By the standards of international law, every merchant ships are required to be registered in a ship registry created by a sovereign country and by this, the ship is subject to the laws of that country of registration and would constantly fly the flag of the country of registration. A common parlance in the world of ship registration is Flag of Convenience (FOC). It is a practice by which ship’s owners register a merchant ship in a ship register of a sovereign country other than his or her country of origin. They do this mostly to avoid or circumvent the regulations of the owners’ country which may, for example, have stricter safety standards. They may also do this to reduce operating costs.
Open registry does not require nationality or residency requirement for the ship owner. Two of the most popular are Panama and Liberia. These countries offer easier mode of ship registration with simple requirements; mostly online based, provision of cheap human labor and exemption from the payment of income taxes for the ship owners.
The history of Flag of Convenience started in the United States in the 1920s with vessel owners, who were frustrated by the the stringent regulations of the American registry coupled with increasing labor costs device the initiative to register their ships in Panama. This model gradually spread around the world and countries such as Liberia and Marshall Island joined the club of FOC nations with substantial share of global vessels registration.
As of 2009, more than half of the world’s merchant vessels were registered with open registries, with 40% of the global fleet by deadweight tonnage registered in Panama, Liberia and Marshall Island.
There had been series of arguments for and against the open registry model of vessel registration. While some argue that it had allowed poor compliance to international maritime law by merchant vessels and their owners; this is in the form of illegal activities; as a result of substandard regulations or weak regulation enforcement by the flag country. On the other hand, other stakeholders in the industry had argued that it is a natural result of globalization citing the fact that there is increased freedom in choosing employees from an international labor pool. They also argued that ship owners from developing countries use the practice to be competitive in a global market.