From “Magic Pipe”

WILL “MAGIC FUEL” BE THE NEXT “MAGIC PIPE”? ALASKAN FEDERAL EMISSIONS CONTROL AREA LAWSUIT RAISES QUESTIONS ABOUT INDUSTRY EXPOSURE UNDER NEW RULES highlights the processes employed by the federal government in applying and enforcing Introduction and Background international standards in areas that extend beyond U.S. territorial waters. Regardless of In a lawsuit that raises unique the outcome of the case, two things are very questions about international and federal law, clear: (1) increasingly stricter air emissions the State of Alaska is seeking an injunction requirements for ships, in some shape or form, against the Federal government which, if are here to stay, and (2) the Federal granted, would prevent Federal agencies from government is serious about enforcing them. enforcing an offshore segment of the newly As a matter of fact, the first known U.S. created North American Emissions Control citation for ECA related deficiencies occurred Area (ECA). The case, which is the first of its in early February of this year, when a kind involving new international standards Panamanian flagged bulk carrier was issued and corresponding U.S. laws that came into two operational deficiencies in New Orleans effect in August 2012, argues that by the U.S. Coast Guard. According to the Environmental Protection Agency (EPA) Coast Guard’s Port State Control Report, the regulations requiring ships transiting the area vessel had compliant fuel onboard, but failed of the ECA off of Alaska’s coast to burn lower to use it while operating in the North sulfur fuel will have the practical effect of an American ECA, and both the Master and additional corporate tax on the shipping and Chief Engineer were not familiar with the tourism industries so vital to Alaska’s operation of Annex VI related equipment and economy. According to Alaska, the additional the current ECA rules. While there has been costs of complying with the ECA, which no report of any subsequent criminal encompasses areas off of the southeastern and investigation of the vessel or her crew, this central parts of Alaska that include shipping incident signals that U.S. inspectors are routes, will ultimately be passed on to the actively paying attention to vessel compliance consumer, making the already high cost of with the new ECA and low sulfur fuel shipping goods to the state and the cruise ship standards and will be on the lookout for passenger fares even more expensive. violations.

The suit is one of the latest Similarities in the recordkeeping developments in the government’s “phased” requirements of Annex VI to those employed approach to cutting sulfur emissions that has in respect to MARPOL1 Annex I (prevention seen some states, like California, seek tighter of oil pollution) and Annex V (garbage regulation of maritime emissions, and others, management), when coupled with the U.S. like Alaska, seek fewer restrictions. Although government’s aggressive pursuit of maritime the immediate impacts of the case may not be environmental crimes cases, makes one recognized by the broader shipping industry, wonder: will the stricter fuel requirements the dispute underscores the varied reactions expose vessels and vessel interests to criminal state governments and industry are having to and civil liability the way oily water separator the new federal emission requirements, and (“OWS”) cases have to date? After all, in the 1

The information contained in this document is for general informational purposes only, does not constitute legal advice, and is presented without any representation or warranty as to its accuracy, completeness, or timeliness. The use of, including the transmission through or receipt of information from, this website does not create an attorney-client relationship with Chalos O'Connor, LLP, or any of its attorneys, and you. last five years alone, U.S. criminal and enforcement of certain types of violations investigations and prosecutions of alleged based upon each agency’s expertise and OWS related misconduct and Oil Record authority. Book log entries have resulted in millions of dollars in criminal fines and community In general, suspected violations of service payments, and thousands of months of MARPOL and the APPS in which there is criminal probation for vessel owners and probable cause to believe a criminal violation operators, including the mandatory has occurred are referred, normally by the implementation of expensive environmental Coast Guard, to the Department of Justice for compliance monitoring programs by many of further investigation and prosecution. In the these entities for their fleets. 30 years since the enactment of APPS, U.S. agencies have refined their tactics for Moreover, the very same statute relied investigating suspected APPS matters and upon by the U.S. government for the improved their coordination, leading to more investigation and prosecution of suspected frequent and successful criminal prosecutions MARPOL Annex I (oil) and V (garbage) under the statute, which in turn deliver violations also governs Annex VI. The U.S. positive publicity and substantial fines to the Act to Prevent Pollution from Ships government. In particular, the U.S. (commonly referred to as the “APPS”) government has increasingly credited the implements all of the international MARPOL allegations of and relied upon testimony from treaty and its Protocol, outlining among other so called “whistleblowers,” who may receive things the administration and enforcement of up to half of a criminal fine levied in a MARPOL, issuance of certificates, reporting criminal APPS case. A mere allegation alone requirements, violations, and penalties for by a whistleblower that a vessel has violated violations of the APPS. The APPS provides the APPS will, in almost all cases, trigger a for both civil and criminal penalties, making lengthy (and costly) investigation by U.S. the knowing violation of the APPS a Class D authorities in port. felony. With such a the powerful tool at its The APPS, for the most part, provides disposal, substantial incentives for successful inspection, examination and investigation APPS prosecutions, and an established authority for suspected violations of the Act to statutory framework for handling such matters two agencies: the U.S. Coast Guard, and the under the APPS, there is little reason the Coast EPA. In 2011, the two agencies entered into a Guard, EPA and Department of Justice will non-binding Memorandum of Understanding approach suspected violations of Annex VI to establish how they would mutually under the APPS any differently than those implement and enforce the newly created involving the other MARPOL annexes (i.e. oil ECAs, including the referral of violations and and garbage). evidence from one agency to another and the provision of relevant technical expertise. For their part, there are steps vessels, While the EPA has authority to issue Engine their owner and operators can take if indeed International Air Pollution Prevention the current pattern for enforcement of (EIAPP) certificates, the Coast Guard has law international environmental standards enforcement authority to board ships on the continues. Vessels calling in U.S. waters and high seas and waters subject to U.S. at U.S. ports, can expect rigorous scrutiny of jurisdiction, as well as certain facilities ashore. their records concerning the purchase and use The agreement delineates the investigation of compliant fuels. Consequently, owners and 2

