With more than 250 days of sun a year, Mongolia’s moniker – Land of the Blue Sky – is well deserved; its association with the deep blue sea, though, is less obvious. The nation’s capital, Ulaanbaatar, is located more than 1,300 kilometres from the ocean, and Mongolia is the largest landlocked country in the world. Nevertheless, over the last decade Mongolia has developed a maritime tradition that it rarely speaks of, offering flags of convenience to shipowners since 2003. Although little attention has been given to Mongolia’s merchant fleet, the lack of transparency and scrutiny associated with it risk facilitating illicit activities and causing serious reputational damage to the country. The material benefit that the Mongolian State derives from its merchant navy is far from clear, making it reasonable to question whether Mongolia’s maritime tradition is worth preserving, or if it would be best abandoned.
With 90 percent of international trade being carried by sea, shipping is one of the most vital industries in the world economy. Its inter- and trans-national nature, however, makes it challenging to regulate and, although the UN attempts to do so under the aegis of the International Maritime Organization (IMO), there is considerable leeway to exploit loopholes and ambiguities in the international regulatory regime. One such practice is that of flying flags of convenience – registering a merchant ship in a sovereign state other than that of the ship’s owner. A country that allows foreign-owned ships to fly its flag is said to have an open registry, and three such registries (Liberia, the Marshall Islands, and Panama) currently account for 40 percent of the entire merchant fleet by tonnage. Indeed the practice is so widespread that some three quarters of the global merchant fleet is registered under a flag of convenience.
Ship owners employ this practice for a number of reasons: It allows them to avoid burdensome regulation, it reduces operating costs and tax bills, it allows shippers to employ cheaper labor and, in some cases, it can offer anonymity to the beneficial owner of a vessel. The more pernicious effects of use of this practice include avoiding safety and environmental standards. The moral ambiguity of flags of convenience has made them a target of ire for international labor unions, but even more concerning than the degradation of labor standards is the potential for the practice to be used to conceal or facilitate illegal activities, such as trafficking of illegal goods, evasion of international sanctions, or providing support to terrorism. Cambodia, for example, used to be notorious for the lax standards of its registry and in 2002 the MV Winner, a Cambodian flagged vessel, was found to be carrying two tons of cocaine off the Canary Islands. This incident highlighted the flagrant abuse of Cambodia’s registry and the government subsequently announced a wholesale reorganization.
Mongolia, for its part, established its own registry under Prime Minister Nambaryn Enkhbayar in February 2003. The Mongolian Ship Registry’s stated mission was to “provide excellence in registry and marine services.” Over the course of ten years the Mongolian merchant fleet grew rapidly and, according to the UN, reached a total dry weight tonnage capacity of 643,000 tons in 2013. While this total tonnage is low relative to other countries, it is not insubstantial. For example, Mongolian-flagged vessels have a greater capacity than their Iraqi or Sri Lankan counterparts (110 and 239 tons respectively). The Mongolian fleet now comprises 168 vessels and, in terms of dry weight tonnage, is the largest merchant fleet of any landlocked country except Switzerland (1,144 tons) and Luxembourg (1,601 tons) – both highly developed economies with long traditions of nominal ownership.
All the Wrong Reasons
In spite of its self-professed commitment to excellence, though, it seems that the registry has proved popular for all the wrong reasons – in effect serving as the maritime equivalent of an offshore financial center, allowing beneficial ownership to be hidden, operating costs and taxes to be minimized, reducing transparency, and, in some cases, facilitating illegal activities. These concerns are exacerbated by the fact that Mongolia’s registry isn’t even based in the country. It is run out of Singapore and managed by Sovereign Ventures, a conglomerate owned by Chong Koy Sen. Chong is a Singaporean citizen who serves as the honorary consulate of Tuvalu (another state renowned for its flag of convenience) in Singapore as well as managing director of its Ship Registry. It is in Tuvalu that a number of Iranian Government ships (owned by the National Iranian Tanker Company) implicated in sanctions busting are registered. According to a leaked American diplomatic cable from 2007, Sovereign Ventures has long-standing ties to North Korea and used to manage the Cambodian Shipping registry until its 2002 reorganization. Indeed, it was Sovereign Ventures that had flagged the Winner in Cambodia.
