Know the Ropes When Flagging Your Vessel: A Comparison of Three of the World’s Du Jour Vessel Registries
Heather C. Devine and Stephanie S. Penninger*
by not requiring the vessel owners, operators, and crew to have the same nationality as the country where the ship is registered or the disclosure of ownership information.1 Today, “flag of convenience” refers to vessel registration in a country with I. Introduction: Choosing a an “open registry” for predominantly vessel registry in the world, reaching economic reasons, including: little to no Flag – More Than a Matter 100 million gross tons in February local taxes on vessel income, acceptance 3 of Convenience 2014. Headquartered in Reston, Va., of foreign owners and crew, increases the International Registries, Inc. and Advising a client of the appropriate in vessel market value, easy currency its affiliates (“IRI”), is the world’s flag state for his or her vessel is a conversion, allowing vessel repairs oldest and one of the most experienced challenging retainer, requiring abroad, lower operating costs due to privately administered Maritime and consideration of almost every lower wages (due to the ability of hiring Corporate Registry provider; it operates commercial issue from vessel ownership, non-union employees), and more lenient 26 full-service offices in major shipping labor and manning issues, and even the labor and safety standards, obtaining and financial centers around the world, reputation of the flag state. The only vessel tonnage more easily, and avoiding 2 and provides worldwide, around-the- certainty is that a vessel must sail under Coast Guard regulations. clock duty officer system and real time a flag: United Nations Convention on With the increased popularity in support to vessels flying its flag.4 the Law of the Sea (UNCLOGS) Article open registries for vessel registry, it is 91 provides: important to understand the advantages 1. International Treatment Ships have the nationality of and disadvantages of the different The RMI maintains a permanent the State whose flag they are available registries and the factors to representative and active delegation entitled to fly. … [Moreover] consider when selecting a particular at the IMO.5 It is included on the ships shall sail under the flag registry. Choosing where a vessel should White Lists of both the Paris and of one State only and … shall be “flagged” is a complex process that Tokyo Memorandums of Understanding be subject to its exclusive requires consideration of a multitude (“MoUs”), and has also maintained jurisdiction on the high seas. of factors. This article considers some Qualship 21 status with the U.S. When considering which flag of the key factors in the context of the Coast Guard for an unprecedented state to choose, one encounters three of the most popular flag states: 10 consecutive years.6 Qualship 21 is several different registration regimes: the Republic of Marshall Islands (RMI), an initiative that was implemented traditional, open, and a hybrid of Mongolia and Panama. by the Coast Guard to identify high- the two. While traditional registries quality ships, and provide incentives usually require the vessel’s owner or A. Taking the Right Tack – Flying to encourage quality operations.7 Only operator and a certain percentage of the the Marshall Islands Flag approximately 10 percent of the foreign- crew to be citizens of the registration The RMI Registry, governed by flagged vessels that call in the U.S. qualify state, open registries typically impose the RMI Maritime Act of 1990 (“RMI for this initiative and certification, more lenient registration requirements Maritime Act”), is the third largest which focuses predominantly on the * Gowling Lafleur Henderson LLP (Hamilton, Ontario, Canada) and Benesch, Friedlander, vessel’s Port State Control (“PSC”) Coplan & Aronoff LLP (Indianapolis, Indiana). We gratefully acknowledge Summer Associates, records and history8 ensuring the vessel Sarah Wouters and Brittany Shaw, for their contributions to the drafting of this article.
