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Flag of convenience (FOC) is a business practice whereby a ship's owners
register Register or registration may refer to: Arts entertainment, and media Music * Register (music), the relative "height" or range of a note, melody, part, instrument, etc. * ''Register'', a 2017 album by Travis Miller * Registration (organ), th ...
a
merchant ship A merchant ship, merchant vessel, trading vessel, or merchantman is a watercraft that transports cargo or carries passengers for hire. This is in contrast to pleasure craft, which are used for personal recreation, and naval ships, which are ...
in a ship register of a country other than that of the ship's owners, and the ship flies the
civil ensign A civil ensign is an ensign (maritime flag) used by civilian vessels to denote their nationality. It can be the same or different from the state ensign and the naval ensign (or war ensign). It is also known as the merchant ensign or merchant flag ...
of that country, called the
flag state The flag state of a merchant vessel is the jurisdiction under whose laws the vessel is registered or licensed, and is deemed the nationality of the vessel. A merchant vessel must be registered and can only be registered in one jurisdiction, but ma ...
.Bernaert, 2006, p. 104. The term is often used pejoratively, and although common, the practice is sometimes regarded as contentious. Each merchant ship is required by
international law International law (also known as public international law and the law of nations) is the set of rules, norms, and standards generally recognized as binding between states. It establishes normative guidelines and a common conceptual framework for ...
to be registered in a registry created by a country,ICFTU et al., 2002, p. 7. and a ship is subject to the laws of that country, which are used also if the ship is involved in a case under
admiralty law Admiralty law or maritime law is a body of law that governs nautical issues and private maritime disputes. Admiralty law consists of both domestic law on maritime activities, and private international law governing the relationships between priv ...
. A ship's owners may elect to register a ship in a foreign country so as to avoid the regulations of the owners' country, which may, for example, have stricter safety standards. They may also select a jurisdiction to reduce operating costs, avoiding higher taxes in the owners' country and bypassing laws that protect the wages and working conditions of
mariner A sailor, seaman, mariner, or seafarer is a person who works aboard a watercraft as part of its crew, and may work in any one of a number of different fields that are related to the operation and maintenance of a ship. The profession of the ...
s.Kemp, 1976. The term "flag of convenience" has been used since the 1950s. A registry which does not have a
nationality Nationality is a legal identification of a person in international law, establishing the person as a subject, a ''national'', of a sovereign state. It affords the state jurisdiction over the person and affords the person the protection of t ...
or
residency Residency may refer to: * Domicile (law), the act of establishing or maintaining a residence in a given place ** Permanent residency, indefinite residence within a country despite not having citizenship * Residency (medicine), a stage of postgrad ...
requirement for ship registration is often described as an open registry. Panama, for example, offers advantages such as easier registration (often online), the ability to employ cheaper foreign labour, and an exemption on income taxes. The modern practice of ships being registered in a foreign country began in the 1920s in the
United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country Continental United States, primarily located in North America. It consists of 50 U.S. state, states, a Washington, D.C., ...
when shipowners seeking to serve alcohol to passengers during
Prohibition Prohibition is the act or practice of forbidding something by law; more particularly the term refers to the banning of the manufacture, storage (whether in barrels or in bottles), transportation, sale, possession, and consumption of alcoholi ...
registered their ships in Panama. Owners soon began to perceive advantages in terms of avoiding increased regulations and rising labor costs and continued to register their ships in
Panama Panama ( , ; es, link=no, Panamá ), officially the Republic of Panama ( es, República de Panamá), is a transcontinental country spanning the southern part of North America and the northern part of South America. It is bordered by Co ...
even after Prohibition ended. The use of open registries steadily increased, and in 1968,
Liberia Liberia (), officially the Republic of Liberia, is a country on the West African coast. It is bordered by Sierra Leone to Liberia–Sierra Leone border, its northwest, Guinea to Guinea–Liberia border, its north, Ivory Coast to Ivory Coast� ...
grew to surpass the
United Kingdom The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom (UK) or Britain, is a country in Europe, off the north-western coast of the continental mainland. It comprises England, Scotland, Wales and ...
with the world's largest ship register. , more than half the world's merchant ships were registered with open registries, and almost 40% of the entire world fleet, in terms of
deadweight tonnage Deadweight tonnage (also known as deadweight; abbreviated to DWT, D.W.T., d.w.t., or dwt) or tons deadweight (DWT) is a measure of how much weight a ship can carry. It is the sum of the weights of cargo, fuel, fresh water, ballast water, pro ...
, (DWT) were registered in Panama, Liberia, and the
Marshall Islands The Marshall Islands ( mh, Ṃajeḷ), officially the Republic of the Marshall Islands ( mh, Aolepān Aorōkin Ṃajeḷ),'' () is an independent island country and microstate near the Equator in the Pacific Ocean, slightly west of the Inte ...
. It is estimated that nearly two thirds of the world's fleet is registered in states to which they had no connection. According to the
UN Conference on Trade and Development The United Nations Conference on Trade and Development (UNCTAD) is an intergovernmental organization within the United Nations Secretariat that promotes the interests of developing countries in world trade. It was established in 1964 by the ...
(UNCTAD), in January 2021, Panama had 6,653 ships on its registry (16 percent of the global fleet by DWT), followed by Liberia (3,909), Marshall Islands (3,732), Singapore (2,541), and Hong Kong (2,440).


