Flag of Convenience - Background

Background

International law requires that every merchant ship be registered in a country. This country in which a ship is registered is called its flag state, and the flag state gives the ship the right to fly its civil ensign. A ship's flag state exercises regulatory control over the vessel and is required to inspect it regularly, certify the ship's equipment and crew, and issue safety and pollution prevention documents. A ship operates under the laws of its flag state, and these laws are used if the ship is involved in an admiralty case. The organization which actually registers the ship is known as its registry. Registries may be governmental or private agencies. In some cases, such as the United States' Alternative Compliance Program, the registry can assign a third party to administer inspections.

The reasons for choosing an open register are varied and include tax avoidance, the ability to avoid national labor and environmental regulations, and the ability to hire crews from lower-wage countries. National or closed registries typically require a ship be owned and constructed by national interests, and at least partially crewed by its citizens. Conversely, open registries frequently offer on-line registration with few questions asked. The use of flags of convenience lowers registration and maintenance costs, which in turn reduces overall transportation costs. The accumulated advantages can be significant, for example in 1999, 28 of Sea-Land's fleet of 63 ships were foreign flagged, saving the company up to 3.5 million dollars per ship every year.

The environmental disaster caused by the 1978 sinking of the MV Amoco Cadiz, which flew the Liberian flag, spurred the creation of a new type of maritime enforcement. Resulting from "strong political and public outcry" over the Cadiz sinking, fourteen European nations signed the 1982 "Paris Memorandum of Understanding on Port State Control" or Paris MOU. Under port state control, ships in international trade became subject to inspection by the states they visit. In addition to shipboard living and working conditions, these inspections cover items concerning the safety of life at sea and the prevention of pollution by ships. In cases when a port state inspection uncovers problems with a ship, the port state may take actions including detaining the ship. In 2008, member states of the Paris MOU conducted 14,322 inspections with deficiencies, which resulted in vessels being detained 1,220 times that year. Member states of the Tokyo Memorandum of Understanding conducted 13,298 ship inspections in 2009, recording 86,820 deficiencies which resulted in 1,336 detentions.

The principle that there be a "genuine link" between a ship's owners and its flag state dates back to 1958, when Article 5(1) of the Geneva Convention on the High Seas also required that "the state must effectively exercise its jurisdiction and control in administrative, technical and social matters over ships flying its flag." The principle was repeated in Article 91 of the 1982 treaty called the United Nations Convention on the Law of the Sea and often referred to as UNCLOS. In 1986, the United Nations Conference on Trade and Development attempted to solidify the genuine link concept in the United Nations Convention for Registration of Ships. The Convention for Registration of Ships would require 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. To come into force, the 1986 treaty requires 40 signatories whose combined tonnage exceeds 25% of the world total. As of 2006, only 14 countries have signed the treaty.