Behind the flags: The role of flag hopping as a deceptive shipping tactic

This article was co-authored by Kat Velasco Boyer, Trainee Solicitor.

Flag hopping has been described by the UK Government’s Office of Financial Sanctions Implementation (OFSI) as “a strategy employed by individuals or entities seeking to evade detection by repeatedly changing the flag under which a vessel is registered”. 

This practice is often considered as a deceptive shipping tactic as it involves vessels rapidly and repeatedly registering with a new flag in order to conceal their movements, avoid sanctions, or bypass regulations and other measures in place to combat illegal trades and activities. While not every flag change will be disingenuous, insurers should give consideration to the frequency of changes and the context of any reflagging and ask whether they are looking at malicious flag hopping or legitimate reflagging.  The two, of course, have very different consequences for insurers…

Insurers need to understand the importance of spotting early warning signs and have systems in place to implement adequate scrutiny measures to help prevent deliberately executed flag hopping operations.

Flag hopping as a deceptive shipping tactic

The practice of flag hopping seeks to abuse the important features associated with a vessel’s registered flag under maritime law. Flagging is a form of identification; a sign of national identity and legal status. Registering under a maritime authority and flying a nation’s flag provides vessels with their nationality and determines the governing laws under which a vessel must operate and comply. A vessel will be expected to follow the rules and regulations enforced by its flag nation at all times, including, as an example, conforming with the nation’s employment conditions and standards for seafarers, as well as its general environmental and safety regulations.  

However, what we are seeing with the deceptive flag hopping trend are sanctioned vessels and/or vessels employed by individuals or entities engaged in illegal activities ‘hopping’ between maritime authority registries that are either fraudulent or have little oversight, and sometimes switching between flags multiples times within a short period. In some instances, we are even seeing fraudulent registry certificates and other usable paperwork being provided to vessels for which no nation would take legal responsibility. Not only can this create jurisdictional challenges but it can also allow unregulated, sanctioned or dangerous vessels to take sail, with their illegal trades and activities being hidden.

This practice is an increasingly popular deceptive shipping tactic, particularly those flag hopping incidents with ties shadow fleet operations or incidents where the trade involves high-risk and sanctioned goods. These deliberately executed flag operations pose a significant challenge to the maritime insurance industry, strategically masking everyday reflagging to obscure deception. It is a troubling trend that is making it ever more difficult for insurers to conduct due diligence, verify vessel identities and assess risks associated with insured operations involving those vessels. In turn, this creates an increase in coverage issues, compliance disputes and the risk of incurring regulatory fines and reputational damage.

Red flags and warning signs

It is important for insurers to be cautious of flag hopping and recognise this phenomenon as a mechanism that can be implemented deceptively to mask a vessel’s illegal trades and activities. In particular, typical red flags to be aware of include (but are not limited to):

• a lack of clear vessel ownership
• a registration under a nation with little maritime oversight
• a history switching the vessel name, IMO number and/or flags multiples times within a short period
• a trade involving high-risk or sanctioned goods (such as the transport of oil from sanctioned countries or illegal arms)
• a history of continuing to use a nation’s flag after a vessel has been deregistered.

Takeaways

If a vessel is hiding its identity, it is most likely hiding underlying risk.

A key consideration for insurers is whether the rules and regulations of the vessel’s flag are compatible with the terms and conditions within the Policy. Flag hopping can create inconsistencies between the two and can create coverage issues. An insurer would be prohibited from paying a claim to its insured if that payment is ultimately for the benefit of a sanctioned entity. If the payment is to indemnify the vessel, and that vessel is, due to flag hopping, deemed to be a sanctioned or restricted vessel, that payment by insurers will be in breach of sanctions.  

As the sanctions pressure mounts, understanding flag hopping as an evasive practice and having proportionate due diligence and scrutiny measures in place is crucial for insurers to be able to better anticipate the risks involved in maritime insurance.

Flag hopping will continue to be used to disguise certain operations. However, spotting early warning signs and security issues today can put insurers ahead of the curve tomorrow, before deceptive flag hopping becomes a more costly problem.

Related item: Spoofing and jamming – evolving geopolitical risks for marine insurers