EVOLUTION OF FLAGS OF CONVENIENCE
(By FEBIN A.K., National University of Advanced Legal Studies, Cochin, India.)
The flying of the national flag is visual evidence and a symbol of a ship’s nationality. The 1958 Geneva Convention oh High Seas makes it clear that the ship will have the nationality of the State whose flag they are entitled to fly. ‘Flag’ is also used as a shorthand for the allocation of nationality to the vessel and the assumption of exclusive jurisdiction and control by a State over the vessel.
In this work I would be dealing with the evolution of a concept, which has great relevance in the present shrinking world- “Flags of Convenience”. The history of the concept would be traced out by me and then I would discuss why this concept emerged and its advantages and disadvantages.
THE CONCEPT OF FLAGS OF CONVENIENCE
According to Boczek a “flag of convenience” (FOC) can be defined as the flag of any country allowing the registration of foreign owned and foreign controlled vessels under conditions which, for whatever reasons, are convenient and opportune for the persons who are registering the vessels”.
The fact of foreign control, if not foreign ownership is a feature common to all flags of convenience. In 1974 the International Transport Workers' Federation (ITF) defined an FOC as follows: "Where beneficial ownership and control of a vessel is found to lie elsewhere than in the country of the flag the vessel is flying, the vessel is considered as sailing under a flag of convenience."
It is the ITF Fair Practices Committee (or the FPC sub-committee), which decides what is and what isn¹t an FOC. The FPC maintains a list of countries offering FOC facilities and from time to time adds or deletes countries from the list. The basis for membership of this select club is the so-called "Rochdale Criteria" laid down by a British Committee of Inquiry in 1970. These were:
Ø The country allows non-citizens to own and control vessels;
Ø Access to and transfer from the register is easy;
Ø Taxes on shipping income are low or non-existent;
Ø The country of registration doesn¹t need the shipping tonnage for its own purposes but is keen to earn the tonnage fees;
Ø Manning by non-nationals is freely permitted;
Ø The country lacks the power (or the willingness) to impose national or international regulations on its' ship-owners.
UNIVERSALITY OF ROCHDALE CRITERIA
It is in no way universal even though all the criteria are present in FOCs. With regard to the second point, most flags of convenience now impose age-limits on vessels entering their registry for the first time, and surveys are insisted upon in a number of cases prior to issuance of the permanent certificate of registry (for example, Panama, Bahamas, Barbados)
Like wise the sixth point is also becoming irrelevant now.
GENERAL LINK THEORY
Flags of convenience are now defined by reference to the existence or otherwise of a genuine economic link between a vessel and its country of registry. Thus, the ad hoc Intergovernmental Working Group, established under the auspices of UNCTAD, on the Economic Consequences of the Existence or Lack of a Genuine Link between Vessel and Flag of Registry concluded in its Report that:
The following elements are normally relevant when establishing whether a genuine link exists between a vessel and its country of registry:
Ø The merchant fleet contributes to the national economy of the State
Ø Revenues and expenditure of shipping, as well .as purchases and sales of vessels are treated in the national balance-of-payment accounts.
Ø The employment of nationals on vessels;
Ø The beneficial ownership of the vessel.
In today's world with second registers, bareboat charter arrangements and other methods designed to get around ITF policy, defining an FOC is becoming more and more difficult. However, ships registered in an FOC register, which can demonstrate that they are genuinely owned in that country, are not treated as FOCs. Equally, ships from countries not on the list will be treated as FOCs if the ITF receives information that they are beneficially owned in another country. The list is as follows:
Antigua & Barbuda, Aruba (added June 1997), Bahamas, Barbados, Belize, Bermuda, Burma, Cambodia (added June 1997), Canary Islands, Cayman Islands, Cook Islands, Cyprus, Germany Second Register GIS, Gibraltar, Honduras, Lebanon, Liberia, Luxembourg, Malta, Marshall Islands, Mauritius, Netherlands Antilles, Panama, Sri Lanka, St Vincent & the Grenadines, Tuvalu, Vanuatu.
