The term has been used since the 1950s and refers to the flag a ship flies to indicate its country of registration. The country of registration determines the laws under which the ship is required to operate and that are to be applied in relevant admiralty cases.
Today, more than half of the world’s merchant ships (measured by tonnage) are registered under so-called flags of convenience, formally referred to as "open registries".
The reasons for choosing an open register are varied and include protection from taxes, the avoidance of national regulations, labour wage scales or political boycotts. For example, the avoidance of the 50% duty the United States government charges on repairs performed on American-flagged ships in foreign ports. Again, in South Africa under apartheid, local shipowners utilised open registers to avoid shipping boycotts.
Globalization has significantly influenced the mechanics of world trade and has affected the owning and operating structures of merchant ships. Long gone are the days when most shipping companies had a single national shareholding and operating base and operated under a single flag. Ships are now more commonly owned by multinational corporations though extensive private family-controlled shipping ventures still feature strongly. For all types of shipping it is common for different aspects of ship operation - for example, technical or crew management, chartering, marketing - to be located in different countries.
Opponents argue that flags of convenience "do not enforce safety standards, minimum social standards or trade union rights for seafarers."
Although the concept of flags of convenience has a long history – for example, American shipowners from both sides in the American Civil War used the British flag – the modern concept began in 1919 when the Belen Quezada became the first foreign-owned vessel to register with the Panamanian registry. Several US ships followed suit in 1922. The registry slowly grew over the next 15 years, mostly due to transfers from European flags. In the late 1940s several factors led US shipowners to become unhappy with the registry, and there became a demand for a new registry that could compete with Panama.
The Liberian registry was formed in 1948 with the help of American businessmen. Stavros Niarchos, a Greek shipowner, registered the first ship (the World Peace) with Liberia in 1949. More shipowners followed suit, and the registry slowly grew and provided the competition that shipowners were looking for.
As of 2010 the three largest ship registries are Panama, Liberia and the Bahamas, all open registers. Of these, Liberia and Bahamas are judged by international safety organizations as “white-listed” flags indicating above-average safety performance. There is nowadays no consistent correlation between open registers and ship safety – while most of the flags with consistently poor safety records are open registers, other registers categorised as open by the ITF have better records than most conventional national registers. In 2008, the Paris MOU on Port State Control showed Bermuda at the top of their "white-list". 
The International Transport Workers' Federation (ITF) website says that “FOCs provide a means of avoiding labor regulation in the country of ownership, and become a vehicle for paying low wages and forcing long hours of work and unsafe working conditions. Since FOC ships have no real nationality, they are beyond the reach of any single national seafarers' trade union.” They also accuse such ships of having low safety standards and no construction requirements.
Several environmental groups have also campaigned against Flags of Convenience in regards to their use by illegal fishing operations. Opponents argue that many of the countries that allow foreign-owned vessels to fly their flag lack the resources or the will to properly monitor and control those vessels. The Environmental Justice Foundation contends that illegal, unreported and unregulated (IUU) fishing vessels use Flags of Convenience to avoid fisheries regulations and controls. Flags of Convenience help reduce the operating costs associated with legal fishing methods, and help illegal operators avoid prosecution and hide beneficial ownership. As a result, Flags of Convenience perpetuate IUU fishing which has extensive environmental, social and economic impacts, particularly in developing countries. The EJF is campaigning to end the granting of Flags of Convenience to fishing vessels as an effective measure to combat IUU fishing.
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. Proponents argue that the choice of flags allows companies to take advantage of another country's infrastructure and the efficiencies of effective and non-bureaucratic maritime administrations typically offered by the prominent open registers.
An open registry allows a Norwegian owner access to US public finance, Japanese shipbuilding expertise with Scottish and Hong Kong shipmanagers, while employing skillful crews from Philippines, India or China. Before the open registry system, national flags required national ownership, national construction and national crew. Flags of convenience enable both lower costs of registration and maintenance. This in turn reduces overall transportation costs.
Many nations, categorized either as open or national registries, effectively implement and enforce the international treaties of the International Maritime Organization, such as the International Convention for the Safety of Life at Sea (SOLAS), International Convention for the Prevention of Pollution from Ships (MARPOL), Standards of Training, Certification and Watchkeeping (STCW) and the International Ship and Port Facility Security Code (ISPS), all of which require minimum standards for vessels trading internationally. Further, several open registers including Liberia have ratified the International Labour Organization’s Consolidated Maritime Convention of 2006, which specifically protects the interest and rights of seafarers. National registries have yet to ratify this international treaty.
