The tax-free shipping company that took control of a country’s UN mission

How the tiny, climate-threatened Marshall Islands came to be represented at UN shipping talks by a private company based in Virginia, 11,000km away

The main office of the Marshallese arm of International Registries Inc. is home to 45,000 paper companies that pay no corporation tax (Photo: Margot Gibbs)

By

In 2015 Tony de Brum, then foreign minister of the Marshall Islands, came to the International Maritime Organisation (IMO) in London to deliver a simple message: international shipping must decarbonise or be responsible for destroying his country.

International shipping could be responsible for nearly a fifth of the world’s carbon emissions by 2050. If the IMO, the branch of the UN that regulates international shipping, failed to set ambitious climate targets, it would be disastrous for low-lying islands like his own, de Brum would say.

But when he walked in to the IMO plenary, de Brum found strangers sitting in his country’s place. “I was talking about a Goldilocks situation,” he told Climate Home two years later on the verandah of his bungalow on the Marshallese capital atoll Majuro, a few feet from the lagoon. “We had some difficulty convincing the people who were sitting in our seats, literally, that we were the representatives of the Marshall Islands.”

The people de Brum found representing the Marshall Islands were from International Registries Inc. (IRI), a private shipping register headquartered in Reston, Virginia. According to its website, the company provides access to the Marshall Islands flag and a “zero tax jurisdiction that statutorily exempts non-resident domestic corporations from taxation on their income and assets”.

Thanks to IRI, the Marshall Islands boasts the second largest fleet of ships in the world and the world’s largest fleet of oil tankers. The company attracts ship owners with the promise of zero corporation tax and no seafarer nationality requirements – the latter allows them to skirt organised labour. The 45,000 offshore companies registered with IRI also benefit from corporate anonymity.

De Brum, now climate change ambassador for the Marshall Islands, said he was “appalled” by IRI’s suspicious response to his arrival at the IMO.

He did eventually deliver his message. But two years on, the shipping industry remains out of step with the rest of the world on climate change. In 20 years, the IMO has made just one intervention to address carbon emissions: an efficiency index which the International Energy Agency said would only improve efficiency by 1% between 2015 and 2025. A new study by CE Delft found the efficiency of new ships actually got worse in 2016.

Climate Weekly: Sign up for your essential climate news update

De Brum’s intervention revealed a struggle between the world’s second largest shipping registry and its flag state over who the IMO really serves – sovereign states or the shipping industry? The issue of climate change has starkly exposed the divergent interests of the islands and the registry. It also highlights deep cultural issues within the IMO – a UN body where delegations are invariably stacked with industry representatives and national interests are oddly peripheral.

This week, that contest entered a new phase as transport minister Mike Halferty arrived at the IMO’s annual meeting, the first time a Marshallese minister has attended since de Brum’s jarring experience. The IMO has committed to publishing an interim climate plan by 2018 and Halferty wants to use the meeting to push for deep cuts. “The IMO must this week send a very clear signal that it will take serious and ambitious climate action and that it will play its full part in delivering the goals of the Paris Agreement,” he said in a statement.

Carbon emissions from shipping aren’t included in national governments’ contributions under the Paris climate agreement. Instead, they are regulated by the IMO. Almost 80% of the world fleet is registered to ‘open registries’ – many of them run by private companies. Because IMO treaties only come into force on the basis when a certain proportion of the world fleet has backed them, the international law made at the IMO stands or falls on the support of companies like IRI.

“Some of the most vulnerable small island states [are represented] by the private companies running their open ship registries, with positions taken at IMO often at odds with their national interest and their positions in the wider climate negotiations,” said John Maggs of the Clean Shipping Coalition, an NGO.

Offshore carbon: why a climate deal for shipping is sinking

According to participants lists seen by Climate Home, the Marshall Islands’ Pacific neighbours in Palau are also represented at the IMO by a private registry; and both Vanuatu and the Marshall Islands have previously attended meetings with oil industry advisors.

