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Emerging Environmental Requirements for Foreign Transfers of U.S.-Flag Vessels

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Background: MARAD’s Foreign Transfer Regulations

In general, the transfer of a U.S.-flag vessel to another registry and/or to a non-U.S. citizen owner requires the prior approval of the Maritime Administration (“MARAD”) under 46 U.S.C. § 56101 (which is the current codification of Section 9 of the Shipping Act, 1916, as amended). Specifically, subject to certain exceptions, Section 56101 prohibits the sale, lease, charter, delivery, or other transfer (and any agreement to do so) to a non-U.S. citizen of any interest in, or control of, a U.S.-flag vessel owned by a U.S. citizen and the transfer of a U.S.-flag vessel to a foreign flag. In addition, the prohibitions of Section 56101 apply to vessels whose last documentation was the U.S. flag.

To address frequent approval requests, MARAD adopted regulations (46 C.F.R. Part 221) that grant general approvals under Section 56101 for certain transfers of U.S.-flag vessels and interests in such vessels to non-U.S. citizens. In general, those regulations permit the sale, lease, charter, delivery, or other transfer of an interest in, or control of, a U.S.-flag vessel to a non-U.S. citizen, provided that the vessel remains documented under the U.S. flag following the transaction and is not operated under authority of a foreign country. Exceptions to this general approval include bareboat or demise charters of U.S.-flag vessels for operation in the coastwise trade and sales for scrapping. In addition, foreign transfers of vessels less than 1,000 gross tons are subject to a general approval subject to certain conditions.

In the case of foreign transfer transactions that are not covered by a general approval, an application must be filed with MARAD, which evaluates them on a case-by-case basis. In evaluating applications, MARAD considers, among other things, the following:

  1. the type, size, speed, general condition, and age of the vessel;
  2. the acceptability of the owner, proposed transferee, and the country of registry or the country under the authority of which the vessel is to be operated; and
  3. the need to retain the vessel under U.S. documentation, ownership, or control for purposes of national defense, maintenance of an adequate merchant marine, foreign policy considerations, or the national interest.

46 C.F.R. § 221.15(b)(1). MARAD’s approval of an application is usually subject to certain standard conditions, which are set forth in its regulations, and MARAD may impose other conditions it deems appropriate. For vessels that are 3,000 gross tons or more, these conditions typically include continuing restrictions—in the form of a contract secured by a surety bond—on the transfer and operation of the vessel for the remainder of its economic life, which is deemed to be 20 years for tank vessels and 25 years for non-tank vessels subject to extension for rebuilt or modified vessels. These restrictions are generally aimed at prohibiting the vessel from being owned or operated by or in countries such as Cuba and North Korea.

During times of war or national emergency declared by the President, 46 U.S.C. § 56102 applies to foreign transfers, and it is more comprehensive and restrictive than Section 56101. For example, these foreign transfer restrictions also apply to the transfer of interests in vessels that are under construction in U.S. shipyards and to the shipyards themselves.

The penalties for violations of Sections 56101 and 56102 are somewhat severe. In the case of Section 56101, a person who knowingly commits a violation is subject to criminal fines and imprisonment for not more than five years. Civil penalties may also be assessed regardless of whether the violation was knowingly made. In addition, transfers made in violation of Section 56101 are void, and a U.S.-flag vessel may be seized and forfeited to the U.S. government for these violations. Similar penalties apply to violations of Section 56102.

MARAD Arrangement with EPA on Foreign Transfers—TSCA Restrictions

In recent years, MARAD has agreed, on an informal basis, to refer foreign transfers of U.S.-flag vessels requiring its approval to the Environmental Protection Agency (“EPA”) for EPA’s review of compliance with U.S. environmental laws, in particular the Toxic Substances Control Act (“TSCA”), which is codified at 15 U.S.C. §§ 2601-2629. According to MARAD officials, there is no formal Memorandum of Agreement with EPA on this subject, but one is being currently developed. Therefore, MARAD has undertaken this process as a matter of policy and has not issued any amendments to its foreign transfer regulations formally notifying interested parties that this review will take place. In light of the MARAD regulatory criteria for evaluating foreign transfer applications (quoted above), there does not appear to be a clear basis under the Administrative Procedure Act for the current informal arrangement. Each shipowner seeking to transfer a vessel out of the U.S. flag has been left to their own devices to navigate what has become a cumbersome and unregulated process.

TSCA prohibited the manufacture, processing, or distribution in commerce of polychlorinated biphenyls (“PCBs”) one year after the law’s enactment in 1977. Under EPA’s regulations, the distribution in commerce, including for export, of PCBs at concentrations of 50 ppm or greater is prohibited, unless a waiver is granted. 40 C.F.R. §§ 761.20 and 761.97. Vessels manufactured before 1977 did contain PCBs in transformers, capacitors, and cables, among other places. However, presumably vessels built in the United States after 1978 do not include PCBs and, hence, are not affected by this prohibition.

Several federal court decisions have held that the sale of a vessel containing PCBs is the equivalent of distributing PCBs in commerce and is prohibited under TSCA’s restrictions. For example, in the case of the United States v. M/V Sanctuary, 540 F. 3d 295 (4th Cir. 2008), involving a former U.S. Navy hospital ship that the owners wanted to bring to Greece for “refurbishing”, the U.S. Court of Appeals for the Fourth Circuit held that EPA has the authority to issue an administrative warrant to inspect the ship at its dock in Baltimore before the ship could leave the country. EPA suspected that the ship contained PCBs.

