concentrated
gain. The massive size of the market that Internet criminals prey on
allows them to spread losses across hundreds or thousands of victims.
“If you take $10 off of 10,000 credit cards, you’ve made $100,000 that
no one victim either recognized or felt enough to care,” says Jim
Maloney, a former CSO at who now runs his own security
consulting firm. “Then scale that up to five different banks’ credit
cards.” Each bank loses rougly $20,000. “The gain is concentrated for
this one hacker group but the penalty to each bank is still written
off as acceptable loss.

“Then go to law enforcement. Unless they hear from many victims and
can aggregate the problem as one big one, so that the resources
required to chase it down are justified, they won’t, they can’t chase
it down.”

And if they did decide to open an investigation, who do they go after?
That’s the distributed risk element. Groups like the HangUp Team, and
76 himself, deal in access to credentials. 76, for example, barely
handles stolen data. He also contracts out the distribution of his
malware. And he sells to people who themselves don’t commit fraud with
the credentials but usually turn around and sell them to still others
who actually commit the final fraud by turning stolen information into
money and goods.

That’s several links in a supply chain all sharing the risk (It’s
instructive to note that, according to several researchers, one of the
biggest frustrations for groups like HangUp Team recently has been
“newbies” to the credentials market who buy a credit card and
immediately rack up tens of thousands of dollars in luxury goods on
that card–essentially concentrating the pain and raising a red flag
that can threaten to put the good guys on the scent. It’s reminiscent
of the movie Goodfellas, when, after the Lufthansa heist, Robert
DeNiro’s character nervously castigates his crew for bringing
attention to themselves by showing up at a Christmas party with new
cars and furs.)

The Internet criminals’ model perfectly mirrors the drug cartel model,
which relies on a stratified market that spreads the risk out to
pushers, distributors, mules, manufacturers, and all the money flows
up, to the cartel. Disrupting the middle men–and that’s what HangUp
Team is becoming–doesn’t solve the problem. Other middle men will
simply arise to fill the void, much the way Smash started the IAACA to
fill the void left by ShadowCrew when it was taken down.

“Information is currency, that’s the radical change,” says Chris
Rouland, CTO and IBM Distinguished Engineer with IBM’s Internet
Security Systems group. “These guys don’t need to steal from anyone.
They’ve moved themselves way up the value chain.”

April: The iFrame Problem

In early April, the Spring Edition 76service server in Hong Kong was
taken down. Filters added the new Gozi variant to their lists of
detected malware. On the run again, 76 and Exoric would fold up their
tent and modify Gozi to be undetectable again while they found a new
place to set up shop. And when they did, the steps would start again,
the two sides entwined in an endless, uneasy foxtrot.

Jackson continued to help where he could but much of this was out of
his hands. He had since immersed himself in another facet of 76service–
its distribution mechanism.

No matter how inspired the idea of a subscription to infected machines
was, or how cleverly engineered the bot that infected those machines
was, 76’s and Exoric’s success with 76service, surprisingly, relied on
something they didn’t develop themselves, but rather contracted out:
distribution, for which they used iFrames, a browser feature that
allows Web sites to deliver content from a remote Web site within a
frame on a page. Think of stock quotes origination from one site
streamed into a small box on another site. (For more about iFrames,
see Death by iFrame.) 76 and Exoric used iFrames to infect computers –
but in April they had contracted this part of the work out to another

Jackson found a partial list of sites hosting the iFrames used
exclusively for Gozi. Jackson sampled 5,848 pages, only a portion of
the infected pages on his partial list (meaning 76 and Exoric probably
paid tens of thousands of dollars for iFrame infections). Some of the
iFramed sites on his list were offline. Some had been cleaned up. But
2,079 of them, more than a third of the sample, still had the code
online, ready to deliver new, undetectable versions of Gozi as soon as
they were ready. A month later, when Jackson took attendance again, 98
percent of the 2,079 were still hosting the iFrame.

Even if Gozi was gone for good, the iFramers would be happy to resell
access to these iFrames to the next malware developer.

