By: Christine M. Walker | June 13, 2022
As published in the Daily Business Review
The U.S. Virgin Islands open ship registry launched on Feb. 1, 2022. Open registries, often referred to as flags of convenience, refer to registry systems that allows vessel owners to register their vessel under the flag of that country, despite no genuine link existing between the flag state and the vessel. Open registry countries generally allow foreign ship owners to register their ship in their country with minimal or no requirements to show national, social or economic connections to that country.
In contrast, a closed ship registry country requires a genuine jurisdictional link between the country and the ship through requirements, such as, the ship owner and crew sharing the nationality of the flag state and the ship-owning company having headquarters within the flag state. Closed ship registry’s comply with both Article 5 of the 1985 United Nations Convention on the High Seas and Article 91 of the United Nations Convention on the Law of the Sea, which provide a country with the right to fix the conditions for the grant of its nationality to ships so long as a genuine link between the flag state and the ship exists. Nevertheless, there is no agreed upon understanding as to what constitutes a genuine link, which has allowed states freely adopted open registries without observing the foregoing genuine link requirement.
The laws of the vessel’s flag state generally apply to the vessel and its crew when on the high seas. Critics of open registries often assert that countries that have open registries usually have lax tax, employment and environmental protection laws. Specifically, most foreign ship owners are not subject to income or withholding tax in those countries, making them attractive tax havens for foreign ship owners. Additionally, while open registry countries have ratified international conventions regarding ship operations, safety and maritime environmental protection, these conventions provide the bare minimum of rights and protections. The requirements in close registry countries are higher, which makes operations more expensive.
At present, Panama, Liberia and Marshall Islands account for the registration of more than 50% of all commercial vessels. Therefore, those in favor of the U.S. Virgin Island open ship registry have taken the position that an open international flag out of the U.S. Virgin Islands will provide responsible and transparent oversight to a commercial fleet of foreign and domestically owned and operated vessels. This registry will not be a flag of convenience, but rather a flag of responsibility, that will reform bad practices in other open registry countries.
From a fiscal perspective, proponents also argue that the new registry will increase U.S. tonnage, maritime labor capacity, oversight of global trade and commerce and green sea initiatives. In contrast, opponents of the new registry have taken the position that the new registry will not benefit the United States maritime industry. Opponents of the new registry find support for their view under the Jones Act. For national security and commercial reasons, historically, the Jones Act has restricted water transportation of cargo between U.S. ports to ships that are owned, crewed, registered, and built in the United States. As a protectorate of the United States, however, the U.S. Virgin Islands is not bound by the Jones Act. Opponents fear that the establishment and growth of the U.S. Virgin Islands open registry will decimate the U.S. national flag fleet to the point that it will no longer have the capability to support the requisite military security and logistical needs of the United States.
Prior to COVID-19 and the present supply chain crisis, many citizens might not have been aware of how dependent the United States is on foreign goods. With shortages and delays felt across all industry sectors, citizens are now acutely aware of this dependence. With several tense international security situations occurring over the past few years, citizens are, likewise, acutely aware of the risk of being dependent on a foreign country for goods.
Thus, the U.S. Virgin Islands open registry touches on several important public policy issues of late. These issues include if the open registry will make the United States less dependent on the foreign supply chain and the cost of subsidizing American maritime operations relative to the national security benefits. Whether the U.S. Virgin Islands new open ship registry will serve as a friend or foe to the U.S. maritime industry remains unknown. Irrespective, there will always be a need for the U.S. flagship fleet. To the extent that the fear that new U.S. Virgin Islands open ship registry will hurt the U.S. commercial fleet’s ability meet the national security and logistical needs of the country comes to fruition, the same may have to be addressed through the appropriate regulation.
Christine M. Walker is a shareholder in Fowler White Burnett’s maritime practice group, where she focuses her practice on all aspects of admiralty law. She received her LL.M. in admiralty from Tulane University Law School, and her J.D. from Nova Southeastern University Shepard Broad Law Center.