Flag of convenience
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.
Panama, for example, offers advantages such as easier registration (often online), the ability to employ cheaper foreign labour, and an exemption on income taxes.
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.
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.
Supporters of the practice, however, point to economic and regulatory advantages, and increased freedom in choosing employees from an international labour pool.
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.
[13] The environmental disaster caused by the 1978 sinking of the MV Amoco Cadiz, which flew the Liberian flag, spurred the creation of a new type of maritime enforcement.
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.
[23] 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.
[24] 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.
[25] 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.
[26] 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.
[29] 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.
[28] 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.
[30] The Liberian open registry, founded in 1948,[32] was the brainchild of Edward Stettinius, who had been Franklin D. Roosevelt's Secretary of State during World War II.
[34] 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.
"[37] As of August 2024[update], the open registries of Panama, Liberia, and Marshall Islands accounted for more than 46% of the entire world fleet by deadweight tonnage,[38] maintaining roughly the same proportion for over a decade.
[7] The International Transport Workers' Federation (ITF) is the biggest campaigner against FOC since 1948, and maintains a list of registries it considers to be flags of convenience.
The following table gives the distribution between the 10 largest world registries in terms of tonnage (millions dwt): Source: UNCTAD (estimates based on data supplied by Clarkson Research Services).
David Cockroft, former general secretary of the ITF, says: Arms smuggling, the ability to conceal large sums of money, trafficking in goods and people and other illegal activities can also thrive in the unregulated havens which the flag of convenience system provides.
[44] 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.
"[44] 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.
In 2003, the North Korean freighter Pong Su reflagged to Tuvalu in the middle of a voyage shortly before being seized by Australian authorities for smuggling heroin into that country.
[17] That year, thirteen nations began monitoring vessels under the North Korean flag for "illicit cargos like drugs, missiles or nuclear weapon fuel".
The Environmental Justice Foundation (EJF) contends that illegal, unreported and unregulated fishing (IUU) vessels use flags of convenience to avoid fisheries regulations and controls.
[60] As a result, flags of convenience perpetuate IUU fishing which has extensive environmental, social and economic impacts, particularly in developing countries.
According to Franz Fischler, European Union Fisheries Commissioner, The practice of flags of convenience, where owners register vessels in countries other than their own in order to avoid binding regulations or controls, is a serious menace to today's maritime world.
Originally developed in response to the sinking of RMS Titanic, SOLAS sets regulations on lifeboats, emergency equipment and safety procedures, including continuous radio watches.
[72] 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.