Background

Open registries have been criticised, mainly by
trade union A trade union (labor union in American English), often simply referred to as a union, is an organization of workers intent on "maintaining or improving the conditions of their employment", ch. I such as attaining better wages and benefits ...
organisations based in developed countries, especially those in the European Union, United States, Japan, Canada, or the United Kingdom. One criticism is that shipowners who want to hide their ownership may select a flag-of-convenience jurisdiction which enables them to be legally anonymous. Some ships with flags of convenience have been found engaging in crime, offering substandard working conditions, and negatively impacting the environment, primarily through
illegal, unreported and unregulated fishing Illegal, unreported and unregulated fishing (IUU) is an issue around the world. Fishing industry observers believe IUU occurs in most fisheries, and accounts for up to 30% of total catches in some important fisheries. Illegal fishing takes pl ...
. Prior to the implementation of the International Convention on Tonnage Measurement of Ships, 1969, shipowners may have selected a jurisdiction with measurement rules that reduced the certified gross register tonnage of a ship, to reduce subsequent port of call dock dues. Such was a consideration when
Carnival Cruise Line Carnival Cruise Line is an international cruise line with headquarters in Doral, Florida. The company is a subsidiary of Carnival Corporation & plc. Its logo is a funnel shaped like a whale's tail, with a red, white, and blue color scheme. This ...
changed the flag of the RMS '' Empress of Canada'' in 1972 to that of Panama. In 2011,
Cunard Line Cunard () is a British shipping and cruise line based at Carnival House at Southampton, England, operated by Carnival Corporation & plc#Carnival United Kingdom, Carnival UK and owned by Carnival Corporation & plc. Since 2011, Cunard and its ...
registered all its ships in
Bermuda ) , anthem = "God Save the King" , song_type = National song , song = "Hail to Bermuda" , image_map = , map_caption = , image_map2 = , mapsize2 = , map_caption2 = , subdivision_type = Sovereign state , subdivision_name = , es ...
, which, besides other considerations, enabled its ship captains to marry couples at sea. Weddings at sea are described as a lucrative market. , thirteen flag states have been found by
international shipping Freight transport, also referred as ''Freight Forwarding'', is the physical process of transporting commodities and merchandise goods and cargo. The term shipping originally referred to transport by sea but in American English, it has been ext ...
organisations to have substandard regulations. On the other hand, maritime industry practitioners and seafarers from other countries contend that this is a natural product of globalisation. Supporters of the practice, however, point to economic and regulatory advantages, and increased freedom in choosing employees from an international labour pool. Publications from as early as 1962 argue that shipowners from developed countries use the practice to be competitive in a global environment.


Legal context

International law International law (also known as public international law and the law of nations) is the set of rules, norms, and standards generally recognized as binding between states. It establishes normative guidelines and a common conceptual framework for ...
requires that every merchant ship be registered in a country. The country in which a ship is registered is its
flag state The flag state of a merchant vessel is the jurisdiction under whose laws the vessel is registered or licensed, and is deemed the nationality of the vessel. A merchant vessel must be registered and can only be registered in one jurisdiction, but ma ...
, and the flag state gives the ship the right to fly its civil ensign.That the flag state gives the right to fly its flag, see United Nations, 1982, Article 91. That this flag is called a civil ensign, see De Kleer, 2007, p. 37. A ship operates under the laws of its flag state, and these laws are used if the ship is involved in an admiralty case.Hamzah, 2004, p.4. A ship's flag state exercises regulatory control over the vessel and is required to inspect it regularly, certify the ship's equipment and crew, and issue safety and pollution prevention documents. The organization which actually registers the ship is known as its registry. Registries may be governmental or private agencies.


Reasons for adopting a flag of convenience

The reasons for choosing an open register are varied and include
tax avoidance Tax avoidance is the legal usage of the tax regime in a single territory to one's own advantage to reduce the amount of tax that is payable by means that are within the law. A tax shelter is one type of tax avoidance, and tax havens are jurisdi ...
, the ability to avoid national labor and environmental regulations,Dempsey and Helling, 1980. and the ability to hire crews from lower-wage countries.Working, 1999. National or closed registries typically require a ship be owned and constructed by national interests, and at least partially crewed by its citizens. Conversely, open registries frequently offer on-line registration with few questions asked.Richardson, 2003.Neff, 2007. The use of flags of convenience lowers registration and maintenance costs, which in turn reduces overall transportation costs. The accumulated advantages can be significant, for example in 1999, 28 of the American company SeaLand's fleet of 63 ships were foreign-flagged, saving the company up to US$3.5 million per ship every year.