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," the "degree of ratification and enforcement of ILO Conventions and Recommendations," and "safety and environmental record." The following registries are on the ITF list (with figures sourced from the CIA World Factbook):
|Registry||Ships Registered||Foreign-owned ships||Percent Foreign||Foreign-owned ship profile||Remarks|
|Antigua and Barbuda International Shipping Register||1,059||1,021||96%||Australia 1, Colombia 1, Cyprus 2, Denmark 15, Estonia 15, France 1, Germany 891, Greece 3, Iceland 9, Latvia 9, Lebanon 1, Lithuania 6, Netherlands 19, Norway 7, NZ 2, Poland 2, Russia 5, Slovenia 6, Sweden 1, Switzerland 5, Turkey 7, UK 4, US 8, Vietnam 1|
|Bahamas Maritime Authority||1,213||1,134||93%||Angola 6, Australia 3, Belgium 15, Bermuda 12, Brazil 1, Canada 13, China 9, Croatia 1, Cuba 1, Cyprus 20, Denmark 66, Finland 8, France 43, Germany 40, Greece 214, Hong Kong 3, Iceland 1, Indonesia 3, Ireland 2, Italy 1, Japan 62, Jordan 2, Kenya 1, Malaysia 11, Monaco 11, Montenegro 2, Netherlands 24, Nigeria 2, Norway 232, Philippines 1, Poland 15, Russia 5, Saudi Arabia 15, Singapore 9, Slovenia 1, South Africa 1, Spain 11, Sweden 5, Switzerland 2, Taiwan 1, Thailand 1, Trinidad and Tobago 1, Turkey 5, UAE 20, UK 68, US 162, Uruguay 1, Venezuela 1 Flag-state self assessment.|
|Barbados Maritime Ship Registry||71||67||94%||Bahamas, The 1, Canada 9, Greece 11, India 1, Lebanon 1, Monaco 1, Norway 35, Sweden 5, UK 3|
|International Merchant Marine Registry of Belize||261||217||83%||China 107, Croatia 1, Cyprus 1, Estonia 1, Hong Kong 5, Iceland 1, Italy 4, Japan 2, South Korea 4, Latvia 14, Norway 3, Peru 1, Philippines 1, Russia 39, Singapore 3, Spain 2, Turkey 11, Ukraine 10, UAE 4, US 3|
|Bermuda Department of Maritime Administration||133||126||95%||Australia 4, Belgium 3, China 10, France 1, Germany 21, Greece 3, Hong Kong 4, Ireland 1, Israel 3, Japan 1, Nigeria 11, Norway 5, Singapore 1, Sweden 15, UK 20, US 23|
|Bolivia||25||9||36%||Argentina 1, China 1, Egypt 1, Iran 1, Italy 1, Singapore 1, Syria 1, Taiwan 1, Yemen 1||Bolivia is a landlocked nation|
|International Ship Registry of Cambodia||586||463||79%||Canada 6, China 166, Cyprus 9, Egypt 14, Estonia 1, Gabon 1, Greece 5, Hong Kong 11, Indonesia 1, Japan 3, South Korea 29, Latvia 2, Lebanon 7, Nigeria 2, Romania 1, Russia 112, Singapore 2, Syria 32, Taiwan 1, Turkey 20, Ukraine 27, UAE 2, US 6, Yemen 3|
|Cayman Islands Shipping Registry||124||122||98%||Denmark 3, Germany 17, Greece 23, Italy 10, Japan 6, Norway 2, Singapore 10, Sweden 1, UK 9, US 41|
|Maritime Administration of the Union of Comoros||144||70||49%||Bangladesh 1, Bulgaria 1, Cyprus 1, Greece 8, India 2, Kenya 1, Kuwait 1, Lebanon 5, Norway 1, Pakistan 2, Philippines 1, Russia 9, Saudi Arabia 1, Syria 8, Turkey 8, Ukraine 13, UAE 5, US 2|
|Republic of Cyprus Department of Merchant Shipping||868||724||83%||Austria 1, Belgium 1, Canada 2, China 10, Cuba 2, Denmark 1, Estonia 5, Germany 197, Greece 292, Hong Kong 2, India 1, Iran 2, Ireland 1, Israel 4, Italy 5, Japan 19, South Korea 2, Latvia 1, Lebanon 1, Netherlands 23, Norway 17, Philippines 1, Poland 18, Portugal 1, Russia 50, Singapore 1, Slovenia 4, Spain 7, Sweden 2, Switzerland 3, Syria 2, Turkey 1, Ukraine 6, UAE 10, UK 21, US 8)
registered in other countries: 133 (Antigua and Barbuda 2, Bahamas 20, Belize 1, Cambodia 9, Comoros 1, Georgia 1, Gibraltar 5, Greece 5, Isle of Man 4, Liberia 5, Malta 15, Marshall Islands 39, Norway 2, Panama 15, Russia 2, Samoa 1, St Vincent and The Grenadines 3, Turkey 2, UK 1, unknown 1
|French International Ship Register||141||56||40%||Belgium 6, China 5, Denmark 3, Germany 1, Italy 2, Japan 5, Norway 17, NZ 1, Saudi Arabia 1, Singapore 2, Sweden 10, Switzerland 3)
registered in other countries: 145 (Antigua and Barbuda 1, Australia 1, Bahamas 43, Belgium 1, Bermuda 1, Cameroon 1, Gibraltar 1, Hong Kong 1, Indonesia 1, Isle of Man 2, Italy 5, South Korea 8, Liberia 5, Luxembourg 14, Malta 4, Morocco 13, Netherlands 1, Norway 3, Panama 15, Singapore 1, St Vincent and The Grenadines 7, Taiwan 1, UK 9, Wallis and Futuna 6
|German International Ship Register||382||7||2%||China 2, Finland 4, Ireland 1|
|Georgia||209||180||86%||Albania 2, Azerbaijan 1, China 4, Cyprus 1, Egypt 14, Germany 2, Greece 7, Lebanon 3, Monaco 10, Romania 15, Russia 17, Slovenia 2, Syria 54, Turkey 23, Ukraine 24, UAE 1|
|Gibraltar Registry of Shipping||216||201||93%||Belgium 3, Cyprus 5, Denmark 9, Finland 3, France 1, Germany 117, Greece 8, Iceland 1, Italy 1, Netherlands 11, Norway 27, Sweden 10, UAE 2, UK 3|
|Honduras||126||40||32%||Bangladesh 1, Canada 1, China 3, Egypt 4, Greece 1, Hong Kong 1, Israel 1, Japan 4, South Korea 6, Lebanon 2, Mexico 1, Singapore 10, Taiwan 2, Tanzania 1, US 1, Vietnam 1|
|Jamaica Ship Registry||13||12||92%||Denmark 1, Germany 1, Greece 8, Latvia 2|
|Lebanon||35||3||9%||Greece 2, Syria 1|
|Liberian International Ship and Corporate Registry||1,948||1,904||98%||Argentina 3, Australia 2, Belgium 1, Brazil 3, Canada 3, China 32, Croatia 5, Cyprus 5, Denmark 12, Estonia 1, France 5, Germany 728, Gibraltar 7, Greece 311, Hong Kong 21, India 2, Indonesia 1, Israel 9, Italy 31, Japan 111, South Korea 4, Kuwait 1, Latvia 15, Lebanon 2, Mexico 1, Monaco 8, Netherlands 28, Norway 42, Poland 14, Qatar 2, Russia 87, Saudi Arabia 24, Singapore 42, Slovenia 1, Sweden 11, Switzerland 11, Taiwan 82, Turkey 7, Ukraine 24, UAE 22, UK 74, US 103, Uruguay 3, Vietnam 3|
|Malta Maritime Authority||1,281||1,197||93%||Austria 1, Azerbaijan 3, Bangladesh 3, Belgium 10, Bulgaria 15, Canada 15, China 13, Croatia 12, Cyprus 15, Denmark 10, Estonia 7, France 4, Germany 67, Greece 448, Hong Kong 1, Iceland 7, India 3, Iran 24, Israel 21, Italy 45, Japan 3, South Korea 3, Latvia 36, Lebanon 12, Libya 3, Monaco 1, Netherlands 3, Norway 71, Pakistan 2, Poland 25, Portugal 3, Romania 10, Russia 66, Slovenia 3, Spain 1, Sweden 1, Switzerland 22, Syria 4, Turkey 143, Ukraine 28, UAE 10, UK 12, US 11|
|International Registries, Inc (Marshall Islands)||990||857||95%||Australia 1, Belgium 1, Bermuda 5, Canada 4, Chile 4, China 3, Croatia 4, Cyprus 39, Denmark 9, Finland 2, Germany 214, Greece 226, Hong Kong 4, Italy 3, Japan 5, South Korea 3, Latvia 10, Malaysia 3, Monaco 7, Netherlands 5, Norway 62, Romania 1, Russia 4, Saudi Arabia 4, Singapore 12, Slovenia 3, Spain 3, Sweden 1, Switzerland 14, Turkey 41, UAE 14, UK 17, US 129|
