Minimizing the Risk of IMO 2020 Fuel Sulfur Limit Violations

Shipowners and operators around the globe know the United States aggressively enforces compliance with the International Convention for the Prevention of Pollution from Ships, as amended (MARPOL). The United States has brought MARPOL cases for nearly 30 years and, by all indications, it will continue to do so for the foreseeable future.

Most MARPOL prosecutions have involved violations of Annex I through bypasses of the Oily Water Separator (OWS) or improper discharges of sludge, along with a few Annex V garbage violations. Nearly all of these cases have been based on false entries in the ship’s records, rather than actual discharges in U.S. waters, combined with some kind of illegal post-incident conduct like lying to the U.S. Coast Guard (USCG) or destroying records or other evidence.

In late 2019, the United States brought its first criminal prosecution based on violations of Annex VI air emissions requirements. This case was a warning signal and we anticipate that the USCG will focus even more on Annex VI violations now that the International Maritime Organization’s (IMO’s) worldwide sulfur limit is in effect.

Compliance challenges presented by IMO 2020

Long-awaited amendments to the fuel sulfur standards under Annex VI – “IMO 2020” or “2020 sulfur cap” – have come into effect. These changes present compliance challenges and increase the risk of an enforcement action. Owners/operators must take steps now to ensure compliance with Annex VI, including maintaining accurate records, or risk becoming a target in the next port State control (PSC) inspection.

The major changes imposed by IMO 2020 are:

• From January 1, 2020, the worldwide sulfur limit in fuel is 0.50% for ships operating outside emission control areas (ECAs); ECA sulfur limits remain 0.10%. 
• As of March 1, 2020, there is a ban on the carriage of non-compliant fuel unless ships are fitted with exhaust gas cleaning systems or “scrubbers.”

There are two short-term options for complying with IMO 2020:  use compliant fuel or install and use scrubbers on all ships. However, both options present their own logistical and compliance challenges. In the longer term, compliance may be achieved through alternative power sources such as LNG, but this is generally not a realistic option for ships already in service.

MARPOL regulations also require vessels to report fuel non-availability to the flag State and relevant PSC authorities. In the United States, fuel oil non-availability reports or FONARS must be submitted to the USCG Captain of the Port. These reports should not be used to report non-compliances like failures to change over to compliant fuel. Nor are they waivers. They are required admissions of non-compliance, whereby the PSC authority will exercise its discretion to enforce or not based on the facts and circumstances.

Annex VI enforcement to date in the United States

In the United States, Annex VI can be enforced through several means:  letters of warning (LOWs); notices of violation (NOVs) with penalties up to $10,000; civil penalties up to $74,552 per violation; and referral to the U.S. Environmental Protection Agency or to the U.S. Department of Justice for investigation and/or criminal enforcement.

Until recently, Annex VI enforcement has been limited primarily to LOWs and NOVs (and a few EPA civil penalties depending on the facts of the case) in the North American and Caribbean ECAs. But, in August 2019, two shipping companies were convicted and sentenced to pay $3 million for violations of Annex VI. The companies admitted to using non-compliant fuel in the Caribbean ECA, failing to maintain an accurate ORB, maintaining false bunker delivery notes (“BDNs”), and obstructing justice. According to court documents, crew members siphoned fuel from cargo tanks and created fake BDNs to show that the fuel was acquired shoreside. The fake BDNs were presented to the USCG during a PSC exam; however, the USCG noticed that the BDNs showed the vessel was burning non-compliant fuel in the Caribbean ECA. This case shows that the United States is willing to prosecute companies for Annex VI violations and will do so based on false documentation, like with Annex I criminal cases.

To that end, the USCG has detailed how PSC inspectors will verify Annex VI compliance: 

• Review BDNs, fuel change-over procedures, and other documentation during a PSC exam, and assess the familiarity of the crew with the procedures, as well as the competency of the crew;
• If warranted, e.g., the ship is missing BDNs, the BDNs indicate non-compliant fuel, or the crew are unfamiliar with or not following procedures – expand the inspection. 

Like Annex I enforcement actions, Annex VI investigations also could result from a whistleblower report to the USCG. We believe the USCG would respond to such a report just as it would to a reported OWS bypass – an expanded MARPOL examination followed by an investigation.

In determining whether to bring an enforcement action, the USCG also may consider whether the vessel (1) proactively reported non-compliance or submitted a FONAR; and/or (2) attempted to acquire compliant fuel before entering the ECAs. In our experience, the USCG exercises its discretion not to enforce when the owner made good faith compliance efforts and was transparent about potential non-compliances. Transparency with respect to third-party sulfur analyses that may differ from the BDN may also be warranted but are beyond the scope of this article.

Recommendations to help ensure your compliance program addresses Annex VI enforcement

The single most significant risk of a potential MARPOL enforcement action is failing to implement a comprehensive compliance system. Shipowners and operators should proactively review and take steps to improve their compliance programs in order to avoid getting caught in the crosshairs of a MARPOL enforcement action (and the reputational and business harm that comes along with a MARPOL conviction). 

Our experience representing companies in MARPOL cases has shown that the efficacy of an environmental compliance program hinges on:

• Crew training programs that are rigorous, realistic, and frequently implemented and updated;
• Internal and external verification mechanisms, including audits and other regular, comprehensive reviews of records and compliance with policies and procedures;
• An anonymous open reporting system, where reports are seriously investigated;
• Meaningful oversight from shoreside management, including superintendents who routinely interact with the officers and all levels of crew, who can address problems quickly as they arise;
• Willingness to investigate information suggesting that an intentional MARPOL violation occurred, including consulting with outside counsel who can develop a complete factual record and provide legal advice concerning corrective actions or reporting obligations; and
• A strong overall corporate compliance culture starting at the top, with management “walking the talk.”

In light of the USCG’s recent focus on Annex VI enforcement, we recommend owners/operators dedicate resources to improving these management practices on a priority basis. A culture of compliance is particularly critical to reduce risk in light of whistleblower laws that may incentivize reporting violations to the USCG rather than to the company.

Jeanne Grasso the co-chair of Blank Rome's Maritime and International Trade Practice Group and a member of the firm's Maritime Emergency Response Team (“MERT”). She focuses her practice on maritime, international, and environmental law for clients worldwide. Jeanne counsels owners and operators of vessels, charterers, cargo owners, and facilities, including manufacturing facilities, both marine-side and inland. 

Kierstan Carlson helps corporate and individual clients navigate a wide range of white collar and complex civil litigation matters. She has substantial experience as the lead associate coordinating responses to subpoenas and civil investigative demands, and conducting parallel internal investigations. Kierstan has significant experience defending clients in maritime environmental criminal cases involving MARPOL and the Clean Water Act, as well as in civil and administrative enforcement actions involving the False Claims Act and other regulatory violations.