Accidents and reform

The environmental disaster caused by the 1978 sinking of the , which flew the Liberian flag, spurred the creation of a new type of maritime enforcement. Resulting from strong political and public outcry over the ''Amoco Cadiz'' sinking, fourteen European nations signed the 1982 Paris Memorandum of Understanding on Port State Control or Paris MOU. Under
port state control Port state control (PSC) is an inspection regime for countries to inspect foreign-registered ships in port other than those of the flag state and take action against ships that are not in compliance. Inspectors for PSC are called PSC officers (PS ...
, ships in international trade became subject to inspection by the states they visit. In addition to shipboard living and working conditions, these inspections cover items concerning the safety of life at sea and the prevention of pollution by ships. In cases when a port state inspection uncovers problems with a ship, the port state may take actions including detaining the ship. In 2015, member states of the Paris MOU conducted 17,858 inspections with deficiencies, which resulted in 595 detained vessels and 11 banned. Member states of the Tokyo Memorandum of Understanding conducted 17,269 ship inspections in 2015, recording 83,606 deficiencies which resulted in 1,153 detentions. The principle that there be a genuine link between a ship's owners and its flag state dates back to 1958, when Article 5(1) of the Geneva Convention on the High Seas also required that "the state must effectively exercise its jurisdiction and control in administrative, technical and social matters over ships flying its flag."D'Andrea 2006, p.2. The principle was repeated in Article 91 of the 1982 treaty called the
United Nations Convention on the Law of the Sea The United Nations Convention on the Law of the Sea (UNCLOS), also called the Law of the Sea Convention or the Law of the Sea Treaty, is an international agreement that establishes a legal framework for all marine and maritime activities. , 167 ...
and often referred to as UNCLOS. In 1986, the
United Nations Conference on Trade and Development The United Nations Conference on Trade and Development (UNCTAD) is an intergovernmental organization within the United Nations Secretariat that promotes the interests of developing countries in world trade. It was established in 1964 by the ...
attempted to solidify the genuine link concept in th
United Nations Convention on Conditions for Registration of Ships
D'Andrea 2006, p.6. The Convention for Registration of Ships would require that a flag state be linked to its ships either by having an economic stake in the ownership of its ships or by providing mariners to crew the ships. To come into force, the 1986 treaty requires 40 signatories whose combined tonnage exceeds 25% of the world total. , only 14 countries have signed the treaty.


