‘A moral crime’: Leaked contract reveals how shipowners wash their hands of toxic vessels via offshore world

Confidential documents leaked as part of a major collaboration between investigative journalists reveal how international companies profit and conceal their pivotal role in the deadly shipbreaking industry.

The commercial contract, obtained by the International Consortium of Investigative Journalists and analysed by Finance Uncovered as part of the Mauritius Leaks project, provides a rare insight into how blue chip corporations boast about their environmental ethics on the one hand, while on the other make deals with offshore companies to rid themselves of polluted assets.

Every year, powerful Western shipowners discard hundreds of end-of-life ships which contain toxic materials such as asbestos, polychlorinated biphenyls (PCBs), and mercury.

Instead of paying for safe dismantling in regulated shipyards they sell them to “cash buying” middlemen. These agents then work with anonymously owned companies which scrap the vessels on the tidal beaches of South Asia, such as Bangladesh and Pakistan.

Satellite image showing scrapped ships on the beach at Gadani, Pakistan (Credit: Google)

As a result many lives are lost in the beach yards, while local ecosystems are destroyed when toxins are released during the scramble for scrap metal.

While the practice is largely legal, European laws prohibit it for EU flagged ships. Campaigners and the UN have long tried to persuade shipowners to be more responsible, but offshore mechanisms mean companies can escape accountability for their deals.

Now the contract found by Finance Uncovered in the ICIJ data centres suggests shipowners should be aware of what they are doing.

The contract focuses on a 2015 deal between Spanish oil giant Cepsa and Conquistador Shipping Corporation, a shell company registered in the Caribbean tax haven of St Kitts and Nevis.

The contract indicates that Cepsa’s oil tanker Coastal Energy Resolution, which had been operating in seas around Thailand, was sold for $3.14m.

Six weeks later the vessel arrived in Gadani, a notorious beaching yard on Pakistan’s Arabian Sea coast, where safety conditions for workers are hugely substandard, according to campaigners and ship recycling experts in Europe.

VIDEO: Workers at Gadani rush to secure vessel arriving on their beach for scrap, 2019

Companies such as Cepsa frequently claim to journalists, law enforcement agencies and litigation lawyers that they do not know and neither are they responsible for their ships once sold.

Indeed, Cepsa told Finance Uncovered: “Under no circumstance were we aware that Coastal Energy Resolution was to be broken up in an unsafe beaching yard.”

But other details in the leaked contract make it reasonable to conclude that the company should have known that was a highly likely outcome.

While its deal was formally with the anonymous Conquistador, it is clear from the documents that Cepsa knew which other company it was acting with – Global Marketing Systems, more commonly known as GMS.

Founded in the US but now based in Dubai, GMS describes itself as the world’s biggest “cash buyer” of ships that end up going for scrap, or “recycling” as the company prefers to describe the process. Industry sources say that GMS is widely known for sending ships for scrap on the poorly regulated beach yards of Pakistan and Bangladesh – a practice it vigorously defends. The company also claims on its website that it has strongly encouraged safety reforms at beach yards and that it has introduced a “responsible recycling programme”.

In the leaked contract, internal Cepsa documents refer to Conquistador and GMS interchangeably. In fact, Cepsa admitted to Finance Uncovered that it went directly to GMS because it is an agent that acts for buyers such as Conquistador.

An oil tanker beached at Gadani in 2016 (Credit: Facebook/Shaizab Khan)

Campaigners say there are other red flags in the contract. They say the $3.14m price itself would have been the central one.

The price of scrap vessels is determined by the “demolition rates” offered by the yards, according to Ingvild Jensen, director of campaign group NGO Shipbreaking Platform. Gadani was offering almost double what the safer Chinese yards were paying at that time for scrap steel, according to publicly available GMS data.

Campbell Johnston Clark, the London lawyers hired by Conquistador to deal with our questions, told us the primary determinants of demolition rates are domestic steel price and currency rates.

But NGO Shipbreaking Platform argues that yards like Gadani can afford to pay more for ships “not only due to low labour costs, but also due to a lack of environmental standards, no proper waste management and inadequate health and safety requirements for the workforce”.

The leaked contract – in line with standard maritime deals of this type, according to Cepsa – also details how the Spanish oil giant:

*required Conquistador to change the vessel’s name, and alter any funnel markings “immediately upon delivery”

*passed responsibility to Conquistador to deal with “any legal issues relevant to all waste management after the vessel delivery”

*agreed to provide documents for the ship to be reflagged to St Kitts and Nevis

“The Ship is sold ‘as she is, where she is’, for scrap only…,” the contract states in bold type.

Over a dozen pages of commercial terms, there is not one mention of the hazardous materials that a 30-year old ship would almost certainly have contained: asbestos, mercury, heavy metals, and banned poisons like PCBs commonly contained in ships’ paint.

