Global Financial Integrity

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Flags of Convenience and the Hazards of Shipbreaking


By Matthew Baur

Massive cargo ships are all too familiar to those living in big port cities. These giant vessels deliver goods needed for much of our society to function, from medical supplies and medicines, to food like bulk grain and rice, to the majority of the clothes we wear. The essential role these metal behemoths play in world trade are undeniable, however they too have a limited life-span. Unfortunately, the scrapping and dismantling of these vessels is marred in opacity, human rights violations, environmental pollution and corruption through the exploitation of an international legal loophole known as flags of convenience (FoC).

This process of dismantling ships is known for its high levels of fatalities, injuries and work-related diseases, making it amongst the most dangerous jobs in the world. Since 2009, the Shipbreaking Platform, a leading NGO focused on uncovering the injustices behind the industry, reported 410 deaths and 320 injuries directly linked to the breaking down of shipping vessels on the beaches of Bangladesh, India and Pakistan. The threat to workers stems from the unregulated nature of the industry. Due to inadequate safety controls, lack of government benefits and daily exposure to toxic substances, the workers are put at risk. These working conditions and environmental impacts have become so hazardous that the EU has banned the demolition of vessels in India.

Vessel owners take advantage of the ambiguity within the international framework for flagging maritime vessels allowing them to circumvent environmental and labor legislation common amongst western nations. Flagging vessels is the legal method by which the international maritime community delegates responsibility for the conduct of sea vessels. For example, if a ship owner registers their vessel under the United States and flies the American flag, the vessel must adhere to all maritime laws and taxes associated to the U.S. In addition, the United States is required to ensure that the vessel and its owner adheres to U.S. and international standards and laws. However, the person or company that owns the vessel does not need to register their vessel in the country where they reside or are based. Owners are able to register their vessel in open-registries or international registries, permitting them to fly what are known as flags of convenience. Countries that provide FoC are typically associated with poor labor laws, lax environmental regulations, weak beneficial ownership enforcement and lower tax rates.

How does a European, Chinese, or American owned vessel end up on the beaches of Bangladesh, India, or Pakistan for dismantling? Let us look at the example of the Yetagun, a Dutch-owned, Bahamas-flagged, floating storage vessel that rested in the gas fields of Myanmar for 20 years. The Yetagun’s flag was changed to Palau and its name to Tag after it was sold to the India-based shipbreaking company Best Oasis. With new owners and a new flag, destruction of the vessel no longer had to comply with EU environmental regulation and labor laws. Instead, the vessel fell under Palau’s legal domain. Zembla, a Dutch documentary series, detailed the poor conditions for the workers after the Yetagun was beached. Zembla revealed that the laborers were not provided with even the minimal amount of safety equipment even though high levels of mercury were present.

The Yetagun narrative is not all that uncommon. According to Platform Shipbreaking’s 2019 report, each year approximately 70% of vessels requiring dismantlement are sold to South Asian beaching yards. More specifically, in 2018 and 2019, 271 European-owned or European flagged ships were beached in South Asia. Of these vessels, 261 did not fly EU flags and 27 swapped from an EU flag to an FoC weeks before their voyage to be dismantled to specifically avoid EU regulation around beaching. This is a common problem around the world.

This exploitation is largely legal. Vessels can legally undergo flag and ownership changes within the maritime framework. The United Nations Convention on the Law of the Sea (UNCLOS) states the only requirement for flagging one’s vessel is that the owner of the vessel and the flagging state have a “genuine link”. This “genuine link” requirement is, as it appears, very vague and efforts to further define the phrase have been unsuccessful and minimal. The lack in a strong legal framework of flagging leads to the exploitation of the FoC system and will come at the cost of both the environment and the safety of workers.

Just a Slice of the FoC Pie

Shipbreaking is not the only activity that FoC impact. The volume of global trade that occurs on maritime vessels make the issue of regulating them essential to promoting safety and security. As of 2019, there are nearly 100,000 seafaring vessels, moving about 500 million shipping containers a year (1.9 billion dead weight tons), worth approximately US$19 trillion. GFI’s calculation estimates that approximately 29% of vessels currently fly FoC. The FoC impact draws linkage to a myriad of other illicit activities at sea including, illegal, unreported and unregulated (IUU) fishing; arms and drug smuggling; sanction busting; counterfeit markets; and environmental crimes.

Sailing Forward

Due to the highly decentralized nature of the international maritime sector and the influence it wields in international fora, implementing stricter regulation will be an uphill climb. However, simple steps can improve transparency and work against clandestine actors. The International Maritime Organization (IMO) should establish a registry that contains beneficial ownership information of the ship owners as well as the ship operators which includes:

  • full legal name, date of birth;
  • current residential or business address;
  • and a unique identifying number from a government identification document (passport, driver’s license, etc.).

A centralized and independent registry allows for better information sharing between member states and law enforcement agencies. In addition, a transparent and central registry will promote flagging integrity, where states can ensure and monitor the compliance of flagging states.

Image by Adam Cohn via Flickr