TTL February 2015, Vol. 16, No. 4 44 is manned and operated in compliance available for certain registrations, e.g., a Island laws will govern the mortgage with applicable international law.9 fleet or newly constructed vessels.20 instrument.29 In addition to the RMI legal system, international legal and 2. Qualifications for Registry 4. Mortgaging Vessels & financial professionals recognize the Business entity formation within Maritime Liens RMI mortgage recordation procedures the RMI is straightforward and efficient, The RMI Maritime Act incorporates and administrative controls.30 and there are tax incentives associated provisions for recordation of security- with vessel registration with the RMI related instruments and documents 5. Manning & Safety Registry. The RMI does not restrict the of title.21 Recordation provides notice Requirements nationality of seafarers serving on RMI to creditors, purchasers, suppliers There are no nationality restrictions flagged vessels, and offers competitive and other parties with interest, and for vessel crewmembers.31 However, registration fees and tonnage taxes.10 furnishes an internationally enforceable RMI officers are required to hold a Additionally, RMI’s legislation permits structure for the protection of legal CoC/Certificate of Endorsement (CoE) vessels to register with the RMI Registry rights recorded.22 The RMI does not issued by the Administrator, and all although the vessel is still subject to a require a particular form of vessel persons serving aboard RMI flagged recorded mortgage in its present country mortgage. However, for a mortgage to commercial vessels are required to 11 of registry. The foreign mortgage lien be recorded with the Administrator, hold an RMI Seafarer’s Identity and accompanies the vessel into the RMI the mortgage must be duly executed and Record Book, which serves as a record 12 Registry. acknowledged as required by the RMI of sea service and contains the Special Seagoing vessels of any tonnage Maritime Regulations (MI-108) Section Qualification Certificates (SQCs), engaged in foreign trade and those 3.30, or with proof of due execution as specifying the rating in which the holder under construction are eligible for required in RMI Maritime Regulation is qualified to serve and any special registration in the RMI.13 At the time of 1.04.2a.23 qualification(s) held by the seafarer.32 registration, vessels should not be more All documents recorded under than 20 years of age, however, vessels that the Maritime Act (MI-107) must be in 6. Taxation are older than 20 years may be granted the English language, except notices Pursuant to RMI Business a waiver for registration depending on of foreign language ship mortgages Corporations Act Section 12, RMI their condition and classification.14 An or financing charters recorded under business entities and foreign maritime owner may check availability of vessel the bareboat registry provisions of the entities (“FME” or “FMEs”) are exempt names and reserve that name for six Maritime Act, Section 264, which only from annual filings and corporate tax, months for an existing vessel and two have to have their cover and execution net income tax, withholding tax on years for a newly constructed vessel.15 pages translated into English.24 entity revenues, asset tax, tax reporting Ownership of vessels registered Preferred status gives priority to a requirement on entity revenues, stamp with the RMI must be through an RMI lender’s mortgage lien over those with duty, exchange controls or other fees or corporation, limited liability company, certain other claimants.25 An RMI ship taxes, provided that they do not engage limited or general partnership, and mortgage must contain the: (1) vessel in business within the RMI.33 associations of individuals or a qualified name; (2) hull number for a vessel under FME.16 The RMI has mandatory construction; (3) names and identifies of 7. Labor and Operating Costs classification and statutory survey and the parties to the mortgage; (3) interest On September 25, 2007, the RMI certification requirements. The country in the vessel affected; and (4) amount(s) ratified the Maritime Labour Convention provides a list of approved societies for of the direct or contingent obligations of 2006 (“MLC 2006”), which provides: an owner’s convenience.17 that are or may become secured under the minimum requirements for seafarers its terms.26 to work on board