By Josh Hutchinson, CEO of ARX Maritime
Ever since their inception back in the 1920s, Flags of Convenience (FoC) have been a subject of no small amount of controversy.
The practice originally began during prohibition, when American cruise ships would fly under the Panamanian flag in order to be able to serve alcohol to passengers and thus escape the stringent US regulations at the time.
Nowadays, the ability to change your ship’s register while avoiding nationality and/or residency requirements still remains as contentious as ever.
Currently, more than half of the world’s maritime fleet operates under an open registry (approximately 55%, according to the latest data). A report written back in 2009 shows that over 40% of the world’s merchant fleet is registered with Panama, Liberia and the Marshall Islands.
There’s a multitude of reasons for why a shipping company might choose to fly a FoC. And granted, while all of them may vary, most are financial in nature. Prominent flag states usually sport very limited regulations when it comes to labor and environmental protections.
Furthermore, open registries usually require lower registration and maintenance costs while providing shipping companies with the ability to hire seafarers from lower-wage countries.
There’s also the much-criticized practice of flag-hopping when it comes to end-of-life vessels, all in an effort to bypass international environmental regulations.
It’s a practice that continues to rise with each passing year. Flying the flag of your country of origin was once considered the norm within the maritime industry, but it’s fast becoming an increasingly rare sight.
And while it could be argued that a number of companies choose the open registry in order to circumvent the law and engage in an opportunity to operate within a morally grey area, this is not necessarily always the case.
Over the last few years, we’ve become witness to a series of attacks and seizures on vessels which transcend the usual financial motivations of everyday piracy.
Starting with the Gulf of Aden back in 2015, the Iranian-backed Houthi rebels made a point of attacking Saudi Arabian vessels transiting through the area, in what surely can be described as an act of political terrorism.
It’s a practice that has become increasingly common, especially around the Middle East.
In May 2019, we saw a devastating attack in the UAE port of Fujairah, targeting mostly Saudi Arabian & UAE vessels.
While the identity of the perpetrators is still a matter that’s up for debate, what is clear is that the attackers were targeting vessels based on their nationality.
Back in June, the Iranians tried to seize three vessels flying a British flag; the BP- owned British Heritage, the Liberian-flagged but British operated Mesdar, and the British-flagged Stena Impero.
Thankfully, the first attempt was thwarted by the presence of British warships in the area. Unfortunately, however, the Stena Impero wasn’t as lucky. It was seized by the Iranian Revolutionary Guards Corps and still remains under Iranian control. Little is known as to its eventual release.
Make no mistake, at that point in time, the British flag was considered to be under attack. The seizure of the Stena Impero was a thinly veiled attempt to retaliate for the seizure of the Adrian Darya 1 (formerly known as Grace1), by the British Royal Commandos in the Strait of Gibraltar.
“Though the present crisis is by no means unique to the United Kingdom, we have unquestionably found ourselves to be the primary target of Iranian aggression in the Gulf.
“Crucially, there is no comparison to be made here with the seizure of Grace 1, which was done under international law for the breach of EU sanctions. The Stena Impero was clearly outside Iranian waters and legitimately carrying out its business at the time it was taken,” reads the statement by the UK Chamber of Shipping.
Following these incidents in the Gulf of Oman, having taken into account the increased risk to the safety & security of their fleet, many vessel owners decided to opt-out of the UK registry, in favor of a flag that wouldn’t draw the attention of such dangerous elements.
Shortly after these incidents, UK- based maritime-risk company Dryad Global quickly responded to the growing controversy by suggesting that ship owners should shy away from using the British flag when transiting through the Gulf.
“In the interests of business continuity, charterers and technical managers are advised to consider the chartering of non-UK connected vessels in the medium to long term. Chinese-flagged vessels currently represent the lowest risk of interruption within the Strait of Hormuz and are highly unlikely to experience any form of disruption by way of detention.
“All UK vessel owners are advised to consider the relocation of all UK interest vessels from the Middle East Gulf when safe to do so, and to remain mindful of the limitations of naval protection,” reads the statement by Dryad Global, as seen in an article on Lloyd’s list website.
According to that very same article, there’s an increasing amount of shipping companies that are considering switching away from the UK flag registry. There is some truth in that statement; these last few months have certainly had an effect on the British registry.
Having lost more than 34% of its tonnage throughout 2019, the UK flag has fallen from the list of the top 20 used flag states; a first since official records began.
What we’re witnessing here, is a sharp increase in companies that choose to fly under a Flag of Convenience.
And the ship owners are not to blame.
Considering the financial and security-related benefits of flying under a FoC, many shipping companies will rightly take the time to consider what is the best option for their business, their vessels & their seafarers.
Having said that, there are certainly benefits associated with the use of one’s own national flag.
While operating under the UK or the US registry, for example, you are actively supported by the governments that these flags represent. One cannot begin to compare the diplomatic and military might of a country like the UK with a country like Panama or Liberia.
Furthermore, there is always the subject of company image and branding; after all, there is a level of status that comes with flying a universally respected flag. As mentioned above, many Flags of Convenience are associated with less-than-ethical practices.
Reputation can be one of those things that can take a lifetime to build but only a moment to destroy. It’s a safe assumption to make; Flags of Convenience can certainly have an effect on a company’s reputation.
Finally, of course, is the subject of loyalty. Granted, we live in an age were profit margins reign supreme, but there’s a lot to be said about giving back to the country that helped support and build your business.
When you’re establishing yourself in a country, you make use of that country’s labor force and infrastructure. You are building your success hand-in-hand with the support of your local government. Whether that support takes on a passive or an active role, is inconsequential.
As a matter of principle, both individuals and companies should aim to give back to the countries and communities that helped them become who they are. Flying under a national flag is merely an extension of that process.
However, the question remains; at the end of the day, when it comes to the safety & security of the people who entrust you with their lives, what is a ship-owner to do?