While there is no direct link between Sovereign Ventures and these incidents, it is clear that the comparative advantage of the registries it runs lies in their relatively lax regulatory requirements. When it comes to the Mongolian Ship Registry, for example, an international service provider for shipowners and shipbrokers lists the advantages of registering under a Mongolian flag as including: competitive fees and taxes; no tax on profits or capital gains; recognition of all IMO standards and certificates for crew; quick service and issuance of certificates within the hour; and the fact that ships are not subject to requisition as national resources. In addition, there are no restrictions on the ownership of any ship registered in the Mongolia Ship Registry. With the registration process being outsourced, and with reduced standards being the main appeal of the registry, it should come as no surprise that Mongolia’s merchant fleet ranks poorly when assessed according to international metrics.
The International Chamber of Shipping (ICS) and International Shipping Federation (ISF) release an annual shipping industry flag state performance table that assesses flag states in terms of performance. These metrics include port state control (whether they have been blacklisted by the world’s principal port state control authorities); ratification of major international maritime treaties; use of recognized organizations compliant with IMO resolution A.379 (which requires states to establish controls over organizations carrying out safety inspections and surveys of ships); age of fleet; reporting requirements (submission of compliance and practice reports as required by the International Labour Organization); and attendance at IMO meetings (suggesting increased likelihood of complying with IMO rules). In all but one of these categories (fleet age), Mongolia performs poorly.
Given that many of these metrics are technical in nature, it is sufficient to highlight Mongolia’s performance relating to port state control to give an idea of the issues that blight the Mongolian merchant fleet. Port state control refers to the inspection of foreign ships in ports and is governed globally by three main regional regimes: the Paris Memorandum of Understanding, the Tokyo Memorandum of Understanding, and the United States’ Coast Guard regime.
With most Mongolian-flagged ships operating in the Asia-Pacific region, it is the Tokyo MoU which is most relevant to Mongolia. This agreements binds together 18 Asia-Pacific states and aims to establish an effective regional port state control regime through cooperation and harmonization of activities – the aims of this being to eliminate sub-standard shipping, promote maritime safety, protect the environment, and safeguard working and living conditions on ships. In 2013, the signatories of the Tokyo MoU conducted 142 inspections of Mongolian-flagged vessels. In 131 of these inspections, deficiencies were found (a total of 1,217 separate deficiencies) and 38 of the inspected ships (26.76 percent of the total) had to be detained. This was the second highest of any country and far above the regional average of 4.5 percent. As a result, Mongolia currently finds itself on the blacklist of the Tokyo MoU, with Mongolian-flagged ships subject to increased inspection as a result.
Moving from the big picture to individual cases, Mongolian-flagged ships have been (and continue to be) involved in a number of incidents that reflect negatively on the state. These can be broken down into four categories: safety; illicit activity; sanctions busting; and lack of control and oversight. These examples highlight the reputational damage that the practice of maintaining an open registry can cause to Mongolia and the need to carefully consider its continuation.
When it comes to safety, Mongolian ships have been involved in a number of life-threatening and fatal accidents. In November 2003, for example, 13 Russian sailors were rescued from the Fest, a Mongolian-flagged vessel loaded with logs that was sinking in the Sea of Japan after the ship’s engine failed. Since this incident, Mongolia promised to stop registering vessels over 30 years old, but accidents continue to occur. Just last year, two North Korean sailors died aboard a Mongolian-flagged vessel after their cargo ship sunk off the coast of South Korea.
In addition to safety concerns, Mongolian registered ships have also been involved or implicated in illicit activities. In 2003 the MV Unique was searched by Irish police and customs officials as they suspected that it was being used by an international crime gang to carry illegal immigrants. In December 2012 another Mongolian-flagged ship was detained by the Malaysian Maritime Enforcement Agency on suspicion of smuggling diesel and selling it in nearby countries. Some 200,000 liters of diesel (which is subsidized in Malaysia) worth $1.2 million was found on board.