The information contained in this document is for general informational purposes only, does not constitute legal advice, and is presented without any representation or warranty as to its accuracy, completeness, or timeliness. The use of, including the transmission through or receipt of information from, this website does not create an attorney-client relationship with Chalos O'Connor, LLP, or any of its attorneys, and you. operators should be vigilant about compliance, the area.2 Beginning in August, 2012, ships International Safety Management (ISM) Code subject to MARPOL regulations transiting the policies and procedures, and onboard training North American ECA, which extends 200 of vessel personnel; and, regulated entities nautical miles from a substantial portion of such as corporate vessel owners and technical both the American and Canadian coastlines, managers, should be knowledgeable about must burn low sulfur fuel oil (not exceeding government requirements, policies and one percent or 10,000 “parts per million.”). In options, with a view towards avoiding many addition to the new North American ECA and of the pitfalls the maritime industry has seen existing ECA’s in the Baltic and North Seas, with OWS cases and Oil Record Book another ECA in the Caribbean Sea is slated to requirements. enter into force in January 2013 and take effect in 2014 and 2015. In general, by 2015 MARPOL, APPS, ECAs and the New most ships will have to cut their fuel sulfur Lower Sulfur Fuel Requirements standard to .10 percent when operating within ECAs, and by 2020 all ships operating When the revised Annex VI to the anywhere (i.e. outside of ECAs) must cut their International Convention to Prevent Maritime fuel sulfur standard to .5 percent. Increasingly Pollution (MARPOL) entered into force in stringent emissions requirements and fuel June 2010, new limitations on sulfur oxides, standards therefore already apply, or will soon which will progressively increase over the apply, to ships whether they are operating next seven years, were put into place. These inside or outside of a designated ECA. measures strive to minimize airborne emissions from ships and, according to the There are some exceptions, codified in International Maritime Organization (IMO), Part 1043 of Title 40, Code of Federal and are intended to reduce local and global air Regulations, to the most recent low sulfur fuel pollution and environmental issues emanating burning requirement. For example, ships can from vessel emissions through two use alternative means of complying with lower complementary sets of standards. The first set emissions standards such as exhaust gas of new standards imposes a “global cap,” cleaning systems or by retrofitting existing applicable at all times, for the sulfur content of systems with the ability to burn very “clean” fuel (lowering the permissible level of sulfur fuel, such as Liquefied Natural Gas, if the in fuel from 45,000 parts per million to alternative system is approved by the EPA as 35,000). The standards will require cutting an equivalent. Some types of vessels, such as sulfur content by an additional 30 percent by steamships, are categorically exempt from the 2020. requirements, but generally the new requirements apply to all vessel types, The second set of new standards in the including recreational vessels. revised MARPOL treaty, which addresses various forms of maritime pollution such as Moreover, interim guidance published oil, sewage and garbage, are limited to certain by the EPA attempts to take into account geographic areas, replacing existing sulfur supply issues and the difficulty some vessels oxide control zones with the new Emissions will face in obtaining compliant low sulphur Control Areas that regulate the emission not fuel by providing the ability to file a “non- only of sulfur oxides but the release of other availability report” with the vessel’s flag ozone-depleting substances such as nitrous administration and the “competent authority” oxides and particulate matter by vessels within in the port of destination (which in the U.S. is the EPA) no later than 96 hours prior to 3