|Ministry of Public Infrastructure, Land Transport & Shipping (Mauritius)||5||2||40%||India 2|
|Mongolia Ship Registry||73||62||85%||Bulgaria 2, China 3, Hong Kong 1, Japan 1, Lebanon 1, Malaysia 1, Russia 17, Singapore 12, Syria 1, Thailand 1, Ukraine 3, UAE 5, Vietnam 14||Mongolia is a landlocked nation|
|Myanmar (Burma)||33||8||24%||Germany 5, Japan 3|
|Netherlands Antilles||138||125||91%||Belgium 1, Cuba 1, Denmark 1, Germany 48, Netherlands 53, Norway 5, Sweden 3, Turkey 12, US 1|
|North Korea||171||29||17%||Egypt 1, India 1, Israel 1, Lebanon 3, Lithuania 1, Pakistan 1, Romania 6, Russia 1, Syria 7, Turkey 1, UAE 4, Yemen 2|
|Autoridad Marítima de Panamá||5764||4,949||86%||Albania 1, Argentina 8, Australia 4, Bahamas 2, Bangladesh 1, Belgium 11, Bulgaria 1, Canada 17, Chile 8, China 473, Colombia 4, Croatia 6, Cuba 11, Cyprus 15, Denmark 32, Dominican Republic 1, Ecuador 2, Egypt 13, Estonia 3, France 15, Gabon 1, Germany 38, Greece 505, Hong Kong 137, India 25, Indonesia 37, Iran 4, Ireland 1, Israel 2, Italy 10, Jamaica 1, Japan 2,151, Jordan 11, South Korea 316, Kuwait 1, Latvia 5, Lebanon 3, Lithuania 5, Malaysia 14, Maldives 1, Malta 2, Mexico 4, Monaco 11, Netherlands 14, Nigeria 6, Norway 60, Oman 1, Pakistan 5, Peru 15, Philippines 12, Poland 15, Portugal 9, Qatar 1, Romania 8, Russia 9, Saudi Arabia 14, Singapore 83, Spain 61, Sri Lanka 3, Sweden 9, Switzerland 26, Syria 24, Taiwan 306, Thailand 10, Turkey 53, Turks and Caicos Islands 1, Ukraine 8, UAE 108, UK 35, US 115, Venezuela 10, Vietnam 10, Yemen 5|
|São Tomé and Príncipe||7||2||29%||Egypt 1, Greece 1|
|SVG Maritime Administration (Saint Vincent and the Grenadines)||582||536||92%||Austria 2, Bangladesh 1, Barbados 1, Belgium 9, Bulgaria 13, Canada 6, China 106, Croatia 7, Cyprus 3, Czech Republic 1, Denmark 16, Egypt 4, Estonia 20, France 7, Germany 3, Greece 81, Guyana 2, Hong Kong 7, Iceland 15, India 5, Iran 1, Israel 4, Italy 19, Kenya 2, Latvia 20, Lebanon 7, Lithuania 7, Malta 1, Monaco 6, Montenegro 1, Netherlands 5, Norway 19, Pakistan 1, Philippines 1, Poland 1, Portugal 1, Puerto Rico 1, Romania 1, Russia 19, Singapore 6, Slovenia 5, Sweden 2, Switzerland 12, Syria 11, Turkey 20, Ukraine 12, UAE 12, UK 9, US 21|
|Merchant Shipping Division (Sri Lanka)||24||6||25%||Germany 6|
|Tonga||14||3||21%||Australia 1, Switzerland 1, UK 1||International registry suspended in 2002.|
|Vanuatu Maritime Services Limited||51||51||100%||Australia 2, Belgium 4, Canada 5, Estonia 1, Japan 28, Poland 7, Russia 1, Switzerland 2, US 1|
The term flag of convenience describes the business practice of registering a merchant ship in a sovereign state different from that of the ship's owners, and flying that state's civil ensign on the ship. Ships are registered under flags of convenience to reduce operating costs or avoid the regulations of the owner's country. The closely-related term open registry is used to describe an organization that will register ships owned by foreign entities.
