Quicktake: What are 'flags of convenience'?

Why most merchant vessels transiting the world's major chokepoints don't sail under the flag of their owners

The Iranian supertanker Grace 1, which was seized by the UK's Royal Marines off the coast of Gibraltar sailed under the Panamanian flag. AFP

The recent tanker attacks along the Strait of Hormuz involved vessels sailing under flags of countries distant from the simmering tensions in the Middle East. Panama and Marshall Islands-flagged ships Kokuka Courageous, as well as Front Altair, came under attack in the Gulf of Oman last month, while Panamanian-flagged MT Riah disappeared in the Strait of Hormuz last week. The National takes a look at why these vessels are caught up in conflict, and why so many of them sail under flags of countries that are not party to any conflict in the region.

Open-registry system

The global shipping industry is dominated by Greece, Japan, China, Singapore, Norway and the United States owning the largest fleets. However, most vessels rarely sail under the flags of these countries. Most common flags by which vessels transit the world's major waterways are dominated by Panama, the Marshall Islands as well as Liberia. The trio maintains what are called open registries allowing for owners of merchant vessels to register their ships online with ease. The UN Convention on Law of the Sea ratified in 1982 says that all ships should sail under a country's flag and all states, regardless of whether they have maritime borders or not, have the right to have ships sail under their flags. This allows for a landlocked state like Bolivia to have ships sail under its flag, for instance. In order to cut costs and have flexible regulations, some of the top shipowners sail their fleet under the flags of countries with an open registry such as Panama to avoid paying high wages to seafarers as well as reduce overall operational costs.

'Flags of convenience'

The pejorative term 'flags of convenience' refers to those states with open registry systems that allow for ship owners to register their vessel, even if they have no links to the said country. The UN requires the flag under which a vessel sails have some link to the state. However, this is not the case for the majority of the world's maritime trade. Most shipowners prefer the anonymity provided by sailing under a flag of convenience to not only avoid higher costs but also to protect their identities when sailing hostile waters. The US, for instance, used the Liberian flag to sail most of its vessels during the Cold War in order to allow its merchant ships neutral, and hassle-free transit. Many ships that sail under such flags also deploy 'flag hopping' that open registries allow, changing their flags repeatedly to conceal their true identity.

Illegal activities

A major concern for shipping regulators is that flags of convenience, with their lax regulations and cheap labour, also allow for countries under sanctions to trade in contraband or dangerous goods. North Korea has been suspected using its flag for the transport of drugs and even nuclear weapon fuel following the seizure of one of its freighters by Australian authorities in 2003 for smuggling drugs. The Panamanian-flagged Grace 1 tanker, which was seized off the coast of Gibraltar by British naval forces was suspected of carrying Iranian crude - embargoed under US sanctions against Tehran - destined for Syria.

Strait of Hormuz

Tankers that transit the Strait of Hormuz, which allows for the passage of a third of the world's seaborne crude often use flags of convenience to navigate the congested and highly volatile chokepoint. The Stena Impero, which was seized by Iran on Friday was interestingly a Swedish vessel that flew under a British flag. MT Riah, which set off sail from Sharjah and turned off its transponder on Tuesday flew under the flag of Panama, that has since de-registered the vessel for having "deliberately violated international regulations". The tanker is suspected to have been captured off Iran’s Larak Island, with the country’s Revolutionary Guards releasing video footage matching the vessel’s attributes. Tehran has accused MT Riah of abetting illegal fuel smuggling in the Gulf.

With the ratcheting up of tensions in the Middle East and higher shipping insurance costs, it is unlikely that ship owners will forgo operating under flags of convenience, further complicating navigation along the world's most sensitive oil chokepoint.