Cruising Along... But For How Long?
Sigma Ratings

While the U.S. airline industry was able to bypass criticism and receive a bailout due to the “vital role [they] play in our economy,” the same can’t be said for the cruise-line industry, in which three companies comprise more than 70% of the market. As Carnival Corporation (incorporated in Panama), Royal Caribbean (incorporated in Liberia), and Norwegian Cruise Line (incorporated in Bermuda) extensively lobby for billions in U.S. taxpayer dollars, it’s received widespread blowback, which is surprising in terms of specificity, over their use of flags of convenience (“FOC”).

Flags of convenience, through its registries, allow ships to fly a flag other than the country of ownership, and have proliferated in the time since its creation approximately a century ago. In response to the safety and labor standards established by the Jones Act (otherwise known as the Merchant Marine Act of 1920), U.S. companies began to transfer their vessels to the newly created FOC registries in jurisdictions like Panama, which today has a maritime fleet larger than that of the U.S. and China combined. Notably, the first transfer of ships to Panama's FOC register occurred in 1922 and involved two U.S. passenger ships looking to serve alcohol during Prohibition before others followed in an attempt to avoid higher wages and improved safety and working conditions set forth by the Jones Act.

In addition to evading regulation and oversight, the appeal of FOC is the ease in which they can be obtained, which require less compliance obligations than opening a bank account. In order to acquire an FOC, all that is required (beyond the fee) is a P.O. Box or virtual office address. Notably, no shareholders or individuals associated need to be disclosed. According to the Yale University Center for the Study of Globalization, such flags have been used by drug traffickers, arms smugglers, sanctions evaders, and more alarmingly terrorist groups like Al Qaeda. Such flags are also utilized by corporate giants like BP, and whose use of a Marshall Island FOC for its Deepwater Horizon oil rig, which legally, is classified as “as an ocean-going vessel,” resulted in one of the greatest environmental disasters in recent history.

The lack of regulation and oversight associated with FOC not only results in one-off scandals but undermines our collective responsibilities in an increasingly globalized society. Diamond Princess’ Carnival Corporation, the most popular of the cruise companies, burns so much fuel that it emits ten times more sulfur dioxide around the coast of Europe than all the cars in the EU combined. The cruise lines have also been heavily criticized for having more influence on regulation of these island economies than the United States and global watchdogs like the FATF. Similarly, as The Verge pointed out, cruise companies could base their operations in the U.S. and utilize complex corporate structures for tax benefits like other multinationals, yet they are not required to do so and are therefore subject only to port taxes. Yet, they have represented themselves as an industry in need of a U.S. government bailout during the COVID-19 crisis.

Ironically, given the unprecedented scale of the current pandemic and the increased awareness of the offshore world, their use of Flags Of Convenience has unwittingly turned the practice into a flag of inconvenience that threatens the long term viability of the industry.

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