Ships entered on the following “secondary” registers may be considered as flying under FOCs; their status depends upon whether or not they are owned by nationals of the flag country and whether or not crew wage agreements acceptable to that country’s unions have been entered into: Norwegian International Ship' Register, Danish International Ship Register, Isle of Man (UK), Luxembourg (in respect of Belgian-owned ships only), Madeira (Portugal), Kerguelen (France). The German International Ship Register and the Spanish secondary register in the Canary Islands are considered "fully-fledged" flags of convenience by the ITF and all ships registered there are treated as FOC vessels.
ORIGIN OF FOC
The use of flags of convenience is generally traced back to the use of the Spanish flag by English merchants in, order to avoid Spanish monopoly restrictions on trade with the West Indies. In the 17th century English fishermen off Newfoundland adopted the French flag in order to avoid fishing restrictions imposed by Great Britain. British fishermen made similar use of the Norwegian flag in the 19th century.
U.S. merchant vessels flew Portuguese flags during the War of 1812 to avoid difficulties with the British. Slave-trading ships owned by citizens of both the U.S. and various Latin American countries flagged elsewhere to avoid detection in the 19th century when international agreements prohibited the slave trade. Even earlier, British ships flew flags of obscure German principalities during Napoleon’s shipping blockade.
Widespread use of such flags, however, came only with the decision by certain states beginning around the 1920s to create open registries, where ships were not required to have onerous ties to a state in order to register. Open registries are generally characterized as those that do not require citizenship of ship owners or operators, levy no or minimal taxes, allow ships to be worked by non-nationals, and have neither the will nor capability to impose domestic or international regulations on registered ships. The first state to create such a registry was Panama, followed shortly thereafter by Honduras and later Liberia. One of the first incidents occurred on August 1919 when a vessel named Belen Quezada was transferred from the Canadian flag to the Panamanian flag and was used in rum running to avoid American prohibition laws. In 1922, two cruise liners, the Reliance and the Resolute, were transferred from the United States flag to the Panamanian for the same reason. Prohibition thus provided the boost for the Panamanian flag and in 1925; Panama enacted a liberally drafted maritime law intending to attract foreign tonnage. The United Fruit Company's fleet of banana vessels was transferred from the United States flag to that of Honduras during the same period.
An officer of the first shipping company to transfer a U.S.-flagged ship to Panamanian registry explained the appeal: “The chief advantage of Panamanian registry is that the owner is relived of the continual . . . boiler and hull inspections and the regulations as to crew’s quarters and subsistence,” pointing out that as long as the ships pay the registry fee and yearly (low) tax, “we are under absolutely no restrictions.”
The worsening political situation in Europe in the 1930s provided considerable impetus to the flags of convenience. In 1935, the 5 vessels forming the Esso Baltic fleet were transferred from the flag of the Free City of Danzig to that of Panama. During the Spanish Civil War a number of Spanish vessels made use of the Panamanian flag and many Greek owners re-flagged their ships in Panama to avoid the non-intervention blockade imposed by Great Britain and other powers. High crewing costs under the Greek flag in the pre-war years also led to growing use of the Panamanian flag by Greek operators. In 1932, Manuel Kulukundis registered the Mount Athos under the Panamanian flag; this was followed by a number of vessels in the Onassis fleet. Following the outbreak of war between the European powers in 1939, the Panamanian flag saw a further influx of United States tonnage seeking to avoid the provisions of the United States Neutrality Act preventing the carriage In American ships of cargoes destined for belligerents on either side.
After the WWII there was an increasing dissatisfaction with some of the aspects of the of the Panamanian flag; like the concern for the stability of the Panamanian Government and excessive consular fees. A former United States Secretary of State, Edward R. Stettinius, Jr saw the saw the development of an off shore shipping register as a useful innovation. In 1948, the Liberian Government promulgated the Liberian Maritime Law and the Liberian Corporation Law, which contained provisions from United States' legislation. Stettinius Associates, which had a profit-sharing arrangement with the Liberian Government, based the ship registry in New York and ran a well off business in contrast with the Panamanian network. The first ship entered in the new Liberian register was the World Peace in 1948. By 1967, the Liberian register had passed the UK to become the largest in the world. In spite of all the hostile Governments, by the end of 1996, Panama and Liberia accounted for 7789 ships tallying 142,119,576 gross register tons, over a quarter of the world tonnage.