Transferred Risk

As much as the HangUp Team has relied on distributed pain for its
success, financial institutions have relied on transferred risk to
keep the Internet crime problem from becoming a consumer cause and
damaging their businesses. So far, it has been cheaper to follow
regulations enough to pass audits and then pay for the fraud rather
than implement more serious security. “If you look at the volume of
loss versus revenue, it’s not horribly bad yet,” says Chris Hoff, with
a nod to the criminal hacker’s strategy of distributed pain. “The
banks say, ‘Regulations say I need to do these seven things, so I do
them and let’s hope the technology to defend against this catches

“John” the security executive at the bank, one of the only security
professionals from financial services who agreed to speak for this
story, says “If you audited a financial institution, you wouldn’t find
many out of compliance. From a legal perspective, banks can spin that
around and say there’s nothing else we could do.”

The banks know how much data Lance James at Secure Science is
monitoring; some of them are his clients. The researcher with
expertise on the HangUp Team calls consumers’ ability to transfer
funds online “the dumbest thing I’ve ever seen. You can’t walk into
the branch of a bank with a mask on and no ID and make a transfer. So
why is it okay online?”

And yet banks push online banking to customers with one hand while the
other hand pushes problems like Gozi away, into acceptable loss
budgets and insurance–transferred risk.

As long as consumers don’t raise a fuss, and thus far they haven’t in
any meaningful way, the banks have little to fear from their

But perhaps the only reason consumers don’t raise a fuss is because
the banks have both overstated the safety and security of online
banking and downplayed negative events around it, like the existence
of Gozi and 76service.

So did the banks create a false sense of security or did consumers
drive them to not address it through their apathy? The banks
themselves might argue that they are acting responsibly. It’s hard to
tell since most decline to talk about the problem. Bill Nelson is
president of the Financial Services Information Sharing and Analysis
Center, or FS-ISAC, a group for bank security executives where they
can safely share intelligence and other information. Membership in the
FS-ISAC has increased from 68 in 2004 to 2,200 this year. “That’s not
a lack of interest,” says Nelson.

Nelson was the closest person to bank security executives who would
speak on the record. He bristled at the notion that banks are
carelessly pushing services they can’t secure. “It’s being
misinterpreted that banks don’t care about security. They spend
millions of dollars on this. These are good, quality people,” Nelson

If anything, say Nelson and others, blaming banks is precisely
backwards. If you want to point fingers look at their customers,
who’ve created the demand for the product in the first place. “It’s
kind of ridiculous to think you wouldn’t, as a bank, use the Internet
as a transport,” notes Hoff. “If you’re not offering some form of
online banking, you’re going to wither away and go out of business.”

Eric Johnson, an economist at Dartmouth who recently published a study
on malware on peer-to-peer networks says, “Customers are the banks’
worst enemies here. Customers are exposing lots of material that
creates an environment for identity theft.”

Indeed, many malware problems are intimately connected to insecure PCs
and finicky consumers who, even if they say otherwise, value
convenience over security. As one CISO at a bank put it–anonymously,
of course, “Users are pretty dumb.”


Hacker Economics 3: MPACK and the Next Wave of Malware
BYScott Berinato  /  October 08, 2007

May: A Poor Re-emergence

The hackers known as 76 and Exoric weren’t just the managers of
76service; they were also clients. Through his undercover work,
SecureWorks researcher Don Jackson found that Exoric himself owned a
project – a portfolio of trojan-infected machines – just like the ones
the team sold. Only, since access was free to him, his was a much
bigger project, with hundreds of bots focused exclusively on Gozi-
infected machines in Mexico and Chile (.mx and .cl domains), and no 30-
day expiration. For a while, Exoric also used his own storefront for
the Latin and South American markets, called GucciService.

But by May the business was strained by the constant pursuit of
researchers writing signatures to detect Gozi and law enforcement
working with them to find and take down the 76service servers.

