Sailing a ship under a flag of convenience is a business practice that a growing number of ship owners take. The ship operates and is taxed under the laws of the country for which it is flagged. Registering the vessel in a different country than the one where the owner lives helps them save money. In some cases, it also allows the ship to operate under less stringent regulations.
Why Do Ships Need a Flag of Convenience?
International law requires every merchant ship to register in a country. The country of registration is the ship’s “flag state.” Ship registration gives the ship its nationality, even when it differs from that of the owners. The flag allows the ship to travel to any destination where citizens of the same nation may travel.
The ship’s flag state also exercises regulatory control over the vessel. The Law of the Sea requires the flag state to inspect the vessel regularly, issue safety and environmental protection documents, and certify the equipment on-board and the crew. A group called “the registry” performs these acts under the government, a private agency, or a hybrid of the two.
Ship registration has been in practice since people started doing business across the seas centuries ago. Originally, registration ensured ships were locally built and carried local crews. Today, registration helps authorities document ownership and prove nationality. It safeguards treaty practices and increases financing options.
Traditional Vs Open Registries
Every nation treats ship registration differently. Some only allow traditional registry, meaning they allow the registration of vessels owned by local residents or companies. Other nations allow open registries or ships that sail under “flags of convenience.”
Every ship that travels internationally must register with someone. Nations with open registries often make it easier to register a vessel. Some allow you to register your ship online. Those with traditional registries sometimes allow ships to register even if you aren’t a resident. For example, they might require you to hire a percentage of your crew locally.
The differences between laws and taxes among nations also make some more popular than others for the registry. The top five flag states with the largest number of registered vessels are:
- Marshall Islands
- Hong Kong
While the list is extensive, these five nations control 77% of the total number of vessels registered under flags of convenience. Panama leads the way with the largest number of registered vessels in the world. How did a small nation with a population of only three million become such an important trade route? Its long, slender shape and position make it ideal for maritime trade. Panama sits between the Pacific and Atlantic oceans.
Panama is one of the Seven Wonders of the World, with a 48-mile canal that handles 14,000 ships annually. These features make it one of the most desired flags for ships to fly under. However, Panama has a limited history of trade.
The country of Panama is one that offers online registration of vessels. It also gives the advantage of cheaper foreign labor. Most important to some ship owners is the fact that they don’t have to pay any income taxes. More ships fly the Panama flag than the flags for the U.S. and China combined!
The Controversy Over Flags
As with any issue or practice, there are both proponents and critics of open registries. Those in favor of the practice want to save money. Cheap labor and slack regulations make them more competitive in a global industry.
Those against open registries complain about the lack of regulations and oversight. The practice of sailing under a flag of convenience began in the 1920s after the end of WWI. The phrase itself didn’t come into use until the 1950s. Early on, images of dilapidated vessels and “rust buckets” emerged. These vessels were often operated by overworked crews.
Today, some people claim that top countries like Panama and Liberia follow the requirements imposed on them. They use maritime experts to ensure vessels are seaworthy and they operate safely. Others cite the high number of accidents involving Panamanian-registered ships as evidence Panama is still cutting corners. Some experts contribute the numbers to the greater number of ships on the water.
Panama has long been the target of charges of corruption. It is also known that other nations with fewer vessel registrations follow substandard regulations. One of the biggest concerns is the ability of ship owners to remain anonymous. In many cases, identifying the owner of a vessel is impossible.
This ability to stay hidden gives some ship owners the ideal setting for criminal activity. These acts might harm the environment or put crew members at a greater risk of injury. When legal issues arise, there’s no way to identify and take legal action against the guilty party. As a result, these vessels are now targeted by other nations when they make call in one of the host nation’s ports.
International Law of the Sea
Oceans run through the planet much like our veins run through our bodies. They deliver oxygen to the atmosphere and absorb carbon from it. The oceans produce life-sustaining air, food, and water. They provide a source of entertainment, livelihood, and transportation.
The International Law of the Sea is a body of customs, treaties, and international agreements used to govern the oceans. These laws help preserve marine life, maintain order, and maintain peace on the sea.
The different countries in the world are both separated and joined by our oceans. Only by implementing international law can we protect the lifeblood of the planet. Granted, some gaps in the laws do exist. Many people believe that the option to fly a flag of convenience is one of them. This option allows shipowner to follow lax rules and regulations observed in some countries.
Maritime law deals with injuries and property damage in domestic waters in the U.S. The Law of the Sea deals with international waters. Failing to follow these laws can have a significant impact on the planet or on the workers on a ship.
Even when ship owners follow the law and safety regulations, jobs on the high seas are inherently more dangerous than others. The work environment comes with greater risks. It also places injured crew members long distances from needed medical attention.
