Run Up The Flag of Convenience
The Peace of Westphalia lit the touch paper for the modern view of state sovereignty and non-interference, affirming territorial sovereignty. While it took time to be interpreted to extend to ships as floating extensions of a nation’s sovereign territory, it eventually happened and in a big way.
Through Westphalia’s legal equality between states, all national flags deserved equal respect on the seas. Only the flag state of a vessel could exercise legal authority over those ships on the High Seas, beyond the territorial control and reach of land states.
In this, we see the seeds of the modern flag State system planted. Something which has taken many twists and turns over the years. As if to illustrate the complications, and perhaps surprises, inherent in the system it can be useful to ask a non-maritime person who they think the largest flag States are. Which have the most ships, or the most tonnage of ships flying under their flag, and so sitting under their notional control?
Answers will of course vary. The old school may even mention the UK, some will say US or China. They will likely follow the clues of other forms of power and international relations indicators. When these laypeople are told that the top three flag States are Panama, Liberia and the Marshall Islands, well they may stop and raise a quizzical eyebrow. If you then continue to tell them that the rest of the world’s top ten flags by tonnage consists of Hong Kong, Bahamas, Singapore, Greece, Malta, China and Cyprus, then they may perhaps begin to see that there is something rather more complex at play.
RISE OF THE FALSE FLAGS
With the flag of a vessel taking on far more importance from the 1700s, it was obvious that ship owners and/or masters would use the system to their advantage and connivance. So it was.
Vessels would fly multiple flags over a voyage, to allow them to pass unhindered or uncharged, to avoid attacks by privateers or perhaps even pirates. In essence, the mere swapping out of a coloured piece of cloth changed the very nature of the ship.
With one tug of a lanyard a vessel could be a sitting duck, or liable for fees and taxes. Or it could be the very manifestation of maritime power. It was all in the flag and its link to the state.
The practice of flying false flags or multiple flags was used extensively by privateers and pirates in the 17th-19th centuries to disguise their identity and intentions. Privateers were privately owned vessels commissioned by governments to attack enemy shipping. They often flew neutral or false friendly flags to get close to target merchant ships before raising their true colours to attack.
While pirates also used false flags to appear harmless or falsely claim nationality with a nation at peace with their target vessel. This allowed them to get near before the attack.
Indeed, ships would frequently stockpile different national flags and pennants to vary their appearance for deception. Some pirates ran up obscure flags to entirely confuse prey.
During times of war, they could fly an enemy flag to get near for raids but then switch to their legal flag. This was even used in the Second World War by German commerce raiders such as the Atlantis.
Extensive use of multiple false flags and disguises, saw vessels exploit national insignia to create confusion and conceal their true purpose from merchant shipping targets. This made them an early abuse of flags of convenience.
In the 18th century, the flying of foreign flags by British and American ships became a tactic to evade certain maritime laws and policies. The British Royal Navy often impressed or conscripted British merchant sailors into naval service, especially during war. Some British ships flew American flags to try to avoid being boarded and having their crew taken.
While American laws prohibited trade with Britain or her colonies during the Revolutionary War. American ships flew Spanish flags to access British colonial ports in the Caribbean and offload goods. These Americans flying Spanish flags could also trade in Spanish colonial ports that were closed to other foreign ships. The Spanish tolerated this ruse to some degree.
It was not just about the rough and tumble of life and threats out at sea. It was also about taxation and ability to trade. To avoid high British import tariffs, British merchants registered ships in America so they could sail under American flags up the Thames. While the “The Navigation Acts” restricted British trade to British-flagged vessels. False foreign flags allowed illicit trade to skirt the regulations.
The ambiguities of flag registries and maritime jurisdiction allowed ships in the Age of Sail to tactically fly flags of convenience to gain advantages in trade, navigation, and avoiding government interference. Lessons which have been passed down through the ages.
RAISE THE FLAG
The rise of modern flag registries can be traced back to the opening up of Panama’s registry in the aftermath of WW1. This was done specifically to attract foreign ships by offering registration with no taxes and little regulation.
The move to allow outside shipping interests into Panama’s “control” was through Panama Law 63 of December 15, 1917. This was a key piece of legislation that established Panama’s open ship registry, enabling foreign-owned and operated ships to fly the Panamanian flag.
It allowed foreign merchant vessels to register in Panama by paying a registration fee rather than, and this is a key detail, than having to pay tax on profits earned abroad.
The law stipulated vessels had to carry Panamanian documentation and fly the flag to gain protected status, but the ships did not need Panamanian crews. To register, ships only had to submit basic information and documentation to gain the Panamanian flag, with no oversight of actual ownership or operations.
So for a low initial registration fees and no tax on foreign earned profits, and lest we forget they were shipping companies, the law allowed the “sale” of the Panamanian flag to any ship for a fee, with no effective link to Panama. Such registration decoupled nationality of ships from the flag state.
It was not merely the Panamanians that benefited. Even the major maritime powers like the U.S. and UK were boosted economically. The Open Register allowed cheaper operation of their domestically owned ships abroad while still receiving income flows of taxation.
Post-WWII the flags of convenience model exploded as businesses registered ships abroad en masse for cost and regulatory advantages, transforming shipping economics and practices.
Liberia emerged as a major flag of convenience, connected to American business interests, and offered foreign ships tax exemptions and corporate anonymity while still receiving registry fees. Honduras also created an open registry in 1949. Like Liberia, it traded registry revenue for jobs while providing a flag of convenience for foreign ships fleeing taxes and regulations at home.
As more nations like Bermuda, the Bahamas, and Cyprus introduced open registries, over 50% of the global merchant fleet tonnage was registered under flags of convenience by the 1960s. Today that figure remains fairly solid, perhaps waxing and waning slightly as the more traditional nations flirt with tonnage tax regimes to attract vessels in, but fundamentally the maritime industry rests on the system which allows ships to be flagged wheresoever they choose and see as the best fit.
Though there were obvious criticisms and flaws evident. It was argued that “flags of convenience” allowed shipowners to skirt regulations on issues like labour, the environment, and safety. Arguments which still abound one hundred years on, though the major Open Registries have raised standards and are respected and recognised members of the International Maritime Organization (IMO), indeed the Secretary-General of IMO, with effect from 1 January 2024 will be Mr. Arsenio Antonio Dominguez Velasco of the Republic of Panama).
