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A ship is said to be flying a flag of convenience if it is registered in a foreign country "for purposes of reducing operating costs or avoiding government regulations."[1]
The term comes from the flag that ships fly to show their country of registration. Under conventions of international law, the country of registration determines the source of law to be applied in admiralty cases, regardless of which court has personal jurisdiction over the parties.[2]
As of 2000, half the world's tonnage of merchant ships were registered under flags of convenience.[3] Some reasons for this include the avoidance of heavy taxes,[4] the ability to hire crews from lower-wage countries,[4] avoidance of environmental regulations,[5] and an overall reduction in the cost of transportation.[4]
A specific example of the type of advantage flying a flag of convenience offers is bypassing the 50% duty the United States government charges on repairs performed on American-flagged ships in foreign ports.[4] The accumulated advantages can be significant, for example in 1999, 28 of Sea-Land's fleet of 63 ships were foreign flagged, saving the company up to 3.5 million dollars per ship per year.[4]
On the other hand, flag of convenience ships are characterized by "poor conditions, inadequately trained crews, and frequent collisions."[5] The International Transport Workers' Federation points out that FOC vessels frequently fail to pay their crews,[4] have poor safety records,[4] and engage in practices such as abandoning crewmen in distant ports.[4]
The first flag of convenience was that of Panama[6] and the practice of re-flagging ships grew in popularity during the period from 1920-1933 of Prohibition in the United States.[4] During this time, American rum runners carried illegal alcohol under the Panamanian flag.[4]
In 1948, the United States helped Liberia create its "open registry."[6] The Liberian registry attracted American oil companies[6] and Greek shipowners[6] who sought to avoid high labor costs.[6] The success of Liberia's registry encouraged the opening of other competing registries.[6]
In the 1970s the United Nations attempted to adopt regulations that would have stopped the practice.[6] However, Organisation for Economic Co-operation and Development countries defeated these measures.[6]
In 2002 in the United States, Democratic senator John Breaux of Louisiana proposed a bill intending to curtail the use of foreign flags as a counter-terrorism measure.[6]
The use of a flag of convenience in order to take advantage of another nation's laxer registration standards is frowned upon for two reasons: The practice causes nations with stricter requirements to lose income and the safety and working conditions of shipboard employees may suffer. However, many nations under the International Ship and Port Facility Security Code (ISPS) require minimum standards for vessels entering their national waters. In the case of the United States, the Coast Guard requires inspections on at least an annual basis and may deny entry to American waters based on defects not corrected.
Cheap registration fees, low taxes, and freedom from labor laws or safety standards are motivating factors for many flags of convenience. Fishing boat owners who use a flag of convenience can also ignore their home countries' conservation agreements. To quote William Langewiesche's The Outlaw Sea:
"No one pretends that a ship comes from the home port painted on its stern, or that it has ever been anywhere near. Panama is the largest maritime nation on earth, followed by bloody Liberia, which hardly exists. No coastline is required either. There are ships that hail from La Paz, in landlocked Bolivia. There are ships that hail from the Mongolian desert. Moreover, the registries themselves are rarely based in the countries whose names they carry: Panama is considered to be an old-fashioned "flag" because its consulates handle the paperwork and collect the registration fees, but "Liberia" is run by a company in Virginia, "Cambodia" by another in South Korea, and the proud and independent "Bahamas" by a group in the City of London.[7]"
Supporters of flags of convenience argue that where a vessel is engaged in international trade it should be free to register in the jurisdiction which best suits its commercial model.
Jurisdictions which are criticised as offering flags of convenience also often have relatively sophisticated maritime codes, and courts which are versed in maritime law and admiralty matters.
Registering vessels in such jurisdictions where they can be mortgaged effectively and the mortgagee's property rights respected facilitates the financing of such vessels. Forcing vessels to register in jurisdictions with unsophisticated maritime laws or where mortgaging the vessel is difficult to do effectively, or worse yet, where the vessel becomes vulnerable to compulsory acquisition causes unnecessary disruption and increased expense in an already volatile international shipping market.
Supporters note that similar criticisms are rarely raised with regard to aircraft registrations, to which similar considerations apply, but which employ fewer people, and form part of a less unionised industry.
The International Transport Workers' Federation maintains a list of 32 registries it considers to be FOC registries. In developing the list, the ITF considers "ability and willingness of the flag state to enforce international minimum social standards on its vessels,"[8] the "degree of ratification and enforcement of ILO Conventions and Recommendations,"[8] and "safety and environmental record."[8] The following registries are on the ITF list: