Why is the Panama flag so popular among shipowners?

According to agency reports, the crew was able to resolve the problems linked to the engine failure it had reported itself. The tanker is now moored off the coast of Skagen in northern Denmark. This is also where the Eventin is supposed to be taken, but as of Thursday German authorities were not allowing it to continue its journey.

In contrast to the Eventin, the Jazz does not appear on the “shadow fleet” document compiled by the environmental organization Greenpeace, which lists “previously unsanctioned crude oil tankers older than 15 years that have exported oil from Russia several times since the start of the war.”

There are about 190 such vessels in the list. Russia is thought to be using tankers flying under a different flag to circumvent the international oil embargo that was imposed after its full-scale invasion of Ukraine in February 2022.

The Eventin and Jazz both have in common the fact that they were sailing under the Panama flag. Why is this South American country’s flag so popular?

Easy ship registration procedure

One possible reason is the easy ship registration procedure. Panamaoperates an open registry and any person or entity, regardless of nationality, is eligible to register a vessel under its flag. The number of registered ships is not restricted.

The Central American country, which boasts 4.4 million inhabitants, has far more registered ships than other states. According to the United Nations Conference on Trade and Development (UNCTAD) around 16% of the world’s merchant ships sailed under the Panama flag in 2023. Last year, The Maritime Executive, a media platform, said that Panama had closed 2023 with 8,540 vessels, which made it the largest registry by number of vessels.

Cutting costs with a flag of convenience

According to Alexander Proelss, a professor of International Maritime Law at the University of Hamburg, “Panama is a typical flag-of-convenience state.” He told DW that such states enabled “shipping companies to register their ships at comparatively low costs and thus fly the flag.” He said that this allowed for certain wage standards and shipping regulations to be circumvented. Meanwhile, for Panama, the registry makes for a lucrative business.

Proelss said that the problem had been known for decades and that it could not easily be resolved in light of the principle of flag sovereignty in maritime law. He said that previous attempts to rectify the issue had failed.

A custom that goes back to the Prohibition era

“Flagging out” and using the flag of Panama is a practice that goes back to the end of the First World War and the Prohibition era, when alcohol was prohibited on US ships but not those flying the flag of Panama. This was when the open registry was introduced, also to avoid paying the higher wages and offering the better working conditions stipulated by US law. After Panama came Honduras and Liberia. According to a University of Bremen blog, the practice boomed in the 1980s.

It was met with criticism, and European states tried to counter the trend by opening offshore registries that were supposed to offer shipowners better conditions. Offshore or dependency registration means that ships are registered in territories whose general administration rests with a parent, or flag, state, but generally regulations are less strict and taxes lower.

The UN Convention on the Law of the Sea, a multilateral treaty often referred to as a “constitution for the seas,” stipulates that there must be a “genuine link” between a state and the ship flying its flag.

However, the International Tribunal for the Law of the Sea clarified several years ago that this criterion does not restrict the right of a state to award its flag to a ship. It must merely ensure the performance of flag state duties after the flag has been awarded.

Little to be done in international maritime law

Generally, it is impossible to prohibit ships from sailing under a “foreign” flag or crossing certain waters. Proelss told DW that “a blanket navigation ban for suspicious tankers is not compatible with international maritime law.” He said that this could at best be introduced for ships flying the Russian flag.

With regard to safety issues, there is some progress in Panama. According to The Maritime Executive, the authorities announced that 160 vessels had been removed from the ship registry in 2022. Their average age was reportedly 17 years. They included almost 80 fishing vessels, suspected of being involved in unregistered and unregulated fishing.

This article was translated from German.