Pacific Maritime Magazine - Marine Business for the Operations Sector

By Jim Shaw 

Flag of Convenience – or Flag of Necessity?

A controversy that may have had its beginnings on the West Coast

 

Stavros Niarchos' 18,072-dwt tanker World Peace was the first ship to make use of the new Liberian registry in 1949 but its greater claim to fame followed five years later when it rammed the railway swing bridge at El Firdan in the Suez Canal and tied up shipping for more than four days. Photo courtesy of LISCR.

The flag of convenience, more politely known today as an open registry, is supported by some and damned by others in the international maritime trade. Flag of convenience (FOC) trading, the practice of registering a merchant ship in a sovereign state other than that of the ship's owner and flying that state's flag, has been a growing trend on the high seas over the past half-century, despite the fact that for many years it brought up images of dilapidated "rust buckets" manned by overworked and underpaid crews.

Although this situation still exists to some extent, the most popular FOC registries, such as Liberia, Panama and Malta, now operate in a business-like manner, often employing a team of maritime experts that stand behind safety issues and proper seafarer conditions. Nevertheless, it cannot be disputed that many shipowners continue to gravitate to FOCs because of cheap registration fees, low or nonexistent taxes and the freedom to employ inexpensive labor from a variety of sources. To these owners, often operating on thin margins, FOCs are seen as more of a "flag of necessity" than a flag of convenience.

History

The history of the FOC is difficult to trace but most references point to the Republic of Panama just after the end of World War I and a three-masted motor schooner by the name of Belen Quezada that traded along the West Coast. With the opening of the Panama Canal in 1914 Panama found itself in a unique geographical position regarding world maritime trade but had few merchant ships, or even merchant crews, under its own flag. Therefore it decided it needed a flag without restrictions concerning owners or crew nationality. By means of law No 63 of 1917 Panama made an amendment to its fiscal code to allow such a registration of vessels in the coastal trades. On 20 August 1919 the 1,141-grt motor schooner Belen Quezada, which was trading between the Pacific Coast and Caribbean ports, was enrolled under the Panamanian flag.

Within months Spanish shipowner Sota Y Aznar, predecessor to Spain's later Aznar Line, made overtures to the Panamanian government for the transfer of several of its ocean-going steamers to the Panamanian flag. This resulted in an Executive Decree dated 7 October, 1921 that the Spanish ships could come under the flag of Panama by paying a registration fee of $1 per net ton and an annual tax of 10 cents per registered ton.

Two years later the advantages of the upcoming flag drew the interest of William A. Harriman, owner of United American Line (UAL), who had UAL's two large American-owned liners, Resolute and Reliance, registered in Panama to escape US Prohibition laws. The 19,653-gt Resolute then transited the Canal on 16 Jan., 1923 during a world cruise as "Panama's largest vessel".

First Open International Ship Registry

Watching demand for its flag grow, Panama enacted law No. 8 in 1925, which formalized its registry as an "open" international ship registry, available to any shipowner. For many years Panama was the only open registry of any significance in a world where the term "flag of convenience" had yet to be applied. Several years later the small country of Honduras also adopted an open registry but this was largely at the urging of the United Fruit Company, which operated banana carriers to the Central American nation and these were among the few ships to make use of the relatively unknown registry. Panama, however, continued to gain users, particularly during the early stages of World War II when a number of American-owned vessels, including 17 tankers and two freighters, were transferred to the Panamanian registry to allow them to carry cargoes across the Atlantic for the Allied cause. By doing so they didn't compromise US Neutrality Act laws in force at the time, and on many of these Panamanian-registered ships supplies were delivered to the United Kingdom.

After December 7, 1941, when the US entered the War, ships captured by US forces as war prizes were often enrolled under the flag of Panama to facilitate their later sale or disposal through what was by then considered a "known" registry.

Liberian Registry

After the Second World War a new open registry was formed in the West African country of Liberia. Prior to this there had been major political disturbances in Panama because of American reluctance to give up military bases that it had established there during the War. These outbreaks, coupled with higher fees being charged to register ships in Panama, opened the door to competition.

The Liberian registry was a creation of Edward Stettinius, who had been Franklin D. Roosevelt's Secretary of State during the war and was aware of Panama's problems. Stettinius was a longtime friend of William Tubman, the president of Liberia, and helped set up the Liberia Company, a partnership between the Liberian government and American financiers. The corporation was structured so that one-fourth of its revenue would go to the Liberian government while another 10 percent would go to fund social programs in Liberia. The remainder would be returned to Stettinius' corporation.

The first ship to be registered under the new Liberian registry was Greek shipowner Stavros Niarchos' 18,072-dwt tanker World Peace on 11 March, 1949, ironically the same year in which Stettinius passed away from a heart attack. Ownership of the registry then went to the International Bank of Washington, DC but the bank quickly contracted the International Trust Company of Boston to manage it, which made registration of ships, especially for US-based owners, much easier.