ARGUMENTS FOR FOC
From the ship owner’s point of view, the characteristics of a flag of convenience would be seen as follows;
Ø The avoidance of tax in the country which he is established;
Ø Lower crewing costs, since
Ø (a) Registration under a flag of convenience generally means an unrestricted choice of crew in the International market;
(b) He is not subject to onerous national wage scales;
Ø Less regulatory control
Ø Anonymity: Ascertaining the beneficial ownership of the vessel is virtually impossible.
ARGUMENTS AGAINST THE FOC
The arguments can be discussed on 3 grounds. (1) Labour (2) Economic distortion
Organized labour opposition to flags of convenience began in the 1935 in the United States as a consequence of the transfer of American Ships to the Panamanian and Honduran flags. The ITF after the WWII adopted a resolution to boycott such ships. The main objectives of this meeting held in July, 1958 were-
Ø To establish by international governmental agreement a genuine link between the flag that a ship flies and the nationality or residence of its owners, managers and seafarers, and so to eliminate the flag of convenience system entirely;
Ø To ensure that the ship owners protect the seafarers who serve on flags of convenience ships, whatever their nationality, from exploitation.
According to the International Shipping Federation, the campaign has been most enthusiastically pursued in Australia and Scandinavia. Although the campaign is expressed to be directed against allegedly substandard labour conditions on board flags of convenience ships, the chief motivation has been to prevent loss of work opportunities for seafarers in the traditional maritime countries where spiraling wage costs have rendered the operation of ships increasingly uneconomic.
Many seafarers working on FOC ships receive shockingly low wages, live in very poor on-board conditions, and work long periods of overtime without proper rest. They get little shore leave, inadequate medical attention, and often safety procedures and vessel maintenance are neglected (in many cases reported to the International Transport Workers' Federation (ITF), FOC ships have been unseaworthy). In some of the worst cases, seafarers are virtual prisoners on FOC vessels. The FOC countries do not enforce minimum social standards or trade union rights for seafarers. If they did, ship-owners would soon lose interest in them. The countries from which the crew is recruited can do little to protect them, even if they wanted to, because the rules, which apply on board, are those of the country of registration.
One tactic in the ITF campaign has been to insist that ship owners operating vessels under flags of convenience employ their crews under the ITF Collective Agreement which contains terms and conditions for the employment of seafarers unilaterally determined by the Federation. Signature of the agreement is evidenced by the issuance of a "Blue Certificate" and failure to produce such a certificate to an ITF inspector can lead to industrial action being taken against the vessel. The ITF will issue a Blue Certificate provided, that:
(a) The ship owner signs the ITF Collective Agreement - or an ITF, approved national agreement. The former provides for rates of pay irrespectively of the nationality of the crew based on an average of European wage levels increased to allow for inflation;
(b) Each crewmember receives an individual contract of employment incorporating the current ITF wage scale endorsed, if necessary by the authorities of the labour-supplying country;
(c) All crew members not already belonging to a Union affiliated with the ITF arc enrolled in the ITF's Special Seafarers' Department;
(d) The ship owner makes an annual contribution in respect of each seafarer to the Federation's Seafarers' International Assistance Welfare and Protection Fund
(e) The Federation is advised of future crew or contract changes and has access to all records
(f) On demand, the crew is paid back pay covering the difference between the ITF rate and the previous rate to the date of commencement of the ITF-approved contract.
2. ECONOMIC DISTORTION
The 1981 report by the UNCTAD Secretariat blamed the freedom from fiscal obligations in flag-of-convenience countries for the liberalization of tax concessions and increases in Government assistance in traditional maritime nations. Certainly, this policy was successfully followed by Greece in the early 1950s in an effort to repatriate the substantial number of Greek-owned ships operated under flags of convenience. The report stated that
There is no doubt that the existence of open registries is the major cause of the distortions that governments have been forced to make to their fiscal regimes.
Oil spills from Liberian-registered tankers in the 1960s and 1970s called attention to issues of inadequate training, communication, and equipment. Working conditions aboard FOC-registered ships from such states as Panama, Honduras or Romania are often abysmal and even “life-threatening.”
Much of the widely publicized maritime disasters of recent years are involved vessels registered under flags of convenience-the Torrey Canyon in 1968; the Amoco Cadiz in 1978; the Exxon Valdez in 1989, The Scandinavian Star in 1990 and the Sea Empress in 1996. It is also a fact that the casualty records or open registry fleets reveal a considerably higher rate of losses than in the traditional maritime countries.
