While official statistics on the extent to which the shipping industry is used for the illegal transportation of narcotics are not compiled, empirical evidence suggests the number of incidents and the quantity of drugs found on board are on the rise, the consequences of which will be cause for concern amongst shipowners and their lenders.
On August 2, 2019, €1bn of cocaine was reported to have been found in the container terminal at Hamburg. The shipment was being transported from Montevideo to Antwerp via Hamburg and the container was listed by the shippers as containing soybeans. The ports of Antwerp and Hamburg have been the chosen ports of entry of drugs into Europe on a number of occasions and Antwerp has been the target of cyber-attacks with the objective of making it easier to move drugs and other illegal cargo through the port.
It is very likely that where a substantial quantity of drugs is found on board a ship (rather than small quantities found on crew members) the ship will at the very least be detained so that a forensic investigation can take place. The master and the crew are also likely to be detained. In many jurisdictions, the authorities have power to seize the ship and sell it where illegal drugs are found on board.
The level of fines and the extent of the powers of the port and criminal authorities to detain ships on which illegal substances have been found varies from jurisdiction to jurisdiction, leaving shipowners vulnerable to loss of hire and, in extreme cases, high fines or forfeiture orders that result in the loss of the ship. We consider below the approach of various jurisdictions and the steps shipowners and their lenders can take to mitigate the risk of losses.
Fines and detention of ships in the US
Large fines can be imposed in the United States under the Maritime Drug Law Enforcement Act, of up to US$25m. These fines can be imposed against both US and non-US flagged vessels. In addition, the courts can also order the civil or criminal forfeiture of assets that enabled the crime to be committed. The judicial process for civil forfeiture may be brought before or after criminal charges are filed and may also be brought in the absence of criminal charges. The purpose of the civil trial would be to establish the US Government’s title to property that is traceable to the offence and property that facilitated its commission.
Seized assets can be temporarily released prior to initiation of forfeiture proceedings. Under forfeiture laws, a court may issue a restraining order permitting the release of property (including a ship) the subject to forfeiture, prior to the commencement of a judicial forfeiture proceeding. Upon a showing of probable cause, a court is authorized to enter a restraining order or injunction “or take any other action to preserve the availability” of property subject to forfeiture. Accordingly, a ship may, under certain conditions, be able to return to commercial service prior to forfeiture proceedings. These conditions typically include a large bond, consent to the court’s ongoing jurisdiction over the ship, and agreement by the ship’s owners, charterers, and managers to cooperate fully with authorities.
If civil forfeiture proceedings are initiated, the shipowner can try to use the “innocent owner” defence in which case the burden of proof will be on the shipowner. Under the Civil Asset Forfeiture Reform Act of 2000, an innocent owner can prevent their interest in property from being forfeited if they can prove that: (i) they did not know of the illegal conduct giving rise to the forfeiture or (ii) that upon learning of the criminal conduct (i.e. drug smuggling), they did everything within their reasonable power to stop the illegal conduct.
Criminal forfeiture can only be pursued following a criminal conviction. In these circumstances only the defendant's asset can be forfeited since this penalty is part of the defendant's sentence. The purpose of criminal forfeiture under US law is to punish the defendant for his wrongdoing. The state must prove the connection between the property and the defendant's criminal conduct. There is also an ancillary hearing that determines which portion of the property is forfeitable as to the defendant and what property is not forfeitable if a third party petitioner has an interest in the property (such as where the bank owns the ship and leases it).
A recent example of how US authorities deal with ships found with drugs on board is the MSC Gayane case. The ship was raided on June 17, 2019 by the US Customs and Border Patrol (CBP) in Philadelphia. The raid follows the detention of MSC Desiree in March 2019 after 1,200 pounds of cocaine was found on board, again in the port of Philadelphia.
In the case of MSC Gayane, the ship was detained for nearly one month and released from US Custody on bail following the payment of $50m to the US Government. Its operator and the US Department of Justice have agreed that, in the event a judge decides to impose forfeiture on the ship, the ship will have 90 days to return to a US port. A major issue for the owners of ships in these circumstances is that the ship will be seized and held by the government until the legal processes are complete, which could be a matter of weeks, months or years, or until an interested party (such as the ship operator or shipowner) posts bail.
Detention of ships in the UK
Ships will undoubtedly be detained following drug seizure in the UK in order to investigate the crime.
The ship can also be forfeited under the Proceeds of Crime Act 2002 (POCA). POCA provides for a civil forfeiture regime under which the prosecutor may seize the proceeds of crime if the shipowner was found to be complicit in the drug-related offence.
In a situation where the shipowner is a defendant in the drug-related criminal conduct and is subsequently convicted, the prosecutor can apply to Court for a Confiscation Order ordering the owner to pay the amount of his benefit from his crime. Unlike US civil forfeiture proceedings, the Confiscation Order would not be directed towards a particular asset although the ship would be one of the various assets which could potentially be confiscated.
