EVOLUTION

OF

FLAGS

OF

CONVENIENCE

The flying of the national flag is visual evidence and a symbol of a ships nationality. The 1958
Geneva Convention of High Seas makes it clear that the ship will have the nationality of the State
whose flag they are entitled to fly. Flag is also used as a shorthand for the allocation of nationality
to the vessel and the assumption of exclusive jurisdiction and control by a State over the vessel.
In this work I would be dealing with the evolution of a concept, which has great relevance in the
present shrinking world- Flags of Convenience. The history of the concept would be traced out by
me and then I would discuss why this concept emerged and its advantages and disadvantages.
THE

CONCEPT

OF

FLAGS

OF

CONVENIENCE

According to Boczek[1] a flag of convenience (FOC) can be defined as the flag of any country
allowing the registration of foreign owned and foreign controlled vessels under conditions which,
for whatever reasons, are convenient and opportune for the persons who are registering the vessels.
The fact of foreign control, if not foreign ownership is a feature common to all flags of
convenience. In 1974 the International Transport Workers' Federation (ITF) defined an FOC as
follows: "Where beneficial ownership and control of a vessel is found to lie elsewhere than in the
country of the flag the vessel is flying, the vessel is considered as sailing under a flag of
convenience."
ORIGIN

OF

FOC

The use of flags of convenience is generally traced back to the use of the Spanish flag by English
merchants in, order to avoid Spanish monopoly restrictions on trade with the West Indies. In the
17th century English fishermen off Newfoundland adopted the French flag in order to avoid fishing
restrictions imposed by Great Britain. British fishermen made similar use of the Norwegian flag in
the
19th
century.
U.S. merchant vessels flew Portuguese flags during the War of 1812 to avoid difficulties with the
British. Slave-trading ships owned by citizens of both the U.S. and various Latin American
countries flagged elsewhere to avoid detection in the 19th century when international agreements
prohibited the slave trade.[2] Even earlier, British ships flew flags of obscure German principalities
during
Napoleons
shipping
blockade.[3]
Widespread use of such flags, however, came only with the decision by certain states beginning
around the 1920s to create open registries, where ships were not required to have onerous ties to a
state in order to register. Open registries are generally characterized as those that do not require
citizenship of ship owners or operators, levy no or minimal taxes, allow ships to be worked by nonnationals, and have neither the will nor capability to impose domestic or international regulations on
registered ships.[4] The first state to create such a registry was Panama, followed shortly thereafter
by Honduras and later Liberia. One of the first incidents occurred on August 1919 when a vessel
named Belen Quezada was transferred from the Canadian flag to the Panamanian flag and was used
in rum running to avoid American prohibition laws.[5] In 1922, two cruise liners, the Reliance and
the Resolute, were transferred from the United States flag to the Panamanian for the same reason.
Prohibition thus provided the boost for the Panamanian flag and in 1925; Panama enacted a
liberally drafted maritime law intending to attract foreign tonnage. The United Fruit Company's
fleet of banana vessels was transferred from the United States flag to that of Honduras during the
same
period.
An officer of the first shipping company to transfer a U.S.-flagged ship to Panamanian registry

