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Federal Document Clearing House Congressional Testimony
June 13, 2002 Thursday
SECTION: CAPITOL HILL HEARING TESTIMONY

LENGTH: 2734 words

COMMITTEE: HOUSE ARMED SERVICE

HEADLINE: FLAGES OF CONVENIENCE

TESTIMONY-BY: WILLIAM G. SCHUBERT, DEPARTMENT OF TRANSPORTATION

AFFILIATION: MARITIME ADMINISTRATOR

BODY:
STATEMENT OF WILLIAM G. SCHUBERT DEPARTMENT OF TRANSPORTATION MARITIME ADMINISTRATOR

BEFORE THE HOUSE ARMED SERVICES COMMITTEE

JUNE 13, 2002

Mr. Chairman and Members of the Panel:

I welcome the opportunity to appear before you today to discuss flags of convenience and the implications on national security posed by these vessels.

First, I would like to thank you for holding this hearing. Our heightened need for homeland security requires that we examine the potential impact of the lack of transparency within open registries, which could ultimately lead to a serious threat to our Nation's safety and security. The international corporate operations of the maritime industry are a complex domain - often one over which the United States exerts very little control. Open registries, informally known as "flags of convenience, "are often complicated and convoluted corporate operations. A dialogue on this important aspect of the international maritime industry certainly complements the discussions on port and container security in which Congress and the Administration are actively involved.

Since the tragic events of September 11th, the media has reported some disturbing occurrences in the maritime industry relating to the war on terrorism. First, in an October report, the United Nation's (UN's) Security Council voiced concerns regarding the Liberian Registry which is operated out of the United States by the Liberian International Ship and Corporate Registry (LISCR). The Chairman of the Panel of Security Experts on Liberia found that a total of four payments from the LISCR to the Government of Liberia had been made to non-government accounts and two of these irregular deposits were payments for arms and transportation in violation of UN sanctions. Less than two months later, ABC news reported that Norwegian intelligence had discovered that 23 merchant vessels were operated under Al Qaida control. In January, the Israeli navy seized a vessel transporting 50 tons of weapons and explosives destined for the Palestinian Authority. The ship, the Karine A, was owned by an Iraqi who had registered the ship through Tonga under the kingdom's flag-of-convenience registry which was run by a Greek company in Piraeus, Greece. Recently, four Pakistani crewmen disappeared from a Maltese-flag cargo ship, which was docked in Chesapeake, Virginia. One of these crewmen was recently captured in Texas, but the other three men remain missing.

I highlight these reports, not to repeat old news, but to mention some of the possible maritime threats which have already been reported to the public. However, there is a much more involved picture to paint.

Why Open Registries?

Ship operators, seeking to lower costs, register their vessels in open registries that feature unrestrictive laws, and low tax liability, vessel registration fees, and crew costs. There is considerable variation among these open registries, however. For example, Liberia's maritime and corporate registry has an international reputation as a quality registry, with the fleet having a relatively low average age, below average Port State Control detention rate and low casualty figures. However, some open registries do not enforce minimum vessel safety or design standards. Foreign crews are often paid low wages and live in squalid conditions aboard "ships of shame, "with little or no oversight or recourse in cases of abuse and mistreatment, which can be common in the open registries. The International Labor Organization (ILO) has undertaken the ambitious task of updating and consolidating dozens of seafarers' welfare conventions, and my agency, MARAD, is leading this effort on behalf of the United States.

Further, many crews aboard flag of convenience vessels do not have the same high quality training as U.S. merchant mariners and mariners from OECD member states. Lastly, a ship owner who registers his or her vessel in an open registry does not need to have any connection or link to the country sponsoring the registry. As a result, the flag of convenience regimes can inadvertently open the door for criminal and terrorist activity that would be impossible under the U.S.-flag registry or other reputable flag states with high standards like the United States.

Between 1980 and 1998, countries with developed market economies, (including the United States, Western Europe and Japan) lost about half of their general cargo vessel tonnage to major open registry countries, such as Liberia, the Bahamas, Panama, Cyprus or Malta. For market economies, their share of world general cargo vessel tonnage dropped to approximately 25 percent, while open registries gained, and continue to gain, in world tonnage. Open registries have captured approximately 60 percent of the capacity of the world merchant fleet. In the year 2000, four of the top five registries were open registries. The United States, the world's largest trading nation, was in 13th place in 2000. See Appendix 1.