And nor are there any clauses which state that the vessel must be scrapped in a safe and regulated yard.

Instead, all risk was offloaded to Conquistador whose owners are not known. Finance Uncovered asked Cepsa the following questions:

*Did Cepsa take steps to establish the beneficial ownership of Conquistador Shipping Corporation?

*If yes, what steps did Cepsa take to establish its beneficial ownership?

*Does Cepsa know the beneficial ownership of Conquistador?

*If yes, who is it?

*Does Cepsa care about who the beneficial owner of Conquistador is?

Cepsa failed to respond.

Finance Uncovered threatened with injunction

Conquistador’s lawyers stated that “the use of offshore companies is not exclusive to the ship recycling industry or indeed the shipping industry at large”, and refused to respond to questions about the company’s ownership, stating that this was “a private and confidential matter.”

They said: “This transaction as an ordinary ship sale and purchase transaction occurring several years ago between private entities without injuries to property or persons.”

They added that any speculation about what hazardous materials might or might not be onboard” was “sweeping and unfounded speculation without any basis in fact”.

Finance Uncovered asked what hazardous materials were on board the vessel and what steps had been taken to remove any such materials. The lawyers refused to answer, stating: “Our client cannot comment on undocumented and unverified claims on the basis of conjecture …. with no first-hand knowledge of this Vessel Transaction.”

The lawyers argued that by publishing details of the contract, Finance Uncovered would be breaching Conquistador’s commercial confidentiality and threatened us with the possibility of an injunction. They said: “Our client reserves it (sic) right to proceed without further notice to issue proceedings against you to seek the appropriate relief including injunctive relief, damages, legal costs and interest.”

Campaigners say that by washing their hands in this way, multinationals like Cepsa are able to avoid accountability for their role in sustaining the poorly regulated South Asian shipbreaking industry – a profitable sector that has claimed more than 300 lives in the last decade, according to figures compiled by Shipbreaking Platform. The industry has also destroyed ecosystems that once supported local fishing economies.

The beach and oceans are the common property of all humanity

Dr Irfan Khan, professor of environmental science at the International Islamic University, Islamabad in Pakistan and a member of the board at Shipbreaking Platform, said the companies behind this “poisoning” of the environment were committing a “moral crime”.

“The beach and the oceans are the common property of all humanity,” he said. “If I think my home should be clean like this, so morally I should not take my rubbish and throw it into my neighbour’s street.

“The asbestos – it’s like a fluff on the beach going in the tide. It looks like mattresses. It’s coming out of all ships. It has contaminated the environment.

“This is a moral crime. The originators, the middlemen – they are not even disclosing their identities. It’s a kind of cheating.”

Ingvild Jensen, of NGO Shipbreaking Platform, said: “The use of these tax haven companies and flags of convenience are clearly what enables substandard practices across the entire shipping industry.

“We need to have beneficial ownership information for these companies so that when a shipowner sells to a cash buyer, they can no longer hide behind an anonymous post-box company.

“We need a genuine link between the beneficial owner and the flag the ship flies.”

In response to a series of questions from Finance Uncovered, a Cepsa spokeswoman: “Under no circumstance were we aware that Coastal Energy Resolution was to be broken up in an unsafe beaching yard.

“Such vessel was sold to a third party in March 2015, after having carried an international tender. The sale was made through GMS that acted as an agent, and which we consider to be a renowned player within the market for the sale and purchase of vessels.

“The risk and ownership of such vessel was passed to the purchaser on the moment of its delivery that took place in Thailand. In the moment of said delivery all hydrocarbons and fluids were emptied from the vessel as per industry standards.

“The clauses of the contract are as per the maritime contracts adopted by international associations widely known for clarity, consistency and certainty.

“Finally, Cepsa maintains a strong commitment to the environment and people’s safety. The company is constantly working to improve its activities and processes day by day with the aim of minimising its impact on the environment.”

We also asked Cepsa what steps it took to remove any asbestos, PCBs or heavy metals which may have been onboard. The company declined to answer.

A Question of Ethics

In its glossy annual report for 2015, Cepsa, one of Spain’s leading oil companies, announced dividends of €327m. In its Corporate and Social Responsibility report, it also boasted about its commitment to the environment and biodiversity.

The company’s success had been achieved “with the utmost care and respect for the environment,” Cepsa’s chairman Chairman Suhail Al Mazrouei pronounced.

But that same year, the company made a deal that would show the reality falling well short of the spin.

The leaked documents from the Mauritius office of law firm Conyers Dill & Pearman show that in early 2015, Cepsa’s head of exploration and production, Luis Travesedo Loring, was sitting down to sign off the sale of its 40,000-deadweight tonne storage tanker Coastal Energy Resolution, which had come to the end of its working life.