History

Merchant ships have used
false flag A false flag operation is an act committed with the intent of disguising the actual source of responsibility and pinning blame on another party. The term "false flag" originated in the 16th century as an expression meaning an intentional misr ...
s as a tactic to evade enemy warships since antiquity, and examples can be found from as early as the
Roman era In modern historiography, ancient Rome refers to Roman civilisation from the founding of the city of Rome in the 8th century BC to the collapse of the Western Roman Empire in the 5th century AD. It encompasses the Roman Kingdom (753–509 BC ...
through to the
Middle Ages In the history of Europe, the Middle Ages or medieval period lasted approximately from the late 5th to the late 15th centuries, similar to the post-classical period of global history. It began with the fall of the Western Roman Empire ...
.Wiswall 1996, p. 113. Following the
American Revolutionary War The American Revolutionary War (April 19, 1775 – September 3, 1783), also known as the Revolutionary War or American War of Independence, was a major war of the American Revolution. Widely considered as the war that secured the independence of t ...
, merchantmen flying the flag of the fledgling
United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country Continental United States, primarily located in North America. It consists of 50 U.S. state, states, a Washington, D.C., ...
quickly found it offered little protection against attack by
Barbary pirates The Barbary pirates, or Barbary corsairs or Ottoman corsairs, were Muslim pirates and privateers who operated from North Africa, based primarily in the ports of Salé, Rabat, Algiers, Tunis and Tripoli. This area was known in Europe ...
– many responded by seeking to transfer their registry back to Great Britain. The use of false flags was frequently used as a ''
ruse de guerre The French , sometimes literally translated as ruse of war, is a non-uniform term; generally what is understood by "ruse of war" can be separated into two groups. The first classifies the phrase purely as an act of military deception against one' ...
'' by the British during the
Napoleonic Wars The Napoleonic Wars (1803–1815) were a series of major global conflicts pitting the French Empire and its allies, led by Napoleon I, against a fluctuating array of European states formed into various coalitions. It produced a period of Fre ...
and the United States during the
War of 1812 The War of 1812 (18 June 1812 – 17 February 1815) was fought by the United States of America and its indigenous allies against the United Kingdom and its allies in British North America, with limited participation by Spain in Florida. It be ...
. During the mid-19th century,
slave ship Slave ships were large cargo ships specially built or converted from the 17th to the 19th century for transporting slaves. Such ships were also known as "Guineamen" because the trade involved human trafficking to and from the Guinea coast ...
s flew various flags to avoid being searched by British anti-slavery fleets. The '' Belen Quezada'', in August 1919, was the first foreign ship to be re-registered in the Panamanian registry, and was employed in running illegal alcohol between Canada and the United States during
Prohibition Prohibition is the act or practice of forbidding something by law; more particularly the term refers to the banning of the manufacture, storage (whether in barrels or in bottles), transportation, sale, possession, and consumption of alcoholi ...
.DeSombre 2006, p. 76. The modern practice of registering ships in foreign countries to gain economic advantage originated in the United States in the era of
World War I World War I (28 July 1914 11 November 1918), often abbreviated as WWI, was List of wars and anthropogenic disasters by death toll, one of the deadliest global conflicts in history. Belligerents included much of Europe, the Russian Empire, ...
, though the term "flag of convenience" did not come into use until the 1950s. Between 1915 and 1922, several laws were passed in the United States to strengthen the
United States Merchant Marine United States Merchant Marines are United States civilian mariners and U.S. civilian and federally owned merchant vessels. Both the civilian mariners and the merchant vessels are managed by a combination of the government and private sectors, an ...
and provide safeguards for its mariners.DeSombre 2006, p. 75. During this period, U.S.-flagged ships became subject to regular inspections undertaken by the
American Bureau of Shipping American(s) may refer to: * American, something of, from, or related to the United States of America, commonly known as the " United States" or "America" ** Americans, citizens and nationals of the United States of America ** American ancestry, p ...
. This was also the time of Robert LaFollette's Seamen's Act of 1915, which has been described as the "''
Magna Carta (Medieval Latin for "Great Charter of Freedoms"), commonly called (also ''Magna Charta''; "Great Charter"), is a royal charter of rights agreed to by King John of England at Runnymede, near Windsor, on 15 June 1215. First drafted by t ...
'' of American sailors' rights". The Seamen's Act regulated mariners' working hours, their payment, and established baseline requirements for shipboard food. It also reduced penalties for disobedience and abolished the practice of imprisoning sailors for the offense of desertion. Another aspect of the Seamen's Act was enforcement of safety standards, with requirements on lifeboats, the number of qualified
able seamen An able seaman (AB) is a seaman and member of the deck department of a merchant ship with more than two years' experience at sea and considered "well acquainted with his duty". An AB may work as a watchstander, a day worker, or a combination ...
on board, and that officers and seamen be able to speak the same language. These laws put U.S.-flagged vessels at an economic disadvantage against countries lacking such safeguards, and ships started to be re-registered in Panama's open registry from 1919. In addition to sidestepping the Seamen's Act, Panamanian-flagged ships in this early period paid sailors on the Japanese wage scale, which was much lower than that of western merchant powers. In the early phase of World War II the transfer of American-owned ships to the Panama registry was sanctioned by the United States government so that they could be used to deliver materials to Britain without dragging the United States, as a neutral, unintentionally into war. The Liberian open registry, founded in 1948, was the brainchild of Edward Stettinius, who had been Franklin D. Roosevelt's Secretary of State during World War II.DeSombre 2006, p. 74. Stettinius created a corporate structure that included The Liberia Corporation, a joint-venture with the government of Liberia. The corporation was structured so that 25% of its revenue would go to the Liberian government, another 10% went to fund social programs in Liberia, and the remainder returned to Stettinius' corporation. The Liberian registry was created at a time when Panama's registry was becoming less attractive for several reasons including its unpopularity with the U.S. labor movement and European shipping concerns, political unrest in Panama, and increases in its fees and regulations. On 11 March 1949, Greek shipping magnate
Stavros Niarchos Stavros Spyrou Niarchos ( el, Σταύρος Σπύρου Νιάρχος, ; 3 July 1909 – 15 April 1996) was a Greek billionaire shipping tycoon. Starting in 1952, he had the world's biggest supertankers built for his fleet. Propelled by both ...
registered the first ship under the Liberian flag, ''World Peace''. When Stettinius died in 1949, ownership of the registry passed to the International Bank of Washington, led by General George Olmsted.Pike, 2008. Within 18 years, Liberia grew to surpass the United Kingdom as the world's largest register. Due to Liberia's 1989 and 1999 civil wars, its registry eventually fell second to Panama's flag of convenience, but maritime funds continued to supply 70% of its total government revenue. After the civil war of 1990, Liberia joined with the
Republic of the Marshall Islands The Marshall Islands ( mh, Ṃajeḷ), officially the Republic of the Marshall Islands ( mh, Aolepān Aorōkin Ṃajeḷ),'' () is an independent island country and microstate near the Equator in the Pacific Ocean, slightly west of the Inte ...
to develop a new maritime and corporate program. The resulting company,
International Registries International Registries, Inc. (IRI) is a company based in Reston, Virginia, United States, which operates the flag of convenience ship registry and corporate registry of the Marshall Islands on behalf of the Republic of the Marshall Islands (RMI) ...
, was formed as a parent company, and in 1993 was bought out by its management. After taking over the Liberian government,
Americo-Liberian Americo-Liberian people or Congo people or Congau people in Liberian English,Cooper, Helene, ''The House at Sugar Beach: In Search of a Lost African Childhood'' (United States: Simon and Schuster, 2008), p. 6 are a Liberian ethnic group of Afric ...
warlord Charles Taylor signed a new registry contract with the Liberian International Ship and Corporate Registry, commonly known as LISCR. LISCR was one of the few legal sources of income for Taylor's regime. Liberia's registry is operated from Virginia, United States. , the open registries of Panama, Liberia, and Marshall Islands accounted for almost 40% of the entire world fleet by
deadweight tonnage Deadweight tonnage (also known as deadweight; abbreviated to DWT, D.W.T., d.w.t., or dwt) or tons deadweight (DWT) is a measure of how much weight a ship can carry. It is the sum of the weights of cargo, fuel, fresh water, ballast water, pro ...
, maintaining roughly the same proportion for over a decade. In 2009, the top ten flags of convenience registered 55% of the world's deadweight tonnage, including 61% of
bulk carrier A bulk carrier or bulker is a merchant ship specially designed to transport unpackaged bulk cargo — such as grains, coal, ore, steel coils, and cement — in its cargo holds. Since the first specialized bulk carrier was built in 1852, eco ...
s and 56% of
oil tanker An oil tanker, also known as a petroleum tanker, is a ship designed for the bulk transport of oil or its products. There are two basic types of oil tankers: crude tankers and product tankers. Crude tankers move large quantities of unrefined ...
s; by 2021, they accounted for 38% of the world's vessels and over two-thirds of the global deadweight tonnage. To counteract ''class hopping'', in 2009 the
International Association of Classification Societies The International Association of Classification Societies (IACS) is a technically based non-governmental organization that currently consists of eleven member marine classification societies. More than 90% of the world's cargo-carrying ships’ ton ...
(IACS) established a Transfer of Class Agreement (TOCA).


