Printer-friendly versionSend by emailPDF version

Using the example of apartheid South Africa, Khadija Sharife reveals the history of how huge oil companies have used flags of convenience in the shipping industry to secure corporate capitalism.

If former apartheid statesman PW Botha is to be believed, the voluntary oil embargo cost the apartheid regime a great deal. ‘Between 1973 and 1984 the Republic of South Africa had to pay R22 billion more than it would have normally spent,’ he stated in 1986. The oil embargo was not created at the behest of collective-security organisations such as the UN's Security Council or recognised members of the international community, chiefly sovereign nations states. It was instead the product of immense collective mobilisation on the part of the African National Congress (ANC), in addition to other local and foreign movements, including NGOs.

Botha cited the need to keep 'locomotives and motor cars' running. He might have referred to the fuel extensively utilised by the military and police. Major suppliers included Mobil, Chevron and Shell, as well as countries like Iran. From 1970 to 1978, the US-backed Shah was a ready exporter.

‘When the Shah fell in 1978 Iranian [oil] supplies dried up and we had to look elsewhere. It is to our credit, not only the oil industry but the South African Government, that there was never one shipment of oil, so to speak, missed,’ said Dennis Fletcher, chairman and managing director of Caltex SA Ltd, previously part of Chevron, then known as Texaco. According to the company (1978), ‘Caltex Oil S.A. (Pty.) Ltd. is incorporated under the laws of South Africa and subject to the laws and regulations of that nation. Caltex South Africa is required by Government directive to sell petroleum and petroleum products to any credit-worthy citizen or organization, and dissemination of information outside South Africa respecting the sales of petroleum and petroleum products to the military and other customers is restricted by South African law.’

‘Although we are effectively prevented from buying oil openly, we still get exactly what we want,’ said Fletcher.

The system was for Caltex to inform the UK branch of the wholly owned US company of oil requirements. The UK branch would outsource flags and ports from the Shah's Iran. ‘Caltex UK would then purchase supplies and arrange for them to be loaded, usually at ports in the Persian Gulf,’ wrote the Financial Mail in 1974. When the Shah was deposed, the Louisiana Offshore Oil Port and the US Virgin Islands became a primary oil trading and trans-shipment center.

‘We have reason to believe that some of the ships and companies involved in shipping oil to South Africa are beneficially owned by U.S. persons, though the ships are registered in “flag of convenience” (FOC) countries,’ disclosed a proposed US sanctions bill in 1988. The bill failed to pass the Senate and become law. Mobil allegedly threatened to sue the US government if the bill was passed.

In 1980, Mobil disclosed to shareholders, 'total denial of supplies to the police and military forces of the host country (South Africa), is hardly consistent with responsible citizenship,' and reiterated Caltex/Chevron's position stating, ‘In order to continue to do business in South Africa, our subsidiary, Mobil Oil Southern Africa, must comply with South African laws and regulations. Our subsidiary cannot be in compliance with those laws and, at the same time, adhere to the requirements of this stockholder proposal. The effect of this resolution, if adopted, would be to place in very real jeopardy both the employees of our South African affiliate and our ability to continue to do business in South Africa.’

The UN Security Council, led by the US and UK, repeatedly blocked suggestions for a mandatory oil embargo under Chapter VII of the UN Charter. Nor did the UN Law of the Sea Convention stipulate that ownership or the ultimate beneficiaries of ship owners and operators be disclosed. Though the two may appear entirely disconnected, the role of FOC jurisdictions, enabling the South African government as well as foreign-owned and national corporations to outsource flags of another state, facilitated the activities financing and abetting the apartheid regime.

In 1988, the UN General Assembly noted that it was crucial to ‘terminate the transport of oil to South Africa by ships flying their flags, or by ships that are ultimately owned, managed or chartered by their nationals or by companies within their jurisdiction’; and ‘to develop a system for registration of ships, registered or owned by their nationals, that have unloaded oil in South Africa in contravention of embargoes imposed’.

Missing from the system of identification was the role of foreign entities intentionally supplying oil to the nation through a collaborative process designed to literally grease the wheels of export-oriented resource exploitation utilising cheapened labour.

This included not simply oil, but outflows of diamonds, gold, uranium and other resources. Concealing the real owner of vessels, including oil rigs, classified as ships under the norms of international law, is as simple as filling out a form and incorporating a paper company in an FOC jurisdiction. As I learned - and a fact that the Organisation for Cooperation and Development (OECD) confirmed - the use of FOC for vessels is not the exception, but the rule.

