Global Policy Forum

By Tim Shorrock

A Liberian government lawsuit against the U.S. company that operates its maritime registry has aroused new passions over the "flag-of-convenience" system, which allows shipowners to register their vessels in another country.

The system was introduced after World War II by U.S. shipping companies -- with the assistance of the U.S. government. It was designed to provide revenue to developing countries in Africa, Latin America and Asia and give the U.S. maritime industry, which was then the world's largest, greater operating flexibility.

But since those days, shipowners in other countries have registered their vessels overseas to avoid heavier fees at home. Labor unions in the United States, Europe and Japan have long opposed the "flags of convenience" -- accusing employers of avoiding safety regulations and labor agreements in the own maritime industries by switching their ships to the laws of another country.

Liberia, Panama and the Marshall islands, a former U.S. Pacific territory, thus became "home" to a huge fleet of ocean-going cargo vessels. But now, a lawsuit filed by the Liberian government against International Registries Inc. (IRI) of Reston, Virginia, is giving the unions more ammunition in their fight. IRI operates both the Liberian and Marshall Islands maritime registries and advertises its services on the Internet.

"This lawsuit is a perfect example of the inherent corruption of the flag-of-convenience system," says Bruce Vail, spokesman for the Marine Engineers Beneficial Association. The Washington-based labor union represents 4,500 shipboard engineers working on U.S.-flagged vessels, and recently lost several hundred jobs when American President Lines Ltd. (APL) registered its fleet of containerships in the Marshall Islands.

Liberia's Bureau of Maritime Affairs earned more than $ 17 million per year in revenues from its FOC registry, making it the largest such registry in the world. It began to lose business in 1990, however, when civil war erupted in Liberia, a conflict that left tens of thousands of people dead and much of its capital, Monrovia, in ruins. Since peace was restored, the newly elected government of Charles Taylor has been trying to rebuild the country and regain control of assets lost during the war.

In the lawsuit, the Liberian government claims that IRI -- which runs its registry for the Bureau of Maritime Affairs -- used the civil war to convince shipowners to register their vessels in the Marshall Islands.

In so doing, IRI's top corporate officers "misappropriated the proprietary information and good reputation of Liberia's programs to market and operate the competing Marshall Islands programs," according to a brief filed with the Virginia court which is to hear the case in June.

During the civil war, Liberia alleges, the number of ships registered in the Marshall Islands increased from 29 to 130, while the amount of gross tonnage grew from 1.5 million to 4.8 million, an increase of 315 percent. The Marshall Islands, in fact, has become an important registry for U.S. shipowners in the 1990s.

Major U.S. shipping lines, under competitive pressure from South Korea, China and other major maritime powers, have reflagged many of their containerships in the Pacific island nation. When they reflag, U.S. carriers like APL and CSX-Sea-land Services Inc. also jettison their U.S. officers and crews in favor of cheaper labor from the Philippines, Russia and other developing countries.

In return for the U.S. military protection provided to the Marshall Islands, the companies agree to turn their ships over to the United States in case of a war or military emergency.

Liberia claims that IRI and its executives are "constructing a large new facility in the Marshall Islands that they intend to use as their base of operations to complete the transfer of new shipowners and Liberian shipowners to the Marshall Islands programs." Liberia asked the Virginia court to issue an injunction that would stop IRI and its owners from operating the competing programs and pay Liberia $ 700 million in compensatory and punitive damages for the loss of business.

IRI does not dispute the fact that registries in the Marshall Islands have increased. But the company's lawyers have countered that Liberia is using the lawsuit to evade international arbitration sought by IRI, which has claimed monetary losses allegedly caused by Liberia. Earlier this month, company attorneys asked a Virginia court to cancel the lawsuit and order Liberia into arbitration.

In a twist to the case, however, the counter-filing was not made by IRI itself but by the International Trust Co. of Liberia. ITC is controlled by the same businessmen who own and operate IRI; it administers Liberia's maritime registry program inside Liberia. It was not named in the lawsuit.

In its defense, ITC said it has remitted $ 700 million to Liberia since 1949 and argued that Liberia's civil war forced many shipowners to shift registries outside of the country. "The years of anarchy and horrific violence naturally caused many shipowners to be concerned about the advisability of continuing to register their vessels with a program identified with a nation in chaos," it said.

"However, the independence, efficiency and stability of ITC's administration not only prevented the collapse of the Liberian maritime program but between 1990 and the present significantly increased the revenues derived from Liberia from the programs." The $ 17 million earned by Liberia from ITC in 1997, the company added, was a "primary source of Liberia's total offshore revenues."