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Flags of convenience are a disgrace to the maritime industry

Nov 30, 2015 10:50 AM

I had completed the academic requirements for graduation from California Maritime Academy and passed my third mate’s exam, so all I had to do was make sure there were no library fines and wait a week until the official graduation ceremony. In the meantime, I decided to attend a maritime symposium; I sat in the audience as a shipping company executive told us how the company he worked for had years earlier re-flagged its ships under various “flag-of-convenience” (FOC) registries such as Liberia — mainly because of no corporate income tax and low labor costs. As someone who the following week would be a licensed third mate in the U.S. merchant marine, I bristled at his slick pro-FOC narrative. So, when the time came for questions from the audience, I quickly raised my hand. He called on me and I asked, “If Liberia is such a great place, why are your company’s corporate headquarters still located here in the United States and not in Africa?” He stood silently and then turned away, ignoring my query. That was the end of the question-and-answer period.

Historically, merchant ships were registered in, and flew the flag of, their home country. U.S.-company-owned vessels were registered in the United States, Italian-company-owned vessels in Italy, and so on. The beauty of that system was that the national flag state authorities had direct control over essential aspects of vessel operation, safety and crewing. Taxes paid by the shipowners went directly to the countries where they were based, with vessel crews being citizens of the country where the ships were registered.  

The rise of FOC registries began nearly 100 years ago when U.S. shipping companies, rather than meeting the high safety and crewing standards set in the Jones Act (the Merchant Marine Act of 1920), started to transfer their vessels to new open FOC registries such as Panama. Under the Panamanian flag, shipping companies could continue to operate vessels that wouldn’t meet U.S. safety regulations and to hire foreign mariners at very low wages, all without having to pay any corporate income tax to the United States. After World War II, FOC registries really came into widespread use. By 2011, according to official U.S. government sources, nearly four out of five of the world’s oceangoing merchant vessels were registered under a flag of convenience. 

The use of FOC registries has proliferated for one main reason: to avoid taxes. A case in point is the American-owned, foreign-registered cruise ship industry. For example, Carnival Cruise Line and Royal Caribbean Cruise Line both have corporate headquarters in Florida but operate only FOC ships registered in foreign countries such as Panama, where international shipping companies pay no corporate income tax. Prompted by the lack of taxes paid to our country by companies such as these, in 2013 U.S. Sen. Jay Rockefeller IV, a West Virginia Democrat, proposed the Cruise Income Tax Loophole Repeal Bill, to close the loophole that he said has “given cruise lines the ability to avoid paying U.S. income tax.” It should be noted that currently there are hundreds of American-owned FOC ships plying the world’s trade routes, siphoning off billions and billions of dollars in tax revenue from our country each year.

Another big reason shipowners choose to register their vessels under flags of convenience is that, as a recent U.S. Maritime Administration report pointed out, unlike the regular U.S. Coast Guard inspections that U.S.-flag ships must undergo, there are essentially no government-conducted safety inspections of FOC ships. The drillship Deepwater Horizon was owned by a Swiss company and registered under the Marshall Islands flag-of-convenience registry. It caused a disaster that killed 11 crewmembers and resulted in the worst marine oil spill in U.S. history — nearly 20 times more than Exxon Valdez. An official U.S. government report that came out after the Deepwater Horizon oil spill occurred blamed the Marshall Islands Registry, which was supposed to ensure the vessel was being operated safely, for “abdicating its safety inspection responsibilities” and being “ineffective” in preventing the catastrophe. 

Unfortunately, the American people will have to deal with the aftermath of this FOC disaster for decades to come. Some scientists have estimated that 60 to 75 percent of the oil that spewed into the Gulf of Mexico was left unrecovered after the cleanup. What remains of the 210 million gallons, or 4.9 million barrels, of crude oil spilled will continue to be a threat to beaches, the livelihoods of many living in coastal communities and the native sea life found offshore — something verified by scientific studies published in 2014 and 2015. 

Many flag-of-convenience vessel operators take advantage of the fact that FOC registries typically have no direct government enforcement of maritime regulations, allowing amoral shipowners to get away with mistreating their officers and crew. Sometimes, unscrupulous flag-of-convenience shipping companies operating under these weak government registries will refuse to pay the bills, including mariners’ salaries and travel home from the job. In these cases the hapless seafarers on board are often stranded with no money, thousands of miles from loved ones, languishing on the ship and surviving on the goodness of handouts from local charities. Here in the United States, a recent case involved the Norwegian-owned, flag-of-convenience Malta-registered ship Green Summer. Its foreign crew was stranded near Baltimore and suffered for months, not receiving their hard-earned wages and running out of food. As a result, U.S. charities such as the Baltimore International Seafarers’ Center and the Seamen’s Church Institute were compelled to help these unfortunate merchant mariners, draining their resources to aid those being ignored by the shipowner. Interestingly, had the vessel been registered under the Norwegian flag, stranding the crew in a foreign port without pay would have been illegal under Norwegian maritime law.

In my opinion, flags of convenience are the worst thing that has ever happened to the global maritime community. I think that they should be eliminated and made illegal. Every commercial vessel should be registered in the country where its owner is incorporated, required to pay the full scope of mandated taxes to the country where the company’s headquarters are based, and be subject to all of its labor laws and inspection requirements — with no exceptions. My Christmas wish this holiday season is that that the United States leads the way to a more ethical maritime industry by prohibiting any U.S.-based shipping company from registering their vessels under a flag of convenience. 

Till next time, I wish you all happy holidays, and smooth sailin.’

Kelly Sweeney holds the licenses of master (oceans, any gross tons) and master of towing vessels (oceans), and regularly sails on a wide variety of commercial vessels. 

Dec 30, 2015 05:15 pm
 Posted by  Nadine

Brilliantly stated, Capt. Sweeney. Seems to me, with serious security concerns escalating and loss of USG tax revenue, there must be a method to motivate the correct parties to reverse this practice. Would love to contribute to such a "think tank" review with the objective for change. Also find Norway to be a strong representation for this argument.
Respectfully yours, Nadine Trevour

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