More than half the global fleet have been registered in sovereign jurisdictions classified as ‘flags states’, specifically Liberia, Panama and the Marshall Islands. Ironically, many of these jurisdictions do not host vessels of national origin or that are nationally owned. Instead, the vessels bear the nationalities of major industrialised economies such as Germany, Switzerland, the Netherlands, the US and the UK.

Liberia alone hosts 509 oil rigs, almost ten times that of the US. Holding 10 per cent of the global fleet, and classified as the world’s second largest 'flag state', Liberia's corporate and maritime registry reflects, for instance, 1,049 German vessels, in addition to that of Hong Kong, Russia, the UAE, Canada and Brazil amongst others.

Foreign owners and operators have intentionally relocated to Liberia for specific reasons: not only does the country allow for foreign clients to ‘purchase’ a flag for a cheap collection fee, circumventing in the process labour, financial, environmental and other national regulations, but it also enables clients to access complete secrecy surrounding the nature of the shipping world.

The origins of FOC, present throughout the history of civilisations, was formalised and modernised during WWII when the US government, US multinationals and their allies, utilised ‘flags of convenience’ to bypass perceived enemy-lines and continue with business-as-usual - including the supply of US oil tankers to communist China.

Though it was Panama that was initially utilised - and indeed, would become the world's leading 'rent-a-flag' state - the US government lacked direct control over the processes involved and the system itself was underdeveloped. It was to Africa that they turned through Secretary of State Edward Stettinius. A former chairman of United States Steel, Stettinius began promoting Liberia as the US’s 'sole beachhead' in Africa against communism, after a brief visit in the early 1940s.

Discovering vast iron-ore and rubber resources, coupled with cheap labour and a crucial geo-strategic location, he negotiated the 'port agreement' signed between the Liberian government and the US government to develop the Port of Monrovia via the lend-lease aid system to allies. The deal was sealed during his term as administrator of the lend-lease programme.

Though he used humanitarian concern as the primary motivating factor, Liberia is known in American history as the only colony ever established by the US, founded by the American Colonisation Society, ‘as a settlement for freed slaves’. States such as Virginia and Maryland, in particular, experienced a considerable mass of emancipated 'free negroes', ‘in the body politic, yet not a part of it’.

Roland Falkner, chairman of the American Mission to Liberia, stated that the creation of the Republic was the ‘product of Southern philanthropy, not the outcome of the militant-type of anti-slavery which arose later in the Northern states’, facilitating ‘expiatory repatriation’. But Liberia's geostrategic purpose, as an ‘invisible protectorate’ (Rosenberg) would later emerge following WWI as a cornerstone of US foreign policy.

Thanks to the influence of revolving-door persons such as Stettinius, mega oil corporations such as Standard Oil and others such as former Congressman Joe Casey, founder of the American Overseas Tanker Corporation (AOTC) via the Casey Group, the idea of Liberia as a 'FOC-haven' was conceived. According to an investor in AOTC, attorney Stanly Klein, who would later be retained by Stettinius to develop his US-based Liberia-flag maritime and corporate registry, owners were ‘fed up to the backteeth with Panamanian demands’. Over 70 per cent of Panama's registered ships, by the late 1940s, were US-owned.

Tubman quickly embarked on an 'open-door' liberalisation policy. Proposing the notion to AOTC, Klein informed Stettinius Liberia Company in 1948 that, ‘certain shipping had indicated a willingness to obtain registration under the Liberian flag’. Liberia's Maritime Code was drafted in late July 1948 by Klein. But the company did not send the proposed code to Tubman until Standard Oil's Director Bushrod Howard and maritime attorney Bob Nash, ‘read, amended and approved’ the draft.

By 12 August, the company noted, ‘Bob Nash and Bush Howard of Standard Oil yesterday gave me a green light on the Maritime Code.’

The US government disclosed that the US-based Liberia Company, peddling flags to US corporations, allies and multinationals would receive support via ‘its policy to encourage economic development of underdeveloped countries through private American capital’. The International Trust Company (ITC) was created in 1949 to administer the registry.

'The US State Department conducted a review of the Code through Francis Truslow Adams, a descendent of the Presidential Adams clan and former President of the government's wartime Rubber Development Corporation. During this period, under US-owned Firestone, Liberia's economy was heavily structured around exploitation of rubber, producing over 80 million pounds annually by the late 1950s.' (Sharife, World Policy Journal, forthcoming).