The new MARPOL Annex VI These offenses have all been utilized, to some standards, together with the APPS, also entail degree, in U.S. APPS prosecutions involving a number of recordkeeping obligations for OWS bypass, Oil Record book, and/or vessels. To demonstrate compliance with the Garbage Record book allegations. requirements, larger ships on international Additionally, the Department of Justice has voyages are required to maintain an Ozone routinely and successfully indicted vessel Depleting Substances Record Book and owners and operators based upon “vicarious record, among other things, the vessel’s liability,” in which the corporation is held position, type of fuel, sulfur content after each liable for the acts and violations of its bunkering operation, as well as the position, employees. As discussed below, the criminal date and time of any fuel-oil-change-over fines and other penalties associated with such operation prior to entering or after exiting an violations are significant for both vessel ECA. Additionally, when a ship is inside an owning and/or operating corporate entities and ECA, it must specify in the log book the the individual vessel officers and crew procedures it uses to comply with the new employed by them. emissions limits, such as its use of low sulfur content fuel or an exhaust gas cleaning The “Cost-Benefit” Factor: Resistance to the system. Smaller vessels or those on domestic New Low Sulfur Fuel Requirements voyages may demonstrate compliance with the lower sulfur requirements by showing marine The federal government’s efforts to distillate fuel receipts for fuel purchased in the implement and enforce the new standards have U.S. already been met with some resistance. The State of Alaska filed its initial complaint in Failure to keep accurate records or, State of Alaska v. Clinton et. al in the U.S. even worse, to conceal non-compliant activity District court in Alaska in July 2012, could result in criminal and civil liability subsequently amending it two months later to under APPS and a potential combination of a include additional factual allegations and re- number of other U.S. criminal provisions, characterizing its action as predominantly an depending upon the circumstances, including Administrative Procedure Act (APA) but not limited to: challenge of the federal government and its 4

In essence, Alaska argues that the The federal government has sought to process utilized to create the ECA ran afoul of dismiss the complaint and corresponding the law in several respects. First, Alaska request for injunctive relief because, it argues, contends that the Secretary of State’s Alaska has failed to demonstrate that it would acceptance of the amendment extending the succeed on the merits of the case, has not ECA to waters off Alaskan shores violated the shown irreparable harm by the underlying APA as it was “accepted” without adequately government actions, and has improperly supported scientific analysis and therefore balanced the financial equities against the arbitrary, capricious, in excess of the APPS or public’s interest. otherwise contrary to law. In other words, the federal government did not meet its burden of In support of its motion to dismiss, the proving negative impacts of sulfur oxide and government relies upon economic analyses other emissions on the population in Alaska. performed by consultants who, at the Alaska further charges that the EPA government’s request, studied the costs and improperly created the ECA without affording benefits associated with implementing and interested persons an opportunity to comment enforcing the Alaskan portion of the ECA. first, through Federal rulemaking, regarding Using data related to the two primary its scope or designation. Finally, raising a containerized shipping companies that carry Constitutional argument, Alaska contends that goods into Alaska, including the percentage of the Secretary of State and EPA unilaterally, transit time inside the disputed portion of the and improperly, adopted an international ECA, these consultants concluded that the measure (the ECA amendment to MARPOL impact on shipping costs imposed by the ECA Annex VI) as Federal U.S. law without proper was and will be “negligible,” the effects on tax Congressional approval. and royalty revenues were “overstated” by the State, and the dire consequences on tourism As a result of these legal and predicted by Alaska are exaggerated. procedural missteps, the State argues, the Moreover, the government argues as a general economic harm Alaska will suffer will matter that refusal by the U.S. to enforce outweigh any “speculative environmental provisions of a treaty it has signed on to would benefits” to be derived from the regulations. damage U.S. diplomatic relations and send Joined by cruise ship industry advocate “mixed signals” to the international Resource Development Council, Alaska seeks community. In addition, a number of a judgment declaring that the federal environmental groups have intervened in the government overstepped its authority when it case and filed briefs in support of the included the waters off Alaska in the ECA, as government’s motion to dismiss the case. The well as an injunction that would prevent the groups have primarily lodged an additional Federal government from enforcing the ECA challenge, which is that the Alaskan complaint in those waters. The primary “harm” was untimely and that venue in Alaskan stemming from the Alaskan portion of the federal district court is inappropriate. The ECA is economic: the state argues that case should have been brought within 60 days enforcement of the ECA off Alaska’s coast of the issuance of EPA regulations, these 5

