It is eight-thirty on a Monday morning in south Florida. A small group of people board a sea-going vessel of palatial proportion that is floating beside the dock. Minutes later, the engines begin to churn the waters aft of the boat and head east into the sun-kissed waters of the Atlantic. The definition of craftsmanship and elegance is slightly more than one hundred feet from bow to stern, capable of traveling long distances at sea without ever seeing a port. On board are the new owners and their family, a broker who arranges for the purchase of vessels between two parties, a seasoned captain, and an attorney specializing in registering vessels in a territory outside of United States jurisdiction.
On this morning the vessel will transfer ownership at a longitude and latitude miles into international waters beyond the Florida coast. Shortly after returning from the sales transaction at sea, the vessel’s registration will be changed to a territory offshore; it will fly the flag of the British Virgin Islands, the home port at the stern of the vessel will read Tortola, and it will be protected under and governed by the sovereign island nation of the British Virgin Islands.
For a vessel docked in the United States that is primarily used in the United States and owned by Americans to be legally registered to and protected by another nation’s laws without ever having to enter into the territory of another nation is legitimate. Desirable pragmatic and legal reasons for an attorney’s client to choose a process of flying the flag of another country on their vessel instead of their own are based on a history of giving their vessel a nationality.
The process of registering vessels is ubiquitous.[i] Developed nations historically considered the flagging of their vessels to be a practical and symbolic extension of territorial rights.[ii] In accord, the rights and laws protecting the people of the governing nation were extended and assigned to the navigable vessels of that nation under a system called ship registry.[iii]
Offshore jurisdictions that operate ‘Open Registries,’’[iv] better known as ‘Flags of Convenience,’ are “countries allowing the registration of foreign-owned and foreign controlled vessels under conditions which, for whatever the reasons, are convenient and opportune for the persons who are registering the vessels.”[v] The process is performed by legally creating a business entity in the foreign jurisdiction where the owner finds the laws of the territory advantageous to their needs, and the business entity then purchases the boat and registers it with the foreign country’s shipping registry.[vi] It is the sole responsibility of the state issuing registration to make sure that the vessel conforms to the conditions by which the registration is granted and maintain control over the internal affairs of the vessel.[vii] The vessel then conveniently flies the flag of the country it is registered to, regardless of the vessel owner’s nationality, the vessel’s initial nationality before transfer, or where the vessel was built.
The United States Supreme Court has ruled in accordance with the principles of international law generally accepted by civilized nations in that so long as there exists a genuine link [viii] between the state and ship, the laws of the state to which the vessel is registered generally has complete jurisdiction over the vessel’s internal affairs.[ix]
Registering a vessel in a territory outside of United States jurisdiction is beneficial to owners because it “…Subjects the boat to the laws of that country, and it is treated as a foreign vessel when it enters U.S. waters. The U.S and foreign countries all deal with vessels for customs, immigration, duty, and other purposes based on how the boat is flagged, rather than who the ultimate beneficial owner of the boat might be.”[x] The impact of giving a vessel a convenient nationality is clear and convincing.
The Rochdale Report,[xi] compiled in 1970, prominently outlines the earliest inherent benefits afforded to vessel owners who opt to use flags of convenience. These factors remain considerably the same today. The most important consideration to American vessel owners when registering their vessels is safeguarding their interests from United States jurisdiction over personal injury claims occurring on U.S.-flagged vessels on the high seas, arising out of the Jones Act.[xii]
The Jones Act [xiii] allows any seaman regardless of nationality working on U.S. flagged ships to bring a personal injury claim for negligence against their employer. Offshore vessel registration may limit a vessel owner’s liability from potential tort claims when either chartering their boat for commercial purposes or from licensees who sustained injuries while on their vessel.[xiv] Additionally, offshore vessel registration may be convenient to certain vessel owners because they have the possibility to forum shop in open registry countries with accommodating laws.[xv]
Another popular reason for using flags of convenience is that vessel owners may see increased profits by taking advantage of the relaxed restrictions normally found in open registry countries on issues of commercial chartering, vessel age and or structural condition, as well as, training and safety standards for crew.[xvi]
Other economic considerations that attract clients are their vulnerability to paying a slew of local, state, federal, or luxury taxes associated with vessel transactions in their home countries.[xvii] Open registries operate as a tax haven to sidestep excessive levies since vessels operating under foreign flags in U.S. waters are not exposed to certain taxes.[xviii] Additionally, open registries operating as tax havens may provide increased protection against creditors.[xix]
Lastly, sea piracy and terrorism on the high seas in certain parts of the world make traveling dangerous for Americans.[xx] Flying an American-flagged vessel may increase chances of attack. Therefore, vessel owners worried about their security may consider offshore vessel registration to quell avoidable scrutiny.[xxi]
Beware, however, registrant convenience and protection under the laws of an open registry is not absolute. Environmental disaster, substandard safety enforcement, poor crew training, and lax vessel inspections have been cited to open registry operations, and may ultimately affect the chances of prosecution or civil liability in United States. The landmark “significance of connection test”[xxii] passed down by the United States Supreme Court, as well as a patchwork of other holdings have continuously allowed vessels to be stripped of their jurisdiction to put an end to “mechanics on evasive schemes.”[xxiii]
Therefore, while there is no greater authority on the high seas than that of the law of the nation to which a vessel may be registered, the trend has been increasingly to view vessel nationality as an element among many that dictates control over the vessel itself. There no longer exists the possibility for a beneficiary to completely remain hidden from liability by registering offshore. Jurisdiction has its limits.
[i] Jane M. Wells, Vessel Registration in Selected Open Registries, 6 Mar. Law. 221 (1981).
[ii] Directors of the Columbia Law Review Ass’n, Inc., Panlibhon Registration of American-Owned Merchant Ships: Government Policy and The Problem of the Courts, 60 Colum L. Rev. 711, 713 (May 1960).
[iii] H. Edwin Anderson, III, The Nationality of Ships and Flags of Convenience: Economics, Politics, and Alternatives, 21 Tul. Mar. L.J. 139, Winter 1996, at 141.
[iv] Frank L. Wiswall, Jr., Address at Southeastern Admiralty Law Institute (1981).
[v] Boleslaw A. Boczek, Flags of Convenience: An International Legal Study 111-112 (1962).
[vi] Gregory A. McLaughlin, Choosing a Home Port: Offshore Registration. Southern Boating, Apr. 2004 at 92.
[vii] Restatement (Third) of Foreign Relations Law § 501, note 7 (1987).
[viii] Convention on the High Seas, U.N. Treaty Series, 450, Art. 5 (Apr. 29, 1958).
[ix] McCullough v. Sociedad Nacional de Marineros de Honduras, 372 U.S. 10, 21 (1963).
[x] McLaughlin, supra, at 92.
[xi] Committee of Inquiry into Shipping, Rochdale Report, Cmd. No. 4337, H. M. Stationary Office, London (1970).
[xii] McLaughlin, supra, at 92.
[xiii] 46 U.S.C.A. §30104 (West 2006).
[xiv] McLaughlin, supra, at 92.
[xv] Anderson, III, supra, at 148.
[xvi] McLaughlin, supra, at 92.
[xvii] Id. at 93.
[xix] Id. at 94.
[xx] Id. at 93.
[xxii] Lauritzen v. Larsen, 345 U.S. 571, 573 (1953).
[xxiii] Bartholomew v. Universe Tank Ships Inc., 263 F.2d 437 (2d Cir. 1959).