Early in the month, Jackson was able to say “Gozi isn’t working. No
one is going to the site.” At this time, his personal site was also
the victim of what he termed a poor DDoS attack that lasted 36 hours.
Soon after that, when he visited, he found it abandoned,
with a simple message: “I choose shadow. Please, never come back

It seemed that, finally, it was over. But it wasn’t, of course. In
fact even before Jackson found abandoned, a new Gozi
variant was already at work, and it would be learned that it had been
infecting machines since at least April 14. This latest Gozi bot was
better than ever. It had added keystroke logging as an alternative to
form grabbing. And recognizing that researchers were their primary
adversaries, the new version added features to stymie detection and
reverse engineering. “Every copy of Gozi has a unique infection ID,”
explains Jackson. “So when data comes into the server it can check
against the ID to make sure it’s a valid infection. This new version
also checked to see what your bot had sent before. Basically it could
shut you off if you kept logging in without delivering good data,
which is what researchers do.” The new version also logged the bot’s
IP address so that it could be blocked from communicating with the

But there were problems. A programming glitch caused the service to
create huge files of redundant information, interrupting service to
customers while the duo tried to fix it. “That’s why QA testing is so
important,” deadpans Jackson. They had only nabbed about 500MB of data
off of 200 infected PCs when their new ISP, which Jackson says was
based in Panama, took them offline again.

It was a poor reemergence. Lurking on a discussion board with a
colleague who could translate Russian, Jackson found a post by someone
named 57, a hacker thought to be part of the HangUp Team. 57 wrote
that 76 broke off work with Exoric because the two were spending more
time on the lam than they did running the service.

The FBI had wound down on the case, according to Jackson (though in an
official statement given to CSO from the press office, the FBI says it
welcomes any leads on information related to Gozi and 76service, which
it termed “unique”). While they continued to monitor some accounts
they knew were connected to 76service, Jackson didn’t think it would
progress beyond that. 76service was officially defunct. By early June,
76 and Exoric had dissolved their partnership.

But 57 also seemed to indicate that 76 was back with HangUp Team and
busy rewriting the Gozi form grabber. The new architecture would allow
76 to hide the drop servers from prying eyes, making it harder to
interrupt or shut services down.

Jackson predicted at the time that a new 76service would follow in
kind. After all, 76service didn’t fail because of the service model.
It failed because of a lack of manpower to secure and manage the
service. It couldn’t scale. “I think they cobbled together Gozi and
76service to see what it could do,” says Jackson. “They realize what
they need to do next. They spotted weaknesses. Torpig was the next
step; it was better. Now what’s next?” With the help of the HangUp
Team, a 76service-like site capable of enduring its own success, will
return using some descendant of Gozi or Torpig.
Next: A Radical New Strategy for Banks?

The Radical New Strategy?

If users are, as one bank CISO said, dumb; and if banks can just write
off their losses; and if the Internet is fundamentally insecure; and
if vendors defenses can’t keep up; and if law enforcement is
overmatched; what happens next?

Don Jackson thinks that the banks will simply transfer more of the
risk. “The banks are worried but their answer is not to track these
guys down or be more diligent about security,” says Jackson, who says
he remembers talking about this with bank security types at last
year’s Information Systems Security Assocaition (ISSA) conference.
“Their answer is to shift more responsibility on to their customers.
They’ll lower fraud limits, the amount of stolen funds they’ll cover.
They’ll make it harder for consumers to prove they were defrauded–and
easier to say it was the customer’s fault.. You’ll have to prove that
you kept your end of the deal by patching your system and so forth.
Watch the terms of use for online banking. I think you’ll see

Like Jackson, Chris Rouland of IBM ISS believes the days of acceptable
loss at the banks are numbered, but he has a hard time seeing a “blame
the customer” strategy succeed. “These write-offs, this thing about
putting it on consumers, it will end. It has to,” he says.

Rouland says that he is rethinking security at a fundamental level,
and many others in the industry are as well. “We’re basically telling
banks that client security is your problem, not [your customers’]
problem. We’re saying all the awareness in the world can not
adequately secure client machines. Telling customers to secure
themselves will not work. We believe that in order to fix the problem,
you have to protect customers’ customers. You have no choice.”

