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What is a Flag of Convenience?

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Flags of convenience came into existence in response to the U.S. Seaman’s Act of 1915. The act made many aspects of safety, working conditions, and meals standard on U.S. based ships. After the changes were implemented the ship operators found themselves with operating costs much higher than their foreign counterparts.

By the 1920’s the idea of radical changes to Flag States was well accepted among ship owners and many sought lower taxes and regulatory requirements by transferring their interests to shell corporations in countries with lax maritime and labor laws.

Early in 1949 the first ship was assigned to the Liberian registry. The Greek ship “World Peace” became the first ship to join the new “Open Registry”.

An Open Registry allows ship owners to register a merchant vessel in any one of thirty countries that offer simple registration and minimal regulations for their fleet.

The countries are:

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

These registrations can often be done online without questions or inspection of the vessel. Of the countries listed above, there are three that control around 40 percent of total dry tonnage globally. Liberia, Marshall Islands, and Panama account for a huge portion of the open registry vessels operating today.

Why Use an FOC?

This is almost always a technique to do one of two things. The first is to save money. As a ship owner you pay taxes on shipping profits in your home country. As an owner of a foreign corporation that holds and operates your ship you will pay the tax rates of that country. The overall question of tax liability is something for the lawyers so make sure you consult a professional to untangle the tangle of foreign taxation.

Additional savings come from operations which are now only limited by the rules of the new Flag State. It’s reasonable to think a ship owner with a crew of thirty sailors would gladly reduce the crew by two or three and take the difference as profit.

The same is true of living conditions and meals which can both yield savings if quality is reduced.

The second reason to use an FOC is the ability to crew the vessel with low wage workers from developing nations. Normally, a vessel must have a certain percentage of its crew be citizens of the Flag State. These are usually officers, but in the case of an FOC the crew can be made up of nationals of the open registry state or in some cases there are no guidelines at all.

Minimum Standards Convention

The International Labour Organization Merchant Shipping Conventions 76/96, or ILO147 is commonly called the Minimum Standards Convention.

These conventions are meant to assure that Open Registry states abide by minimum standards set by the IMO member countries. These standards pertain to working conditions, living quarters, time off, training, and certification.

The vessel will also be required to have specific safety equipment on board in addition to responsible waste disposal and remediation equipment in case of a fuel spill.

In order for an IMO Convention to take force it must be ratified. The ratification process began in the early 1980’s and continues today. It was updated in the mid-1990’s but still does not have the global tonnage percentage to move forward.

The Open Registry is a high profit and low overhead business model that participating nations are eager to preserve. The big players are growing and they know the lowest cost operator will get all the business eventually. These are the same countries that must sign the Minimum Standards Conventions to enable ratification but that is unlikely since it is a source of income which is protected vigorously.

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