According to Maggs, this system “puts a disproportionate influence in the hands of the shipping industry, and is one of the reasons why, 20 years after [the Kyoto climate protocol], we are only now taking the issue of climate change seriously at IMO”.

A spokesman from the IMO said: “Member states decide themselves who represents them at IMO meetings and speaks on their behalf. It is entirely down to the member states. All member states have equal status and it is one state one vote.”

For the Marshall Islands, it is an invidious position; trapped between rising seas and a sense of dependence on one of their few economic staples. There are real fears the registry could simply move to another, more pliant country.

Rather than de-registering the country’s huge tanker fleet, which could easily move to another tax-free register, de Brum’s vision had been a reformed register that would incentivise green shipping, as well as use its significant tonnage to influence the stagnated debates on shipping emissions at the IMO.

A girl looks over a sea wall in Majuro, Marshall Islands, which is just 6 ft above sea level. Spring tides inundate the islands with saltwater, making agricultural land infertile (Photo: Margot Gibbs)

Instead, IRI has attempted to dissuade Marshallese ministers from delivering their message at the IMO. High-level government sources told Climate Home registry officials advised the government that the 2016 IMO meeting was “technical” and not suitable for ministerial attendance. Ministers had been planning to be there, but at the last minute the visit was called off. On this and other questions, the IRI did not respond to a request for comment.

The Marshallese are often left in the dark over IRI’s business activities. Climate Home shows de Brum a flyer for a recent Arctic shipping conference that bears the IRI’s insignia. Did he know that IRI were touting the new opportunities afforded by melting ice caps? After pausing for a few moments, eyebrows raised, he responds: “Nothing surprises me anymore about what IRI does… what would surprise me is if the government had a briefing on it and if they understood what was going on”.

“Not many government officials are aware of IMO issues,” said minister-in-assistance to the president Mattlan Zackhras. Adding the new administration had decided to “to take a more direct leading role on climate”, which means that may be changing.

Pacific islanders: Shipping must comply with Paris climate goals

A drive up and down the Majuro’s single, potholed road is a good place to begin understanding how a country lost control of its own UN mission. All along it are well-advertised donations from foreign governments: each of the solar streetlights is “a gift from ROC Taiwan” and the once brightly painted bus shelters are a gift from the nation’s former colonial ruler, Japan. Civil servants ride down the pancake-flat island in 4 x 4 pickup trucks donated by the European Union. For a government otherwise deeply dependent on grant aid, dependableself-generated income is precious.

A “capping agreement” signed in 2009 and obtained by Climate Home gives the Marshall Islands a set fee of $5m a year (although the 2016 budget cited $6.5m from the ship registry). Senior officials privately admit their stance towards the registry has been affected by fears they could jeopardise this income. The amount is tiny relative to the value of the ships operating under the flag. But it makes up about 10% of the islands’ non-aid revenue.

“When you come from a country whose budget barely survives each budget situation – every penny matters,” said de Brum.

A 40-minute drive from the town along Majuro’s narrow isthmus is a sprawling building with tinted windows. The main office of IRI’s Marshallese subsidiary, the Trust Company of the Marshall Islands’ (TCMI), serves as a library for 45,000 paper companies.

Senators and former ministers describe TCMI as “deeply secretive”. Few people in Majuro even know the Trust Company exists. The taxi driver who takes this reporter there, who has lived in Majuro for more than thirty years, thinks the Trust Company is an agency for American and Japanese tourists. The Trust Company’s other office, and the one nominally in charge of the ship register, is at the other end of the island, squashed between a tattoo parlour and a local café where old men play board games in the midday heat.

TCMI claims to employ 20 people in Majuro, but cabinet ministers laugh at this: maybe if they are counting the garden staff, the cleaners, they suggest. It is generally understood just three Marshallese are employed by the register. James Myazoe deals with the corporate registry, and his cousins, Baron and Joseph Bigler, deal with the maritime side of the business.

The real nerve centre of IRI is more than 11,300 kilometres east of Majuro, in the leafy suburbs outside Washington DC, and in its 27 offices in the world’s shipping and financial centres. It is from here that the company has chipped away at the benefits the islands receive from their association with the registry as well as the transparency the government can command.