explained the appeal: The chief advantage of Panamanian registry is that the owner is relived of
the continual . . . boiler and hull inspections and the regulations as to crews quarters and
subsistence, pointing out that as long as the ships pay the registry fee and yearly (low) tax, we are
under
absolutely
no
restrictions.[6]
The worsening political situation in Europe in the 1930s provided considerable impetus to the flags
of convenience. In 1935, the 5 vessels forming the Esso Baltic fleet were transferred from the flag
of the Free City of Danzig to that of Panama. During the Spanish Civil War a number of Spanish
vessels made use of the Panamanian flag and many Greek owners re-flagged their ships in Panama
to avoid the non-intervention blockade imposed by Great Britain and other powers. High crewing
costs under the Greek flag in the pre-war years also led to growing use of the Panamanian flag by
Greek operators. In 1932, Manuel Kulukundis registered the Mount Athos under the Panamanian
flag; this was followed by a number of vessels in the Onassis fleet. Following the outbreak of war
between the European powers in 1939, the Panamanian flag saw a further influx of United States
tonnage seeking to avoid the provisions of the United States Neutrality Act preventing the carriage
In American
ships
of
cargoes
destined
for
belligerents
on
either
side.
After the WWII there was an increasing dissatisfaction with some of the aspects of the of the
Panamanian flag; like the concern for the stability of the Panamanian Government and excessive
consular fees. A former United States Secretary of State, Edward R. Stettinius, Jr saw the saw the
development of an off shore shipping register as a useful innovation. In 1948, the Liberian
Government promulgated the Liberian Maritime Law and the Liberian Corporation Law, which
contained provisions from United States' legislation. Stettinius Associates, which had a profitsharing arrangement with the Liberian Government, based the ship registry in New York and ran a
well off business in contrast with the Panamanian network. The first ship entered in the new
Liberian register was the World Peace in 1948. By 1967, the Liberian register had passed the UK to
become the largest in the world. In spite of all the hostile Governments, by the end of 1996, Panama
and Liberia accounted for 7789 ships tallying 142,119,576 gross register tons, over a quarter of the
world
tonnage.
ARGUMENTS

FOR

FOC

From the ship owners point of view, the characteristics of a flag of convenience would be seen as
follows;

The
avoidance
of
tax
in
the
country
which
he
is
established;

Lower
crewing
costs,
since
(a) Registration under a flag of convenience generally means an unrestricted choice of crew in the
International
market;
(b)
He
is
not
subject
to
onerous
national
wage
scales;

Less
regulatory
control
Anonymity: Ascertaining the beneficial ownership of the vessel is virtually impossible.
ARGUMENTS

AGAINST

THE

FOC

The arguments can be discussed on 3 grounds. (1) Labour (2) Economic distortion
(3)
Safety
1.

LABOUR

Organized labour opposition to flags of convenience began in the 1935 in the United States as a
consequence of the transfer of American Ships to the Panamanian and Honduran flags. The ITF
after the WWII adopted a resolution to boycott such ships. The main objectives of this meeting held
in
July,
1958
were To establish by international governmental agreement a genuine link between the flag that a ship
flies and the nationality or residence of its owners, managers and seafarers, and so to eliminate the
flag
of
convenience
system
entirely;
To ensure that the ship owners protect the seafarers who serve on flags of convenience ships,
whatever
their
nationality,
from
exploitation.
According to the International Shipping Federation, the campaign has been most enthusiastically
pursued in Australia and Scandinavia. Although the campaign is expressed to be directed against
allegedly substandard labour conditions on board flags of convenience ships, the chief motivation
has been to prevent loss of work opportunities for seafarers in the traditional maritime countries
where spiraling wage costs have rendered the operation of ships increasingly uneconomic.
Many seafarers working on FOC ships receive shockingly low wages, live in very poor on-board
conditions, and work long periods of overtime without proper rest. They get little shore leave,
inadequate medical attention, and often safety procedures and vessel maintenance are neglected (in
many cases reported to the International Transport Workers' Federation (ITF), FOC ships have been
unseaworthy). In some of the worst cases, seafarers are virtual prisoners on FOC vessels. The FOC
countries do not enforce minimum social standards or trade union rights for seafarers. If they did,
ship-owners would soon lose interest in them. The countries from which the crew is recruited can
do little to protect them, even if they wanted to, because the rules, which apply on board, are those
of
the
country
of
registration.
BLUE