Extent of use

The
International Transport Workers' Federation The International Transport Workers' Federation (ITF) is a democratic global union federation of transport workers' trade unions, founded in 1896. In 2017 the ITF had 677 member organizations in 149 countries, representing a combined membership ...
(ITF) maintains a list of registries it considers to be flags of convenience (FOC) registries. In developing the list, the ITF considers "ability and willingness of the flag state to enforce international minimum social standards on its vessels," the "degree of ratification and enforcement of ILO Conventions and Recommendations," and "safety and environmental record". , the list includes 42 countries. , Panama, Liberia and the Marshall Islands are the world's three largest registries in terms of deadweight tonnage (DWT). These three organizations registered 11,636 ships of and above, for a total of : more than 39% of the world's shipborne carrying capacity. Panama dominates the scene with over 8,065 ships accounting for almost 23% of the world's DWT. Of the three, the Marshall Islands (with 1,265 registered ships) had the greatest rate of DWT increase in 2009, increasing its tonnage by almost 15%. The Bahamian flag ranks sixth worldwide, behind the Hong Kong and Greek registries, but is similar in size to the Marshallese flag of convenience, with about 200 more ships but a carrying capacity about lower. Malta, at the ninth position worldwide, had about 100 more ships than the Bahamas, with a capacity of , representing 4% of the world fleet with 12% growth that year. At the eleventh position, Cyprus registered 1,016 ships in 2009, 2.6% of world tonnage. The remaining top 11 flags of convenience are Antigua and Barbuda (#20), Bermuda (#22), Saint Vincent and the Grenadines (#26), and the French International Ship Register (FIS) at number No. 27. Bermuda and the FIS have fewer than 200 ships apiece, but they are large: the average Bermudan ship is and the average FIS ship is at . (By way of reference, the average capacity of ships in the U.S. and U.K. registers is and respectively.) The registries of Antigua and Barbuda and Saint Vincent and the Grenadines both have over 1,000 ships with average capacity of and respectively. The remaining flags of convenience listed by the ITF each account for less than 1% of the world's DWT. , more than half of the world's merchant ships (measured by tonnage) are registered under flags of convenience.


Criticism

There are a number of common threads found in criticisms of the flag of convenience system. One is that these flag states have insufficient regulations and that those regulations they do have are poorly enforced. Another is that, in many cases, the flag state cannot identify a shipowner, much less hold the owner civilly or criminally responsible for a ship's actions. As a result of this lack of flag state control, flags of convenience are criticized on grounds of enabling tax avoidance, providing an environment for conducting criminal activities, supporting terrorism, providing poor working conditions for seafarers, and having an adverse effect on the environment. David Cockroft, former general secretary of the ITF says: Panama has the largest maritime register, followed by Liberia. Landlocked Bolivia also has a major registry, as does Mongolia. Also, some registers are based in other countries. For example, Panamanian overseas consulates manage the documentation and collect registration fees, Liberia's registry is managed by a company in Virginia and Bahamas' from the City of London.


Concealed ownership

A ship's
beneficial owner Beneficial owner is a legal term where specific property rights ("use and title") in equity belong to a person even though legal title of the property belongs to another person. Beneficial owner is subject to a state's statutory laws regulating i ...
is legally and financially responsible for the ship and its activities.OECD 2003, p. 4. For any of a number of reasons, some justifiable and some suspicious, shipowners who wish to conceal their ownership may use a number of strategies to achieve that goal. In jurisdictions that permit it, actual owners may establish shell corporations to be the legal owners of their ships,Gianni 2008, p. 20. making it difficult, if not impossible, to track who is the beneficial owner of the ship. The 2004 Report of the UN Secretary General's Consultative Group 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 the identities of beneficial owners who do not want to be known."Gianni 2008, p. 19. According to a 2003 report by the
Organisation for Economic Co-operation and Development The Organisation for Economic Co-operation and Development (OECD; french: Organisation de coopération et de développement économiques, ''OCDE'') is an intergovernmental organisation with 38 member countries, founded in 1961 to stimulate ...
(OECD) report entitled "Ownership and Control of Ships", these corporate structures are often multi-layered, spread across numerous jurisdictions, and make the beneficial owner "almost impenetrable" to law enforcement officials and taxation. The report concludes that "regardless of the reasons why the cloak of anonymity is made available, if it is provided it will also assist those who may wish to remain hidden because they engage in illegal or criminal activities, including terrorists." The OECD report concludes that the use of bearer shares is "perhaps the single most important (and perhaps the most widely used) mechanism" to protect the anonymity of a ship's beneficial owner.OECD 2003, p. 8. Physically possessing a bearer share accords ownership of the corporation. There is no requirement for reporting the transfer of bearer shares, and not every jurisdiction requires that their serial numbers even be recorded. Two similar techniques to provide anonymity for a ship's beneficial owner are "nominee shareholders" and "
nominee director A board of directors (commonly referred simply as the board) is an executive committee that jointly supervises the activities of an organization, which can be either a for-profit or a nonprofit organization such as a business, nonprofit organiz ...
s". In some jurisdictions that require shareholder identities to be reported, a loophole may exist where the beneficial owner may appoint a nominee to be the shareholder, and that nominee cannot legally be compelled to reveal the identity of the beneficial owner.OECD 2003, pp. 8–9. All corporations are required to have at least one director, however many jurisdictions allow this to be a nominee director.OECD 2009, p. 9. A nominee director's name would appear on all corporate paperwork in place of the beneficial owners, and like nominee shareholders, few jurisdictions can compel a nominee director to divulge the identity of beneficial owners. A further hurdle is that some jurisdictions allow a corporation to be named as a director.


