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Shipping Compliance Alert: Deficiencies Discovered During Coast Guard Investigation Lead to Criminal Penalties, Highlighting Importance of Establishing an Effective Compliance Program

Finance, Litigation
May 11, 2022

On May 5, 2022, in United States v. Evridiki Navigation, Inc. et al., U.S. District Court Judge Richard G. Andrews of the District of Delaware imposed a total of $3 million in criminal fines and five-year periods of probation against the owner and operator of the oil tanker M/T Evridiki (the “Vessel”) in an action arising from deficiencies found in the course of a U.S. Coast Guard inspection. These fines were imposed following the defendants’ conviction at trial on all charges, including violating the Act to Prevent Pollution from Ships (“APPS”), falsifying ships’ documents, obstructing a U.S. Coast Guard inspection and making false statements to U.S. Coast Guard inspectors. Further to our report in January’s Maritime Litigation Roundup – concerning the Third Circuit’s decision in United States v. Vastardis that affirmed criminal penalties imposed against the Vessel’s chief engineer – the district court imposed the maximum fine available against the Vessel’s registered owner ($2 million) and fined its commercial / technical manager an additional $1 million.

Typical Penalties

Such penalties are not uncommon where violations of U.S. laws are found following a Coast Guard inspection – such as was found in this case, involving the defendants’ knowing failure to maintain an accurate Oil Record Book. As reflected on a chart submitted by the government showing corporate fines and the length of probation imposed on corporate defendants in other vessel pollution cases, total corporate monetary penalties in recent matters have ranged up to $40 million, frequently including terms of up to 60 months’ probation.

As an additional condition of sentencing, courts also often order companies to implement a comprehensive Environmental Compliance Plan (“ECP”). If imposed by the Court, an ECP may include the appointment of an outside independent third-party auditor and court appointed monitor that must be funded by the defendant, but who is responsible directly to the Court and Office of Probation. Finally, in some cases, a period of probation will also include the condition that vessels owned or operated by the company subject to probation are entirely banned from the ports or territorial waters of the United States without prior approval of the Coast Guard.

Importance of Establishing and Maintaining an Effective Compliance Program

In its sentencing memorandum, the government focused the Court on what it contended was a “corporate managerial failure to prioritize environmental compliance,” and argued that one of the most important characteristics of the organizational defendants for the Court to consider at sentencing included that they “did not have an effective ethics and environmental compliance program at the time of the offense.”

In support of its recommendations at sentencing, the government also argued that the alleged management failures at issue were not limited to the shipboard misconduct of the chief engineer, but included evidence that the government contended demonstrated “willful criminal conduct by shore side managers.” For example, the government supported its sentencing recommendations by highlighting fake oil content meter certificates and other forged and fake seals and certificates, found following a forensic examination of the ship’s computers. The government noted that these materials were provided to the ship by shore-side personnel, in order to infer that this evidence reflected an organization that did not prioritize environmental compliance.

The experience in this case and the steep penalties imposed – on both the Vessel’s chief engineer and its controlling organizational defendants – demonstrates that devoting upfront resources and attention to establishing and maintaining an effective environmental compliance program for one’s entire organization should remain a top priority for all participants in the shipping industry, including vessel owners and ship managers, as well as lenders or other financiers of such ventures.

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