A report by the UNCT AD Secretariat in 1981 identified 10 reasons why the non observance of safety standards is likely to be greater under open-registry flag's than under the flags of States having genuine economic links with vessels:
Ø Real owners are not readily identifiable.
Ø Real owners can change their identities by manipulating brass-plate companies and consequently avoid being identified as repeated substandard operators or risk-takers;
Ø Since the master and other key shipboard personnel arc not nationals of the flag State, they have no need or incentive to visit the flag State and can avoid legal action;
Ø Owners who reside outside the jurisdiction of the flag State can defy the flag state by refusing to testify at an inquiry by the flag State and avoid prosecution
Ø Since open-registry owners do not have the same interest in preserving good relations with the flag State, they do not feel the need to co-operate with inspectors of the flag State;
Ø Open-registry shipping lacks the union structure which is so essential to the application of safety and social standards in countries of normal registry: namely, a national trade union of the flag State representing basically the interests of national seamen on board vessels owned by owners who have economic links with the flag State;
Ø Open-registry owners arc in a better position to put pressure on masters and officers to take risks, since there is no really appropriate government to which shipboard personnel can complain;
Ø Port State control is weaker because the port State can only report substandard vessels and practice to a flag State which has no real control over the owner;
Ø Owners can suppress any signs of militancy among crews by virtue of their freedom to change nationalities of crews at whim:
Ø Enforcement of standards is basically inconsistent with the operation of registry with the sole aim of making a profit.
Many people however consider these criticisms as unjustified as there are many factors that are present in the Flags of Convenience, which are present in all the maritime nations around the world. All these problems are faced by all the nations of the world which have shipping registries.
THE MODERN SCENARIO
Many steps are being taken in all the Flags of Convenience states to provide for better safety. Some of the most modern ships are operating under flags of convenience and a number of registers have taken steps to exclude very old tonnage. Liberia, for example, stipulates that vessels seeking registration (or re-registration) must not be more than 20 years old, although subject to certain conditions vessels exceeding that age-limit may be accepted for re-registration, Panama prescribes no age limitation, but vessels over 20 years of age are subject to a special inspection before the Permanent Certificate of Registry can be issued. Bahamas generally applies a 12-year age-limit, whilst Vanuatu follows the 20-year rule, Cyprus has a basic 17-year age-limit, but older' vessels maybe be registered subject to a number of conditions, including the existence of a rent and effective ownership or management link between the vessel and the island.
The flags of Convenience states are parties to the major safety conventions and more responsible registries ensure a stricter compliance. Liberia needs a “decision maker” who is contactable 24 hours in the event of any incident rising with the ship. Exasperation among the International community at the unwillingness or inability of many flag States to exercise proper control has led in recent years to increasing reliance on port States to monitor compliance with international standards, Intervention by port States is sanctioned by the 1982 Convention on the Law of the Sea (see articles 25 and 218) and numerous other international conventions; including SOLAS, MARPOL and STCW.
THE PARIS MEMORANDUM OF UNDERSTANDING OF 1982
This represented the first step towards establishing uniformity of port State control on a regional basis. The maritime authorities of 17 European States (including the Russian Federation) and Canada have adhered to the MOU which requires each authority to maintain an effective system of ports State control in order to ensure that, without discrimination as to flag, foreign merchant ships visiting its ports comply international conventions relating to safety of life at sea, prevention of pollution and working and social conditions on board.
Ø Maritime authorities carry out inspections, a visit on board the ship to ensure that she has all the necessary certificates and documents
Ø A more detailed inspection is carried out in case the documents are absent and if there is a doubt that the ship does not follow the international standards.
Ø If there are some problems found then the authorities will refuse the ship to proceed to sea.
Special attention is paid to
Ø Passenger ships, ro-ro ships and bulk carriers;
Ø Ships, which may present a special hazard for instance oil tankers, gas carriers, chemical tankers and ships carrying harmful substances in package form;
Ø Ships flying the flag of a State appearing in the three year rolling average table of above average delays and detentions in the MOU's annual report;
Ø Ships, which have had several recent deficiencies.
