4 Banking Issues Most Often Faced by Shipping Companies
In our work, we often find that banks, in their eagerness to adhere to regulations, overdo these rules, and this negatively impacts their clients’ businesses. One of the industries suffering from overcompliance is shipping. We discuss the most common problems shipping companies face when dealing with banks. And we’d like to remind everyone: not only are requirements important, but so is common sense.
So, given: a shipping company registered, let’s say, in Panama. Or the Marshall Islands. What do many bank employees see? Ooooh, “black offshore zones”! What do people familiar with the maritime business see? A flag of convenience. Let’s delve deeper.
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Flag of convenience, or FOC is a business practice whereby a ship’s owners register a merchant ship in a ship register of a country other than that of the ship’s owners, and the ship flies the civil ensign of that country, called the flag state.
Each merchant ship is required by international law to be registered in a registry created by a country, and a ship is subject to the laws of that country. To circumvent higher taxes in their home country, shipowners often choose to register their vessels in foreign nations, a practice commonly referred to as “flag of convenience,” a term coined in the 1950s.
A registry that doesn’t impose nationality or residency prerequisites for ship registration is typically known as an “open registry.” Panama, for instance, offers a range of advantages, including simplified registration procedures, the ability to employ cost-effective foreign labor, and exemptions from income taxes. This practice of registering ships in foreign countries traces its roots back to the 1920s in the United States, where shipowners, looking to serve alcohol to passengers during Prohibition, began registering their vessels in Panama. Even after the end of Prohibition, shipowners continued to register their ships in Panama due to perceived benefits like evading stricter regulations and escalating labor costs.
The use of open registries steadily increased, and in 1968, Liberia grew to surpass the United Kingdom with the world’s largest ship register. As of 2021, more than half the world’s merchant ships were registered with open registries, and almost 40% of the entire world fleet, in terms of deadweight tonnage, (DWT) were registered in Panama, Liberia, and the Marshall Islands. It is estimated that nearly two thirds of the world’s fleet is registered in states to which they had no connection.
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So, a shipping company registered in one of the “flag of convenience” jurisdictions comes to us. It’s not an offshore company with an obscure ownership structure: it’s a legitimate ship, transparent business. What issues do such vessels face when dealing with banks?
First: the problem of opening an account. The mere name of the state under whose flag the ship sails gives most banks the impression as if you’re invoking demons. Such companies often get rejected without even starting to review the documents.
Second: tariffs. Many banks categorize these clients as super high-risk customers simply because these jurisdictions are often used for conducting questionable transactions.
Third: commissions for paying salaries to their employees. Every ship has a crew. More often than not, these are people from different countries. And when paying them, the bank charges a commission as if it’s an overseas payment (even though they could open an account for the crew in the same bank and transfer there, or to make payments as local transactions for significantly lower fees.).
Fourth: transaction speed. The ship is docked at the port, all the cargo has been loaded, all documents are in place. The ship needs to receive money from the cargo suppliers and from that money pay for everything: from food on the ship to port fees. However, the bank delays the payment, asking, “Why is an offshore and non-public company providing food services on board your ship?” and requests additional food acceptance and transfer documents with the captain’s signature and stamp. For ships, transaction speed is crucial: often, if the money is held up, so is the ship.
Any financial institution must ensure the integrity of the funds passing through its service. The rules set by the regulator are more than justified. However, it’s essential not only to comply with them but also to understand why they were devised.