CERTIFICATE

One tactic in the ITF campaign has been to insist that ship owners operating vessels under flags of
convenience employ their crews under the ITF Collective Agreement which contains terms and
conditions for the employment of seafarers unilaterally determined by the Federation. Signature of
the agreement is evidenced by the issuance of a "Blue Certificate" and failure to produce such a
certificate to an ITF inspector can lead to industrial action being taken against the vessel. The ITF
will
issue
a
Blue
Certificate
provided,
that:
(a) The ship owner signs the ITF Collective Agreement - or an ITF, approved national agreement.
The former provides for rates of pay irrespectively of the nationality of the crew based on an
average
of
European
wage
levels
increased
to
allow
for
inflation;
(b) Each crewmember receives an individual contract of employment incorporating the current ITF
wage scale endorsed, if necessary by the authorities of the labour-supplying country;
(c) All crew members not already belonging to a Union affiliated with the ITF arc enrolled in the
ITF's
Special
Seafarers'
Department;
(d) The ship owner makes an annual contribution in respect of each seafarer to the Federation's
Seafarers'
International
Assistance
Welfare
and
Protection
Fund
(e) The Federation is advised of future crew or contract changes and has access to all records
(f) On demand, the crew is paid back pay covering the difference between the ITF rate and the
previous rate to the date of commencement of the ITF-approved contract.
2.

ECONOMIC

DISTORTION

The 1981 report by the UNCTAD Secretariat[7] blamed the freedom from fiscal obligations in flagof-convenience countries for the liberalization of tax concessions and increases in Government
assistance in traditional maritime nations. Certainly, this policy was successfully followed by
Greece in the early 1950s in an effort to repatriate the substantial number of Greek-owned ships
operated
under
flags
of
convenience.
The
report
stated
that
There is no doubt that the existence of open registries is the major cause of the distortions that
governments
have
been
forced
to
make
to
their
fiscal
regimes.
3.

SAFETY

Oil spills from Liberian-registered tankers in the 1960s and 1970s called attention to issues of
inadequate training, communication, and equipment.[8] Working conditions aboard FOC-registered
ships from such states as Panama, Honduras or Romania are often abysmal and even lifethreatening.[9]
Much of the widely publicized maritime disasters of recent years are involved vessels registered
under flags of convenience-the Torrey Canyon in 1968; the Amoco Cadiz in 1978; the Exxon
Valdez in 1989, The Scandinavian Star in 1990 and the Sea Empress in 1996. It is also a fact that
the casualty records or open registry fleets reveal a considerably higher rate of losses than in the
traditional
maritime
countries.
A report by the UNCT AD Secretariat in 1981 identified 10 reasons why the non observance of
safety standards is likely to be greater under open-registry flag's than under the flags of States
having
genuine
economic
links
with
vessels:

Real

owners

are

not

readily

identifiable.

Real owners can change their identities by manipulating brass-plate companies and consequently
avoid
being
identified
as
repeated
substandard
operators
or
risk-takers;
Since the master and other key shipboard personnel arc not nationals of the flag State, they have
no need or incentive to visit the flag State and can avoid legal action;
Owners who reside outside the jurisdiction of the flag State can defy the flag state by refusing to
testify
at
an
inquiry
by
the
flag
State
and
avoid
prosecution
Since open-registry owners do not have the same interest in preserving good relations with the
flag State, they do not feel the need to co-operate with inspectors of the flag State;
Open-registry shipping lacks the union structure which is so essential to the application of safety
and social standards in countries of normal registry: namely, a national trade union of the flag State
representing basically the interests of national seamen on board vessels owned by owners who have
economic
links
with
the
flag
State;
Open-registry owners arc in a better position to put pressure on masters and officers to take risks,
since there is no really appropriate government to which shipboard personnel can complain;
Port State control is weaker because the port State can only report substandard vessels and
practice to a flag State which has no real control over the owner;
Owners can suppress any signs of militancy among crews by virtue of their freedom to change
nationalities
of
crews
at
whim:

 Enforcement of standards is basically inconsistent with the operation of registry with the sole aim
of
making
a
profit.
Many people however consider these criticisms as unjustified as there are many factors that are
present in the Flags of Convenience, which are present in all the maritime nations around the world.
All these problems are faced by all the nations of the world which have shipping registries.
THE