The MOU requires each authority to consult, co-operate and exchange information with other authorities in order to further the aims of the Memorandum. The success of the MOU has led to the establishment of regional port State control in other parts of the world, notably under the 1992 Vina del Mar Agreement signed between the maritime authorities of ten Latin American countries, the 1993 Tokyo Memorandum of Understanding on Port State Control for the Asia/Pacific region and the 1996 Memorandum of Understanding on Port State Control in the Caribbean Region.
At a European Union level, the Commission’s communication in 1993, A Common Policy on Safe Seas, urged the strengthening of the level of intervention of port and coastal States in order to reduce sub-standard shipping in Community waters. Council Directive 95/21/EC establishes common criteria for control of ships by port States and Harmonizing procedures on inspection and detention throughout the Community. The Directive builds on the experience gained through the operation of the MOU, but seeks to develop a better targeting system. Certain categories of ships, including passenger ships, older tankers and bulk-carriers are subject to "expanded" inspections. The maritime authority in each Member State is required to publish quarterly information concerning ships detained during the previous three month period and which have been detained more than once during the past 24 months; this information must include the flag States of the vessels concerned. The Directive is implemented in the United Kingdom by the Merchant Shipping (Port State Control) Regulations 1995. The International Safety Management Code adopted by the International Maritime Organization and the 1995 amendments to the International Convention on Standards of Training Certifications and Watch keeping for Seafarers 1978 (STCW 197X) are likely to have a major effect in improving operating standards.
THE OFFSHORE NATIONAL REGISTRIES
To try to do away with the FOC would be paving the doom of the maritime nations, as it is not possible. The only way to do so is to place severe limitations on national sovereignty, which cannot be done. The response of a number of the traditional maritime powers has been, often additionally to the traditional tax and other financial incentives to the shipping sector, either to enable the bareboating out of vessels under their flag (e.g., Italy) or to establish offshore or international registries, offering many of the advantages of flags of convenience, but nonetheless retaining a link between beneficial ownership or management and the national flag. Some like the Isle of Man registry have arisen out of accident of history. Torschlusspanik has led to the establishment of "designer" registries, such as the Norwegian International Ship Register (NIS) and the Madeira Shipping Register (MAR), which seek, to halt the decline of the merchant fleets of the traditional maritime powers by allowing ship owners to operate in a low-cost environment whilst retaining the respectability of the national flag. This retention of the link with the national flag preserves the jurisdiction of the maritime power over vessels owned by its nationals.
In 1986 the French Government started a registry at Kerguelen Island. The ships could be operated with a crew consisting of only 25% French nationals.
Unlike the Kerguelen registry, the NIS is open to all self-propelled passenger and cargo ships and hovercrafts, as well as drilling platforms and other moveable installations (but not fishing vessels) whether Norwegian or foreign owned provided they meet minimum technical standards. Norwegian safety rules are among the strictest in the world. However, in the case of foreign-owned ships, not only must an agent for service of process be appointed in Norway, but a substantial part of the technical or commercial management of' the vessel must be delegated to a ship management company established in Norway.
The most important benefit of the NIS is his freedom to appoint foreign nationals to all positions on board, with the exception of the master, who must be a Norwegian citizen. In the latter case, a waiver may be granted by the Norwegian 'Maritime Directorate. The Norwegian Seamen's Act applies to vessels entered in the NIS and the NIS Act itself lays down maximum working hours. Its success can be noted from the fact that between 1987 and 1989 the number of vessels flying the Norwegian flag increased by 250%.
Denmark and Germany have followed Norway's example in establishing their own international registers (DIS and GIS respectively) and Portugal has recently established an offshore register on the island of Madeira (MAR). Spain operates a secondary register in the Canary Islands (CSR). The German international register is open only to German-owned vessels. DIS is not an open registry-in order for a ship to qualify for registration; her owner must be a Danish national.
The Brazilian second register (Registro Especial Brasileiro) became operational in 1997. The closest American equivalent of an offshore register is the Marshall Islands, which enjoys a Compact of Free Association with the United States under the terms of which Marshall Islands vessel may avail them of United States consular assistance. In 1989, the Commission of the European Communities submitted a proposal for a Council Regulation establishing a Community ship register ("EUROS").