The term "flag of convenience" has been in use since the 1950s and refers to the civil ensign a ship flies to indicate its country of registration or flag state. A ship operates under the laws of its flag state, and these laws are used if the ship is involved in an admiralty case.
The modern practice of flagging ships in foreign countries began in the 1920s in the United States, when shipowners frustrated by increased regulations and rising labor costs began to register their ships to Panama. The use of flags of convenience steadily increased, and in 1968, Liberia grew to surpass the United Kingdom as the world's largest shipping register. As of 2009[update], more than half of the world’s merchant ships are registered under flags of convenience, and the Panamanian, Liberian, and Marshallese flags of convenience account for almost 40% of the entire world fleet, in terms of deadweight tonnage.
Flag-of-convenience registries are often criticized. As of 2009[update], thirteen flag states have been found by international shipping organizations to have substandard regulations. A basis for many criticisms is that the flag-of-convenience system allows shipowners to be legally anonymous and difficult to prosecute in civil and criminal actions. Ships with flags of convenience have been found engaging in crime and terrorism, frequently offer substandard working conditions, and negatively impact the environment, primarily through illegal, unreported and unregulated fishing. As of 2009[update], ships of thirteen flags of convenience are targeted for special enforcement by countries that they visit. Supporters of the practice, however, point to economic and regulatory advantages, and increased freedom in choosing employees from an international labor pool.
International law requires that every merchant ship be registered in a country. This country in which a ship is registered is called its flag state, and the flag state gives the ship the right to fly its civil ensign. 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. A ship operates under the laws of its flag state, and these laws are used if the ship is involved in an admiralty case. The organization which actually registers the ship is known as its registry. Registries may be governmental or private agencies. In some cases, such as the United States' Alternative Compliance Program, the registry can assign a third party to administer inspections.
The reasons for choosing an open register are varied and include tax avoidance, the ability to avoid national labor and environmental regulations, and the ability to hire crews from lower-wage countries. 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. 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 Sea-Land's fleet of 63 ships were foreign flagged, saving the company up to 3.5 million dollars per ship every year.MV Amoco Cadiz, which flew the Liberian flag of convenience, spurred the creation of a new type of maritime enforcement. Resulting from "strong political and public outcry" over the Cadiz sinking, fourteen European nations signed the 1982 "Paris Memorandum of Understanding on Port State Control" or Paris MOU. 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. In cases when a port state inspection uncovers problems with a ship, the port state may take actions including detaining the ship. In 2008, member states of the Paris MOU conducted 14,322 inspections with deficiencies, which resulted in vessels being detained 1,220 times that year. Member states of the Tokyo Memorandum of Understanding conducted 13,298 ship inspections in 2009, recording 86,820 deficiencies which resulted in 1,336 detentions.
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." 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. In 1986, the United Nations Conference on Trade and Development attempted to solidify the genuine link concept in the United Nations Convention for Registration of Ships. 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. To come into force, the 1986 treaty requires 40 signatories whose combined tonnage exceeds 25% of the world total. As of 2006[update], only 14 countries have signed the treaty.
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 the Middle Ages. More recently, this technique was used by the British during the Napoleonic Wars and the United States during the War of 1812. However, 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, and the term flag of convenience came into use in the 1950s.
, from left to right, maritime labor leader Andrew Furuseth, Senator La Follette, and muckraker Lincoln Steffens, circa 1915.]]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. During this period, U.S.-flagged ships became subject to regular inspections undertaken by the American Bureau of Shipping. This was also the time of Robert LaFollette's Seamen's Act of 1915, which has been described as the "Magna Carta of sailors' rights." The Seamen's Act regulated mariners' working hours, their payment, and established baseline requirements for shipboard food. It also reduced penalties for disobedience and abolished the practice of imprisoning sailors for the offense of desertion. 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.
