The registration process allows a ship to be documented, and given the nationality of the country to which the ship has been documented. The nationality allows a ship to travel around world safe sea areas, and it serves as the proof of ownership for any vessel. To trade internationally, a ship must have a nationality. Without being registered under certain flag states, a ship cannot enter the geographic limit of another state. Once registered, a ship becomes subject to the laws of a registering nation. Registration makes the ship entitled to military protection, and therefore it is an extension of that nation anywhere in the world.
So why will a ship owner seek to register a vessel under a flag with lesser military prowess? The answer is money.
Historically, flagging a vessel was simple. The shipowner would register a ship under the flag of the nation in which they were located and had its office.
However, as the business of shipping changed, ship owners became more
concerned about government taxation, high wages imposed by maritime labor
unions and other increased costs.
Ship owners looked for a solution and nations like Liberia and Panama
(among others) were willing to provide that solution. This was the beginning of the
modern concept of “flags of convenience”.
A "flag of convenience" is the shipping business practice of registering a merchant ship in a sovereign nation different from that of the ship's owners, flying
that other nation's flag, and becoming subject to that nation's laws. Generally,
ships are registered under flags of convenience to reduce operating costs or avoid
the regulations of the ship owner's country.
However, not all ships fly flags of convenience. Many will fly the national
flag of the shipowner.
The main point is, a shipowner needs to decide where the vessel
should be registered. This decision must be made whenever a shipowner has
taken delivery of a new building or seeks to change the flag of a recently
purchased second-hand vessel.
Shipowners have some flexibility when choosing where to register a
vessel. However, there is no doubt that a major consideration is the ability to
minimize operating costs and maximize revenue. There are many flags
available.
Here are some of the factors a shipowner might consider as well as the
role that the flag state plays.
Vessel Requirements:
Some registries impose restrictions on the type, size, and/or the age of the
ship. However, requirements regarding size and age may be waived by
arranging additional inspections and the payment of fees. Again this depends on
the flag state.
Cabotage and Embargoes:
The transportation of cargo or passengers between domestic ports is
restricted in most countries. These cabotage laws are quite common – so if a
shipowner wishes to take advantage of a particular trade – the choice of the flag
may be limited. A well-known example in the United States is the Jones Act
and its strict restrictions on those vessels available to service the U.S. coastwise
trade.
Vessel Detentions By Port State Control:
The flag state's reputation may result in the vessel being boarded and/or
detained more frequently by Port State Control. A flag's rating according to Port
State Control bodies such as the Paris Memorandum of Understanding, the U.S.
Coast Guard, among others, is a significant consideration when choosing a flag. A black or grey-listed flag may increase the frequency of detentions, which may
result in expensive delays. Likewise, vessels flying certain flags may be looked at
poorly by premium charterers due to the enhanced risk of delay by Port State
Control.
Nationality of Crew and Managers:
Most registries do not impose restrictions on the nationality of crew or
management, provided that international standards are met. However, national
registries may require manning by citizens of the country of Registry. It can
result in higher wage costs as well as organized labor unrest.
Taxes and fees:
Registries have an initial registration fee, an annual tonnage tax, among
other fees. Income tax is generally not imposed if the ship-owned Company is not
a tax resident in the flag state.
Bareboat registration:
The shipowner may need the vessel to temporarily fly the flag of a second state to take advantage of a trading opportunity Thus, the shipowner
may very well be interested in whether the flag state permits the vessel to be
registered elsewhere on a bareboat basis.
Ship Financing and Mortgagee’s Rights:
Mortgage requirements vary greatly under different flags. The mortgage recording
regime of the flag state should be acceptable to banks from many
jurisdictions. It will allow the shipowner an opportunity to obtain the most
favorable vessel financing.
Safety:
There are numerous international conventions concerning safety that has been established by the International Maritime Organization, a branch of the
United Nations. The most well known is probably the Safety of Life at Sea
Convention (SOLAS), as well as MARPOL (Marine Pollution). There are others of
course, such as the Convention on the International Regulations for Preventing
Collisions at Sea (COLREG), the International Convention on Standards of
Training, Certification, and Watchkeeping for Seafarers (STCW), the Load Lines
Convention, the International Tonnage Convention, the International Safety
Management (ISM) Code and International Ship and Port Facility Security (ISPS)
Code, etc. The flag state must establish a reputation for insuring compliance so
that governments, insurance underwriters, port state control, charterers, and cargo
interests are confident in the vessel's safe and efficient operations.
Service:
The flag state needs to be a service provider. It needs to deliver a very
prompt and high degree of service to its customer – typically the shipowner.
The Registry's staff needs to be available to assist the shipowner with any one of many problems that might arise concerning vessel documentation, port
state control, crew issues, among many others. Flag states need to be available
on a 24 hour a day/ 365 days a year basis.
Things to do by flag state/ the Registry's staff:
Needs to ensure that the Master, officers, and crew
understand and comply with applicable international regulations
Need to advise owners about changes to international
rules, regulations, and laws that might affect the vessel's operations.
Need to thoroughly investigate casualties and publish
detailed reports with recommendations.
Must be sure that registration formalities comply with
international standards concerning safety and documentation and without
delay to the ship owner's operations.
Must keep up to date on maritime security measures,
incidents of piracy worldwide and other threats, and provide advice to their
customers.
Also provide information and guidance on forming
business entities under the laws of the flag state for purposes of holding
ownership of vessels, as well as preparing amendments, dissolutions and other
filings, required by the flag state’s corporate law.
Modern flag state management is decentralized with responsibilities
assigned to offices in the world's shipping centers and other locations so
that decisions can be made in local time zones. Therefore, it is common for flag
states to have offices outside of the flag state country. For example, some significant
flags are managed out of Alexandria, Virginia.
Resources:
Major ship registers:
The Liberian Registry
: Is administered by the Liberian International Ship &
Corporate Registry (LISCR, LLC), a private U.S. owned and globally operated
Company. However, the Registry maintains offices around the world,
including Dubai, Hamburg, Hong Kong, Houston, Istanbul, London, Monrovia,
New York, Panama City, Piraeus, Rio de Janeiro, Seoul, Shanghai, Singapore,
Tokyo and Zurich. The Liberian Registry is the fastest-growing major open Registry with +4,500
vessels in their fleet, almost 12% of the world's oceangoing fleet that accounts for 180
Million Gross Tons of merchandised goods.
International Registries, Inc.: With 28 global offices, International Registries, Inc., in the Marshall Island is the world’s most experienced, privately held maritime and corporate registry service provider, specializing in the needs of the shipping and financial services industries across a broad commercial and economic spectrum.
Ship Registry in Panama: With more than 8,000 registered international shipping vessels, the Panama Ship Register is the world's first registry. Panama fleet containing 81 million tons making up nearly 22% of the world's total tonnage.
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