Flags of convenience are manifestations of international free riding in a way that is particularly obvious. As long as the flag states gain from running open registries and ship owners can benefit from avoiding international standards, the phenomenon is not going to disappear. The improvements we can expect to see in addressing FOC issues may therefore be modest. The changes come largely through increasing the cost to FOC vessels of not adhering to international standards. A combination of international pressure and individual incentives may therefore be what is needed to hold ships to international standards. Most frequently that international pressure has led to increased standards when actors have been able to create some a way to deny access to a benefit to those that do not accept the standards in question. Ironically, then, it is through creating mechanisms of exclusion that the ability to include the widest number of actors in international regulatory efforts is most likely to succeed.
1. Rodney Carlisle, Sovereignty for Sale: The Origins and Evolution of the Panamanian and Liberian Flags of Convenience. (Annapolis: Naval Institute Press, 1981)
2. Boleslaw Adam Boczek, Flags of Convenience: An International Legal Study. Cambridge: Harvard University Press, 1962)
3. Frank L. Wiswall, Jr., “Flags of Convenience,” in William A. Lovett, ed., United States Shipping Policies and the World Market (Westport, CT and London: Quorum Books, 1996)
4. Jim Morris, “Lost at Sea: ‘Flags of Convenience’ Give Owners a Paper Refuge,” Houston Chronicle, August 22, 1996, p. 15 (Lexis/Nexis)
5. Jane Marc Wells, “Vessel Registration in Selected Open Registries,” The Maritime Lawyer 6 (1981), p. 226; Rodney Carlisle, Sovereignty for Sale: The Origins and Evolution of the Panamanian and Liberian Flags of Convenience. (Annapolis: Naval Institute Press, 1981)
6. H. Edwin Anderson III, “The Nationality of Ships and Flags of Convenience: Economics, Politics, and Alternatives,” The Maritime Lawyer 21, p. 162; Carlisle, p. 175
7. Jim Morris and Kevin Moran, “Lost at Sea: Uneven Regulation and a Ready Supply of Cheap Labor Have Added a Harsh Modern Reality to the Romance of Going to Sea,” Houston Chronicle 18 August 1996, p. A1 (Lexis/Nexis);
8. Jim Morris, “Lost at Sea: Accident Underscores Potential Hazards of Foreign Vessels,” Houston Chronicle December 16, 1996, p. A12 (Lexis/Nexis).
 Flags of Convenience- An International Legal Study, 1962, Harvard University Press, p.2
 Rodney Carlisle, Sovereignty for Sale: The Origins and Evolution of the Panamanian and Liberian Flags of Convenience. (Annapolis: Naval Institute Press, 1981) p.8
 Boleslaw Adam Boczek, Flags of Convenience: An International Legal Study. Cambridge: Harvard University Press, 1962), p. 8.
Wells, p. 222; Frank L. Wiswall, Jr., “Flags of Convenience,” in William A. Lovett, ed., United States Shipping Policies and the World Market (Westport, CT and London: Quorum Books, 1996), p. 116; Jim Morris, “Lost at Sea: ‘Flags of Convenience’ Give Owners a Paper Refuge,” Houston Chronicle, August 22, 1996, p. 15 (Lexis/Nexis) [cited hereafter as Morris 8/22/96].
 Jane Marc Wells, “Vessel Registration in Selected Open Registries,” The Maritime Lawyer 6 (1981), p. 226; Rodney Carlisle, Sovereignty for Sale: The Origins and Evolution of the Panamanian and Liberian Flags of Convenience. (Annapolis: Naval Institute Press, 1981), pp. 14-18.
 W.L. Comyn, of Pacific Freighters, quoted in Carlisle, pp. 10-11.
 Action on the Question of Open registries TD/B/C.4/220
 H. Edwin Anderson III, “The Nationality of Ships and Flags of Convenience: Economics, Politics, and Alternatives,” The Maritime Lawyer 21, p. 162; Carlisle, p. 175
 Jim Morris and Kevin Moran, “Lost at Sea: Uneven Regulation and a Ready Supply of Cheap Labor Have Added a Harsh Modern Reality to the Romance of Going to Sea,” Houston Chronicle 18 August 1996, p. A1 (Lexis/Nexis); Jim Morris, “Lost at Sea: Accident Underscores Potential Hazards of Foreign Vessels,” Houston Chronicle December 16, 1996, p. A12 (Lexis/Nexis).