Notice Rouland did not say you have to secure the client. He never
says the banks must figure out a way to protect that machine. That’s
careful and deliberate, because Rouland doesn’t believe that’s what
banks have to do. When it comes to security PCs, Rouland’s advice is
radical: Give up.

“In the next generation,” he says, “we will all do business with
infected end points,” he says.

He was asked to repeat what he said, just to be sure. So he did: “Our
strategy is we have to figure out how you do business with an infected
computer. How do you secure a transaction with an infected machine?
Whoever figures out how to do that first will win.”

June: Disturbing Developments

By mid-June, Gozi was practically forgotten, and the new thing was
MPACK. This one even had some veteran researchers muttering pesdato!

A typical Trojan like Gozi might rely on one exploit to try and open
up a connection with the target PC. MPACK, on the other hand, is a
briefcase full of exploits, a dozen or more of them. Mostly they’re
old exploits, but the idea is that if you try 15 different lock picks,
one is bound to get you in. What’s more, MPACK then reports back to
its server which exploits worked where and stores that information in
a database, an intelligence function used to effectively pack the
briefcases with the most successful lock picks. The practice seems to
have vastly increased the successful infection rate of PCs that visit
sites delivering MPACK.

MPACK is actually sold with malware such that once the briefcase of
exploits gets access, a Trojan–often Torpig–will be delivered to the
PC. Other Trojans, like Apophis (which steals digital certificates)
and even the old Nuclear Grabber that Corpse was hocking more than a
year ago are also available in conjunction with MPACK. It costs
hundreds to thousands of dollars.

Researchers still trying to penetrate this service say that MPACK is
being sold by sash, likely the same as “sash” who posted news of
Corpse’s semi-retirement on the discussion board. (Sash
sells Pinch, too). Sash in turn seems to be working with Step57, a
group likely run by 57, the HangUp Team coder who Jackson had found
who posted the news of 76service’s demise. All of these players have
connections to the Russian Business Network, according to several
researchers, including Jackson.

MPACK’s multiple-exploit technique was used before in an exploit
called WebAttacker. But MPACK is more effective because of iFrames.
Disturbingly, the iFramers seem to have come up with some automated
exploit kit capable infecting a massive number of Web pages with
illicit iFrames in a short period of time, “like a machine gun
spraying holes in sites” says Lance James. The first round of iFrame
injections created to deliver MPACK showed up, literally, overnight–
more than 10,000 pages were infected, mostly on Italian sites. Since
then the process has repeated itself, moving country to country.
Thousands of infections all at once.

Researchers are still trying to understand what allows the deployment
of so many iFrames so quickly. Mostly they’re reporting on rumors and
theories. Using a virtual host to infect many sites is one working
theory. But no one knows yet for sure how it’s done. What they do know
is iFraming is officially pandemic. “The iFramers are making a
killing,” Jackson says. “They don’t get their hands dirty with the
actual malware. They just break into a server with scripts. It’s a
good business to be in right now.”

Fraud 4ever

“The thing about MPACK,” says James, “this is the start of the whole
thing.” By this he seems to mean that Golden Age of Internet Crime,
that dawning era. “They’re starting to think like architects instead
of engineers.” MPACK brings together the best iFrames, the best
exploits and some state-of-the-art malware into a single package all
of which is being improved constantly, and sold with a focus on
customer service. In marketing parlance, it’s not a product, it’s a

Business is good. Internet criminals operate with de facto immunity.
The pool of vulnerable computers to exploit remains massive. The
target financial institutions still treat their crime as acceptable
loss. Law enforcement is otherwise occupied. And technical defenses
are mere market conditions to adapt to. For example, when some clever
banks came up with a way to beat keylogging by having users use
“virtual keyboards” on the screen, criminal hackers just developed
Briz, code that captures the pixels around the cursor, the pictures of
the characters being typed. Problem solved.