As a practical matter, EPA’s review of a foreign transfer request can take weeks or months, which adds significant time to the MARAD review process. It is up to the shipowner to decide to what extent to comply with any EPA orders for inspection of a vessel. If EPA were to issue such an order, most shipowners would have to retain environmental experts to determine whether their vessels contain PCBs or any other hazardous materials, such as asbestos, over which EPA has jurisdiction. If a shipowner is able to convince EPA that its vessel does not contain any of these materials, the process will be easier.

In the past, EPA admitted that it had no authority over U.S. vessels once they left U.S. territory. In other words, it admitted that there is no extraterritorial effect of TSCA or other environmental laws, unless Congress were to explicitly determine otherwise. Many vessels that are the subject of foreign transfer applications to MARAD are being sold for the purpose of scrapping. However, through MARAD’s unofficial arrangement with EPA granting EPA review of a foreign transfer application before MARAD will issue its approval under Section 56101, MARAD has granted EPA new jurisdiction over U.S.-flag vessels, even those that have left U.S. shores.

We have not yet encountered a case where EPA has instructed a shipowner to return a vessel suspected of containing hazardous materials to the United States for scrapping, but this day may yet come. We will then have a test case of the extent of EPA’s authority overseas.

What Will the Future Bring for Vessel Scrapping and Sales of U.S. Vessels to Foreign Owners?

In the coming green world, vessels will not be built with any hazardous materials—they will carry certificates that document what is on the vessel that may be hazardous, and a plethora of green shipyards will exist to conduct safe vessel scrapping both here and overseas. This is the future envisioned by the new Hong Kong International Convention for the Safe and Environmentally Sound Recycling of Ships, negotiated under the auspices of the International Maritime Organization and completed in Hong Kong in 2009.1 However, this world does not yet exist, so shipowners have to struggle with current conditions.

The Hong Kong Convention, which has only been signed by one party, France, is not yet in force, and will not enter into force until at least 15 nations have signed it. These 15 signatories must represent a combined merchant fleet of no less than 40% of the world’s gross tonnage of merchant shipping, and the combined annual ship recycling volume of these nations during the preceding 10 years must constitute no less than three percent of the gross tonnage of the combined merchant shipping of these nations. In other words, we can expect a long wait until the Hong Kong Convention enters into force, unless the major shipping nations make a commitment to its earlier implementation.

In brief, the Hong Kong Convention requires each vessel to carry a certificate that accompanies the vessel throughout its life and identifies any hazardous materials that may be contained in the vessel. PCBs and asbestos are prohibited under Annex I to the Convention; installations containing hydrochlorofluorocarbons (“HFCs”) are permitted only until January 1, 2020. The Convention also requires that each member state ensure that ship recycling facilities within its borders conduct ship scrapping in an environmentally sound and safe manner. Removal of hazardous materials must be conducted by properly trained and equipped workers. Flag states are required to ensure that their vessels comply with the Convention’s requirements. (For further details of the Hong Kong Convention, see the July 2009 issue of Mainbrace at http://www.blankrome.com/index.cfm?content ID=37&itemID=2022.

Until the Convention enters into force and all countries have certified that their shipyards are in compliance with the Convention, shipowners have to decide where to scrap their older vessels. The two options for U.S. shipowners are in the U.S. and overseas. We know that overseas shipyards, particularly in Asia, have been under scrutiny for some of their scrapping practices.2 On the other hand, there is a scarcity of U.S. shipyards that have been willing to undertake ship scrapping (with the exception of some smaller yards). This leaves U.S. shipowners on the horns of a dilemma.

Conclusions and Next Steps

If EPA continues to step up its enforcement actions against U.S. shipowners under TSCA, Section 56101 and other statutes, shipowners will have no choice but to clean up their vessels before they are sold for scrap overseas. From a legal perspective, MARAD must amend its foreign transfer regulations to make clear to interested parties that it has adopted this new practice. At a recent maritime forum, a MARAD attorney announced that the agency planned to do so. Until the agency amends its regulations and establishes a new procedure, MARAD will have to document the legal authority under which it is imposing the new requirements. The EPA has also issued an Advance Notice of Proposed Rulemaking requesting comments on its reassessment of use authorizations for PCBs.3 Specifically for the maritime industry, EPA is seeking comments on nine questions about the use of PCBs on vessels.4

Eventually, Congress will have to review the new MARAD and EPA requirements to determine if they make sense for the maritime industry and if new legislation addressing the subject is needed.


  1. The Convention exempts from its coverage warships, vessels of less than 500 GT, and vessels operating throughout their life only in internal waters. Article 3, Hong Kong Convention.
  2. http://www.baltimoresun.com.
  3. 75 Fed. Reg. 17,645-17,667 (April 7, 2010). The comment period closes on July 6, 2010. See also “EPA Reviewing PCB Rules and MARAD Foreign Transfer Approvals,” Maritime Developments Advisory, June 2010, No. 4.
  4. 75 Fed. Reg. at 17,665.

Notice: The purpose of this newsletter is to identify select developments that may be of interest to readers. The information contained herein is abridged and summarized from various sources, the accuracy and completeness of which cannot be assured. The Advisory should not be construed as legal advice or opinion, and is not a substitute for the advice of counsel. Additional information on Blank Rome may be found on our website www.blankrome.com.