The Cost of Non-Compliance: Regulatory and Enforcement Challenges

1. Compliance, Cost, and Competency in America NAMEPA Seminar at Posidonia 2014 Jeanne M. Grasso Gregory F. Linsin Blank Rome LLP Washington, DC June 5, 2014 The Cost of Non-Compliance: Regulatory and Enforcement Challenges

2. What We’ll Be Talking About … • Regulatory Challenges and New Developments • History of Maritime Prosecutions • Whistleblowers and Other Criminal Enforcement Trends • Avoiding the Trend

3. Key Domestic Legislation • Federal Law / Regulations • Act to Prevent Pollution from Ships (“APPS”) • Clean Water Act (“CWA”) • State Laws • Alaska, California, Washington, Oregon, New York, Maryland and others

4. Port-State Control • Enforcement Options • Prohibit a ship from entering port • Detain a ship in port • Refer the matter to the Flag State • Prosecute the violation – administrative, civil, criminal penalties • Statistics in 2013 • ~9200 different vessels • ~9300 inspections • ~120 detentions • 18% marine pollution (~21) • Most in New Orleans and Miami • Corpus Christi, Mobile, Portland and New York increasing

5. Key Regulatory Challenges

6. MARPOL Annex VI – Air • Regulations for the Prevention of Air Pollution from Ships • Extensive recordkeeping • Numerous US guidance documents • APPS subpoenas for failure to provide / use compliant fuel • Notices of Protest related to sulfur content • Enforcement • Emissions Control Areas (ECAs) • North American ECA – August 2012 • Caribbean ECA – January 2014 • 1% sulfur limit reduced to .1% in 2015 • Written procedures for fuel switching Accurate record keeping is critical!

7. U.S. Ballast Water Management • Mandatory ballast water management and reporting • Penalties for non-compliance • Independent/more stringent State requirements • US Coast Guard Final Rule (March 2012) – Options • Install and operate a USCG type-approved system (phased-in schedule) • Use only water from the U.S. public water system • Do not discharge ballast water in U.S. waters • Discharge to a shore-based treatment facility • Complete exchange at least 200 NM from shore until required to have a system • Coast Guard Extensions, BUT…

8. EPA’s Vessel General Permit • History • Clean Water Act permitting program encompassed “incidental discharges from vessels” inside 3 miles, but EPA exempted them • More than 30 years later, environmental groups sued, and won, and exemption invalid as of February 2009 • The VGPs • 2008 VGP covered 26 discharges and required “best management practices” to minimize those discharges • 2013 VGP covers 27 discharges, with some other changes • Key Provisions • Inspections – Weekly, Voyage, Annual, Drydock • Corrective Actions / Assessments • Extensive Recordkeeping • Reporting of non-compliances

9. Inspections • Weekly/Voyage Visual Self Inspections • Person doing the inspection must be a “signatory,” e.g., master or duly authorized person • Comprehensive Annual Inspection • Conducted by qualified, trained personnel • Drydock Inspections • If a vessel regularly leaves VGP waters: • Inspectionsmust be done prior to the vessel returning to the US waters  MUST be in compliance when entering VGP waters!

10. EPA’s Vessel General Permit (cont’d) • Some key changes in the 2013 VGP • Ballast water (numeric limits) • Oil-to-Sea Interfaces / Environmentally Acceptable Lubricants • Monitoring requirements for ballast water, bilge water, gray water and exhaust gas scrubber effluent • Enforcement on the rise  EPA also regulates ballast water, independent from the Coast Guard…

11. Ballast Water Conundrum • EPA’s Vessel General Permit 2013 vs. Coast Guard regulations • The Conundrum • USCG Extension Letter • EPA “Low Enforcement Priority” Letter • Non Enforcement  Compliance • Challenges with IMO approved AMSs • Implications • P&I cover • Charters / Vetting • Enforcement • Citizen Suits

12. Marine Casualty Reporting • What must be reported in the navigable waters? • Grounding, allision, loss of propulsion/maneuverability, unseaworthiness/fitness for service, death, injury requiring professional medical treatment, certain property damage, “significant harm to the environment” Confusion as to whether certain marine casualties need to be reported Confusion whether something is a casualty

13. Understanding Marine Casualties • Draft NVIC (guidance) (January 2014) • Goal is to provide guidance and clear policy as to the Coast Guard’s expectations to facilitate compliance • Proposed Rule (January 10, 2014) • Would broaden existing regulatory requirements for reporting marine casualties on the OCS by foreign-flag vessels and units

14. Serious Marine Incidents and Hazardous Conditions • Serious Marine Incidents • Marine casualty requiring drug/alcohol testing of someone “whose order, action or failure to act is determined to be, or cannot be ruled out as, a causative factor in the events leading to or causing a serious marine incident.” • Death; property damage > $100,000,;discharge > 10,000 gallons oil; injury requiring professional medical treatment • Hazardous Conditions • "Any condition that may adversely affect the safety of any vessel, bridge, structure, or shore area or the environmental quality of any port, harbor, or navigable waterway of the United States. • Collision, allision, fire, explosion, grounding, leaking, damage, injury or illness, or manning-shortage.”

15. What , When and How? • Reports must be made immediately after addressing resultant safety concerns to the nearest Coast Guard Sector if the casualty occurred within 12 miles • The oral report must be followed by a written report a "Report of Marine Accident, Injury or Death" (CG-2692) Form within 5 days

16. Coast Guard Enforcement • Vessel experienced a failure of its main engine and did not report for over hours. • $75,000 penalty for failure to immediately report a marine casualty or provide notice of a hazardous condition.