Crime

Flag of convenience ships have long been linked to crime on the high seas. For example, in 1982, Honduras shut down its open registry operations because it had enabled "illegal traffic of all kinds and had given Honduras a bad name".Reuters, 1982. Ships registered by the Cambodia Shipping Corporation (CSC) were found smuggling drugs and cigarettes in Europe, breaking the Iraq oil embargo, and engaging in human trafficking and prostitution in Europe and Asia. In response to these activities, in 2000, Ahamd Yahya of the Cambodian Ministry of Public Works and Transport told industry publication ''Fairplay'' "We don't know or care who owns the ships or whether they're doing 'white' or 'black' business ... it is not our concern." Less than two years later, French forces seized the Cambodian-flagged, Greek-owned MV ''Winner'' for cocaine smuggling. Shortly after the seizure, Cambodian Prime Minister
Hun Sen Hun Sen (; km, ហ៊ុន សែន, ; born 5 August 1952) is a Cambodian politician and former military commander who has served as the prime minister of Cambodia since 1985. He is the longest-serving head of government of Cambodia, and ...
closed the registry to foreign ships, and Cambodia canceled its contract with CSC shortly thereafter.Brooke, 2004. The North Korean flag of convenience has also garnered significant scrutiny. In 2003, the North Korean freighter ''
Pong Su The ''Pong Su'' incident began on 16 April 2003 when heroin was smuggled from the ''Pong Su'', a North Korean cargo ship, onto an Australian beach. Australian military special forces subsequently boarded the ''Pong Su'' in Australian territorial ...
'' reflagged to
Tuvalu Tuvalu ( or ; formerly known as the Ellice Islands) is an island country and microstate in the Polynesian subregion of Oceania in the Pacific Ocean. Its islands are situated about midway between Hawaii and Australia. They lie east-northea ...
in the middle of a voyage shortly before being seized by Australian authorities for smuggling
heroin Heroin, also known as diacetylmorphine and diamorphine among other names, is a potent opioid mainly used as a recreational drug for its euphoric effects. Medical grade diamorphine is used as a pure hydrochloride salt. Various white and bro ...
into that country. That year, thirteen nations began monitoring vessels under the North Korean flag for "illicit cargos like drugs, missiles or nuclear weapon fuel".


Working conditions

In the accompanying material of the ILO's Maritime Labour Convention of 2006, the International Labour Organization estimated that at that time there were approximately 1,200,000 working seafarers across the world.International Labour Organization, "Maritime Labour Convention 2006, Frequently Asked Questions", p. 5. This document goes on to say that when working aboard ships flagged to states that do not "exercise effective jurisdiction and control" over their ships that "seafarers often have to work under unacceptable conditions, to the detriment of their well-being, health and safety and the safety of the ships on which they work."International Labour Organization, "Maritime Labour Convention 2006, Frequently Asked Questions", pp. 4–5. The International Transport Workers' Federation goes further, stating that flags of convenience "provide a means of avoiding labor regulation in the country of ownership, and become a vehicle for paying low wages and forcing long hours of work and unsafe working conditions. Since FOC ships have no real nationality, they are beyond the reach of any single national seafarers' trade union." They also say that these ships have low safety standards and no construction requirements, that they "do not enforce safety standards, minimum social standards or trade union rights for seafarers", that they frequently fail to pay their crews, have poor safety records, and engage in practices such as abandoning crewmen in distant ports.


Environmental effects

While flag of convenience ships have been involved with some of the highest-profile oil spills in history (such as the Maltese-flagged , the Bahamian-flagged , the Marshallese-flagged ''
Deepwater Horizon ''Deepwater Horizon'' was an ultra-deepwater, dynamically positioned, semi-submersible offshore drilling rig owned by Transocean and operated by BP. On 20 April 2010, while drilling at the Macondo Prospect, a blowout caused an explosion ...
'', and the Liberian-flagged , and ), the most common environmental criticism they face regards
illegal fishing Illegal, unreported and unregulated fishing (IUU) is an issue around the world. Fishing industry observers believe IUU occurs in most fisheries, and accounts for up to 30% of total catches in some important fisheries. Illegal fishing takes p ...
. These critics of the flag of convenience system argue that many of the FOC flag states lack the resources or the will to properly monitor and control those vessels. The Environmental Justice Foundation (EJF) contends that
illegal, unreported and unregulated fishing Illegal, unreported and unregulated fishing (IUU) is an issue around the world. Fishing industry observers believe IUU occurs in most fisheries, and accounts for up to 30% of total catches in some important fisheries. Illegal fishing takes pl ...
(IUU) vessels use flags of convenience to avoid fisheries regulations and controls. Flags of convenience help reduce the operating costs associated with illegal fishing methods, and help illegal operators avoid prosecution and hide beneficial ownership. As a result, flags of convenience perpetuate IUU fishing which has extensive environmental, social and economic impacts, particularly in developing countries. The EJF is campaigning to end the granting of flags of convenience to fishing vessels as an effective measure to combat IUU fishing. According to
Franz Fischler Franz Fischler (born 23 September 1946) is an Austrian politician from the Christian- conservative People's Party ( ÖVP). He was the European Union's Commissioner for Agriculture, Rural Development and Fisheries (1995–2004). He also was Pres ...
, European Union Fisheries Commissioner,


