Flying a Questionable Flag: Liberia's Lucrative Shipping Industry

The now infamous Deepwater Horizon oil rig is, according to international law, a ship. Though it's owned by Swiss-based offshore drilling company Transocean and operated by British Petroleum, the rig is registered to the Marshall Islands, thousands of miles from Europe. As a "flag of convenience" [FOC] state, the Marshall Islands—and a host of other, similarly structured nations—make a handsome living offering any ship owner legal and financial benefits simply by flying that nation's flag. Doing so enables owners and operators to circumvent the laws and taxes of their countries of origin, a substantial financial convenience. The Marshall Islands, with a population of 62,000 and no oil reserves to speak of, has 221 registered oil tankers, four times as many as the United States. It is, in fact, the world's fastest-growing shipping registry. Ironically, its registration occurs within the boundaries of the United States, through a corporate entity called International Registries Inc. [IRI], based in Reston, Virginia, on the outskirts of Washington DC.

The IRI puts their promise bluntly: "Generally the goal is to maximize profitability, while minimizing the risk of exposing beneficial owners to personal liability." Foreign clients keen to access the Marshall Islands' financial services, inaccessible to its own citizens, need only invest an initial fee of $650 to form a corporation within 24 hours, wherever the clients may actually be located. Perks include no taxation, lax regulation and lack of disclosure of critical corporate details—even to the United States government.

So it is hardly surprising that Trans-ocean chose the Marshall Islands as its corporate and maritime flag of choice for 29 of the company's rigs. The rest are registered in Panama and Liberia—the two countries that top the list of FOC states. As it happens, Liberia, too, conducts ship registration in America. Not 10 miles from IRI headquarters sits Liberia's maritime registry, the Liberian International Ship and Corporate Registry, in Vienna, Virginia. The West African nation, sandwiched between Sierra Leone, Guinea and Cote d'Ivoire, is "home" to more than 509 foreign petroleum tankers, making it the second largest maritime nation on earth.

First World Care

Flying Liberia's convenience flag over their maritime and corporate services, American ship owners and operators access first-world corporate client care with FOC concealment. The contract facilitates a process whereby, in the words of the Organization for Economic Cooperation and Development, foreign maritime corporations eager to conceal economic activity can tap into, as the organization puts it, "cloaking" services that are "almost impenetrable." When it comes to the registration of ships, the OECD suggests that "anonymity" is the "rule rather than the exception," as demonstrated by an overwhelming 60 percent of all ships registered in FOC havens. The UN Law of the Sea Convention states that there "must exist a genuine link between the State and the ship." But this rarely is the case, in large part because the Law of the Sea neglects to address the issue of ownership. Indeed, most FOC havens are far from forthcoming regarding disclosure of ownership, and Liberia is no exception. The legally and financially responsible parties are easily disguised through murky arrangements. For instance, stand-in or nominee shareholders can be appointed by owners to represent their interests from behind the corporate veil.

Many FOC jurisdictions do not require that such a veil be penetrated at all, though actual beneficial owners so often work through a legal intermediary and are not even disclosed to the nation whose flag the ship carries. Bearer shares provide yet another level of opacity. Unlike ordinary shares in a company, bearer shares enable total anonymity precisely because physical possession accords ownership, enabling owners to trade such shares in complete secrecy, while ordinary shares may leave paper trails. Moreover, the types of corporate entities offered by FOC havens like Liberia can easily be converted into shell corporations—secretive legal entities that disguise the nature of economic activities. Such shells, conduits for all taxable revenues and profits, are not themselves subject to taxation by Liberia. Their listings reveal only...