In a 2015 case the tugboat mv Hamal was stopped on the High Seas offshore Scotland and was found to be carrying 3.2 tonnes of cocaine. The master and the second in command were convicted of drug smuggling and the ship was forfeited and sold at auction.
Although there is no maximum fine under the Misuse of Drugs Act 1971 for shipowners who are found with drugs on board, they would have to be found to be complicit in the crime for a fine to be levied, and the amount of the fine would be likely to be far less than in the US.
Detention of ships in other countries
In 2014 the small tanker Noor 1 was found to be smuggling two tonnes of heroin into Greece. The owner of the ship and the broker received heavy prison sentences and the NOOR 1 was confiscated by the State. Three attempts were made to auction it with a starting price of €60,000, but all repeated auctions were unsuccessful. Noor 1 was then returned to its owners, a decision that surprised the market. An appeal is now pending before the public prosecutor against the decision of the court of appeal.
In the B Atlantic case, 132 kg of cocaine was found strapped to the ship’s hull ten metres below the waterline. It was accepted that unidentified third parties were responsible for the concealment of the drugs. On discovery, the ship was subject to a provision in the Venezuelan Anti-Drug law that the property, including ships employed to commit the investigated offence, will in all cases by seized as a preventative measure and that when there is an final and definitive judgment, an order will be made to confiscate the property.
Mitigating the risk of losses from fines or detained or confiscated ships
Before entering into any mortgage, a bank would be well advised to review the security arrangements of the manager to ensure that proper vetting of the crew takes place and that there are security measures in place to prevent drug smuggling. Some trading routes will be higher risk than others. Furthermore, containerships are particularly vulnerable. It is notable that in the B Atlantic case, before the drugs were discovered, the master was warned to seal an underwater grille behind which a grappling hook, a saw, a rope and other tools had been found by divers. The master declined to do so because he thought it would delay the ship, with calamitous consequences for both him and the owners.
The main method of mitigating the risk of losses is by obtaining insurance that would cover the owners and/or their financing bank if the ship were confiscated.
Insurance options for shipowners and their lenders
In the B Atlantic case the owners claimed against their war risk insurers for the value of the ship on the basis that it was a constructive total loss. The owners’ argument was that the ship was covered under the terms of the Institute War and Strikes Clauses Hulls – Time (1/10/83). The cover included ‘malicious mischief and/or malicious damage, including confiscation and expropriation’ but excluded, among other things:
“4.1.5 the arrest restraint detainment confiscation or expropriation under quarantine regulations or by reason of infringement of any customs or trading regulations, and
4.1.6 the operation of ordinary judicial process, failure to provide security or to pay any fine or penalty or any financial cause”.
The Supreme Court  UKSC 26 took that view that the placing of the drugs on the hull of the ship was not malicious mischief and/or damage (despite this point having been accepted by both sides) since it was not aimed at harming the owners but at profit for the drug smugglers. The Supreme Court then went on to consider what the position would have been if they had found that the circumstances were covered by malicious damage. They would still have found that the risk was not covered because it was excluded as resulting at least concurrently by the detainment by reason of infringement of customs regulations.
It is possible to purchase cover from a number of P&I clubs in the international group for loss of hire as a result of detention of a vessel arising out of a drugs case. (The premium is calculated as a percentage of the amount of cover purchased.)
Discretionary cover for fines (including the entire value of the vessel if it is confiscated) is provided for under the rules of the P&I clubs that are members of the international group; although it is not ideal to have to rely on a discretionary rule to recover the entire value of a vessel because the insurer is not required to provide a reason for withholding cover. Bespoke cover is also available via Lloyds but could be prohibitively expensive for many owners.
A mortgagee can take out mortgagee’s Interest Insurance, which covers only the mortgagee in circumstances where the P&I club has denied cover on the basis of an alleged deliberate, negligent or accidental act or omission or any knowledge or privity of the owner or charterers or any of their servants or agents (together referred to as ‘owners’ interests’). In other words this will only cover the mortgagee if the reason given by club for denial of cover is linked to the fault (whether deliberate, negligent or accidental) of the owners’ interests. There may be cases where the owners’ interests are innocent but the club nevertheless exercises its discretion not to provide cover
Increased instances of cyber-attacks on ports risk bringing ships under even closer scrutiny by drug enforcement agencies. Shipowners are advised to undertake regular risk assessments, ensuring crews undergo vetting procedures, that sufficient security measures are in place, and vessels are well maintained.
If the vessel is technically owned by a lender, the lender should ensure that it has the benefit of all the usual owners’ insurances such as P&I cover and the extended war risks cover, and that it has an assignment of insurance proceeds where it is the mortgagee.