Ratification of maritime conventions

International regulations for the maritime industry are promulgated by agencies of the
United Nations The United Nations (UN) is an intergovernmental organization whose stated purposes are to maintain international peace and security, develop friendly relations among nations, achieve international cooperation, and be a centre for harmoni ...
, particularly the
International Maritime Organization The International Maritime Organization (IMO, French: ''Organisation maritime internationale'') is a specialised agency of the United Nations responsible for regulating shipping. The IMO was established following agreement at a UN conference ...
and
International Labour Organization The International Labour Organization (ILO) is a United Nations agency whose mandate is to advance social and economic justice by setting international labour standards. Founded in October 1919 under the League of Nations, it is the first and o ...
. Flag states adopt these regulations for their ships by ratifying individual treaties. One common criticism against flag of convenience countries is that they allow shipowners to avoid these regulations by not ratifying important treaties or by failing to enforce them. The
International Chamber of Shipping The International Chamber of Shipping is one of the world's principal shipping organisations, representing around 80% of the world's merchant tonnage through membership by national shipowners' associations. It is concerned with maritime regulatory, ...
(ICS) issues an annual report entitled the ''Shipping Industry Flag State Performance Table'' identifying the six "core" conventions representing a minimum level of maritime regulation, from the viewpoint of shipowners, as SOLAS, MARPOL, LL 66, STCW, MLC, and CLC/FUND92. Of these, all 42 flag of convenience countries listed by ITF have ratified the
STCW Convention International Convention on Standards of Training, Certification and Watchkeeping for Seafarers (STCW) sets minimum qualification standards for masters, officers and watch personnel on seagoing merchant ships and large yachts. STCW was adopte ...
, concerning standards of training, certification and watchkeeping for seafarers, and 22 of them have ratified all six. However, at least seventeen listed countries have not ratified all the remaining five conventions. To put this in context, over 50 flag states have not ratified all six conventions, including China and United States of America. The
Safety of Life at Sea The International Convention for the Safety of Life at Sea (SOLAS) is an international maritime treaty that sets minimum safety standards in the construction, equipment and operation of merchant ships. The International Maritime Organization c ...
(SOLAS) and
Load Line Load line may refer to: * Ship's load line The waterline is the line where the hull of a ship meets the surface of the water. Specifically, it is also the name of a special marking, also known as an international load line, Plimsoll line and ...
(LL 66) conventions focus on shipboard safety issues. Originally developed in response to the sinking of RMS ''Titanic'', SOLAS sets regulations on lifeboats, emergency equipment and safety procedures, including continuous radio watches. It has been updated to include regulations on ship construction, fire protection systems, life-saving appliances, radio communications, safety of navigation, management for the safe operation of ships, and other safety and security concerns. LL 66 sets standards for minimum buoyancy, hull stress, and ship's fittings, as well as establishing navigational zones where extra precautions must be taken. The International Labour Organization Maritime Labour Convention, 2006 provides comprehensive rights and protection at work for seafarers, including requirements for minimum age, qualifications, hours of work and rest, medical care, complaint procedures, wage payments, and onboard living arrangements. The MLC replaced a number of earlier ILO Conventions including ILO147. MARPOL and CLC/FUND92 relate to pollution. The International Convention for the Prevention of Pollution from Ships, 1973 (MARPOL), as modified by the Protocol of 1978, including Annexes I–VI" regulates pollution by ships, including oil and air pollution, shipboard sewage and garbage. The Civil Liability for Oil Pollution Damage (CLC) and International Fund for Compensation for Oil Pollution Damage (FUND92) together provide mechanisms to ensure compensation for victims of oil spills.


Port state control

In 1978, a number of European countries agreed in
The Hague The Hague ( ; nl, Den Haag or ) is a city and municipality of the Netherlands, situated on the west coast facing the North Sea. The Hague is the country's administrative centre and its seat of government, and while the official capital o ...
to audit labour conditions on board vessels ''vis-a-vis'' the rules of the
International Labour Organization The International Labour Organization (ILO) is a United Nations agency whose mandate is to advance social and economic justice by setting international labour standards. Founded in October 1919 under the League of Nations, it is the first and o ...
. To this end, in 1982 the " Paris Memorandum of Understanding on Port State Control" (Paris MOU) was established, setting port state control standards for what is now twenty-six European countries and Canada. Several other regional Memoranda of Understanding have been established based on the Paris model, including the "
Memorandum of Understanding on Port State Control in the Asia-Pacific Region A memorandum ( : memoranda; abbr: memo; from the Latin ''memorandum'', "(that) which is to be remembered") is a written message that is typically used in a professional setting. Commonly abbreviated "memo," these messages are usually brief and ...
", typically referred to as the "Tokyo MOU", and organizations for the Black Sea, the Caribbean, the Indian Ocean, the Mediterranean, and Latin America.Tokyo MOU Secretariat, 2008. The Tokyo and Paris organizations generate, based on deficiencies and detentions, black-, white-, and grey-lists of flag states. The
US Coast Guard The United States Coast Guard (USCG) is the maritime security, search and rescue, and law enforcement service branch of the United States Armed Forces and one of the country's eight uniformed services. The service is a maritime, military, multi ...
, which handles port state control inspections in the US, maintains a similar target list for underperforming flag states. , at least fifteen of the 42 flags of convenience listed by the ITF are targeted for special enforcement by the countries of the Paris and Tokyo MOUs or U.S. Coast Guard. The effectiveness of the port state control regime in correcting deficiencies is mitigated in some part by the practice of flag-hopping, in which shipowners and operators will rename their ships and acquire new vessel registrations in other jurisdictions in order to avoid detection and reduce the likelihood of being selected for port state control inspections.