The criminals innovate. Some tactics will make the hair on your neck
prickle. Rumors persist of a nasty Brazilian banking Trojan that can
change banking account numbers, routing numbers, balance, and payment/
transfer values by injecting HTML or even whole, cloned HTTP requests
into an online banking session on the fly, such that the person
banking would see false information that reflected their intentions
and not the actual transfer. Chris Rouland of IBM has seen similar
functionality in a bot called Grams.

Prg, another form-grabbing Trojan discovered last October, makes
researchers awfully nervous. New variants emerge every couple of
months and managed to steal tens of GB of data before being detected.
Its encryption is strong and well-designed, its ability to hide itself
with anti-forensics deft.

In June, Don Jackson found a new Prg variant. It shipped with a
development kit which allows anyone who buys it to adapt the code on
the fly in order to evade anti-virus and anti-spyware. On the server
where he found it, he also found a staging area where new variants
were already developed and waiting to be released as soon as the
defenses recognized and blocked the current variant. He also found a
couple of drops for two different groups who had bought Prg and
distributed it through both iFrames and some good old-fashioned “click-
on-this-link” emails. The drops comprised 10,000 account credentials,
including second factors of authentication and answers to those
security check questions like your mother’s maiden name meant to layer
extra security into the online banking process.

“There’s a consumer side of me that says, Be cautious but life must go
on. Someone somehow will take care of this,” says Christopher Hoff.
“And the security side of me wants to curl up in the fetal position
and not go out.”

After Jackson discovered the Prg variant, he learned of two more Gozi
variants found in the wild. The EXE inside these versions is called
76.exe, and is probably the product of 76’s reunion with the HangUp
Team. It’s pesdato! It has vastly improved its server network and
obfuscation techniques. It bounces traffic from country to country. It
hides its drops well. In fact, Jackson’s not sure what it even
connects to. He’s looking for the front end, the next 76service. He
knows it’s out there. But so far he can’t find it.

From the archive, originally posted by: [ spectre ]


“This is the untold story of how the global racket in fake drugs
turned an easily curable disease into Africa’s biggest child killer.
According to leading scientists, millions of children could have been
saved if the pharmaceutical industry and World Health Organisation had
collaborated to address the problem. Now, signs are emerging that
malaria is developing resistance to the one effective drug which can
still treat it. It’s a development which threatens patients all over
the world. But – after decades of silence – has the WHO left it too
late to act?

“The fake drugs racket is one of the greatest atrocities of our times.
It is mass murder”, states Dr Dora Akunyili, director of Nigeria’s
food and drug’s regulatory body. Thirty years ago, malaria was no more
dangerous than a dose of the flu. “It was when the fake drugs racket
broke out that people started dying like rats”, states Dr Akunyili.
Even Prof Nick White, one of the world’s top malaria scientists
admits: “fifty years ago, malaria was in retreat. Now, it is getting

Many believe that fake and substandard drugs are the main cause of the
devastating resurgence in malaria. In the hours lost giving a child a
useless fake, malaria turns into a killer. “Getting the treatment
right in the first instance is crucial”, explains Dr Meremikwu, who
runs the children’s emergency unit. “You don’t have time to wait.”

The worst type of fakes are those which contain a small portion of
active ingredient. “Counterfeit drugs with little active ingredient
drive drug resistance”, explains Prof White. “Everyone in the malaria
field accepts they’re a major threat.” There is now only one effective
drug which treats malaria. “If we lose this drug to resistance, it
will be an absolute disaster,” starts White. “All our modern
treatments depend on it.” But despite this, the WHO has yet to
acknowledge the link between fake drugs and malaria resistance.”

Drug giants accused of ignoring fake medicines that kill millions

By Saeed Shah  /  13 April 2007

The world’s major drug companies have been accused of turning a blind
eye to the multibillion-dollar trade in fake medicine that has
resulted in an explosion of child malaria deaths in developing

Governments have not tackled the problem and pharmaceutical companies
are burying the issue, afraid that any publicity given to their
medicines being faked will lead to a fall in the sale of the genuine
product, according to a documentary.

