Secrecy pact

An OECD report has uncovered loopholes that allow beneficial owners of vessels to go unnamed. Richard Coles reports on how easy it is to bypass shipping registration rules

In a recent article in shipping industry newspaper Lloyd's List, David Osler drew attention to the 'Ownership and Control of Ships' report published in March 2003 by the Maritime Transport Committee of the Organisation for Economic Cooperation and Development (OECD). The purpose of the OECD report was to review ship registration provisions to assess the possibilities available to beneficial owners to mask or hide their identity, whether for legitimate commercial or illegal purposes.

The Maritime Transport Committee sent a questionnaire to each of the open registers to ascertain ownership requirements, in particular in relation to whether the applicant is required to identify the beneficial owner. The data collected contained a few surprises. The report concluded that it is the corporate structures of the owning company rather than ship registration rules that allow owners to hide their identity if they so wish. In particular, the report focused on the use of bearer shares, nominee shareholders, nominee directors, trusts and intermediaries.

To put the OECD report into context it must be remembered that a large proportion of the world's merchant fleet is registered in open registers or 'flags of convenience' as they used to be known – Panama, Liberia, the Bahamas and Malta are the most common. In many cases, the owning companies are well known and there is no attempt to hide the beneficial ownership. Even where vessels are registered in one-

ship companies, often to reduce the risk of sister ship arrest, Lloyd's Confidential Index will identify the beneficial owners or their operators at the very least. However, the report concludes that it is easy and relatively cheap for a shipowner to hide the true ownership of a vessel by means of a web of companies using some of the devices above.

The OECD report suggests that it is equally possible for an anonymous beneficial owner to register a vessel in an OECD nation such as the UK. Although it may be more difficult to hide the beneficial ownership, the effort of so doing will be rewarded by cloaking the vessel concerned with a respectable flag, which is least likely to cause suspicion.

In the UK, an applicant is obliged to provide the Registry of Shipping and Seamen with a copy of the Certificate of Incorporation of the owning company, together with a declaration of eligibility stating the company's address, the name of the managing owner (which can be the registered owner) and the identity of the beneficial owner if not the same as the registered owner. Companies incorporated in other EU member states and overseas UK possessions, such as the British Virgin Islands, are permitted to register vessels in the UK. There is no restriction on a UK company being owned by overseas or nominee shareholders, nor is there any prohibition in English company law upon the use of corporate directors, although this is likely to be prohibited in the forthcoming Companies Bill. The report suggests that no registry in the world can be certain of knowing the identity of the beneficial owner of every vessel. The UK system relies on the integrity of applicants rather than an insistence on the production of underlying due diligence documentation.

The OECD report refers to the fact that lawyers and other intermediaries in some jurisdictions may not carry out due diligence checks on the beneficial owners of client companies. It also points out that lawyers and notaries may be entitled to claim professional confidentiality. Although there are undoubtedly some jurisdictions that do not impose due diligence obligations on lawyers and other professional advisers, the number of countries on the Financial Action Task Force on Money Laundering list of non-cooperative countries and territories is steadily reducing. St Vincent and the Grenadines is now the most prominent open registry country on the NCFT list. The difficulty is that although lawyers in London and other major maritime centres are involved in the structuring of major shipping transactions, a large proportion of registrations are handled without professional advisers.

The Maritime Transport Committee will now consider what remedies could be applied to ensure greater transparency and whether a statement of best practice could be adopted by ship registration processes to maximise transparency of ownership, while protecting commercially sensitive information. While it is undoubtedly possible for the OECD to recommend that national registries introduce stringent due diligence requirements, one suspects that determined terrorists will simply focus their attention on the more obscure and less efficient registries.

Richard Coles is a senior partner at Shaw and Croft