Flag of convenience (FOC) is 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.^[1] 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,^[2] 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.^[3] 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 (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 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.

As of 2021^[update], 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, (DWT) were registered in Panama, Liberia, and the Marshall Islands.^[4] It is estimated that nearly two thirds of the world's fleet is registered in states to which they have no connection.^[5][6] According to the UN Conference on Trade and Development (UNCTAD), in January 2021, Panama had 6,653 ships on its registry (16 per cent of the global fleet by DWT), followed by Liberia (3,909), Marshall Islands (3,732), Singapore (2,541), and Hong Kong (2,440).^[4]

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.^{[citation needed]} 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.^[7]

As of 2009^[update], thirteen flag states have been found by international shipping organisations^[which?] 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.^[8]

Legal context

International law requires that every merchant ship be registered in a country.^[2] The country in which a ship is registered is its flag state,^[1] and the flag state gives the ship the right to fly its civil ensign.^[9] A ship operates under the laws of its flag state, and these laws are used if the ship is involved in an admiralty case.^[10] 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,^[11] the ability to avoid national labor and environmental regulations,^[11][12] and the ability to hire crews from lower-wage countries.^[11][13] 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.^[14][15] 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.^[11]

Accidents and reform

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.^[16] 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.^[16] 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.^[16] In cases when a port state inspection uncovers problems with a ship, the port state may take actions including detaining the ship.^[17] In 2015, member states of the Paris MOU conducted 17,858 inspections with deficiencies, which resulted in 595 detained vessels and 11 banned.^[18] 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.^[19]

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."^[20] 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.^[2] In 1986, the United Nations Conference on Trade and Development attempted to solidify the genuine link concept in the United Nations Convention on Conditions for Registration of Ships.^[21] 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.^[21] To come into force, the 1986 treaty requires 40 signatories whose combined tonnage exceeds 25% of the world total.^[21] As of 2017^[update], only 14 countries have signed the treaty.^[21]

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.^[22] 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.^[3] During the mid-19th century, slave ships flew various flags to avoid being searched by British anti-slavery fleets.^[23] 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.^[24] 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.^[25]

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.^[26] During this period, U.S.-flagged ships became subject to regular inspections undertaken by the American Bureau of Shipping.^[26] 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".^[27] The Seamen's Act regulated mariners' working hours, their payment, and established baseline requirements for shipboard food.^[27] It also reduced penalties for disobedience and abolished the practice of imprisoning sailors for the offense of desertion.^[27] 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.^[27] 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.^[26] 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.^[24] 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.^[28]

The Liberian open registry, founded in 1948,^[29] was the brainchild of Edward Stettinius, who had been Franklin D. Roosevelt's Secretary of State during World War II.^[30] Stettinius created a corporate structure that included The Liberia Corporation, a joint-venture with the government of Liberia.^[30] 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.^[30] 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.^[30]

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.^[31] Within 18 years, Liberia grew to surpass the United Kingdom as the world's largest register.^[31]

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.^[31] After the civil war of 1990, Liberia joined with the Republic of the Marshall Islands to develop a new maritime and corporate program.^[31] The resulting company, International Registries, was formed as a parent company, and in 1993 was bought out by its management.^[31] 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.^[31] Liberia's registry is operated from Virginia, United States.^{[citation needed]}

As of 2021^[update], the open registries of Panama, Liberia, and Marshall Islands accounted for almost 40% of the entire world fleet by deadweight tonnage,^[4] maintaining roughly the same proportion for over a decade.^[32] In 2009, the top ten flags of convenience registered 55% of the world's deadweight tonnage, including 61% of bulk carriers and 56% of oil tankers;^[32] by 2021, they accounted for 38% of the world's vessels and over two-thirds of the global deadweight tonnage.^[33]

To counteract class hopping, in 2009 the International Association of Classification Societies (IACS) established a Transfer of Class Agreement (TOCA).^[34][35]

