Ever since the United States encouraged Panama's independence from Colombia and orchestrated the 1903 treaty that gave it the right to build and operate the Panama Canal, Panama has frequently been a convenient haven for U.S. businessmen. In 1922, the transfer of two passenger liners, the Reliance and the Resolute, from the U.S. to the Panamanian registry represented the first major step in the development of the flag of convenience system. Panama offered ship registration in a country free of burdensome laws and regulations found elsewhere. In this case, the passenger liner company wished to avoid the U.S. prohibition laws against serving alcohol on board.

The Panamanian registry, run from offices in New York, has grown steadily since then and now includes more than 6,000 ships. Ship registration generates approximately $255 million annually in revenue for the Panamanian government. Owners from Japan, Greece, China and South Korea claim 70 percent of Panama's fleet.

In 2001, Panama's registry made the mistake of selling a first officer's certificate to the general secretary of the International Transport Workers' Federation (ITF), David Cockroft, in spite of his having absolutely no seafaring experience. The ITF, an international federation of transport trade unions, is well-known for strongly opposing the flag of convenience system. "The laugh is on Panama," said Cockroft, "whose controls are so lax that they hand out a vital document to the head of an organization that for 53 years has challenged the abuses permitted by flags of convenience states such as theirs. It's like awarding a good conduct medal to Attila the Hun."

Perks of the Flag

Shipping companies with vessels flagged in Panama are free from Panamanian taxation and do not have to be located in Panama. Panamanian Law requires that 10 percent of the crew be Panamanian, but a study has shown that this rule is generally ignored. Ships pay a flat registration fee as high as $3,000 and annual fees that range between $1,800 and $3,000; discounts of up to 50 percent are available for larger fleets. Registration itself is easy and can be completed in one day by fax.

WHAT THE REGULATORS SAY

The relatively high detention rate for Panama's ships has placed the country on international blacklists as a "medium risk" flagging nation. This rating suggests that Panamanian ships are more likely to be violating international safety, labor or environmental codes and encourages members of the shipping industry to keep a close watch on vessels flagged there. Between 1999 and 2001, port authorities operating in Europe and North America inspected more than 5,000 Panamanian ships. Of these ships, 525 were found to have serious enough problems that the vessel was detained until those problems were resolved. Panama also has more casualties, or ships lost through accident, than any other registry -- 15 ships were lost in 2001 alone.

A MEMBER OF THE FLEET: GAZ POEM

In November 2002, a fire broke out inside the engine room of the 26-year-old gas tanker Gaz Poem. The ship was 38 km east of Hong Kong. Given that the tanker was carrying a highly volatile load of liquefied petroleum gas, the fire posed a serious threat for a major explosion. Fortunately, the prevailing wind kept the fire away from the cargo hold, and the fire eventually burned itself out. Later, investigations showed that the cause of the fire was a burst oil pipe. The Gaz Poem turned out to be 10 years older than the average age of the Panamanian fleet, yet in February 2002, the ship had passed a Renewal Class Survey as well as statutory surveys on behalf of Panama. So the accident raised a couple of questions. How was a ship of that age able to pass the surveys? And even if it did pass the surveys legitimately, why would a ship that age be permitted to carry dangerous cargo?"

• Introduction
• Belize: Where Have All the Fish Pirates Gone?
• Bahamas: Cruising a Sea of Labor Complaints
• Panama: Home of "Convenience"
• Tonga: Closed for Security Concerns
• Liberia: Ruling the Waves From Virginia

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