MODERN

SCENARIO

Many steps are being taken in all the Flags of Convenience states to provide for better safety. Some
of the most modern ships are operating under flags of convenience and a number of registers have
taken steps to exclude very old tonnage. Liberia, for example, stipulates that vessels seeking
registration (or re-registration) must not be more than 20 years old, although subject to certain
conditions vessels exceeding that age-limit may be accepted for re-registration, Panama prescribes
no age limitation, but vessels over 20 years of age are subject to a special inspection before the
Permanent Certificate of Registry can be issued. Bahamas generally applies a 12-year age-limit,
whilst Vanuatu follows the 20-year rule, Cyprus has a basic 17-year age-limit, but older' vessels
maybe be registered subject to a number of conditions, including the existence of a rent and
effective ownership or management link between the vessel and the island.
The flags of Convenience states are parties to the major safety conventions and more responsible
registries ensure a stricter compliance. Liberia needs a decision maker who is contactable 24
hours in the event of any incident rising with the ship. Exasperation among the International
community at the unwillingness or inability of many flag States to exercise proper control has led in
recent years to increasing reliance on port States to monitor compliance with international
standards, Intervention by port States is sanctioned by the 1982 Convention on the Law of the Sea
(see articles 25 and 218) and numerous other international conventions; including SOLAS,
MARPOL
and
STCW.
THE

PARIS

MEMORANDUM

OF

UNDERSTANDING

OF

1982

This represented the first step towards establishing uniformity of port State control on a regional
basis. The maritime authorities of 17 European States (including the Russian Federation) and
Canada have adhered to the MOU which requires each authority to maintain an effective system of
ports State control in order to ensure that, without discrimination as to flag, foreign merchant ships
visiting its ports comply international conventions relating to safety of life at sea, prevention of
pollution
and
working
and
social
conditions
on
board.
INSPECTIONS
Maritime authorities carry out inspections, a visit on board the ship to ensure that she has all the
necessary
certificates
and
documents
A more detailed inspection is carried out in case the documents are absent and if there is a doubt
that
the
ship
does
not
follow
the
international
standards.
If there are some problems found then the authorities will refuse the ship to proceed to sea.
Special

attention

is

paid

to

Passenger
ships,
ro-ro
ships
and
bulk
carriers;
Ships, which may present a special hazard for instance oil tankers, gas carriers, chemical tankers
and
ships
carrying
harmful
substances
in
package
form;

 Ships flying the flag of a State appearing in the three year rolling average table of above average
delays
and
detentions
in
the
MOU's
annual
report;

Ships,
which
have
had
several
recent
deficiencies.
The MOU requires each authority to consult, co-operate and exchange information with other
authorities in order to further the aims of the Memorandum. The success of the MOU has led to the
establishment of regional port State control in other parts of the world, notably under the 1992 Vina
del Mar Agreement signed between the maritime authorities of ten Latin American countries, the
1993 Tokyo Memorandum of Understanding on Port State Control for the Asia/Pacific region and
the 1996 Memorandum of Understanding on Port State Control in the Caribbean Region.
At a European Union level, the Commissions communication in 1993, A Common Policy on Safe
Seas, urged the strengthening of the level of intervention of port and coastal States in order to
reduce sub-standard shipping in Community waters. Council Directive 95/21/EC establishes
common criteria for control of ships by port States and Harmonizing procedures on inspection and
detention throughout the Community. The Directive builds on the experience gained through the
operation of the MOU, but seeks to develop a better targeting system. Certain categories of ships,
including passenger ships, older tankers and bulk-carriers are subject to "expanded" inspections.
The maritime authority in each Member State is required to publish quarterly information
concerning ships detained during the previous three month period and which have been detained
more than once during the past 24 months; this information must include the flag States of the
vessels concerned. The Directive is implemented in the United Kingdom by the Merchant Shipping
(Port State Control) Regulations 1995. The International Safety Management Code adopted by the
International Maritime Organization and the 1995 amendments to the International Convention on
Standards of Training Certifications and Watch keeping for Seafarers 1978 (STCW 197X) are likely
to
have
a
major
effect
in
improving
operating
standards.
THE