Extent of use

This section needs to be updated. Please help update this article to reflect recent events or newly available information. (November 2023)

The International Transport Workers' Federation (ITF) maintains a list of registries it considers to be flags of convenience (FOC) registries.^[36] In developing the list, the ITF considers "ability and willingness of the flag state to enforce international minimum social standards on its vessels,"^[37] the "degree of ratification and enforcement of ILO Conventions and Recommendations,"^[37] and "safety and environmental record".^[37] As of 2024^[update], the list includes 42 countries.^[36]

As of 2009^[update], Panama, Liberia and the Marshall Islands are the world's three largest registries in terms of deadweight tonnage (DWT).^[32] These three organizations registered 11,636 ships of 1,000 DWT and above, for a total of 468,405,000 DWT: more than 39% of the world's shipborne carrying capacity.^[32] Panama dominates the scene with over 8,065 ships accounting for almost 23% of the world's DWT.^[32] 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%.^[32]

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 6,000,000 DWT lower.^[32] Malta, at the ninth position worldwide, had about 100 more ships than the Bahamas, with a capacity of 50,666,000 DWT, representing 4% of the world fleet with 12% growth that year.^[32]

At the eleventh position, Cyprus registered 1,016 ships in 2009, 2.6% of world tonnage.^[32] 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.^[32] Bermuda and the FIS have fewer than 200 ships apiece, but they are large: the average Bermudan ship is 67,310 DWT and the average FIS ship is at 42,524 DWT.^[32] (By way of reference, the average capacity of ships in the U.S. and U.K. registers is 1,851 DWT and 9,517 DWT respectively.^[32]) The registries of Antigua and Barbuda and Saint Vincent and the Grenadines both have over 1,000 ships with average capacity of 10,423 DWT and 7,334 DWT respectively.^[32]

The remaining flags of convenience listed by the ITF each account for less than 1% of the world's DWT.^[32] As of 2008^[update], more than half of the world's merchant ships (measured by tonnage) are registered under flags of convenience.^[38]

Table of flags of convenience and statistics of registered ships
(2023 data)^[39]

Flag state[36]	Ships registered	Bulk carriers	Container ships	General cargo	Oil tankers	other
Panama	8,174	2,732	671	1,428	866	2,477
Liberia	4,821	1,895	1,013	170	1,038	705
Marshall Islands	4,180	1,939	277	66	1,039	859
Malta	1,957	490	348	152	354	613
Bahamas	1,274	345	39	58	193	639
Cyprus	1,005	243	154	211	47	350
Madeira0(as data for Portugal)	888	110	299	191	29	259
Saint Vincent and the Grenadines	830	30	18	137	16	629
Belize	774	49	–	410	64	251
Antigua and Barbuda	614	24	109	425	6	50
Germany	595	1	69	82	32	411
Sierra Leone	584	33	8	320	97	126
France	553	–	32	48	25	448
Honduras	489	–	–	233	82	174
Palau	427	49	8	200	52	118
Togo	397	1	10	250	56	80
Zanzibar0(as data for Tanzania)	381	4	17	170	58	132
Saint Kitts and Nevis	341	22	16	85	59	159
Vanuatu	338	11	3	101	–	223
Mongolia	318	8	8	151	58	93
Comoros	273	17	7	125	36	88
Barbados	272	90	–	149	5	28
North Korea	264	10	5	191	29	29
Cameroon	198	2	–	91	42	63
Cook Islands	190	19	–	44	58	69
Cayman Islands	130	29	3	1	20	77
Gibraltar	129	8	5	31	16	69
Bermuda	122	–	15	–	8	99
Myanmar	101	1	–	44	5	51
Sri Lanka	96	5	–	15	11	65
Faroe Islands	91	–	6	45	–	40
Moldova	75	1	1	44	7	22
Curaçao	57	–	–	5	1	51
Equatorial Guinea	53	1	–	16	7	29
Lebanon	51	2	1	30	1	17
Bolivia	50	–	–	30	2	18
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