Flag of convenience
International Maritime Law requires that every merchant ship be registered in a country called its flag state. Once registered, she operates under its laws in her home country and on the high seas. Term flag of convenience means registering a merchant ship in a sovereign state different from that of her owners, and flying its flag. Modern practice of registering ships in foreign countries to gain economic and regulatory advantages to ship owners originated in USA in 1919. But term flag of convenience (FOC) came into use in the1950s. Basic reasons for choosing FOC is avoidance of tax, labor and environmental regulations. As the system also allows ship owners to become legally anonymous and difficult to prosecute in civil and criminal actions, its use steadily increased. Over half of world merchant fleet was registered under FOC in 2009. 13 flag states were found to have substandard regulations. In 2009, 28 out of 63 ships under FOC, saved a shipping Company, up to 3.5 million dollars per ship every year.
The 1978 environmental disaster caused by sinking of Liberian flag Amoco Cadiz, raised a “strong political and public outcry to spur creation of a new type of maritime enforcement to make ships in international trade subject to inspection by states they visit. Fourteen European nations signed the 1982 “Paris MOU on Port State Control.” In addition to shipboard living and working conditions, these inspections cover items concerning safety of life at sea and prevention of pollution by ships. When a port state inspection uncovers problems, it may take actions including detention of the ship. In 2008, member states of Paris MOU conducted 14,322 inspections resulting in 1,220 detentions due to deficiencies. Member states of Tokyo MOU conducted 13,298 inspections in 2009, found 86,820 deficiencies with 1,336 detentions.
To require “genuine link” between ship owners and her flag state, Article 5(1) of Geneva Convention on the High Seas 1958, requires that “the state must effectively exercise its jurisdiction and control in administrative, technical and social matters over ships flying its flag.” Article 91 of UNCLOS 1982 incorporated it. The 1986 UN Convention for Registration of Ships requires that a flag state be linked to its ships either by having an economic stake in their ownership or by providing crew to them. But out of 40 signatories with combined world tonnage of over 25%, only 14 countries had signed it by 2006.
Robert La Follette’s Seamen’s Act of 1915, has been described as the “Magna Carta of sailors’ rights.” Between 1915 and 1922, USA tried to strengthen its Merchant Marine by providing safeguards for its mariners. It regulated mariners’ working hours, their payment, baseline requirements for shipboard food, reduced penalties for disobedience and also abolished imprisonment of seafarers for desertion. It also enforced safety standards, with requirements of lifeboats, number of qualified able seamen on board, and also that officers and seamen be able to speak the same language. U.S.-flagged ships were regularly inspected by ABS. This put U.S. flag ships at economic disadvantage. By moving their ships to Panamanian flag, owners could avoid providing these protections. ‘Belen Quezada’ was running illegal alcohol between Canada and USA during prohibition. She was the first US ship flagged in Panama in 1919. Owners paid her sailors on the Japanese wage scale, which was much lower. On March 11 1949, Niarchos registered his first ship ‘World Peace’ under Liberian flag created by an American Edward Stettinius, as a joint venture with Govt. of Liberia. 25% of its revenue was to go to Liberian Govt., 10% to social programs in Liberia, and 65% to Stettinius. When he died in 1949, its ownership passed to International Bank of Washington. In 18 years, Liberia surpassed UK as world’s largest register. By 1999, it was second to Panama and its Govt. earned 70% of Govt. revenue. In 2009 Panama, Liberia, and Marshall Islands flags of convenience had 468,405,000 DWT or 40% of world fleet. Panama dominates with over 8,065 ships or 23% of world DWT. Top ten flags of convenience had 55% of world DWT, including 61% bulk carriers and 56% tankers.
In 2010 ITF listed 32 registries to be FOC including Antigua, Barbuda, Bahamas, Barbados, Belize, Bermuda, Bolivia, Burma, Cambodia, the Cayman Island, Comoros, Cyprus, Equatorial Guinea, Georgia, Gibraltar, Honduras, Jamaica, Lebanon, Liberia, Malta, the Marshall Islands, Mauritius, Mongolia, Netherlands Antilles, North Korea, Panama, Sao Tome and Príncipe, St Vincent, Sri Lanka, Tonga, Vanuatu, and French and German International Ship Registers. These states have insufficient and poorly enforced regulations. They cannot identify a ship owner, much less hold him civilly or criminally responsible for his ship’s actions. Hence terrorism and criminal activities, poor working conditions for seafarers, and adverse effect on the environment.
Ship owners often establish shell corporations as legal owners of their ships with terms such as beneficial owner or ultimate owner. A beneficial owner is legally and financially responsible for the ship and her activities. In 2004, a Consultative Group of UN on Flag State Implementation reported that “It is very easy, and comparatively inexpensive, to establish a complex web of corporate entities to provide very effective cover to identities of beneficial owners who do not want to be known.” The 2003 OECD report on “Ownership and Control of Ships,” stated that these corporate structures are often multi-layered and spread across numerous jurisdictions to make beneficial owner “almost impenetrable” to law enforcement officials and taxation. OECD report concludes that use of “bearer shares” protects anonymity of a ship’s beneficial owner because physical possession of bearer shares accords ownership of the corporation. There is no requirement to report transfer of bearer shares, and usually even their serial numbers are not recorded. In 2002, USA proposed a law to prevent American ship owners to use foreign flags to counter terrorism.
Many FOC states lack resources or will to properly monitor and control their ship. They allow ship owners to avoid International regulations by not ratifying core conventions. SOLAS, MARPOL, LL 66, STCW, ILO 147, and CLC/FUND 92. are not ratified by several FOC states. In 2009, Antigua, Barbudan, Bolivia, Cambodia, N. Korea, Georgia, Honduras, Jamaica, Mongolia, Vincentia, and Sri Lanka flags had not ratified ILO147 Merchant Shipping (Minimum Standards) Convention 1976 and its 1996 Protocol”. In 2009, MARPOL, CLC, and FUND conventions had not been ratified by Bahama Bolivia, Cambodia, North Korea, Georgia, Honduras, Lebanon, Malta and Sri Lanka.
The 1982 Paris MOU now sets port state control standards by twenty-six European countries and Canada. 14 out of 31 flags of convenience states listed by ITF are targeted for special enforcement by Paris & Tokyo MOU countries and U.S. Coast Guard.
The seafaring industry has licensed mariners including deck officers and marine engineers plus unlicensed mariners or ratings. Differences in wages between “high cost” crewing sources such as USA from American Bureau of Labor Statistics gave median earnings for US unlicenced mariners at average US$35,810, varying from $21,640 to $55,360 yearly. 2006 statistics from ILO, for earnings of Filipino and Chinese crew, average between $2,000 to $3,000 yearly. American chief engineers earned $63,630, varying from $35,030 to $109,310 while their Filipino counterparts averaged $5,500 per year.
In 2006, ITF coined a new term, ‘ports of convenience which refers to port companies that operate like flags of convenience. On March 9 2012, Port of Auckland was declared the world’s first port-of-convenience, after it made nearly 300 striking dock workers redundant, contracting out the work.
Capt. A K Bansal,
L.L.B. (Hons) London,
Master Mariner, Bar at Law