Flags of Convenience in Merchant Shipping

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Seaborne trade continues to expand, bringing benefits for consumers across the world through competitive freight costs. Thanks to the growing efficiency of shipping as a mode of transport and increased economic liberalisation, the prospects for the industry’s further growth continue to be strong. As per the international law, every merchant ship must be registered with a country, known as its flag state. That country has jurisdiction over the vessel and is responsible for inspecting that it is safe to sail and to check on the crew’s working conditions.

Flags of Convenience or FOC: A flag of convenience ship is one that flies the flag of a country other than the country of ownership. Open registries, sometimes referred to as flags of convenience, have been disputed at times owing to a number of reasons including wages of seafarers and safety of the vessels. Vessels registered under flags of convenience can often cut operating costs or avoid the regulations of the owner’s country. To achieve that, a ship owner will find a country with an open registry, or a nation that allows registration of vessels owned by foreign entities. For workers onboard, this can mean, very low wages at times.

A look at some ‘contentious advantages’ of an FOC: Foreign corporations can register a ship without being established in the territory. Where a company is required to be formed in the State, there are low formation costs. Besides, the beneficial ownership of the ship may remain anonymous. Lastly, FOC offers low taxation and other fiscal incentives

Why FOCs Attract: Many shipping companies deem the regulations of non-FOCs as unattractive, which is why they lean towards a country which has regulations and laws which benefit the company and its operation. Some claim that the corporations which sail under a foreign flag do so simply to avoid cumbersome regulations and laws which impede seamless trade.

The Cruise Lines International Association explains the reason behind the fact that 90% of the cruise liners register their ships under a foreign flags due to the “capabilities of the flag to deliver the services needed; representation and reputation of the flag in the international shipping community; the performance of the flag state, which dictates how a ship is prioritized by port states; the pool of seafarers able to meet the need of the flag; and the flag’s fees/charges and taxes.”

Leading FOCs across the World: Ship registration is the process of documenting a ship’s given nationality. The nationality of a ship allows it to travel internationally wherever citizens of that nation are authorized to travel. The registration is almost like the passport for the ship, itself. Panama now has the largest registry in the world, followed by Liberia, the Marshall Islands, Hong Kong and Singapore. By last year, almost three quarters of the world’s fleet was registered under a flag of a country other than its own. Panama, a small nation of just three million, has the largest shipping fleet in the world, greater than those of the US and China combined. Thanks to its location and slender shape, Panama enjoys a position as the guardian of one of the world’s most important marine trade routes, which connects the Pacific and Atlantic oceans.

The Checks and Balances:

Shipping is the life blood of the global economy. Without shipping, intercontinental trade, the bulk transport of raw materials, and the import/export of affordable food and manufactured goods would simply not be possible. There are over 50,000 merchant ships trading internationally, transporting every kind of cargo. The world fleet is registered in over 150 nations, and manned by over a million seafarers of virtually every nationality. Ship registration or flag state system has been in practice since the beginning of business conducted over the seas. It was originally used to control ships ferrying cargo among European countries and to ensure that ships were built locally and using local crews. Today it is used to document ships for ownership in order to provide definitive evidence of nationality for international treaty purposes.

Geneva Convention on the High Seas of 1958 and subsequently the United Nations Convention on Conditions for Registration of Ships in 1986 lay down regulations which state 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. National or closed registries typically require that a ship be owned and constructed by national interests, and at least partially crewed by its citizens. Open registries do not have such requirements; some offer on-line registration, sometimes guaranteeing completion in less than a day. However, some registries make it more difficult for industry stakeholders and the public to hold ship owners to account.

(References: ICS, Crew-center, ITF Global,  BBC, SAFETY4SEA, HG.Org)

Sea News Feature, July 29

Baibhav Mishra
Author: Baibhav Mishra