Effective U.S.-Controlled (EUSC) Fleet

The open registries include ships considered to be under effective U.S. Control (EUSC). The registries commonly associated with the EUSC concept are Liberia, Panama, Honduras, the Bahamas, and the Marshall Islands - and usually crewed by foreign nationals. These ships are majority-owned by U.S. citizens and are thus subject to requisition pursuant to Section 902 of the Merchant Marine Act, 1936. The core of the EUSC concept is the assumption that the concerned nations will not interpose any objection to the exercise by the United States of its power of requisition over ships on their registries. There are no agreements, formal or otherwise, underlying the EUSC concept, which originated in the Department of Defense as a way to avoid the Neutrality Act prior to World War II, before our entry into that conflict, when we wished to supply Great Britain. The composition of the aggregate of EUSC ships varies over time depending on the economic interests of their owners, the usual incentive being relatively low crew costs. Not all EUSC ships are militarily useful and the requisition power does not cover the crewing of any ship requisitioned.

The U.S. as a Flag State

It is critical, now more than ever, to have a strong U.S. merchant marine and U.S. crews. U.S. crews employed on U.S.-flag ships provide the pool of seafarers needed for both commercial and government sealift fleets in times of national emergency or crisis.

Bilateral and multilateral treaties governed by admiralty and international law direct that the national flag of commercial vessels engaged in merchant trade and in military supporting roles determines the resolution of maritime disputes. Therefore, the continued presence of U.S-flag vessels, which are supported by the Maritime Security Program (MSP) and Voluntary Intermodal Sealift Agreement (VISA) program, in the foreign trades provides legal standing for the U.S. Government to protect the interests of American businesses and consumers, including in particular the trade interests of the United States. As a result, the U.S. Government may directly intervene in disputes with foreign countries that regulate or otherwise restrict the operation of U.S.-flag ships, carriers, ports, and connecting intermodal operators abroad to assure that U.S. interests are protected. Because we have U.S.-flag vessels engaged in international trade, we have a recognizable presence in the market which gives shippers a competitive choice of service providers and injects a healthy competitive discipline to the market.

While bilateral treaty rights could be upheld with the presence of a single ship in each major U.S. foreign trade with an individual country, the credible presence of a U.S.-flag fleet of vessels in larger numbers in international trade provides the U.S. Government with the greatest influence in international bodies that create international standards of conduct with respect to shipping safety, as well as commerce. Today, MARAD, the U.S. Coast Guard, the Department of State, the United States Trade Representative, and the Federal Maritime Commission are able to initiate, as well as negotiate the international rules, regulations and guidelines that affect U.S. foreign trade, public safety, and environmental protection, as a flag-state member. These organizations include the UN's International Maritime Organization (IMO) and World Trade Organization (WTO), the Organization for Economic Cooperation and Development (OECD), as well as number of regional groups.

Now more than ever, our presence as a flag-state is critical to our national interests. If we lost all our U.S.-flag vessels to open registries tomorrow, our presence in the international maritime arena would be diminished to that of a port state only - - at a tremendous cost to U.S. national security and economic interests.

Returning to the U.S flag

Encouraging shipowners to return to the U.S. flag is a daunting task, especially when compared to the economic advantages of open registries. However, the best way to protect our homeland and national security interests across the globe is a strong U.S.- flag fleet manned by U.S. citizen mariners. If we did not have the Jones Act , cargo preference, and the MSP and VISA programs, I can assure you it is unlikely that ships would remain under U.S.-flag, and the U.S.-citizen mariner pool needed by the Department of Defense in times of national emergency or war would disappear.

In general terms, the following differences between the U.S. and foreign open registries apply:

U.S. flag Flag of Convenience Taxes & Fees High None or Little Regulatory Requirements High IMO Minimum Standards Crew & Vessel Ownership* Crew-- Not known; not transparent

*As defined by various licensed -100% U.S. citizens statutes unlicensed- 75% U.S. citizens

Many maritime scholars, industry experts and some members of Congress have suggested a complete reexamination of the tax laws which govern merchant shipping in order to create more incentives for investment by shipowners to return to the U.S. flag. These and other options to increase the number of vessels under U.S. registry should be fully explored and given the highest consideration.

Who is crewing the world's merchant fleet and vessels entering the U.S.?

Over 97 percent of U.S. overseas trade (by tonnage) now arrives or departs on foreign vessels. In November 2000, the Maritime Administration compiled a report entitled, "Foreign-Flag Crewing Practices"which summarized 9,760 crew lists of over 3,456 foreign-flag cargo vessels calling in 1998 at the top four U.S. port areas in terms of cargo tonnage (Houston, TX; New Orleans, LA; LA/Long Beach/San Diego, CA; and Newark,NJ/New York, NY) and three additional ports for geographic balance (Miami, FL; Savannah, GA; and Seattle, WA). While the study did not cover all foreign-flag vessels entering U.S. ports, the seven ports examined accounted for 38 percent of all U.S. port calls in 1998 and 209,719 individual crewmember entries. At the time, 1998 data was the latest available for the study.