ships, conditions of 3. Registration Fees A preferred mortgage may secure employment, including pay, rest hours, Registration fees as well as first year’s sale and lease transactions, contingent leaves of absence, training and manning RMI tonnage taxes and annual fees and future obligations, advances and of ships, accommodation, health are payable upon registration.18 There repayments, and guarantees. Owners protection and care and compliance are two fee option schedules available. also have an option to “tack on” a and enforcement mechanisms and Schedule A where the standard fees are previously recorded mortgage.27 Owners measures. The government also adheres payable for the registration in the RMI may submit the recorded foreign to certain minimum standards of social or Schedule B providing a sliding scale mortgage and a simple signed mortgage security, under the Social Security for various tonnage categories and a instrument that is recorded when a vessel (Minimum Standards) Convention of fleet discount structure.19 Discounts are is registered with the RMI.28 Marshall 1952 (“SSC 1952”), concerning: medical
TTL February 2015, Vol. 16, No. 4 45 care, sickness benefits, unemployment 4. Mortgaging Vessels & 7. Labor and Operating Costs benefits, employment injury benefits Maritime Liens At present, Mongolia has not and survivors’ benefits.34 The Regulations for Registration of ratified the MLC 2006, although a draft B. Full Steam Ahead: Flying the Ships in the Ship Registry of Mongolia bill was submitted to Parliament last year Mongolian Flag allows for a Mongolian vessel to be used in support of Mongolia’s ratification of as security for “a loan or other valuable the MLC 2006.50 Ratifying the MLC 1. International Treatment consideration.”41 However, a mortgagee 2006 would mean that Mongolia has Port State Control authorities, under or creditor is prevented from acting accepted the responsibility of ensuring the Memorandum of Understanding on on its security interests by detaining a the safety and wellbeing of seafarers, Port State Control in the Asia-Pacific vessel’s Certificate of Registry.42 namely meeting requirements for Region (Tokyo MOU), detained 26.76 minimum age, hours of work, wage 51 percent of all Mongolian-flagged ships 5. Manning & Safety payments and medical care. Nor has in 2013; the second highest detention Requirements Mongolia ratified the SSC 1952. percentage.35 (Ships are detained when All seafarers are required to Remaining as a non-ratifying flag the condition of the ship or its crew does have a valid Mongolian certificate state means that Mongolian flagged not correspond substantially with the of endorsement (“COE”) to work on ships calling at ports of ratifying states 36 applicable conventions.) Based on the board a Mongolian vessel.43 Annex will be subject to Port State Control number of inspections and detentions 2 to the Regulations for Registration of inspections, the purpose of which is from 2011-2013, Mongolia sits at the Ships in the Ship Registry of Mongolia to enforce the Labour Conventions’ 6th position on the Tokyo MOU, 2013 provides that a duly licensed Master minimum standards for work and living “black list.” A “black list” categorization 52 needs to be on board every registered conditions upon vessels. is one of several factors considered Mongolian vessel.44 Moreover, vessels when assigning a ship risk profile which C. Plain Sailing under the with a propeller thrust of 300KW or can have the effect of increasing or Panamanian Flag decreasing the number of Port State more need to have a licensed Chief Engineer on board.45 Pursuant to Panama’s registry is the world’s Control inspections a particular vessel largest vessel registry.53 Indeed, the is subjected to.37 the International Convention on Standards of Training, Certification Panama flag is flown by over 6,000 2. Qualifications for Registry and Watchkeeping for Seafarers vessels currently trading in the world’s oceans, most of which are not owned To register a vessel under Mongolia’s 1978 (“STCW Code”) manning by Panamanians.54 Panama is one of ship registry, a registrant submits a Bill standards, every officer and crewman the oldest and most widely chosen of Sale, existing registry and statutory on a Mongolian vessel must have the jurisdictions for ship registration certificates, as well as a certificate of requisite training and certification to because of the ease of registration, competency for