Graveyards on the Majuro seafront have been washed into the sea during the spring tides (Photo: Margot Gibbs)

Under a 1990 deal, the Marshall Islands government was entitled to 75% of the profits from the register. But as the business grew, this was watered down to a maximum 40% of revenue 1995 and then in 2009 the government agreed a $5m limit. According to documents submitted to the US justice department, the Liberian International Ship and Corporate Register – just down the road from IRI’s Virginia offices, built on the same model and roughly the same size – provides the Liberian government around $20m – four times what the Marshall Islands get from IRI.

The deal will be up for renegotiation in 2018. If IRI’s revenues, which it does not disclose, were the same as the Liberian registry, the government’s deal in 2009 may have cost the national budget roughly $30m each year. (Although financial records seen by Climate Home suggest this may be an overstatement.) Panama’s registry, which is government owned, provides around $90m to the country’s annual budget.

Copies of contracts between the government and the Trust Company seen by Climate Home show how the government also forfeited critical oversight rights. The original contract, signed in October 1990, gave the auditor general the right to full audited accounts. But in an amended agreement, signed in 1995, these audit rights are limited “to the records and information of the Trust Company relating to the gross revenues from the Programmes”. Neither of these agreements has been scrutinised by the Nitijela, the Marshall Islands parliament, said speaker Kenneth Kedi.

The 1990 agreement also gives the Trust Company the authority to take representatives to international conferences such as the IMO, but compels TCMI to keep the government informed of these meetings. Something it has failed to do, according to Zackhras, although he suggests past governments had failed to press the company to fulfil the obligation.

The secrecy around these finances has focused attention on the register. But according to Kedi, attempts by senators and the public accounts committee to scrutinise IRI’s accounts, or the contract between the government and the register, have failed; the IRI citing commercial confidentiality. Again, the IRI did not respond to a request to comment on this.

The office for the Maritime Administrator in Majuro, which hosts the world’s second largest fleet of ships, sits between a tattoo parlour and a local café (Photo: Margot Gibbs)

“Because they give the Marshall Islands a few million bucks – it keeps everyone fine and happy,” one senator tells me. “But a lot of the new senators coming in are asking the same questions that some of us are asking.”

Zackhras describes the past absence of any government representation at the IMO as “awkward”, but says the Trust Company is now working more willingly with the government.

That is showing at the IMO this week, where Halferty has been joined by ministers from other Pacific countries. Pacific states have formed a “high ambition coalition” with European nations calling for immediate peaking of ship emissions, as well as for an overall cap for the sector, consistent with the Paris agreement.

Signs at the IMO point to a thawing of relations, with Marshallese government negotiators occupying seats alongside IRI employees and advocating a strong stance on climate change. The Clean Shipping Coalition’s Maggs said Pacific island states were “now largely represented by government officials and providing some much needed climate leadership at IMO”.

Marshall Islands president Hilda Heine declined to be interviewed for this article or respond to questions about the contracts between the government and IRI. A spokesman from the foreign office said: “The maritime sector is crucial to the economic well-being of the Marshall Islands… But such concerns must not be used by any country as an excuse to avoid the ambitious climate action necessary to ensure our survival.”

Pacific States have been described as the world’s conscience when it comes to climate talks. They have done little to cause the global warming, rising sea-levels and ocean acidification which could destroy them. The UN has provided a rare, equalising forum. “We are fighting basically for survival – for the right to exist,” says de Brum. “In the UN everyone’s the same: I had one vote and [former US secretary of state] John Kerry had one vote. It was based on that kind of respect and recognition that we were able to pull off one of the most exciting agreements in mankind.”

This is what the Marshall Islands has signed away at the IMO – and what it is fighting to get back before it’s too late.

Travel costs for the research of this article were partly funded by the European Climate Foundation. The European Climate Foundation also contributes funding to Climate Home.

Read more on: Climate Politics | Pacific | Shipping | UN climate talks |