Flags of convenience: How a small Central American nation came to rule the waves

Chris Beck explains how a strategic location and various loopholes have meant shippers from across the world have registered their vessels under the Panamanian flag

The tiny Central American country of Panama is more famous for its headwear (although Panama hats are actually Ecuadorian in origin) than for its mighty shipping fleet, but this nation of just three million people has a larger number of registered boats than the US and China combined.

The reason behind this is largely thanks to the country’s strategic location and the presence of one of the Seven Wonders of the Modern World – the Panama Canal. At just 48 miles long, this architectural marvel provides a short cut for shippers sailing between the Atlantic and Pacific Oceans. It is one of the most important trade routes in the world, and handles over 14,000 ships per year, many of which fly the Panamanian flag.

By law, every merchant ship must be registered to a country, known as its flag state. Panama itself has only one small shipping line and a few companies providing maritime services around the Canal. Most merchant ships flying Panama’s flag belong to foreign owners who are looking to avoid the stricter marine regulations imposed by their own countries. Panama operates a so-called open registry, which offers easier registration and the ability to employ cheaper foreign labour on board, as well as the advantage of zero income tax.

The vessel’s flag state is responsible for inspecting that the ship is safe to sail and that the crew’s working conditions meet international standards. Open registries, sometimes referred to pejoratively as flags of convenience, have been contentious from the start.

The first transfer of ships to Panama’s register in 1922 involved two US passenger ships wishing to serve alcohol to passengers during Prohibition. More followed as ship owners sought to avoid higher wages and improved working conditions secured through US legislation. After World War Two, Panama’s registry grew more rapidly as US ship owners sought to lower overheads while European ones switched flags to avoid high tax rates. As demand rose for open registration, other countries in the developing world formed their own. The US used Liberia’s registry to build a fleet of neutral ships during the Cold War.

Panama now has the largest registry in the world, followed by Liberia, the Marshall Islands, Hong Kong and Singapore. By last year, almost three quarters of the world’s fleet was registered under a flag of a country other than its own. The registry is lucrative for Panama, bringing in half a billion dollars for the economy in fees, services and taxes. However, critics of the system point to the ease of hiding the true identity of ship owners and the lax enforcement of rules and regulations.

International legal requirements insist that countries operating open registries inspect vessels, comply with international regulations and investigate accidents and corruption. But critics say that Panama cuts corners in all these tasks, putting maritime workers at risk. Indeed, accidents involving Panamanian-registered ships are high.

However, Carlos Gonzalez, former Executive Secretary of the Panamanian Maritime Authority, attributes this to a numbers game. Panama has the most ships and therefore the most incidents, he says. Since 2008, Panama has cut down on enough offences to move up from the black to the white list of the Paris Memorandum of Understanding, a watchdog comprising 27 maritime administrations from Europe and North America.
Yet Panama’s registry is consistently beset by allegations of corruption. In 2000, International Transport Workers’ Federation (ITF) General Secretary David Cockroft was able to buy a Panamanian first officer’s certificate for $4,000 to navigate a ship – even though he had no maritime skills or experience.

Despite repeated assurances that the country was cleaning up its act, Roberto Linares, the Head of the Panama Maritime Authority, resigned in June after it was discovered that workers were being certified without the proper qualifications.

“The scandal brings us back to the days that Panama was called a ‘convenience flag’,” said Franklin Castrellon, former spokesman for the Panama Canal Commission, an independent agency operating the waterway until the country took over from the US in 1999.

The new leadership plans to turn things around again. Jorge Barakat, the new Head of the maritime authority, said: “The Panamanian flag is still robust and secure. Whatever kind of non-compliance there is will be reviewed by the administration.”

As a commercial venture, Panama’s flag of convenience is a success. But according to the ITF, that comes at a cost. It believes the world economy could survive a ban on flags of convenience and the higher costs that it says would follow. ITF secretary Jon Whitlow said: “There would be some reconfiguration. The positive effects would include better protections and safeguards for seafarers who found themselves once again serving on a national flag ship.”

Shipping prices would rise, but free competition has extensively distorted the market, he says. However, defenders of the system say this thinking is outdated and that flags of convenience are here to stay.

“Panama’s registry will last for ever,” said Jorge Luis Sanchez, Professor at the International Maritime University of Panama. “Those who don’t like the open registry can opt to do something else with their ships.”

With the new maritime administrator sworn in in July, it remains to be seen whether Panama will crack down on corruption and safety breaches or continue to live with the taint that still clings to flags of convenience.