Maritime law applies to injuries of sailors, rig workers, and longshoreman. It covers private entities including ship owners and their employees. It also applies to cruise ships that cater to passengers. Types of maritime law include:
- The Jones Act – Formally called the Merchant Marine Act of 1928, this law gives injured seamen the right to sue the shipowner for negligence that caused their injuries.
- The Death on the High Seas Act (DOHSA) gives relatives of soldiers who die more than three nautical miles from the shore the right to sue the employer. The types of damages available include lost financial support and funeral expenses.
- The Outer Continental Shelf Lands Act (OCSLA) – Provides financial compensation to injured oil rig workers and other non-sailor professionals.
- The Longshore and Harbor Workers’ Compensation Act (LHWCA) – Gives rights to non-sailors in the maritime industry.
In contrast, the Law of the Sea deals with international agreements that apply to all nations. These laws accumulated over centuries. The rules and principles were codified into law during the 1994 United Nations Convention on the Law of the Sea (UNCLOS.) Specifically, it deals with the following issues:
– Jurisdiction Over Coastal Waters: Many countries have extended coastal waters to include waters to 12 nautical miles beyond the low water line or baseline. UNCLOS sets territorial waters at 12 nautical miles, also putting a contiguous zone at 24 nautical miles in place.
– Ownership of Natural Resources: Countries have the legal right to claim up to 200 nautical miles from the baseline, or 350 nautical miles where the continental shelf extends that far as their Exclusive Economic Zone (EEZ). The rights extend to mineral deposits including oil and gas.
– Navigational Rights: Vessels from other nations have a legal right to pass through territorial waters to the extent necessary to reach their destination. The “innocent passage” doctrine prevents foreign vessels from breaking laws or causing harm to the nation that owns the territorial waters.
Flag of Convenience: The Abuse of International Law of the Sea?
Some critics of flag of convenience registrations blame gaps in the laws for resulting issues. Others blame the failure of nations to apply the laws. Others point out that all FOC ship owners aren’t bad. Many observe the safety measures and pay their workers a fair wage. It’s the negligence of those ship owners who always put finances first that puts crew members at a higher risk of serious injury or death.
What Happens When Maritime Accidents Occur Due to the Use of Flags?
Regardless of which side of the debate you’re on, serious maritime accidents occur with vessels flying a flag of convenience. The combination of more ships carrying the flag and the lower safety regulations means the problem will only grow larger. When an injury or death occurs because of a safety breach, someone is liable. But whom?
Choosing a Registry
Simply choosing a top registry like Panama or Liberia might not get the results you need. The rules differ among the nations with open registries. The right one for your needs depends on…
- What type of shipping you perform
- The reputations of the country of registration
- The convenience and expense of registration
Talk with a maritime lawyer who understands the rules and responsibilities of flying a flag of convenience before you register.
Pros and Cons of Applying for a Flag of Convenience
As commerce becomes more global, so does the practice of international shipping. As the number of businesses selling their goods internationally grows, so does the competition. International shipping and trade companies are looking for every possible avenue to cut their expenses.
Many businesses feel driven to have a flag of convenience to remain competitive. Many consider it more of a “flag of necessity.” Business owners don’t feel they can provide the same level of service as other companies without the same financial advantages. But there are some disadvantages that go with the designation, too.
– You can register your ship in a foreign territory without being established in that country
– Low formation costs in states where required
– The benefits of ownership remain anonymous
– Low or no taxation
– No limitations on the nationality or employment conditions of the crew including the age limits
– No minimum tonnage requirements
– Dual registration may be allowed
– Fast and easy registration procedures, sometimes online
Ship owners have few disadvantages while the workers often pay a higher price. The cons for them are:
– FOC doesn’t necessitate their basic rights
– Lower standards of working conditions
– The risk of unknowingly being dragged into illegal trade
– Lower pay
– Insufficient compensation for injuries due to accidents at sea. A lack of regulation puts mariners at an even greater risk of an accident. Running under a flag of convenience might mean the mariner or their family doesn’t get the compensation they need.
– Challenging work schedules that don’t allow mariners the proper amount of rest
– Uncertain career choices for the future. Some mariners suffer from the uncertainty of not knowing what situation they will get into next. In some cases, situations have resulted in physical injury. In others, it has led to damage to their career. One of the biggest risks is the early termination of a mariner from their career.
Carrying a flag of convenience isn’t always a bad thing. It helps ship owners who can’t otherwise compete to run a successful business. If you’re considering sailing under a flag of convenience, consult with an experienced maritime attorney who knows which flag is right for you.
If you have been injured because of a flag of convenience, contact a maritime attorney to learn more about your rights. Some changes in the application of the laws of the sea might help your case.
Contact the Law Offices of Charles D. Naylor for a free case evaluation. Our maritime personal injury attorneys provide expert legal representation for maritime workers, offshore oil workers, and cruise ship passengers.