17. Update

18. Two Decades of Magic Pipe Cases • Began in the 1990s, with most cases involving discharges in the US • Enforcement role has expanded to reach improper discharges wherever they occur • APPS regulations require accurate maintenance of ORB, GRB and other records • Inaccurate ORB brought into U.S. port can be prosecuted as criminal violation • Begins with port-state control inspection

19. Coast Guard Referrals to DOJ Year Number 2008 12 2009 9 2010 22 2011 18 2012 13 2013 8 2014 (to date) 5

20. 2013/2014 Prosecutions (to date) “This conviction ensures that the defendant is held accountable with a criminal fine and a contribution to conservation efforts in coastal Delaware, as well as a two-year ban from United States ports.  The message to the shipping industry is clear: environmental crimes at sea will not be tolerated.”   • ~11 criminal prosecutions • > $25 million • 6 months in prison • OWS cases • Failure to report oil spill during salvage • Failure to report hazardous conditions • Repeat offenders • Fishing Vessels • Two trials (conviction and acquittal)

22. 15 parts per million?

23. Trends • Cases continue apace • Penalties higher and more jail time • More whistleblower awards • Increased international cooperation • Expanding theories of liability and additional regulation • VGP? Annex VI? Ballast Water? • Jurisdictional challenges and more trials • Convictions and an acquittal

24. Whistleblowers and Awards • 102 crew members have received APPS awards since mid 1990s • Over $17 million USD awarded • Highest award was for $2.1 million USD • Many awards were 25 to 30 times what the crew member earns in a year • “In the discretion of the Court, • an amount equal to not more than • ½ of such fine • may be paid to the person • giving information • leading to a conviction.”

25. Challenges to Whistleblower Awards • Award challenge in Texas: • Failure to comply with company policy requiring reporting of environmental noncompliance • Extended delay in reporting violation despite multiple port calls and superintendent visits • Affirmative misrepresentation to company denying knowledge of any deficiency • Court awarded only 40% of amount requested by the government • Recent case in Maryland • Same factors discussed with prosecutors before sentencing • U.S. Department of Justice decided not to seek an award • Another similar Maryland case argued in April / Pending Court decision

26. Proactive Measures to Neutralize Whistleblowers • Training programs • Encourage internal reporting of noncompliance • Open reporting systems • Investigate reports and take appropriate action • Reward internal reporting • Utilize superintendent ship visits to reinforce compliance message to officers and crew • Ensure technical needs of vessel regarding pollution prevention equipment are addressed promptly

27. Investment Strategy:Cultivate Compliance Culture • Implement policies through SMS designed to foster and facilitate compliance • Training and re-training program for officers and crew • Clarify and update compliance obligations • Emphasize company’s commitment to and expectation of compliance by officers, crew, and shore-side managers • Stress internal reporting program • Communicate company’s willingness to support vessel’s needs to operate in compliance • Incorporate compliance as a factor in evaluations

28. Investment Strategy:Cultivate Compliance Culture(cont’d) • Measures will require a sustained commitment of resources • Continuous improvement • Yield on that investment is two-fold: • Reduce risk of non-compliance • Develop corporate compliance track-record that will serve to minimize corporate liability if port-state control inspectors identify a non-compliance aboard a vessel

29. “For the Benefit of the Company” • Under US law, the basis for corporate vicarious liability is proof that the conduct giving rise to liability was done – • by an employee/agent acting within the scope of his authority • at least in part, “for the benefit of the company.” • Training of officers and crew should emphasize that • Company’s policies require compliance • Company will provide vessels resources needed to comply with the law • Compliance benefits the Company  NONCOMPLIANCE DOES NOT BENEFIT THE COMPANY!

30. Avoiding the Costs of Non-Compliance

31. Avoiding This Trend • Comprehensive Environmental Compliance Program • Good Company Culture • Close Coordination with Flag State • “The Department of Justice will continue to prosecute shipping companies who break the laws that protect our oceans.”

32. Why Be Pro-Active? • Coast Guard Authorization Act of 2010 – International Efforts on Enforcement. • Mandates better enforcement coordination between U.S. and international partners regarding oil discharges • Per DOJ, over $300 million in fines and 38 years in jail since inception of Vessel Pollution Initiative • Aggressiveness of Coast Guard / DOJ will not change. • Coast Guard / EPA Memoranda of Understanding regarding enforcement of EPA’s Vessel General Permit and MAROL Annex VI

33. Flag State’s Role • Flag State intended to have primary, ongoing responsibility for ensuring compliance. • Requiring corrective actions • Taking enforcement • Port states authorized to inspect, investigate, and enforce for pollution events in their waters. • U.S. has taken over primary compliance role. • Per DOJ, it is because flag states are too complacent.

34. Options for Empowering Flag State • Owners / Managers should identify issues through their own compliance programs: • Open Reports, Audits, Superintendent Visits, Investigations • Coordination with Flag State • Corrective Actions • Corrective Entries in the ORB • Flag State can help resolve issues. • Helps prevents whistleblowers from disclosing in the U.S. • Corrective entry in the ORB may preclude U.S. enforcement for discharges outside U.S. territorial waters.

35. Do not be complacent… “Those who cannot remember the past are condemned to repeat it.” George Santayana, The Life of Reason, 1905

36. Questions? Jeanne M. Grasso Blank Rome LLP 202-772-5927 (office) 202-431-2240 (mobile) grasso@blankrome.com