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INDEPTH: PAUL MARTIN
Flags of convenience
CBC News Online | March 17, 2006

After Paul Martin took Canada Steamship Lines international in the 1980s, the Canadian flags came down on three of its ships, replaced by the flag of the Bahamas – what's often known as a "flag of convenience" country. CSL International (a division of the CSL Group) now owns 18 ships that fly foreign flags. CSL ships have, over the years, flown the flags of Liberia, Cyprus, the Bahamas and the tiny South Pacific nation of Vanuatu. CSL Group also owns 18 ships that fly the Canadian flag, pay Canadian taxes and employ Canadians.

Martin handed over the company to his sons while he was prime minister, after years of holding it in a controversial blind management trust. But the practice of flying "flags of convenience" continued to attract attention. It was mentioned repeatedly in the campaign leading up to the Jan. 23, 2006 election.

What is a flag of convenience?

Simply put, a flag of convenience (FOC) ship is one that flies the flag of a country other than the country of the ship's owner.

What are the main countries that try to attract foreign ship registration?

The International Transport Workers' Federation (ITF) lists 28 countries as FOC havens. Panama is by far the biggest, with more than 6,000 large tonnage vessels registered there and flying the Panamanian flag. Other major FOC countries on the ITF's list include Liberia, the Bahamas, Malta and Cyprus.

How strong must the connection be between the country of registry and the country where the ship is owned?

Often, there is no link at all. Open registries (which FOC countries have) usually do not require the ship to have any business connection to the country. Often, the ships flying flags of convenience have never even paid a visit to the country where they're registered. Sometimes, the registration isn't even done in the country where the registration is purportedly based. In Liberia's case, the registration paperwork is done by a private company based in Virginia. Cambodia's registration office is in Singapore.

Why do ship owners register their ships in foreign countries?

One word: money. FOC countries have a number of things in common, all related to saving the owners of big merchant ships big money. The initial registration of the ship in an FOC country is cheaper, and annual tonnage fees are also typically far lower than in the country of ownership. Taxes on the shipping company's profits or dividends are low or non-existent. Savings can amount to millions of dollars a year per ship.

Are there other reasons for registering a ship in another country besides saving on fees and taxes?

There can be several other reasons why ship owners will choose to fly a flag of convenience:

1. Ease of registration:
Registering a ship in an FOC country typically involves much less paperwork than in countries with national registers. Sometimes the registration can be done in as little as a few hours – in Panama's case, by fax.

2. Looser environmental laws and regulations:
Registering a ship makes it subject to the laws and the country of its flag state, regardless of the nationality of the ship's owner. In FOC states, those laws can be substantially weaker than those in Canada, the U.S. or Europe. The Bahamas, for instance, does not require oil tankers to have a double hull – a deficiency that became painfully evident after the single-hulled, Panamanian-flagged Prestige sank off Spain in 2002, fouling beaches. The Seafarers International Research Centre at the University of Cardiff points out that some FOC countries, like Cambodia and Equatorial Guinea, have virtually no regulations of any kind. FOC countries have registered about 23 per cent of the world's 88,000 seagoing vessels. But 58 per cent of the vessels lost at sea in 2001 flew flags of convenience.

3. Lower labour standards:
The International Transport Workers' Federation has lobbied against FOC registration for half a century. Ships registered in FOC countries typically do not need to employ nationals from that country. Owners are free to hire the cheapest labour they can get. And they usually do. Popular sources of cheap labour include the Philippines, India, Indonesia, and Eastern Europe. In some FOC countries, working conditions aboard ships are seldom monitored and international maritime conventions are rarely enforced. The ITF has documented cases where workers on board some FOC-flagged ships haven't been paid for a year, or lived in substandard conditions aboard ship with no shore leave. When they complained, some seafarers were blacklisted. The ITF admits those horror stories come from a minority of owners. Typically, the benefit for the ship's owners from flying a foreign flag is simply in not having to pay the higher wages of the industrialized countries where the ships are owned. Seamen on some FOC ships are paid as little as $1.50 US an hour. CBC Disclosure documented last year how the Canadian crew aboard one Canada Steamship Lines vessel was replaced with a Filipino crew after the ship shed its Canadian flag and was reflagged in 1988. The Canadian crew earned $11.68 an hour. The Filipino workers earned $1.74 an hour.

4. Secrecy:
Some FOC countries allow ship owners to effectively hide or muddy their true ownership in their registration documentation. Authorities have long complained that lax registration requirements make it more difficult to prosecute people smuggling, money laundering and drug trafficking.

Have flag of convenience registries been growing?

Yes. In 2001, flag of convenience registries accounted for over 53 per cent of the total tonnage of the world's seagoing vessels – a percentage that has been steadily growing since the first reflagging took place in the 1920s. Among the six largest fleets, five belong to FOC countries. That's the main reason why shipping companies increasingly say they have no choice but to flag their ships offshore – "everyone else is doing it." As CSL's senior vice-president Pierre Prefontaine told CBC Disclosure, "The reflagging and the change of crews were all required in order to remain competitive in the international market. All our competitors employ foreign crews, and we must be competitive," he said.






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