all officers on board perform their job duties.46 the vessel.38 There are no restrictions low registration fees, low-tax offshore With respect to safety requirements, jurisdiction and regulatory protections.55 on the ownership of the vessel, a registered Mongolian vessel must be meaning that the owner’s nationality, Panama’s Maritime Court is available manned by the appropriate number of 24 hours a day, 365 days a year.56 or registration as a corporate body or officers and crewmen necessary for the entity, are not taken into consideration Currently, Panama, which trades in vessel’s safe navigation and operation.47 for registration as long as the applicant U.S. dollars, has over 1,000 inspectors In the case of a registered Mongolian is capable of owning a vessel under the in over 300 ports ensuring compliance, passenger vessel, a certified survival 57 law of its national country.39 Moreover, worldwide. the Mongolia ship registry offers to craft crewman must be assigned to each 1. International Treatment complete the entire registration process survival craft (i.e. lifeboat) on board the 48 online in as little as 24 hours. vessel. Panama is a signatory of the four “pillars” of international maritime law 3. Registration Fees 6. Taxation – the STCW Convention, SOLAS, When applying to register a There is little taxation information MARPOL and the MLC 2006. Panama vessel, financial considerations hold provided to potential registry applicants. was notably listed in the first edition considerable weight. Mongolia’s ship However, the Mongolian Ship Registry of the IMO’s “White List,” released registry boasts as having “low initial does entice applicants by purporting to on December 6, 2000, defining the registration and annual tonnage taxes” have low initial registration and annual flag states assessed to be properly as well as no cost to the ship owner(s) tonnage taxes as well as no taxes on implementing the revised STCW 95 for setting up an “owning company”.40 profits or capital gains.49 Convention.58
TTL February 2015, Vol. 16, No. 4 46 2. Qualifications for Registry 3. Registration Fees 6. Taxation Panamanian law provides that The cost to register a ship under Corporations can be created in “[a]ny individual or corporate entity, Panama’s registry is lower than many Panama to register vessels providing irrespective of nationality or country of the other registries.70 The initial protection for owner’s assets.81 Panama of incorporation, may register a vessel registration fee is approximately $0.25 does not collect income tax on profits under Panamanian flag.”59 Accordingly, per registered ton plus an additional resulting from the business made from corporations are not required to have $0.10 per net ton in annual tonnage merchant shipping outside of Panama, 71 a place of business or business agent tax. Owners can receive fee and and, so long as services are not provided in Panama and incorporations, and tonnage tax discounts when registering while the vessel is on coastal trade 72 officers and directors are not required a fleet of vessels. or performing work in the navigable to be residents of Panama to register waters of Panama, shipping companies 60 4. Mortgaging Vessels & vessels in Panama. Further, vessel Maritime Liens are not required to withhold income crewmembers need not be Panamanian taxes from employees’ salaries.82 nationals.61 There is no minimum Preliminary registration of a tonnage requirement, and almost any title or mortgage is accepted by the 7. Labor and Operating Costs category of ships can be registered, from United States, Far Eastern, European, On February 6, 2009, Panama and worldwide banks as providing passenger ships to dredges and floating ratified the Maritime Labour satisfactory security.73 A vessel mortgage docks.62 Although there are no age Convention of 2006. The government may be executed in Panama or any restrictions, vessels that are 20 years old has also ratified the SSC 1952, accepting other country, but must be registered require a special inspection.63 obligations under the Convention at the Public Registry of Panama.74 concerning the following branches of Panama provides a provisional The mortgage will not become patent for a six-month period.64 After social security: old-age benefit, invalidity effective against third parties until 83 the preliminary information about the it is registered.75 It may be written benefit and survivors’ benefits. vessel