The study found that the Philippines, China, India, Russia, Ukraine, Greece, Poland, Croatia, South Korea and Myanmar were the ten most common nationalities of foreign-flag crews calling at the seven major U.S ports sampled.

Like the vessel owners who have registered their ships in the open registries, there is little relationship between the vessel's flag and the nationality of crewmembers aboard each vessel. For the top five foreign vessel flags, the crews were primarily from five different nations:

Flag Nation Primary Crew Nationality

Panama Philippines

Liberia China

Cyprus India

Bahamas Russia

Greece Ukraine

The top 10 mariner-supplying nations for vessels engaged in domestic as well as international trade in 2000 and 1995 are presented in the table below. However, Russia and China are rapidly becoming dominant in mariner supply.

Country Share of Total Rank

Philippines 36.9% 1

China 6.5 2

India 5.8 3

Russia 5.2 4

Ukraine 4.1 5

Greece 4.1 6

Poland 3.9 7

South Korea 3.3 8

Croatia 2.4 9

Myanmar 1.6 10

Conclusion

While it would be difficult to eliminate the lack of transparency and other problems inherent in the international operations of the open registries, there are things we can do to further deter threats from the maritime domain. Pre-screening of crew identification before seafarers arrive in U.S. waters is critical. U.S. authorities should have positive and verifiable identification cards for all crew members to help deter crew from using a seafaring position to illegally enter the United States. These forms of identification could also assist authorities in capturing individuals who illegally jump ship.

We must also continue to work with other governments and agencies to prevent fraudulent mariner documentation and practices associated with the issuance of seafarer credentials and with other vessel certificates. A recent International Maritime Organization study found that the incidence of fraudulent practices was found to be "much higher than anyone thought"before the IMO study: 12,635 cases of forged certificates and roughly as many incidents of "laundering"(where forgeries were used to obtain legal qualifications from authorities which failed to check for original documentation). In the Philippines, for example, which is a significant source of seagoing labor, the sale of seafarer certificates was found to be profitable for organized syndicates engaged in "transnational business"as well as for civil servants to supplement their income. In addition to obtaining employment on board vessels, fraudulent certificates have also been used for illegal immigration, to commit piracy, to traffic drugs and immigrants, and for other criminal activities. In addition, around 85 percent of employers detected fraud over the past five years. MARAD is working with the ILO to achieve a new international agreement on positive and verifieable identification for all seafaring personnel.

Finally, high cost registry requirements, regulatory standards, and taxes and fees make it difficult for U.S. carriers in international trade to compete with low-cost, flag-of-convenience vessel operations. The United States does not need to lower its labor and environmental standards, but should continue to work with the International Maritime Organization to assure international standards are fair and universally implemented. We should, however, explore ways to make the U.S. flag more attractive to potential U.S. citizen investors, through market and financial incentives that have been successful in other seafaring countries.

In today's environment, we should not compromise our security. In the United States we know who owns our ships, who operates them and who crews them. There is no better assurance to our nation's national security interests than a strong U.S.-flag merchant marine.

I would be remiss if I did not at least mention the Coast Guard's efforts in this area. According to the 2000 Port State Control (PSC) Project Report, the total number of vessels visiting U.S. ports rose slightly from 1999 to 2000, while the number of detained ships declined. Of the 51,871 port calls made by 7657 individual vessels from 95 different flag states, 11,767 exams were conducted and 193 vessels were detained. Additionally, the three-year rolling detention ratio of detentions to individual vessels dropped from 5% to 3.6% in 2000, providing evidence that the quality of vessels visiting U.S. ports is improving.

As a final comment, I would like to see the truly bad flag-of- convenience operators relegated to a role of "flag-of- inconvenience."We neither need nor want those ships whose owners try to circumvent the legitimate demands of the world maritime community for safe, high quality ships. While it is not the policy of the United States to dictate where ship owners invest their money or register their ships, we must continue to pursue the elimination of substandard ships utilizing our port state control authorities to the fullest extent. We must vigorously lead international efforts to eliminate the underlying conditions that have led to notoriously weak vessel registries.

I would be pleased to answer any questions you may have at this time.



LOAD-DATE: June 14, 2002