It only works via SH3 Commander, and (I presume) only if you check the "use real ship names" option.
In order to populate your patrol log with real ship names from the shipnames file, after you finish a patrol you must exit the game and reopen Commander. Select that career and click on "other available actions" for that kaleun and then click "update personnel file" to update his info with the results of the patrol you just finished. That will trigger Commander to generate a patrol log using real ship names for the sinkings in that patrol.
You must update the personnel file first in order to see real ship names in your patrol log.
As far as I can tell you don't have to ID a ship in the game for this to work, since the Ship Names feature assigns a name based on the class of ship sunk, which the game knows and adds to your in-game log even if you didn't ID it correctly as such (or at all).
I have not yet sunk anything that wasn't given a name with this feature, including some pretty small stuff.
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