and vessel owner is provided by or executed in any language or form, way of the registry application,65 the but must include name, address of II. When the Ship Comes vessel owner must notarize and file a mortgagor and mortgagee, fixed In: Final Thoughts and number of required documents with the or maximum mortgaged principal, Conclusion 66 Consulate at the time of registration. schedules for payment of principal and It is clear that while the only Another benefit of registering in interest, interest rate or manner for certainty for a commercial vessel is Panama is the ability for dual registry. A determining it, name of mortgaged that it must be flagged, every other foreign vessel bareboat chartered (where vessel, patent number, tonnage and issue will be affected by the needs and dimensions.76 Fleet mortgages require a vessel owner leases a ship, without its requirements of one’s client. This paper paperwork of each vessel.77 Additionally, crew or provisions, to the charterer, canvasses the key considerations for special naval mortgage provisions are which becomes responsible for the each client, in order to provide insight required for ships under construction.78 vessel’s operation), already registered in into the differences and similarities one state may be registered in Panama 5. Manning & Safety amongst the three most popular flag for the same period, up to two years (dual Requirements states. For example, the convenience registration is renewable).67 This allows of quick registration under the flag To be registered with the Panama a charterer, leasing a ship registered Registry, all vessels must pass an annual of Mongolia can be balanced against in a country without an open registry, inspection to ensure that they meet the cost and labor requirements of to take advantage of the Panamanian international safety regulations, carry the flags of Panama or the Marshall registry benefits. A vessel owner can up to date certificates and are properly Islands. These in turn may be balanced also maintain the vessel’s original manned and equipped for their intended against the ease of mortgage and registration, which is suspended during trade.79 To prevent the enrollment of lien registrations. In each case, the the dual registration and regains its potentially hazardous ships, vessels built international reputation of the flag effectiveness upon termination of the over 20 years ago are required to be state, any port conveniences offered charter.68 A certificate of consent from inspected before a permanent patent to a vessel flying certain flags, the the country where the vessel is originally can be issued. All vessels are subject to labor requirements (or lack thereof), registered is required and dual registry surveys by an approved classification are balanced by the nationality of the can only apply if the vessels home society that will issue tonnage and other purchaser (or not), and, perhaps, the age country allows it.69 technical certificates.80 of the vessel.
TTL February 2015, Vol. 16, No. 4 47 Endnotes 1. Alexander J. Marcopoulos Flags of Terror: An argument for Rethinking Maritime Security Policy Regarding Flags of Convenience, Tulane Maritime Law Journal, 32 Tul. Mar. L.J. 277, at * 280-281 (Winter 2007). 2. Comment: Vessel Registration in Selected Open Registries, Tulane Maritime Law Journal, 6 Tul. Mar. L.J. 221 (Fall 1981). 3. About IRI, International Registries, Inc. available at https://www.register-iri.com/index.cfm?action=about, last viewed Oct. 7, 2014. 4. Id.; The Republic of the Marshall Islands, Official Guide to Ship and Yacht Registries, GSR, available at http://www.guidetoshipregistries.com/ shipregistries-country/marshall-islands, last viewed Oct. 7, 2014. 5. As part of its commitment to supporting maritime safety security, environmental protection and social responsibility, the RMI is a signatory to and enforces major maritime conventions, including: (1) the International Convention on Standards of Training, Certification and Watchkeeping for Seafarers (“STCW Convention”), which provides qualification standards for masters, officers and watch personnel on seagoing merchant ships; (2) the International Convention for the Safety of Life at Sea (“SOLAS”), which sets forth the minimum safety standards concerning vessel construction, equipment and operation; (3) the International Convention for the Prevention of Pollution From Ships (“MARPOL”), which details the minimum standards governing pollution of the seas, including those governing oil dumping and exhaust pollution; and (4) the Maritime Labour Convention (“MLC”), which provides: (a) the minimum requirements for seafarers to work on board ships; (b) conditions of employment, including pay, rest hours, leaves of absence, training and manning of ships; (c) accommodation; (d) health protection and care; and (e) compliance and enforcement mechanisms and measures. 