The information contained in this document is for general informational purposes only, does not constitute legal advice, and is presented without any representation or warranty as to its accuracy, completeness, or timeliness. The use of, including the transmission through or receipt of information from, this website does not create an attorney-client relationship with Chalos O'Connor, LLP, or any of its attorneys, and you. groups argue, and in the District of Columbia Second, the IMO has indicated that success district court. and uniformity will not be realized “overnight” by pledging to assess the The effects of the anticipated decision availability of low sulfur fuels as the new in the State of Alaska v. Clinton et. al case on standards take effect and to adjust regulations shipping, tourism, the general American accordingly. Third, the federal government public and the scope and extent of federal has publically disclosed its strategy and intent versus state authority, await the judge’s ruling, to enforce the new ECA and lower sulfur fuel and any appeals that will surely follow. It is requirements, announced through policy unclear whether other states will pursue guidance posted by the Coast Guard and EPA. similar actions in federal court, whether states This last development serves as a clear signal will continue to take a varied approach to that the U.S. will be watching ships subject to emissions standards, or whether industry the new standards to ensure compliance. representatives will seek to exert political or economic pressure in court or through other The Coast Guard is the agency most avenues to alter the government’s plans to likely to detect non-compliance with the phase-in the new emissions control standards. emissions control requirements because of its For example, one Canadian-based company is broad maritime law enforcement authority and encouraging Canadian and U.S. lawmakers to Port State Control vessel safety and security carve out an exception that would push the program, part of which is aimed at detecting ECA requirements 50 miles offshore in order and preventing violations of MARPOL and to exempt “shortsea” or “coastal” shipping. the APPS. In 2011 the Coast Guard reported Implementation of the new measures, this 9,326 “distinct visits” by vessels subject to its company argues, will have the Port State Control program and close to counterproductive effect of driving many 80,000 vessel calls in the U.S. overall.5 shippers to use other, more “emissions heavy” non-maritime transport methods, such as Jurisdictional and other legal issues railways and trucking. Like the one Alaska associated with enforcing MARPOL Annex now faces in court, such challenges will VI and the new ECA requirements bear some require a significant reversal in the U.S. resemblance to those encountered with oily diplomatic and regulatory stance in order to be water separator (OWS) and Oil Record Book successful. violations (commonly referred to as “magic pipe” cases), which the U.S. Department of From “Magic Pipes” to “Magic Fuel?” Justice continues to aggressively investigate Enforcement of the New Lower Sulfur and prosecute. Namely, substantive violations Requirements and the Shipping Industry of MARPOL and APPS onboard foreign flagged vessels are subject to U.S. Regardless of how the Alaskan case enforcement only if the violation is committed plays out over the next several months, it inside waters subject to U.S. jurisdiction. As a appears the increasingly strict emissions rules result, most APPS violations are prosecuted as and corresponding record keeping felony federal recordkeeping offenses in requirements are here to stay. First, which the criminal offense is the physical act environmental groups and states like of presenting an altered or materially false California have been successful at imposing record to U.S. authorities inside U.S. waters or even stricter standards, demonstrating the at a U.S. port. The stakes in such cases are broad range of views on such measures. high, as corporate entities such as vessel owners and technical managers face large 6

