Hanjin_container_ship.jpegEconomy Risk & Security 

Flags of Convenience: Panama Papers on the High Seas

By Craig Moran

When an Australian court late last month ordered the destruction of fishing boats and handed down suspended jail sentences to 30 Vietnamese fishermen caught fishing illegally in a marine reserve, the ruling was hailed as a strong deterrent for anyone considering unlicensed fishing in Australian waters. While increased maritime surveillance by Australian authorities has helped cut into illegal fishing rates off their shores, maritime law enforcement in general remains sorely lacking. And nothing exposes this disconnect more than the so-called “flags of convenience.”

In practice, this means that ships are registered in third countries, allowing ship owners to circumvent more stringent regulations in their home countries as the ship’s nationality “determines which domestic and international laws they are subject to, and what taxes their owners must pay.” Perhaps unsurprisingly, Panama is one of the most sought out destinations for ship registrations, followed by Liberia and the Marshall Islands. Together, these “registration havens” account for more than 60 percent of shippers, up from a measly 4 percent in the 1950s.

Despite the fact that such countries rake in billions of dollars of profit from their registries, many are often unwilling or unable to provide safety oversight, observe, and enforce working conditions on ships, or even investigate accidents. An exacerbating factor is that ship safety certificates are often provided by private classification societies, many with low standards and demands, thereby increasing the risk of accidents at sea. In a statement commenting on Panama’s business of granting flags of convenience, the International Transport Workers’ Federation lamented, “Registering a ship under a FOC, where a vessel is owned in one country and flagged in another, is also a system of tax avoidance . . . And who pays the price? Seafarers, who are subject to poor conditions and lower wages, because they’re at the mercy of a system that allows for minimal regulation and the acquisition of cheap labour.”

Yet flags of convenience are not merely about disregarding labor laws or tax evasion. They also fit into a wider global pattern of using deception to engage in illicit activities or skirt international law. Mongolia, for instance, has a thriving merchant navy, despite being a landlocked country 800 miles away from the nearest shore. Over the years, Mongolia’s fleet has acquired an infamous and unsavory reputation. Ships flying Mongolia’s flag have been involved in a series of life-threatening and fatal incidents, such as in 2003, when the Russian-manned Fest sunk off the Japanese coast, or when two North Korean sailors sank along with their ship in 2014. While Mongolian officials stated they would cancel the flag registrations of five Iranian cargo ships thought to be used to circumvent sanctions, reflagging is still easily accomplished and remains a serious problem for fighting illicit activities of internationally-chastised regimes such as North Korea.

Flags of convenience are also directly tied to illegal, unreported, and unregulated fishing. As a 2005 report by the Australian government and the World Wildlife Fund laid out, many illegal fishing vessels “deliberately register with FOC countries to evade conservation and management regulations for high seas fisheries.” However, while the international community is still struggling to rein in illegal fishing on the high seas—experts estimate the annual figure to be at least 11 million tons of fish—on June 5 a new international agreement entered into force. The Port State Measures Agreement seeks “to prevent, deter and eliminate illegal, unreported and unregulated (IUU) fishing through the implementation of robust port State measures.” It furthermore “enhances flag States control over vessels as the Agreement requires the flag State to take certain actions, at the request of the port State, or when vessels flying their flag are determined to have been involved in IUU fishing.” This is a major step forward in combating the role that flags of convenience play in IUU, as foreign-flagged ships must now undergo document and cargo checks before harboring at a port.

Beyond threatening fish stocks and the environment, the damage caused by substandard safety measures and illegal fishing have a real human cost. A most prominent example is the Deepwater Horizon oil rig that spilled nearly 5 million barrels of oil into the Gulf of Mexico in 2010. The rig was registered to the Marshall Islands under a flag of convenience, making Marshall Islands shipping registry officials responsible for complying with quality standards regarding construction, equipment, and operations.

Furthermore, West Africa loses $1.3 billion a year to IUU fishing, but these coastal nations could earn an estimated $3.3 billion by fishing their own waters instead of selling fishing rights to foreign fleets. Mozambique’s economy was losing $35 million a year to IUU fishing, prompting the country to invest millions in state-backed loans and buy 20 much-needed coast guard vessels in the hopes of alleviating the economic burden and protect its population—much of it dependent on fish for proteins—from starvation. The nuisance of illegal fishing has almost bankrupted Mozambique, whose Mozambique Asset Management, which contracted the loan, is trying to persuade international creditors that it had no choice but to buy the vessels.

Flags of convenience provide ample opportunity for exploiting subpar labor, tax, and environmental laws to the detriment of people and the environment around the planet. The Port State Measures Agreement is an important step toward undercutting illicit activities resulting from flags of convenience, as it subjects suspicious ships to extended scrutiny. However, that is not enough. Just like tax havens, flags of convenience will represent an attractive alternative for as long as secrecy, disdain for national regulations, and the disconnect between the country of ownership and the country of registration are allowed by national governments. It is high time policymakers recognize the dangers flags of convenience represent to the world economy and take concerted action to delegitimize the practice.

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Craig Moran is an independent geopolitical consultant. He has experience in energy and natural resources planning, assessing and advising on political and security risks, and handling constitutional and legislative issues across multiple territories.

[photo courtesy of Ingrid Taylar]

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