IMO 2020 Enforcement: Magic Pipe Cases All-Over Again?

IMO 2020 Enforcement: Magic Pipe Cases All-Over Again?

in International Shipping News,Shipping: Emission Possible 28/11/2019

The shipping industry is well aware of the fines and penalties imposed by US authorities against vessel owners, operators and officers for alleged bypasses of a vessel’s oily-water-separator (“OWS”), which is required pollution control equipment under Annex I of MARPOL—the international treaty governing environmental compliance and pollution control on the high seas. In these so-called “magic pipe” cases, the US Department of Justice brought a number of successful criminal prosecutions, with several convictions that included fines in excess of $10 million. Now the US government is poised to use the same legal regime to prosecute violations of the upcoming sulfur emission reduction mandate under Annex VI of MARPOL, otherwise known as IMO 2020.

By now, almost everyone knows that on January 1, 2020, ocean-going vessels will need to utilize bunker fuel with a sulfur content of less than 5,000 ppm or otherwise use emission control technology (i.e., scrubbers) or alternative fuel (i.e., LNG) that achieves the same emission reductions. Despite the widespread knowledge of the new global sulfur mandate, many analysts are predicting between 10–20 percent non-compliance in the first year of implementation. This is a staggeringly high percentage given that environmental regulatory agencies in the developed world pride themselves on upwards of 99 percent compliance with environmental laws in their respective countries.

The rate of 10–20 percent non-compliance is all the more staggering when considering that this is the percentage of purposeful, willing non-compliance rather than inadvertent non-compliance—which will likely be significant given the creation of new fuel blends to meet the new sulfur specification. Currently, there is significant uncertainty around whether individual fuel blends created by various bunker fuel suppliers will be compatible with one another. For example, fuel bunkered in Singapore may react with fuel bunkered in Houston to result in fuel that does not comply with the sulfur standard or causes damage to the engine. Moreover, blends of fuel containing fuel oil and distillate may undergo phase separation, and the vessel could burn off the compliant distillate fuel first, leaving non-complaint fuel oil to be discovered by port state enforcement authorities. Finally, insufficiently cleaned bunker fuel tanks may still have non-compliant sediment in the tank that could be knocked loose when distillate is introduced into the tank, causing the fuel to come into non-compliance.

US authorities are aware of the potentially high rate of non-compliance, and it is reasonable to believe that they will seek to implement the same enforcement playbook for enforcing Annex VI of MARPOL that they used in the magic pipe cases for enforcement of Annex I of MARPOL. That playbook allowed US authorities to pursue bypasses that occurred entirely outside of US waters but were not recorded in a ship’s Oil Record Book (“ORB”) when presented to the US Coast Guard. The presentation of the ORB to the Coast Guard is considered a submission to the US federal government and falsification of the ORB is considered criminal fraud that can be prosecuted in the US.

While most analysts predict that the anticipated non-compliance with IMO 2020 will occur outside of US waters, US authorities may attempt to prosecute such non-compliance if it is accompanied by falsification of records required to be maintained by Annex VI of MARPOL. Most notably, bunker delivery notes (“BDNs”) contain certifications made by bunker fuel suppliers that the fuel supplied complies with MARPOL Annex VI. BDNs are issued by bunker fuel suppliers and maintained onboard the vessel. When presented to the US Coast Guard upon inspection of a vessel in a US port, BDNs are considered a submission to the federal government in the same way that the ORB is considered a submission in the “magic pipe” cases. Correspondingly, the US Coast may use the BDNs as its hook to pursue violations of Annex VI/IMO 2020 that occur entirely outside US waters, and that would otherwise be beyond its regulatory and enforcement reach.

While the Trump Administration is not currently known for aggressive implementation and enforcement of environmental laws and statutes—particularly related to international pollution control treaties—the law implementing Annex VI/IMO 2020 in the US contains significant whistleblower awards that incentivize the reporting of non-compliance. The Act to Prevent Pollution from Ships (“APPS”) authorizes courts to provide an individual reporting non-compliance with MARPOL (including Annex VI/IMO 2020) with up to one-half of the fine imposed on the violator. This provision would provide significant incentives to those that might want to report a violator of Annex VI/IMO 2020, which may include not only an officer or crew member but also a rival ship owner, bunker fuel supplier or a general competitor in the maritime shipping trade.

Moreover, the US Coast, a branch of the US Military that is not as affected by the enforcement whims of a particular presidential administration, is primarily tasked with inspecting and detecting non-compliance on vessels calling on US ports. The other US agency involved in IMO 2020 implementation and enforcement, the US Environmental Protection Agency, recently proposed a new rule that would provide it with greater ability to enforce off-specification bunker fuel sales and violations of IMO 2020 against bunker fuel suppliers. These factors and the long track record of successful prosecution of MARPOL violations make it prudent for the shipping industry to expect robust enforcement of IMO 2020.

While ultimately only time will tell how robustly this new regime will be enforced, most large vessel owners, operators, charterers, bunker fuel suppliers, traders and shipping companies have spent and will spend considerable resources on compliance. Robust compliance by these entities will narrow the field of entities who seek to obtain low-cost, non-compliant fuel and who may find themselves in the cross-hairs of the US federal government. If you are an entity that seeks full compliance, you want to actively avoid becoming inadvertently involved in one of these bad actor’s non-compliance through being a charterparty, bunker fuel sales counterparty or general customer of one of these bad actors.

However, there are a number of steps that companies can take now to reduce their exposure to both purposeful non-compliance by bad actors as well as inadvertent non-compliance. These steps primarily involve implementing: (1) sampling procedures that comply with IMO 2020 and are sufficiently robust; (2) vessel vetting that includes review of the vessel’s implementation plan and route analysis of whether the vessel has called upon or frequently calls upon ports of caution where off-spec bunkering is more likely to occur, and (3) analysis of compatibility among fuel blends. Lastly, in the event that a shipping company does find itself involved in a non-compliance event, involving and coordinating with the vessel’s flag state in the response may assist in bringing a quicker resolution to the event.

Source: By David McCullough and Ronald Zdrojeski, Arranged on Behalf of Hellenic Shipping News Worldwide (www.hellenicshipppingnews.com),
David McCullough is a partner in the Energy & Infrastructure practice group of Eversheds Sutherland (US) LLP. Ronald Zdrojeski is also a partner at Eversheds Sutherland (US) LLP and the co-lead of Global Litigation