6. The Marshall Islands Registry: service and quality are within your reach, International Registries, Inc., available at www.register-iri.com. 7. Qualship 21 Initiative, Homeport, U.S. Dept. Of Homeland Security, available at https://homeport.uscg.mil/mycg/portal/ep/contentView. do?channelId=-18371&contentId=21978&programId=21428&programPage=%2Fep%2Fprogram%2Feditorial.jsp&pageTypeId=13489&content Type=EDITORIAL, (last viewed Oct. 14, 2014). 8. Id. 9. Port State Control, Wikipedia, available at http://en.wikipedia.org/wiki/Port_State_Control. 10. Id.; Annual tonnage taxes are due in full by January 1 of a given year for all vessels registered with the RMI. See Marine Notice 1-005-1 for the most current fee schedule, available at: www.reegister-iri.com. 11. Id. 12. Id. 13. Marshall and Vessel Registration and Mortgage Recording Procedures at § 2. 14. Id. 15. Id. 16. Marshall Islands Vessel Registration and Mortgage Recording Procedures. 17. Id. 18. Id. 19. Id. 20. Marshall Islands Vessel Registration and Mortgage Recording Procedures; see Marine Notice 1-005-1, available at www.register-iri.com, for most current fee schedule, including non-registration fees, e.g., Radio and Seafarer’s documentation. 21. Id. 22. Id. 23. Id. 24. Id. 25. Id. 26. Id.; see also Maritime Act §§ 302(2), 305. 27. Id. 28. Id. 29. Id. 30. Richard Coles and Edward Watt, Ship Registration: Law and Practice, 20.18 at p. 238. 31. Id. 32. Id. 33. Republic of the Marshall Islands, A New Dawn Beckons for International Finance, Business Annual Offshore Guide 2011/12, available at http://issuu.com/businessannual/docs/baog2011-12. 34. Ratifications of MLC- Maritime Labour Convention, 2006, International Labour Organization, available at http://www.ilo.org/dyn/ normlex/en/f?p=NORMLEXPUB:11300:0::NO::P11300_INSTRUMENT_ID:312331(last viewed Dec. 23, 2014). 35. Tokyo MOU, 2013 Figure 4: Detentions Per Flag, p. 17. 36. Tokyo MOU, 2013, Port State Control Under the Tokyo Mou, 2013 p. 13. 37. Port State Control – Tokyo MOU New Inspection regime, West of England, available at http://www.westpandi.com/Publications/News/Port- State-Control---Tokyo-MOU-New-Inspection-Regime/ (June 28, 2013). 38. Mongolia Ship Registry, Features and Benefits, Mongolia Ship Registry, available at http://www.mngship.org. 39. Salient Features, Mongolia Ship Registry, available at http://www.mngssl.org/index.php. 40. Mongolia Ship Registry, Features and Benefits, Mongolia Ship Registry, available at http://www.mngship.org. 41. Regulations for Registration of Ships in the Ship Registry of Mongolia § 4.1. 42. Regulations for Registration of Ships in the Ship Registry of Mongolia § 3.25. 43. Shanghai Shipping Limited, Manning Requirements, online: Mongolia Ship Registry available at http://www.mngssl.org. 44. Annex 2 to the Regulations for Registration of Ships in the Ship Registry of Mongolia Section 1, available at http://www.mngssl.org/. documents/MgnManning_annex2.pdf.
TTL February 2015, Vol. 16, No. 4 48 45. Annex 2 to the Regulations for Registration of Ships in the Ship Registry of Mongolia Section 2, available at http://www.mngssl.org/documents/ MgnManning_annex2.pdf. 46. Mongolia Ship Registry, Marine Circular 7-2003, Mongolia Ship Registry, available at www.mngssl.org/documents/MC072003.pdf (Feb. 10, 2013). 47. Annex 2 to the Regulations for Registration of Ships in the Ship Registry of Mongolia, available at http://www.mngssl.org/documents/ MgnManning_annex2.pdf. 48. Annex 2 to the Regulations for Registration of Ships in the Ship Registry of Mongolia Section 4, available at http://www.mngssl.org/documents/ MgnManning_annex2.pdf. 49. Shanghi Shipping Limited, Manning Requirements, Mongolia Ship Registry, available at http://mngssl.org. 50. “Mongolia to Join the Maritime Labour Convention,” Information Mongolia, available at http://www.informongolia.com/ct/ci/6940 (Oct. 28, 2013); E. Oyundari, “Draft bills submitted to Parliament,” available at UB Post News
TTL February 2015, Vol. 16, No. 4 49