The problem has been particularly acute with the treatment of malaria
in Africa, with anti-malaria drugs faked on an industrial scale.
Professor Nick White, of Oxford University, one of the world’s leading
experts on malaria, said: “We estimate that there are more than one
million deaths each year – which is the equivalent of seven jumbo jets
going down every day. And 90 per cent of those deaths are in

Professor White said that counterfeit medicine was a major reason why
malaria had become, over the past 30 years, Africa’s biggest child
killer, from an illness that used to be easily treated with medicines.

Some of the fake drugs contain no medicine at all, but others have
tiny traces of the real ingredients – which leads to another,
potentially bigger problem: it allows the malaria parasite to build up
resistance to the drug.

Nigeria’s campaigning drugs regulator, Dora Akunyili, described
counterfeiting as “mass murder”. She told the documentary, which will
be aired today on The Business Channel, a satellite station: “The fake
drug racket and the silence associated with it have led to the
resurgence of malaria… The companies kept quiet. The regulators were
paid off and everybody was helpless. Drug counterfeiters operated in
this country and in most developing countries for almost three
decades, unchallenged.”

There is now just one family of drugs left that malaria has not built
up resistance to, Artemisinins – which are also being faked. Professor
White said: “Resistance to the Artemisinins would be an absolute
catastrophe for our current attempts to try to control malaria.”

It is estimated that the global fake drug racket is worth $40bn
(£20bn) a year, and between 50 and 90 per cent of medicine in some
African and Asian countries is counterfeit. Graham Satchwell, the
former head of security at GlaxoSmithKline, the British-based global
pharmaceutical giant, told The Independent: “Each therapy area is
highly competitive, so if one person’s drug is undermined, their
market share will suffer. It takes a brave company to say they have a

Mr Satchwell said that the “majority of the industry are sitting on
their hands”, rather than tackling the problem – for instance through
radio tracking of their products. He also pointed out that the figures
from the industry’s own organisation, the Pharmaceutical Security
Institute, showed many cases of counterfeiting in the US, but hardly
any in China or Africa – despite firm evidence from other sources that
tens of thousands die each year in China and Africa as a result of
fake medicines each year.

Dr Akunyili said: “If the companies had risen up to their
responsibilities early enough, the issue of the preponderance of fake
drugs would not have gotten to the level it got in Nigeria. It is this
silence that is actually largely encouraging drug counterfeiting”

Dr Martin Meremikwu, of Calabar University Hospital, in southern
Nigeria, said that he had seen child malaria deaths soar. He said
that, by the time children who had been treated with fake drugs got to
the hospitals, it was often too late to save them.

“Malaria should not kill people. It’s a curable disease. But if the
patient uses the wrong drug – either because they are fake or they are
ineffective because of higher resistance – then they are lying here
with complications.

“And in children, young children, the time between a mild disease and
a severe disease can be as little as eight hours, or 24 hours or 12
hours. So time is of the huge essence here. You really cannot afford
to try some other drug before trying a good one. You can’t. Because
you don’t have that time.”

The drugs don’t work

* Counterfeit medicines are swamping unregulated markets in developing
nations with unknown and sometimes fatal results. Not only are
thousands dying needlessly, but patients are also becoming immune to
the effects of the real thing. Counterfeit drugs occasionally contain
small doses of the active ingredient – enough to induce resistance

* The UN World Health Organisation estimates the incidence of
counterfeit medicines is about 10 per cent in developing countries,
with prevalence higher where regulatory control is weakest. But in
many parts of Africa, according to the WHO, as well as in some
countries in Latin America and South Asia, prevalence sits at around
30 per cent. The patients hit are the sickest and the poorest.

* WHO estimates that 200,000 of the one million malaria deaths every
year would be prevented if all the drugs taken were genuine. The
popularity of combination malaria drugs – which are more expensive
than other treatments – has seen counterfeit peddlers cash in on the
opportunity to boost sales. In Cambodia, Tanzania and Cameroon, up to
90 per cent of such drugs on sale in local markets are believed to
contain nothing but chalk or maize flour.

* As recently as 2001, about 68 per cent of medicines in circulation
in Nigeria were unregistered, and as much as 41 per cent were believed
to be fake.