These laws put U.S.-flagged vessels at an economic disadvantage against countries lacking such safeguards. By moving their ships to the Panamanian flag, owners could avoid providing these protections. The Belen Quezada, the first foreign ship flagged in the Panamanian registry, was employed in running illegal alcohol between Canada and the United States during Prohibition. 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.
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On 11 March 1949, Greek shipping magnate Stavros Niarchos registered the first ship under the Liberian flag of convenience, the World Peace. When Stettinius died in 1950, ownership of the registry passed to the International Bank of Washington, led by General George Olmsted. Within 18 years, Liberia grew to surpass the United Kingdom as the world's largest register.
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. After the civil war of 1990, Liberia joined with the Republic of the Marshall Islands to develop a new maritime and corporate program. The resulting company, International Registries, was formed as a parent company, and in 1993 was bought out by its management. 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. Taylor is now on trial at the International Criminal Court in The Hague on 11 counts of war crimes, crimes against humanity, and other serious violations of international humanitarian law.
As of 2009[update], the Panamanian, Liberian, and Marshallese flags of convenience account for almost 40% of the entire world fleet, in terms of deadweight tonnage That same year, the top ten flags of convenience registered 55% of the world's deadweight tonnage, including 61% of bulk carriers and 56% of oil tankers.
The International Transport Workers' Federation (ITF) 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," the "degree of ratification and enforcement of ILO Conventions and Recommendations," and "safety and environmental record." As of 2010[update] the list includes Antigua and Barbuda, the Bahamas, Barbados, Belize, Bermuda, Bolivia, Burma, Cambodia, the Cayman Island, Comoros, Cyprus, Equatorial Guinea, Georgia, Gibraltar, Honduras, Jamaica, Lebanon, Liberia, Malta, the Marshall Islands, Mauritius, Mongolia, Netherlands Antilles, North Korea, Panama, Sao Tome and Príncipe, St Vincent, Sri Lanka, Tonga, Vanuatu, and the French and German International Ship Registers.
As of 2009[update], Panama, Liberia and the Marshall Islands are the worlds three largest registries in terms of deadweight tonnage (DWT). 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 shipbourne carrying capacity. Panama dominates the scene with over 8,065 ships accounting for almost 23% of the world's DWT. 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%.
The Bahamanian 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. 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.
At the eleventh position, Cyprus registered 1,016 ships in 2009, 2.6% of world tonnage. 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 #27. 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. (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.) 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.
The 21 other flags of convenience listed by the ITF each account for less than 1% of the world's DWT. As of 2008[update], more than half of the world’s merchant ships (measured by tonnage) are registered under flags of convenience.
Shipowners often establish shell corporations to be the legal owners of their ships. To distinguish between the actual shipowner and the shell corporations, the terms beneficial owner or ultimate owner are often used. Webster's defines a beneficial owner as "one who enjoys the benefit of a property of which another is the legal owner." A ship's beneficial owner is legally and financially responsible for the ship and its activities.
The 2004 Report of the UN Secretary General’s Consultative Group on Flag State Implementation reported that "It is very easy, and comparatively inexpensive, to establish a complex web of corporate entities to provide very effective cover to the identities of beneficial owners who do not want to be known." According to a 2003 report by the Organisation for Economic Co-operation and Development report entitled "Ownership and Control of Ships", these corporate structures are often multi-layered, spread across numerous jurisdictions, and make the beneficial owner "almost impenetrable" to law enforcement officials and taxation. 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."
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. Physically possessing a bearer share accords ownership of the corporation. There is no requirement for reporting the transfer of bearer shares, and not every jurisdiction requires that their serial numbers even be recorded.
Two similar techniques to provide anonymity for a ship's beneficial owner are "nominee shareholders" and "nominee directors." In some jurisdictions that require shareholder identities to be reported, a loophole is created where the beneficial owner may appoint a nominee to be the shareholder, and that nominee cannot legally be compelled to reveal the identity of the beneficial owner. All corporations are required to have at least one director, however many jurisdictions allow this to be a nominee director. A nominee director's name would appear on all corporate paperwork in place of the beneficial owners, and like nominee shareholders, few jurisdictions can compel a nominee director to divulge the identity of beneficial owners. To further complicate matters, some jurisdictions allow a corporation to fulfill the duties of a nominee director.
