Shipowners could profit from US anti-‘slush fund’ directive

US Attorney General Jeff Sessions’ order could save shipowners money – or create a new set of challenges in pollution cases. Credit: US Customs

 

Federal prosecutors in the United States have been ordered to end third-party settlements against private companies, a move that could save shipowners millions previously paid out in oil pollution cases.

 

The directive, issued by US Attorney General Jeff Sessions earlier this month, ends a practice made popular during the Obama administration whereby community service payments were routinely made to non-profit groups such as the National Fish and Wildlife Foundation as part of plea agreements in oil dumping cases.

 

“When the federal government settles a case against a corporate wrongdoer, any settlement funds should go first to the victims and then to the American people – not to bankroll third-party special interest groups or the political friends of whoever is in power,” Sessions said in announcing the order on 5 June,

which became effective immediately.

 

Such third-party settlements, deemed ‘slush fund’ payments by those lawmakers who have opposed them for years, are a familiar part of ‘magic pipe’ pollution cases brought against foreign shipowners trading in the United States.

 

Because the actual oil dumping usually occurred outside US jurisdiction, cases against shipowners were instead based on doctored oil record books that hid the actual oil pollution, and on obstruction of justice charges in which the crew lied to US Coast Guard investigators. Both charges violated the Act to Prevent Pollution from Ships (APPS), the US codification of MARPOL, and have statutory maximum penalties of USD500,000 each.

 

Tacked on to those fines, in most cases, have been third-party community service payments to environmental groups. They have ranged from over USD100,000 – as was the case with Arab Ship Management in 2014 – to over USD1 million, in the case of Princess Cruise lines last year.

 

However, it is not yet certain if shipowners will end up directly benefiting from new US Justice Department (DOJ) policy. George Chalos, a New York-based lawyer who defends shipowners in oil dumping cases, said it remains to be seen whether the price to settle such cases will come down, or whether prosecutors will find a way to make up for the amount not being paid out to third parties, funnelling the money instead into government coffers.

 

“What we’re saying is, there’s no way that they’re going to be able to justify bringing a million dollars’ worth of penalties, plus something else on top that, because the only way they can do that, under the new policy, is to add additional counts to the wrongful act, or go into a contorted alternate-fines calculation, for which there is no precedent,” Chalos told Fairplay.

 

“If prosecutors go down this route of intellectual dishonesty – and there’s a substantial chance that they will – then we’re going to have a whole new flourishing area of law that people will challenge.”

There are limited exceptions to the new policy. It does not apply to “an otherwise lawful payment or loan that provides restitution to a victim or that otherwise directly remedies the harm that is sought to be redressed”, the directive states, including, for example, harm to the environment. It also does not apply to payments for legal services made in connection with a case, nor does it apply to payments expressly authorised by statute, including restitution.

 

Third-party payments made by shipowners have been a lucrative source of revenue for environmental groups, based on criminal penalties imposed in vessel pollution cases. Between 2005 and 2015, those penalties totalled USD200 million, with shipboard and shoreside officers sentenced to more than 17 years in prison, according to the DOJ.

 

Republican lawmakers in the US Congress attempted to address the issue of third-party payments last year with the introduction of the Stop Settlement Slush Funds Act of 2016. The proposal was made following an investigation revealing that the DOJ had collected as much as USD880 million for third parties in the previous two years alone.

 

“The purpose of DOJ enforcement actions should be punishment and redress to actual victims,” the proposal noted. “Carrying that concept to communities at large or community groups, however worthy, is a matter for the legislative branch and is not to be conducted at the unilateral discretion of the executive.”

However, through Sessions’ order the executive branch has itself succeeded in such a unilateral manoeuvre around the legislative process.

 

Contact John Gallagher at john.gallagher@ihsmarkit.com and follow him on Twitter:@JohnAGallagher1

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