Wages

The
United Nations Conference on Trade and Development The United Nations Conference on Trade and Development (UNCTAD) is an intergovernmental organization within the United Nations Secretariat that promotes the interests of developing countries in world trade. It was established in 1964 by the ...
, in its 2009 ''Report on Maritime Trade'', states that shipowners often register their ships under a foreign flag in order to employ "seafarers from developing countries with lower wages". The Philippines and China supply a large percentage of maritime labor in general, and major flags of convenience in particular. In 2009, the flag-states employing the highest number of expatriate-Filipino seafarers were Panama, the Bahamas, Liberia and the Marshall Islands. That year, more than 150,000 Filipino sailors were employed by these four flags of convenience. In a 2006 study by the
United States Maritime Administration The United States Maritime Administration (MARAD) is an agency of the United States Department of Transportation. MARAD administers financial programs to develop, promote, and operate the U.S. Maritime Service and the U.S. Merchant Marine. Det ...
(MARAD), sailors from the People's Republic of China comprised over 40% of the crews on surveyed ships flying the Panamanian flag, and around 10% of those flying the Liberian flag.Maritime Administration, 2006, p. 14. The MARAD report referred to both China and the Philippines as "low cost" crewing sources.Maritime Administration, 2006, p. 13-14. The seafaring industry is often divided into two employment groups: licensed mariners including
deck officer The deck department is an organisational team on board naval and merchant ships. The department and its manning requirements, including the responsibilities of each rank are regulated within the STCW Convention, applicable only to the merchant f ...
s and
marine engineers Marine engineering is the engineering of boats, ships, submarines, and any other marine vessel. Here it is also taken to include the engineering of other ocean systems and structures – referred to in certain academic and professional circl ...
, and mariners that are not required to have licenses, such as
able seamen An able seaman (AB) is a seaman and member of the deck department of a merchant ship with more than two years' experience at sea and considered "well acquainted with his duty". An AB may work as a watchstander, a day worker, or a combination ...
and cooks, but are required to be certified. The latter group is collectively known as unlicensed mariners or ratings. Differences in wages can be seen in both groups, between "high cost" crewing sources such as the United States, and "low cost" sources such as China and The Philippines. However, salaries on flag of convenience ships are still far higher than median salaries of non-seafarers in these countries, in addition to income tax exemption of some seamen, particularly those from the Philippines. For unlicensed mariners, 2009 statistics from the American
Bureau of Labor Statistics The Bureau of Labor Statistics (BLS) is a unit of the United States Department of Labor. It is the principal fact-finding agency for the U.S. government in the broad field of labor economics and statistics and serves as a principal agency of ...
give median earnings for
able Able may refer to: * Able (1920 automobile), a small French cyclecar * Able (rocket stage), an upper stage for Vanguard, Atlas, and Thor rockets * Able (surname) * ABLE account, a savings plan for people with disabilities * Able UK, British ship ...
and ordinary seamen as US$35,810, varying from $21,640 (at the 10th percentile) to $55,360 (at the 90th percentile). This can be compared with 2006 statistics from the International Labour Organization, giving average yearly earnings for Filipino and Chinese able seamen around $2,000 to $3,000 per year ( PHP9,900 per month and
CNY The renminbi (; symbol: ¥; ISO code: CNY; abbreviation: RMB) is the official currency of the People's Republic of China and one of the world's most traded currencies, ranking as the fifth most traded currency in the world as of April 2022 ...
3,071 per year).From . Expand "Wages" tab. Select "Wages and hours of work in 159 occupations." Select "China" and click "Go." Click "view." Data under "Able seaman". Among licensed mariners, American
chief engineer A chief engineer, commonly referred to as "ChEng" or "Chief", is the most senior engine officer of an engine department on a ship, typically a merchant ship, and holds overall leadership and the responsibility of that department..Chief engineer ...
s earned a median $63,630, varying from $35,030 to $109,310 while their Filipino counterparts averaged $5,500 per year (PHP21,342 per month).From . Expand "Wages" tab. Select "Wages and hours of work in 159 occupations." Select "Philippines" and click "Go." Click "view." Data under "Ship's chief engineer" and "Able seaman".


See also

* Declaration recognising the Right to a Flag of States having no Sea-coast *
Tax haven A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity) by a governmental organization in order to fund government spending and various public expenditures (regional, local, or n ...


Footnotes


References

* * * * * * * * * * * * * * * * * * * * *


News stories

* * * * * *


Fishing references

* *


Port state control organisations

* * * * * * * *


Further reading

* * * *Carlisle, Rodney. (1981). ''Sovereignty for Sale: The Origin and Evolution of the Panamanian and Liberian Flags of Convenience''. Annapolis, MD: Naval Institute Press. *Carlisle, Rodney. (2009). Second Registers: Maritime Nations Respond to Flags of Convenience, 1984–1998. ''The Northern Mariner'', 19:3, 319–340. * * * * *


External links


Database on reported incidents of abandonment of seafarersFlag of Convenience Cyprus: Prestige Oil Spill

List of flag State comments on detentions for the years 2000, 2001 and 2002
* {{DEFAULTSORT:Flag Of Convenience 1920s establishments in the United States 1950s neologisms Business terms Flag practices International taxation International trade Law of the sea Offshore finance Offshoring Ship registration *Flag of convenience Illegal, unreported and unregulated fishing