OFFSHORE

NATIONAL

REGISTRIES

To try to do away with the FOC would be paving the doom of the maritime nations, as it is not
possible. The only way to do so is to place severe limitations on national sovereignty, which cannot
be done. The response of a number of the traditional maritime powers has been, often additionally
to the traditional tax and other financial incentives to the shipping sector, either to enable the
bareboating out of vessels under their flag (e.g., Italy) or to establish offshore or international
registries, offering many of the advantages of flags of convenience, but nonetheless retaining a link
between beneficial ownership or management and the national flag. Some like the Isle of Man
registry have arisen out of accident of history. Torschlusspanik has led to the establishment of
"designer" registries, such as the Norwegian International Ship Register (NIS) and the Madeira
Shipping Register (MAR), which seek, to halt the decline of the merchant fleets of the traditional
maritime powers by allowing ship owners to operate in a low-cost environment whilst retaining the
respectability of the national flag. This retention of the link with the national flag preserves the
jurisdiction of the maritime power over vessels owned by its nationals.
In 1986 the French Government started a registry at Kerguelen Island. The ships could be operated
with
a
crew
consisting
of
only
25%
French
nationals.
Unlike the Kerguelen registry, the NIS is open to all self-propelled passenger and cargo ships and
hovercrafts, as well as drilling platforms and other moveable installations (but not fishing vessels)
whether Norwegian or foreign owned provided they meet minimum technical standards. Norwegian
safety rules are among the strictest in the world. However, in the case of foreign-owned ships, not

only must an agent for service of process be appointed in Norway, but a substantial part of the
technical or commercial management of' the vessel must be delegated to a ship management
company
established
in
Norway.
The most important benefit of the NIS is his freedom to appoint foreign nationals to all positions on
board, with the exception of the master, who must be a Norwegian citizen. In the latter case, a
waiver may be granted by the Norwegian 'Maritime Directorate. The Norwegian Seamen's Act
applies to vessels entered in the NIS and the NIS Act itself lays down maximum working hours. Its
success can be noted from the fact that between 1987 and 1989 the number of vessels flying the
Norwegian
flag
increased
by
250%.
Denmark and Germany have followed Norway's example in establishing their own international
registers (DIS and GIS respectively) and Portugal has recently established an offshore register on
the island of Madeira (MAR). Spain operates a secondary register in the Canary Islands (CSR). The
German international register is open only to German-owned vessels. DIS is not an open registry-in
order for a ship to qualify for registration; her owner must be a Danish national.
The Brazilian second register (Registro Especial Brasileiro) became operational in 1997. The
closest American equivalent of an offshore register is the Marshall Islands, which enjoys a Compact
of Free Association with the United States under the terms of which Marshall Islands vessel may
avail them of United States consular assistance. In 1989, the Commission of the European
Communities submitted a proposal for a Council Regulation establishing a Community ship register
("EUROS").
CONCLUSION
Flags of convenience are manifestations of international free riding in a way that is particularly
obvious. As long as the flag states gain from running open registries and ship owners can benefit
from avoiding international standards, the phenomenon is not going to disappear. The
improvements we can expect to see in addressing FOC issues may therefore be modest. The
changes come largely through increasing the cost to FOC vessels of not adhering to international
standards. A combination of international pressure and individual incentives may therefore be what
is needed to hold ships to international standards. Most frequently that international pressure has led
to increased standards when actors have been able to create some a way to deny access to a benefit
to those that do not accept the standards in question. Ironically, then, it is through creating
mechanisms of exclusion that the ability to include the widest number of actors in international
regulatory efforts is most likely to succeed.