Flag of convenience
Flag of convenience refers to a business practice whereby a ship's owners register a merchant ship in a ship register of a country other than that of the ship's owners, and the ship flies the civil ensign of that country, called the flag state. The term is often used pejoratively, and although common, the practice is sometimes regarded as contentious.
Each merchant ship is required by international law to be registered in a registry created by a country, 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. 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 mariners. The term "flag of convenience" has been used since the 1950s. A registry which does not have a nationality or residency requirement for ship registration is often described as an open registry. Panama, for example, offers advantages such as easier registration, the ability to employ cheaper foreign labour, and an exemption on income taxes.
The modern practice of registering ships in a foreign country began in the 1920s in the United States when shipowners seeking to serve alcohol to passengers during Prohibition 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 even after Prohibition ended. The use of open registries steadily increased, and in 1968, Liberia grew to surpass the United Kingdom with the world's largest ship register.
Traditional maritime nations, mainly from Europe, responded to this practice with creation of so-called "second registers": open registries, using national flags or flags of semi-sovereign offshore dependencies. That process begun in 1984 with the Isle of Man registry created as a second UK register. Soon after Norway and the Netherlands followed this practice adopting Norwegian International Ship Register and Netherlands Antiles respectively. France established in 1989 Kerguelen Islands Register and Germany created German International Register in the same year. The last two registries are still considered as flags of convenience.
, more than half of the world's merchant ships in terms of deadweight tonnage are registered in open registries.
Background
Open registries have been criticised, mainly by trade union 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. 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 changed the flag of the RMS Empress of Canada in 1972 to that of Panama. In 2011, Cunard Line registered all its ships in Bermuda, which, besides other considerations, enabled its ship captains to marry couples at sea. Weddings at sea are described as a lucrative market.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.
In 2010 in a message connected to the World Maritime Day, the Secretary-General of the International Maritime Organization gave recognition to the present status of the open registries and noted that the seafarers from some developing countries are providing major source of foreign currency to their home economies:
The development of open registries for ships has given the shipping industry the flexibility to recruit its manpower from alternate sources, with the result that developing and newly industrialized countries now provide the majority of seafarers for the entire global fleet – not just for the ships flying their own country's flag.
Legal context
requires that every merchant ship be registered in a country. The country in which a ship is registered is its flag state, and the flag state gives the ship the right to fly its civil ensign. A ship operates under the laws of its flag state, and these laws are used if the ship is involved in an admiralty case. 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, the ability to avoid national labor and environmental regulations, and the ability to hire crews from lower-wage countries. 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. 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, 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 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." The principle was repeated in Article 91 of the 1982 treaty called the United Nations Convention on the Law of the Sea and often referred to as UNCLOS. In 1986, the United Nations Conference on Trade and Development attempted to solidify the genuine link concept in the . 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 flags as a tactic to evade enemy warships since antiquity, and examples can be found from as early as the Roman era through to the Middle Ages. Following the American Revolutionary War, merchantmen flying the flag of the fledgling United States quickly found it offered little protection against attack by Barbary pirates – 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 by the British during the Napoleonic Wars and the United States during the War of 1812. During the mid-19th century, slave ships 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. 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, though the term "flag of convenience" did not come into use until the 1950s.Image:Furuseth-La Follette-Steffens-1915.jpeg|right|thumb|The engineers of the Seamen's Act, from left to right, maritime labor leader Andrew Furuseth, Senator Robert La Follette, and muckraker Lincoln Steffens, circa 1915
Between 1915 and 1922, several laws were passed in the United States to strengthen the United States Merchant Marine and provide safeguards for its mariners. During this period, U.S.-flagged ships became subject to regular inspections undertaken by the American Bureau of Shipping. This was also the time of Robert LaFollette's Seamen's Act of 1915, which has been described as the "Magna Carta 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 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.
| Date | Event |
| 1919 | m/v "Belen Quezada" flagged in Panama |
| 1948 | ITF FOC Campaign begins |
| 1949 | m/v "World Peace" flagged in Liberia |
| 1969 | Liberia becoming the largest registry |
| 1976 | FOC first mentioned in international convention |
| 1988 | Marshall Islands starts own registry |
| 1999 | Panama is the largest registry |
| 2009 | Panama, Liberia & Marshall Islands account for 40% of world's tonnage |
| 2010 | Open registries addressed by IMO |
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. 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 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. 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 to develop a new maritime and corporate program. The resulting company, International Registries, was formed as a parent company, and in 1993 was bought out by its management. After taking over the Liberian government, Americo-Liberian 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.
To counteract class hopping, in 2009 the International Association of Classification Societies established a Transfer of Class Agreement.
Ships of the Russian war-time shadow fleet transporting sanctioned cargo frequently change their flag registrations. Since 2022, this practice has given new importance in global shipping to previously insignificant registries like those of Gabon, Eswatini, the Comoro Islands, and Guinea-Bissau. According to a report of the Atlantic council "They are so permissive that virtually any vessel can register, even ones turned down by other flag-of-convenience-states."
, the open registries of Panama, Liberia, and Marshall Islands accounted for approximately half of the entire world fleet by deadweight tonnage, maintaining roughly the same proportion for over a decade.