Ships registered by the Cambodia Shipping Corporation (CSC) were found smuggling drugs and cigarettes in Europe, breaking the Iraq oil embargo, and engaging in human trafficking and prostitution in Europe and Asia. In response to these activities, in 2000, Ahamd Yahya of the Cambodian Ministry of Public Works and Transport told industry publication Fairplay "We don't know or care who owns the ships or whether they're doing 'white' or 'black' business ... it is not our concern." Less than two years later, French forces seized the Cambodian-flagged, Greek-owned MV Winner for cocaine smuggling. Shortly after the seizure, Cambodian Prime Minister Hun Sen closed the registry to foreign ships, and Cambodia canceled its contract with CSC shortly thereafter.
The North Korean flag of convenience has also garnered significant scrutiny. In 2003, the North Korean freighter Pong-su reflagged to Tuvulu in the middle of a voyage shortly before being seized by Australian authorities for smuggling heroin into that country. That year thirteen nations began monitoring vessels under the North Korean flag for "illicit cargos, like drugs, missiles or nuclear weapon fuel." In 2006, ships owned by Egyptian and Syrian interests, flagged by North Korea, and based in the United States were discovered to be engaged in smuggling migrants in Europe.
The OECD report states that the possibility of terrorists using ships is "obvious" and "potentially devastating" and goes on to list ways in which ships could be used. One clear use would be to move personnel, equipment, and weapons around the world. Another would be to transport bombs, such as a "container set to explode near a city." Also, ships could be used as a weapon in their own right, for example an oil tanker or liquefied natural gas carrier rigged as a floating bomb. Finally, the OECD discussed the possibility of criminal and terrorist organizations using ships engaging in legal or illegal trade as a source of revenue to fund criminal activities.
The International Transport Workers' Federation goes further, stating that flags of convenience "provide a means of avoiding labor regulation in the country of ownership, and become a vehicle for paying low wages and forcing long hours of work and unsafe working conditions. Since FOC ships have no real nationality, they are beyond the reach of any single national seafarers' trade union." They also say that these ships have low safety standards and no construction requirements, that they "do not enforce safety standards, minimum social standards or trade union rights for seafarers", that they frequently fail to pay their crews, have poor safety records, and engage in practices such as abandoning crewmen in distant ports.
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International regulations for the maritime industry are promulgated by agencies of the United Nations, particularly the International Maritime Organization and International Labour Organization. Flag states adopt these regulations for their ships by ratifying individual treaties. One common criticism against flag of convenience countries is that they allow shipowners to avoid these regulations by not ratifying important treaties or by failing to enforce them.
Maritime International Secretariat Services (MARISEC) issues a yearly report entitled the Flag State Performance Table in association with industry groups the Baltic and International Maritime Council, the International Association of Dry Cargo Shipowners, the International Chamber of Shipping, the International Shipping Federation, and the International Association of Independent Tanker Owners. The 2009 report identified the six "core" conventions representing a minimum level of maritime regulation, from the viewpoint of shipowners, as SOLAS, MARPOL, LL 66, STCW, ILO 147, and CLC/FUND92. Five of these six core conventions are not ratified by several flag of convenience countries.
The SOLAS and LL 66 conventions focus on shipboard safety issues. SOLAS is an acronym for Safety of Life at Sea, or formally "International Convention for the Safety of Life at Sea, 1974 as amended, including the 1988 Protocol, the International Safety Management Code (ISM) and the International Ship and Port Facility Security Code (ISPS)". Originally ratified in response to the sinking of the RMS Titanic, SOLAS sets regulations on lifeboats, emergency equipment and safety procedures, including continuous radio watches. It has been updated to include regulations on ship construction, fire protection systems, life-saving appliances, radio communications, safety of navigation, management for the safe operation of ships, and other safety and security concerns. As of 2009[update], the Bolivian, Honduran, Lebanese, and Sri Lankan flags of convenience have not ratified the SOLAS treaty. LL 66 is an industry designation for the "International Convention on Load Lines, 1966, including the 1988 Protocol". This convention sets standards for minimum buoyancy, hull stress, and ship's fittings, as well as establishing navigational zones where extra precautions must be taken. As of 2009[update], the Bahamanian, Bolivian, Georgian, Honduran, and Sri Lankan flags of convenience have not ratified the LL 66 treaty.