The information contained in this document is for general informational purposes only, does not constitute legal advice, and is presented without any representation or warranty as to its accuracy, completeness, or timeliness. The use of, including the transmission through or receipt of information from, this website does not create an attorney-client relationship with Chalos O'Connor, LLP, or any of its attorneys, and you. corporate criminal fines (up to $500,000 per owners and operators desiring to “self report” count proven or plead to) for the unlawful acts suspected and confirmed Annex VI violations of their employees, and individual onboard their vessels will have the ability to crewmembers face the prospect of jail and do so under the Coast Guard’s “Appendix V” other penalties (such as fines of up to program, as is, under applicable $250,000 per count proven or plead to) for circumstances, the case with other MARPOL substantive violations of APPS and related and APPS matters, such as cases involving the U.S. criminal laws. Individuals and/or discharge of oily waste. Because the Coast organizations that violate APPS may also be Guard’s current environmental crimes liable for civil penalties of up to $40,000 per voluntary disclosure policy applies broadly “to violation, separate and apart from any criminal criminal violations under all of the Federal liability. environmental statutes that the Coast Guard administers,” there is little reason to believe It comes as no surprise that the Coast otherwise. Guard has unambiguously conveyed its intent to pursue suspected MARPOL Annex VI and Under the Appendix V policy, entities associated recordkeeping violations in an who maintain compliance management approach similar to suspected “magic pipe” programs to prevent, detect and correct cases. Last July, the Coast Guard posted MARPOL violations and who promptly report guidelines, in the form of answers to such violations within 21 days of discovery “frequently asked questions,” for may avoid criminal charges so long as the incorporating the new MARPOL Annex VI Coast Guard is satisfied the violation is not requirements into its overall marine safety part of a pattern or broader practice, does not inspection, examination and investigation involve a “prevalent management philosophy regime, including how it will handle referral or practice that conceals or condones of suspected and confirmed MARPOL Annex environmental regulations,” or does not reveal VI violations.6 The Coast Guard has indicated conscious involvement or disregard by senior that violations by foreign flagged vessels management. It is worth noting that because which occur seaward of waters not subject to voluntary disclosure is not a literal “get out of U.S. jurisdiction will be referred to the jail free” card and involves the consideration vessel’s flag administration, but because of a number of complex factors, an entity’s foreign vessels visiting U.S. ports remain timely consultation with its counsel is subject to international and U.S. laws related important. Similarly, voluntary disclosure of a to recordkeeping, the Coast Guard will serve violation “after the fact” should not be as lead agency for investigating suspected confused with the voluntary filing of a fuel violations of such (i.e. the falsification of a log “non-availability” report, which applies before book). Non-criminal enforcement action will a vessel has entered the North American ECA be referred to the EPA, but the Coast Guard and violated the new rules. noted that it reserves the right to process non- criminal violations under its own policies and Conclusion penalty procedures. To date, the Coast Guard has not formally promulgated or proposed As the parties in State of Alaska v. regulations in the Code of Federal Clinton et. al continue briefing the federal Regulations. government’s motion to dismiss the case and preparing for oral argument on the motion, the Although it remains to be seen, it is shipping industry rightfully continues to adapt likely that regulated entities such as vessel to significant changes in the type of fuel ships 7

● ● ● ● ● ● ● ● ●

Chalos O’Connor LLP is an experienced admiralty and maritime environmental criminal and civil defense, coverage litigation, and insurance defense firm that regularly represents shipowners, charterers, protection and indemnity associations (P&I Clubs), hull and machinery underwriters, insurers, underwriters, domestic and foreign business entities and, in some cases, individuals. If you or your entity have questions related to the implementation and enforcement of the new MARPOL ANNEX VI regulations, voluntary disclosure procedures or other civil and criminal admiralty and environmental law matters, please contact the firm at (516) 767-3600 or visit our website at www.codus- law.com for more information.

1 MARPOL is a reference to the International Convention for the Prevention of Pollution from Ships (MARPOL) as amended by the Protocol of 1978 and enacted in the United States by the Act to Prevent Pollution from Ships of 1980 (the “APPS”), which is codified in the U.S. at 33 U.S.C. §§ 1901-1915. 2 See generally MARPOL Annex VI at Regulations 13, 14 and 18; see also 40 C.F.R. Part 1043. Information about MARPOL air emissions standards and other International Maritime Organization (IMO) environmental programs and initiatives may be accessed via the IMO website at: http://www.imo.org/OurWork/Environment/ (last visited Feb. 23, 2013). 3 See EPA Memorandum “Interim Guidance on the Non-Availability of Compliant Fuel Oil for the North American Emission Control Are” dated June 26, 2012 (Air Enforcement Division); see also MARPOL Annex VI Regulation 18. 4 The docket for State of Alaska v. Clinton et al. may be accessed using the Federal judiciary’s Case Management/Electronic Case Files (CM/ECF) system (registration and password required), Civil Case Number 3:12-cv-00142-SLG. 5 See U.S. Coast Guard Port State Control Annual Report for 2011 (dated August 23, 2012), available at: https://homeport.uscg.mil/mycg/portal/ep/contentView.do?contentTypeId=2&channelId=- 18371&contentId=65744&programId=13086&programPage=%2Fep%2Fprogram%2Feditorial.jsp&pageT ypeId=0&BV_SessionID=@@@@1485114913.1362150414@@@@&BV_EngineID=ccccadfjemmhkeec fngcfkmdfhfdfgo.0. Editors note: the 2011 Annual Report provides the latest figures publicly available, as the Coast Guard at the time of this writing has not published its 2012 report. 6 These guidelines are available at the U.S. Coast Guard’s publicly accessible “Homeport” website at: https://homeport.uscg.mil/ (keyword: “Air Emissions”).