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The vessel had spent four years in Thailand, where it had been operated by Viking Storage Solutions, a Mauritius-based subsidiary of Cepsa. But it had reached the end of its working life. At this point, Cepsa had a number of options. One would have been to contract with a recycling yard in Europe or China, which would have created a formal scrappage plan for this specific ship, as outlined in the 2009 Hong Kong Convention for the Safe Recycling of Ships.

Such a plan would have included a map noting the location of all hazardous materials onboard: for example, asbestos in the pumps and anything working near heat; banned polychlorinated biphenyls (PCBs) in the rubber handrails and mattings, and in the layers of paint the ship had accumulated over the years. The map would guide workers on what to avoid, or to deal with safely.

It could even have contracted a cash buyer like GMS to do this: the company offers its clients a voluntary “Responsible Recycling Initiative” which is supposed to guarantee that certain minimum standards in the recycling process are met.

But safe dismantling of a ship in this way is more expensive, and instead, Cepsa opted to generate a lucrative $3.14m sales revenue by doing a deal with the apparently anonymous Conquistador. In doing so, it passed on the onerous responsibility of safely scrapping the vessel to another party and so apparently turned a blind eye to how or where the vessel might end up.

Thanks to the ICIJ leak, it can be shown that Cepsa should have had a strong idea where and how its vessel would be scrapped.

The shipbreaking “yards” at Gadani occupy a six-mile stretch along the golden sands of the Arabian Sea coast, a 90-minute drive from Karachi. Currently the fourth biggest destination for scrap ships, it also has the least infrastructure.

According to Tom Peter Blankestijn, a Rotterdam-based ship recycling expert, the tanker would “1000% have contained hazardous materials” if they have not been previously removed.

“Pakistan’s infrastructure is by far the worst”, he said. “The proper waste disposal facilities are just not there so these toxic wastes are just being sold on in the market or left to the environment somewhere”.

The year after Coastal Energy Resolution arrived for breaking in Gadani, 28 workers there were killed and 58 injured while dismantling a LNG tanker that caught fire, according to a report by the Human Rights Commission of Pakistan. The report in the wake of the disaster found that the agency tasked with inspecting each ship before breaking could begin had no means to do so: its nearest office was a nine hour drive away, and the agency had an annual fuel budget at the time of around £260.

Fire on board MT Aces at Gadani, 2016 (Credit: Facebook/Gadani Ship Breaking Yard Pakistan)

Dr Khan, who has undertaken studies for labour unions in Gadani, said: “There are no concrete surfaces, so every time the tide goes out, it takes the mercury, the PCBs with it.”

Lawyers for Conquistador said “conflating the tragic Gadani incident and remarks of ‘moral crimes’” with its client’s transaction with Cepsa would be, “defamatory, libellous and likely to cause actionable harm”.

They added that allegations about poor conditions in South Asian yards “does great disservice to an industry whereby upgrades are ongoing and an increasing number of recycling yards are adopting the Hong Kong Convention for the Safe and Environmentally Sound Recycling of Ships”. They stated that at least one yard in Bangladesh is “certified” under the Hong Kong Convention, and that 60% of recycling in India is performed in line with the convention.

But they refused to state whether they had prepared an “inventory of hazardous materials” in the case of Coastal Energy Resolution, as required by the Hong Kong Convention.

They added: “From a recycling standpoint, a growing number of ship owners are personally visiting recycling yards in India and Bangladesh, vetting them and mandating that cash buyers only sell to one of the approved yards on their ship owners’ list.”

They did not comment on whether this had been the case in the Cepsa transaction.

Of the 744 ships scrapped last year, 518 ships were sent to South Asia, according to Shipbreaking Platform’s figures. GMS claims to control a third of the global scrapping market.

This is not the first time that Finance Uncovered has come across Conquistador. Earlier this year we revealed how the company was also involved in another GMS deal to send a large oil storage vessel from the UK for scrap in Chittagong, Bangladesh, in 2016.

GMS did not respond to multiple requests for comment to this article.

The port authorities in Gadani could not be reached for comment.

* Edited by Ted Jeory and Nick Mathiason

The Mauritius Leaks

*Mauritius Leaks is a cross-border investigation into how one law firm on a small island off Africa’s east coast helped companies avoid tax revenue from poor African, Arab and Asian nations.

Led by the International Consortium of Investigative Journalists, the investigation is a collaboration by 54 journalists in 18 countries. More than 200,000 documents from the Mauritius office of a prestigious offshore law firm, Conyers Dill & Pearman, are at the heart of the investigation.

ICIJ corroborated company information from the leaked documents with data in the Mauritius corporate registry and the Financial Services Commission’s register of licensees. The documents offer a rare window into corporate tax avoidance in countries in Africa, the Middle East and Asia.