World shipping, up to the early post-war years, was dominated by the fleets of the
traditional maritime nations—among these we may mention the United Kingdom
with its imperial trade routes, the United States, France, the Netherlands, and the
Scandinavian countries. From the 1950s onwards, a gradual but ever accelerating
contraction took place in the fleets of these nations. To some extent, this contraction
can be attributed to a diversion of resources from the maritime sector, the
consequent slackening of investment, and catastrophic slumps such as took place
in the mid 1980s. However, the most significant reason for the haemorrhage of
tonnage from national flags has been the use by ship operators of the open registries,
often known as ‘flags of convenience’.
For example, the UK fleet, which in 1950 consisted of over 6,000 steam and
motor vessels, had shrunk by January 2013 to a fleet of under 1,500. Over the
same period, the Panamanian fleet had risen from approximately 600 steam and
motor vessels in 1950 to just under 8,500.66 Other traditional maritime countries
have suffered declines in their registered merchant fleets similar to that experienced
by the United Kingdom. In January 2013, the ten major open and international
registries accounted for 56.3 percent of world merchant shipping in
deadweight terms.
There is no standard definition of what constitutes an open registry, or flag of
convenience. According to one commonly quoted source: ‘Functionally, a “flag of
convenience” can be defined as the flag of any country allowing the registration
of foreign-owned and foreign-controlled vessels under conditions which, for
whatever the reasons, are convenient and opportune for the persons who are
registering the vessels.’
Another locus classicus is the 1970 Rochdale report for the UK Government which
identified the following features common to flags of convenience:
i. the country of registry allows ownership and/or control of its merchant vessels
by non-citizens;
ii. access to the registry is easy. A ship may usually be registered at a consul’s office
abroad. Equally important, transfer from the registry at the owner’s option is
not restricted;
iii. taxes on the income from the ships are not levied locally or are low. A registry
fee and an annual fee, based on tonnage, are normally the only charges made. A
guarantee or acceptable understanding regarding future freedom from taxation
may also be given;
iv. the country of registry is a small power with no national requirement under
any foreseeable circumstances for all the shipping registered, but receipts from
very small charges on a large tonnage may produce a substantial effect on its
national income and balance of payments;
v. manning of ships by non-nationals is freely permitted; and,
vi. the country of registry has neither the power nor the administrative machinery
effectively to impose any government or international regulations; nor has the
country the wish or the power to control the companies themselves.
The fact of foreign control, if not foreign ownership, is a feature common to all open
registries. However, even in the case of some traditional maritime countries—
notably the United Kingdom—the element of foreign control may still be present.
Likewise, the element of convenience, economic or otherwise, is not the exclusive
preserve of the flags bearing that designation. Resort is often had to the traditional
maritime registries for a variety of reasons which may have nothing to do with
national affinity—for example, to take advantage of government subsidies or incentives
to the shipping sector (e.g. tonnage tax) or the protection offered by the naval
forces of the State concerned.
Other indicators identified by the Rochdale report are present in some open registries,
but this is by no means universally the case. Lack of regulation is becoming
less of a feature of international shipping and this process has been accelerated by
the use of port State control as a mechanism for ensuring compliance with international
standards, and through initiatives such as the Voluntary IMO Member
State Audit Scheme (VIMSAS). As we have seen, many open registries now impose
age limits on vessels entering their registers for the first time, and pre-registration
surveys may be required.
From the ship operator’s point of view, the characteristics of an open registry might
be seen as all or some of the following:
• the avoidance of tax in the country in which he is established;
• lower crewing costs, since registration in an open registry generally means
an unrestricted choice of crew in the international market and freedom from
onerous national wage scales;
• less regulatory control, although this factor, as we have seen, is diminishing in
importance;
• anonymity: incorporation of the shipowning company in an offshore jurisdiction
coupled with the use of bearer shares, trust, or nominee arrangements may
render the beneficial ownership of the vessel opaque.
There are, of course, other miscellaneous factors which may induce a ship operator
to flag out his tonnage. Those factors may be economic or political. For
example, raising funds in the international capital markets in order to finance
the acquisition of new or second-hand tonnage may present difficulties for operators
in Third World countries and State-controlled economies such as Cuba.
Financial institutions may not be prepared to advance funds to enterprises established
in countries with a history of default in the repayment of foreign currency
loans or whose legal systems may present obstacles to the enforcement of
a lender’s security.
The political factors which may induce an operator to ‘flag out’ his vessels might
include: the ability to trade worldwide without any restrictions imposed by a flag
State with regard to the carrying of cargoes to certain countries against whom
embargoes or boycotts have been applied—for example, Israel or Iran; the avoidance
of discrimination against vessels trading under certain flags, and freedom
from requisition in time of conflict.
The economic advantages to the flag State of operating an open registry can be
considerable and the number of smaller countries providing offshore registration
facilities continues to grow. Clearly, opposition to the open registry system continues
to be vociferous; opponents focus their criticism on three aspects: safety,
employment, and economic (including fiscal) distortion. A fuller discussion of
these elements is outside the scope of this Chapter.