International Transport Workers' Federation (ITF)

Maritime unions were quick to take note of the ships and jobs being lost to the flags of Liberia and Panama. As early as 1933, when several European-owned tankers gravitated to Panamanian registry, the International Transport Workers' Federation (ITF) began questioning the practice. By 1954 the flags of Panama and Liberia, and to a lesser extent Costa Rica and Honduras, had drawn over 6.5 million gross registered tons (grts) of shipping to their banners, many supplied by US-based owners.

At a US Senate Committee on Interstate and Foreign Commerce hearing in 1958 a representative of the United Fruit Company candidly admitted that his company had registered its fleet under the Honduran flag because "it is a flag of convenience," the first time the term had been used - and it stuck. The use of "flags of convenience" then steadily increased and in 1968 Liberia surpassed the United Kingdom as the world's largest shipping register. Today, nearly two-thirds of the world's merchant ships are registered under FOCs, with the Panamanian, Liberian, and Marshallese flags accounting for approximately 40 percent of the entire world fleet in terms of deadweight tonnage.

A Tarnished Image

This rapid expansion was closely watched by the ITF, which began stepping up its campaign against FOCs in the 1950s as a large amount of war surplus tonnage entered the world market, much of it under less than scrupulous ownership. The ITF noted that the use of FOCs by these owners provided them with a means of avoiding labor regulations in their own countries while also allowing them to pay very low wages for long hours of work under unsafe working conditions.

Because FOC ships have no real nationality, the ITF pointed out, they remain beyond the reach of any single national seafarers' trade union. In addition to the union backlash against FOCs, a growing number of casualties relating to FOC vessels also began to draw public attention.

One receiving considerable publicity on the West Coast was the loss of the 10,462-gt freighter Dona Anita in 1972 while under the flag of the Somali Republic. Built in Japan in 1953, and owned at the time by the International Shipping Company of Hong Kong, the ship had departed Vancouver, Canada with 9,000 tons of potash and 41 people on board, including the British master's wife. It began radioing for assistance after it encountered heavy weather 120 miles west of Vancouver Island. The last message from the vessel indicated that the crew was attempting to abandon ship due to flooding of the engine room.

Although the Canadian destroyer Mackenzie and weather ship Quadra responded to the distress call, they found only two empty life rafts, a life ring with the ship's name on it, and an expanding oil slick. The freighter had gone down with no survivors.

The Amoco Cadiz Disaster

The fact that other vessels, including the Canadian search and rescue ships and tugs with barges, survived the same storm with limited damage, gave credence to the complaint of many mariners of the time that ships registered under FOCs failed to meet minimum safety standards. The general press went so far as to label FOC vessels "little better than floating rust heaps." Not helping matters was the loss of a second FOC ship, the 10,051-gt Liberian registered Oriental Monarch, in the same area the following year and again with the loss of all on board. Coast Guard vessels recovered four empty lifeboats while 31 bodies were later picked up in the area after an extensive air and sea search (there had been 40 on board).

While tragic, the loss of Oriental Monarch and Dona Anita were completely overshadowed by the Amoco Cadiz disaster of 1978 in which the 233,690-dwt American-owned tanker broke apart after drifting onto rocks off the French coast and spilling its entire cargo of 1.6 million barrels of crude oil.

Port State Control

The loss of Amoco Cadiz, which flew the Liberian flag, and the massive oil spill it created, resulted in a public outcry and spurred the creation of a new type of maritime enforcement: Port State Control. The feeling was, if FOC nations could not inspect and regulate ships under their flags, then the ports they visited would.

Fourteen European nations signed the 1982 Paris Memorandum of Understanding on Port State Control or Paris MOU and there are now nine such MOUs around the globe, including the Tokyo MOU in Asia.

Under Port State Control, ships in international trade become subject to inspection by the states they visit, with the inspections covering such items as safety and pollution prevention as well as shipboard living and working conditions. In cases when a port state inspection uncovers problems with a ship, the port state may take actions, including detaining the ship. Much to the annoyance of some shipowners, Port State Control is now regarded as a measure "complementary" to Flag State Control.

The White, Grey and Black List

Port State Control inspections are regarded as being "complementary" to Flag State control and several agencies, such as the US Coast Guard, conduct many thousands of ship inspections annually. Photo courtesy of US Coast Guard.

At its 49th meeting held earlier this year the Paris MoU Committee adopted new performance lists for flags following a series of inspections and detentions over a 3-year rolling period. The results were incorporated in its "White, Grey and Black (WGB) List" with White representing quality flags with a consistently low detention record while Black represented the poorest performing flags. A total of 73 flags were listed, with 43 on the White List, 19 on the Grey and 11 on the Black.

Sweden was ranked highest on the White List in terms of performance followed by the United Kingdom, France, Denmark and Norway. Moving up from the Grey list, which denotes "average performance," were Portugal and Spain while dropping from White to Grey were India and Switzerland.

In the poorest performing ranking, the Black List, were United Republic of Tanzania, Republic of Moldova, Togo, Comoros and Cook Islands, joined by Saint Kitts and Nevis, which had fallen from the Grey list. It can be noted that Panama, Liberia, Malta, Cyprus and the Marshall Islands, among the top FOCs, remained on the White list.

 
 

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