More worrying than diesel smuggling is the potential use of Mongolian flags to help states avoid international sanctions. Although no direct evidence has emerged of Mongolian ships being used to this end, Mongolia was forced to cancel the flags of five Iranian owned cargo ships in 2012 following international pressure. North Korea, another state subject to international sanctions, has long used foreign registries to hide its shipping activities with foreign-flagged ships having been used for drugs and arms smuggling amongst other things. Cambodia was long the registry of preference, until the international pressure that ensued following the MV Winner incident put an end to this practice in 2002, and the apparent replacement for North Korea was none other than Mongolia. The willingness to provide flags to Pyongyang has attracted stern criticism, with the director of the Institute for International Affairs at James Madison University calling on the State Department to “investigate Mongolia’s maritime activities and aims,” before asking that its coordinator for counterterrorism should “certify whether they represent a threat to Americans at home and abroad.”
The final example of abuse of Mongolian flags of convenience is perhaps the most surprising, and relates to control and oversight. In the context of the international effort to combat piracy off the coast of Somalia, a number of floating arsenals have sprung up in international waters. These vessels act as storage locations for weapons and personnel, so that ships can quickly and efficiently pick up and deposit security teams as they pass through the Gulf of Aden. With these vessels based out of international waters, regulation of the weapons and material on board falls to the flag state. All weapons aboard U.K. flagged ships, for example, are registered and licensed with the British authorities. If the flag state has limited controls over the storing and transfer of military equipment, then these ships may operate with no oversight. A number of service providers seem to be using Mongolian-flagged ships to this end, and a December 2014 research report by the Remote Control Project (a body that examines developments in warfare) found at least 32 ships that act as such floating armories in and around the area. Of these, eight were found to use Mongolian flags of convenience, while a further two are thought to do so. Given Mongolia’s presence on several blacklists, this means that these weapons are as good as unregistered and these ships are acting without any effective oversight or regulation.
It is no surprise, then, that the International Chamber of Shipping included Mongolia on a list of countries that it classified as “conspicuous examples of sub-standard ship registers” in February of this year. Taken together, these metrics and incidents highlight that the Mongolian Ship Registry is open to abuse. But what does the registry bring to Mongolia? Finding precise information about the division of revenues between the Singapore-based company that operates the registry and the Mongolian Marine Administration, which is nominally responsible for it, is almost impossible. Attempts to contact both parties received no reply. However, according to budgetary information from the Mongolian Ministry of Roads and Transportation, the Mongolian Marine Administration was expected to contribute 274.4 million Tugrugs ($140,000) of revenues in 2014. This is a pitifully small amount. It is likely that the registry generates more money than this. The fact that Enkhtuya Nambayar, the sister of the prime minister who founded the registry (who was later jailed for corruption) was working there before herself being investigated for corruption (on charges that were later dropped) would suggest that all is not as it seems, but no public information on where, and to whom, the earnings go is available.
Mongolia’s naval tradition is barely ten years old, but its registry has rapidly developed into an example of the risks and failings of poorly controlled open registries and flags of convenience. To date, Mongolia’s willingness to flag foreign vessels has gone relatively unobserved, and there has been little debate within the country about the merits and demerits of this policy. Clearly this needs to change. Mongolian-flagged vessels have been involved in fatal accidents, illegal smuggling, implicated in helping rogue states avoid sanctions regimes, and are currently used to host floating arsenals with no oversight. What is surprising is that these activities have not yet caused significant reputational damage to the country. The longer the government maintains its open registry with little or no oversight, the less likely it is to continue avoiding the spotlight. At a time when Mongolia is already under scrutiny for its rule of law and the behavior of its government, this is reputational damage that it can scarcely afford to sustain. With the registry officially bringing in only $140,000 dollars to the public purse, a cost-benefit analysis of providing flags of convenience makes clear the need to terminate or severely modify the practice. Mongolia is a country replete in tradition, and its ability to retain and protect these traditions is one of its most admirable features. The country’s maritime tradition, however, has a much shorter and more ignominious history, and is one that deserves to be consigned to the deep.
Graham Alexander is a freelance writer currently based in Mongolia.