Flag of convenience FOC refers to a business practice whereby a ship's owners register a merchant ship in a ship register of a country other than that of the ship's owners, and the ship flies the civil ensign of that country, called the flag state.
Each merchant ship is required by international law to be registered in a registry created by a country, [ 2 ] and a ship is subject to the laws of that country, which are used also if the ship is involved in a case under admiralty law. A ship's owners may elect to register a ship in a foreign country so as to avoid the regulations of the owners' country, which may, for example, have stricter safety standards.
They may also select a jurisdiction to reduce operating costs, avoiding higher taxes in the owners' country and bypassing laws that protect the wages and working conditions of mariners. A registry which does not have a nationality or residency requirement for ship registration is often described as an open registry. Panama, for example, offers advantages such as easier registration often online , the ability to employ cheaper foreign labour, and an exemption on income taxes. The modern practice of registering ships in a foreign country began in the s in the United States when shipowners seeking to serve alcohol to passengers during Prohibition registered their ships in Panama.
Owners soon began to perceive advantages in terms of avoiding increased regulations and rising labor costs and continued to register their ships in Panama even after Prohibition ended. The use of open registries steadily increased, and in , Liberia grew to surpass the United Kingdom with the world's largest ship register. Traditional maritime nations, mainly from Europe, responded to this practice with creation of so-called " second registers ": open registries, using national flags or flags of semi-sovereign offshore dependencies.
The last two registries are still in considered as flags of convenience. As of [update] , more than half of the world's merchant ships in terms of deadweight tonnage are registered in open registries. Open registries have been criticised, mainly by trade union organisations based in developed countries, especially those in the European Union, United States, Japan, Canada, or the United Kingdom.
