A flag of convenience (FOC) vessel or ship is one where the nationality of the owner is different from the country of registration. [1]
The term has been used since the 1950s and comes from the flag ships fly to show their country of registration. The country of registration determines the laws under which the ship is required to operate and to be applied in relevant admiralty cases.
Today, more than half of the world’s merchant ships (measured by tonnage) are registered under the so-called flags of convenience, more commonly referred to as "open registries".
Traditional reasons for choosing an open register include protection from income taxes, wage scales and regulations. 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.
Globalization has significantly influenced the mechanics of world trade. Likewise, it has also affected the owning and operating structures of merchant ships. Long gone are the days of the traditional family owned and operated shipping companies. Today’s ships are commonly owned by multinational corporations and operated by multinationals. This fact makes the traditional flag of convenience argument of a national owner seeking an international jurisdiction largely irrelevant as there are few national owners.
Opponents argue that flags of convenience "do not enforce safety standards, minimum social standards or trade union rights for seafarers."
While this may be true of some open registries, it is difficult to substantiate generalized arguments against flags of convenience.
The Belen Quezada was the first foreign-owned vessel to register with the Panamanian registry in 1919. 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 American 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.
Currently the three largest ship registries are open registers, namely Panama, Liberia and the Bahamas. All of these are judged by international safety organizations as “white-listed” flags indicating above average safety performance, even though the worst oil spills such as the Prestige and the Amoco Cadiz involve tankers registered in Bahamas and Liberia. No major spills involve Panamanian tankers.
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.
Other arguments against flags of convenience include evasion of taxes and lack of patriotism.
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 cost effective crew from the 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 the 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 ground breaking international treaty.