Adams gave the company and code the thumbs up, pointing out that the aspect most admired by Standard Oil - that of collection of registration as the primary basis for the code, enabling multinationals, particularly oil corporations, to bypass taxes and revenues as well as other regulations - was not as firmly embedded as it should be.

A private sub-cabinet meeting, hosted by Stettinius, and attended by key US government officials, endorsed the proposal, further accepting the offer of receiving intelligence information from the company. CIA Director Alan Dulles would later endorse it, amongst others. As the managing director of Gulf Oil informed the Senate on the same issue, ‘Liberia, we regard as the godson of the United States.’

The first client, oil billionaire Stavros Niarchos, a former client of the AOTC via the Panamian entity titled Greenwich Marine Corporation (GMC), registered the World Peace under Liberia's flag. Operating from NY York, clients were able to receive 'first world' efficiency accompanied by 'third world' cost effectiveness.

But Liberia's role in modernising the FOC haven rested not simply in its services, but in the fact that it was the first sovereign nation to contract a private US corporation to administer a national maritime and corporate registry.

In 1949, control of the ITC, following Stettinius's passing, fell into the hands of General George Olmstead, who headed the International Bank, located diagonal to the White House. Representing the interests of the US Navy, the Bank was a holding company headquartered in Washington DC, with a branch in the Bahamas, another FOC haven. A merger between the Bank and USLICO, who became the majority shareholder, evidenced the creation of International Registries Inc (IRI) in the 1990s, which describing itself as the world's oldest private maritime and corporate registry. Management structures retained crucial links through key personnel such as managing director Florigio Guida, the International Bank's former vice president.

The civil war in Liberia, coupled with former President Charles Taylor's unchecked demands on IRI to finance the war, evidenced the company quickly outsourcing the use of the Marshall Islands, part of the US's Compact of Free Association. Thanks to IRI's dedication, these days, the Marshall Islands is the world's fastest growing FOC haven.

Ironically, IRI's current location - Reston, Virginia, a suburb close to Washington DC - is just several kilometres away from Liberia's current US private corporate and maritime registry, the LISCR.

The company, structured as it was during the civil war and Taylor's time when the Registry supplied between 40-70 per cent of official government revenue, proudly markets the US government origins of its services: ‘The Liberian Registry was established in 1948,with the support of the US State Department, and continues to be an important source of revenue for Liberia. One of the main factors in its establishment was the need to find a neutral State where US-built ships could be registered.’

Under the Bush administration, the unofficial military watch of the US government was formalised through the Proliferation Security Initiative (PSI), allowing for the US naval and military forces to search, seize and protect ships under the Liberian flag. During an investigation of LISCR, I learned, ‘The annual cost of maintaining a Liberian Corporation is $450, which includes the annual registration tax to the Government of Liberia of $150 and the Registered Agent’s annual fee of $300...Taxes on operations and profits are not assessed.’

The conclusion? Standard Oil - whose current descendent is Exxon-Mobil - got its way, through formulating the modern FOC as a sovereign jurisdiction deliberately structuring legal and financial ring-fenced environments to exchange a flag for a cheap annual collection fee.

‘The principal objective in many of the jurisdictions is simply to collect the registration fees,’ revealed the OECD. Like other FOC-havens, Liberia offers clients the option of nominee shareholders and directors amongst other secrecy tools. What this basically means is that ultimate owners or beneficiaries are allowed to conceal their true identities by nominating legal intermediaries to create a corporate veil described by the OECD as impenetrable.

In his seminal paper, ‘The American Century Implemented - Liberia's Flag of Convenience’, Rutgers University professor and historian Rodney Carlisle locates Liberia's flag of convenience in the context of an age designed to ‘generate markets for American products and preserve a world where American free enterprise system could survive.’

‘The basic ideas of the American Century,’ he wrote, ‘that America could prevent world domination by Fascist - or Soviet-planned economies only through consciously exporting technology, capital, food and know-how gave a patriotic logic to American-based multinationals in extending their holdings and strengthening their positions.

‘In this accidental fashion, a military-industrial-governmental complex emerged…brought together by a shared commitment to keep the world safe for corporate capitalism.’


* This article is forthcoming in The Thinker. Khadija Sharife is a journalist and a visiting scholar at the Centre for Civil 
Society (CCS) based in South Africa.
* Please send comments to [email protected] or comment online at Pambazuka News.