June 22, 2021
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The Growth of the Open Registry Model and Attempts to Diminish it

Credit: Cruise Mapper Credit: Cruise Mapper

By Gola Traub

Since its inception, the business philosophy – the fundamental principle that underpins the formation and operation of the open registry model – has been fiercely and relentlessly impugned as a poor-quality business model designed to steal Westerners’ jobs and avoid stringent international shipping regulations. Seemingly, however, nothing could be further from the truth.

 

This piece aims to highlight the deep gap between these two major business contenders – and how over the years they have become comparable, almost indistinguishable.

Article 91 of UNCLOS (United Nations Law of the Sea Convention) affirms that  every state (including landlocked ones) has the right to give its nationality to ships, but the notion of a ship assuming the nationality of a foreign flag is probably as old as shipping itself, for there is evidence the Phoenicians did so centuries ago.

Indeed, for eons an ocean-going vessel operated under the flag of her home country – and almost certainly, such a merchant vessel, according to traditional shipping norms, rules and regulations was owned, manned and operated by nationals of the concerned state, meaning that the ship had to follow all the laws (including admiralty, labour laws and safety requirements) of that country, even when she was half a world away from home.

Nowadays, it can be safely said that international waters are populated with ships that ply under assumed nationalities, mainly because of economic reasons. Other seagoing vessels, however, flag out essentially as a means of camouflaging their true identity.

The notion of a “false” flag being adopted as a tool to mask a ship’s real identity – and is used to elude enemy warships is probably as old as naval warfare itself.

 

 An excellent example of this deception was evident when prior to entering World War II, the United States circumvented its own neutrality law by passing the Lend-Lease Act on 11 March 1941, a law that gave the President power to sell, lend, or lease weapons, ships, and munitions to Allied Nations. This piece of legislation granted the government the right to re-flag American vessels as other countries’. 

 However, the current usage of flags by shipping companies as a tool to boost commercial performance is quite a recent phenomenon. The history of today’s open registry goes back only as far as the United States’ Seamen’s Act of March 1915, an act of Congress often termed the ‘Magna Carta of the Seas’. Like the International SOLAS Convention, this act was occasioned by the sinking of the Titanic in 1912. 

The Seamen’s Act provided for the general welfare of American seamen (i.e., for better wage scale, safety, and an end to the old-aged practice of caging mariners for desertion). 

Howbeit, some American ship owners, frustrated by overly bureaucratic shipping regulations and ever-increasing labour costs, concluded that the Act was far too controlling and expensive for United States-flagged merchant vessels, as other shipping nations did not have such stringent safeguards and additional operational overheads. Hence, they began looking for means to relocate their companies in foreign parts. Their longing was satisfied when Panama became an independent state.

 

A chain of events favoured these seemingly disgruntled businessmen when the American government, under President Roosevelt, began coaxing and tacitly supporting Panamanian revolutionaries to secede from Colombia (Panama used to be a part of Colombia.), something that eventually led to Panama declaring its independence from Colombia in 1903.

 In a bid to aid the newly formed state, the Roosevelt administration encouraged American business owners to do business with Panama.  Along with other American business owners, many American ship owners, acquiesced heartedly and thought it was an excellent means of cutting their operating costs.

Consequently, many registered their vessels in Panama, the first open registry state. (An open registry is a country that allows ships to fly its civil ensign in an effort to help them operate cheaply, while seeking to adhere to international shipping regulations.)

American shipping seamen and unions did not welcome this move by President Roosevelt and the ship owners. They were convinced that all of this was geared at shipping American jobs to Panama - and they were determined to end the scheme by vehement protestations -  and by their blunt refusal to handle all ships under the Panamanian flag.

Panama started its open registry in 1924; by the close of that year, the country had only 14 ships or some 83,776 tonnages.

Today’s second largest open registry, the Liberia Registry, was established in 1948 by a former US Secretary of State, Edward Stettinius, who served under President Franklin Roosevelt. At the end of 1948, the Liberian Registry had only 2 ships or 772 tonnages.

Today, nearly all merchant ships in the world sail under open registry flags (exclusively from the developing world).

A Divided Industry

The shipping industry is truly globalized. It ferries some 90% of world trade.  However, it is a divided industry - divided between the industrialized West and developing countries, split between low and high labour costs, and split between syndicated and non-syndicated workforce, and divided between open registries  and closed registries (traditional registries).

As intimated above, right from the beginning of the open registry mode of shipping, many Western maritime unions were determined to demonstrate, even in courts, their conviction that the new shipping model that was being advanced by Liberia and Panama was a scam designed to take Westerners’ jobs, and stitched up to evade safety regulations and taxation. The legal assaults were mounted in international forums, the US Congress, and European and American courts – some cases even landed in the US Supreme Court.

An example of such a case is the famous case in which the US Supreme Court denied jurisdiction to a foreign mariner seeking damages under US law for injuries he sustained aboard an open registry vessel. In its ruling the Court said that in international law, every nation has the right to determine the conditions by which it registers a ship, thereby taking full jurisdiction and responsibility for it. And, the validity of that decision can only be questioned by the said state Lauritzen v. Larsen - 345 U.S. 571 (1953).

For American ship owners who relied on the Liberian and Panamanian registries, each court battle was an issue of commercial life or death. Albeit, by1963, Liberia and Panama had surmounted all lawsuits; thereupon, invigorating the open registry shipping model.

It is worth noting that things came to a head in 1959 when Liberia and Panama sued IMCO (Inter-governmental Maritime Consultative Organization, the forerunner of the IMO) at the International Court of Justice (IJC). Find out what happened in the next Marine Monitor Magazine.

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