ILO147 is shorthand for the "International Labour Organization Merchant Shipping (Minimum Standards) Convention 1976, including the 1996 Protocol". This convention sets safety and competency standards, regulates work hours, manning, conditions of employment as well as shipboard living arrangements. As of 2009[update], the Antigua/Barbudan, Bolivian, Cambodian, North Korean, Georgian, Honduran, Jamaican, Mongolian, Vincentian, and Sri Lankan flags of convenience have not ratified the ILO147 treaty.
MARPOL, CLC, and FUND are treaties related to pollution. MARPOL refers to the "International Convention for the Prevention of Pollution from Ships,1973 as modified by the Protocol of 1978, including Annexes I – VI". This treaty regulates pollution by ships, including oil and air pollution, shipboard sewage and garbage. As of 2009[update], the Bahamanian, Bolivian, Cambodian, North Korean, Georgian, Honduran, Lebanese, Maltese, and Sri Lankan flags of convenience have not ratified the MARPOL treaty. CLC and FUND92 refer to the "International Convention on Civil Liability for Oil Pollution Damage, 1992" and the "International Convention on the Establishment of an International Fund for Compensation for Oil Pollution Damage, 1992". These two related conventions provide mechanisms to ensure remuneration for victims of oil spills. As of 2009[update], the Bolivian, North Korean, Honduran, Lebanese, and, Mongolian flags of convenience have not ratified the CLC and FUND treaties.
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Several other regional Memoranda Of Understanding have been established based on the Paris model, including the "Memorandum of Understanding on Port State Control in the Asia-Pacific Region", typically referred to as the "Tokyo MOU", and organizations for the Black Sea, the Caribbean, the Indian Ocean, the Mediterranean, and Latin America. The Tokyo and Paris organizations generate, based on deficiencies and detentions, black-, white-, and grey-lists of flag states. The US Coast Guard, which handles port state control inspections in the US, maintains a similar target list for underperforming flag states. As of 2009[update], fourteen of the thirty-one flags of convenience listed by the ITF are targeted for special enforcement by the countries of the Paris and Tokyo MOUs or U.S. Coast Guard: Antigua and Barbuda, the Bahamas, Belize, Bolivia, Cambodia, the Cayman Islands, North Korea, Georgia, Honduras, Lebanon, Malta, Mongolia, Panama, and Saint Vincent and the Grenadines.
The United Nations Conference on Trade and Development, in its 2009 Report on Maritime Trade, states that shipowners often register their ships under a foreign flag in order to employ "seafarers from developing countries with lower wages." The Philippines and the People's Republic of China supply a large percentage of maritime labor in general, and major flags of convenience in particular. In 2009, the flag-states employing the highest number of expatriate-Filipino seafarers were Panama, the Bahamas, Liberia and the Marshall Islands. That year, more than 150,000 Filipino sailors were employed by these four flags of convenience. In a 2006 study by the United States Maritime Administration (MARAD), sailors from the People's Republic of China comprised over 40% of the crews on surveyed ships flying the Panamanian flag, and around 10% of those flying the Liberian flag. The MARAD report referred to both China and The Philippines as "low cost" crewing sources.
The seafaring industry is often broken down in two employment groups: licensed mariners including deck officers and marine engineers, and mariners that are not required to have licenses, such as able seamen and cooks. The latter group is collectively known as unlicensed mariners or ratings. Differences in wages can be seen in both groups, between "high cost" crewing sources such as the United States, and "low cost" sources such as China and The Philippines.
For unlicensed mariners, 2009 statistics from the American Bureau of Labor Statistics give median earnings for able and ordinary seamen as US$35,810, varying from $21,640 (at the 10th percentile) to $55,360 (at the 90th percentile). This can be compared with 2006 statistics from the International Labour Organization, giving average yearly earnings for Filipino and Chinese able seamen around $2,000 to $3,000 per year (PHP9,900 per month and CNY3,071 per year). Among licensed mariners, American chief engineers earned a median $63,630, varying from $35,030 to $109,310 while their Filipino counterparts averaged $5,500 per year (PHP21,342 per month).
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Flag of convenience is a word from shipping. Every ship needs to be registered in a port. The laws of the port are valid for the ship's crew. In some countries the rules are not as strict as in others, or they are cheaper to use. Many owners of ships from other countries register their ships in one of those easy or cheap countries. The ship might never even come anywhere near that country, but it must fly the flag of the country where it was registered. This is then called a flag of convenience. The two most popular flags are Panama and Liberia.