Although Carnival employees were as susceptible as anyone to the tension and emotional strain of a pandemic, Carnival as a company was more mentally prepared than most to take on a public health crisis. Why? Because the coronavirus pandemic was hardly its first storm. For Carnival, COVID-19 was one crisis in a line of many that plagued its fleet over the course of 38 years of operation. Granted, laying up an entire fleet of ships was an unprecedented event, but responding to the outbreak of a disease was not.

“We’ve gone through Ebola, Zika, MERS, SARS. … Because we’re global, we have to deal with this stuff all the time. The difference with this one is community spread has been global,” Carnival CEO Arnold Donald told CNBC in April.

One Carnival cruise ship caused a stir in 2014 when a passenger self-quarantined after being exposed to someone with Ebola; her blood test results returned negative. Carnival waived cancellation penalties to pregnant women on sailings that included stops impacted by the Zika virus in 2016.

Carnival is accustomed to riding out storms. At another juncture of time between 2013 and 2016, fires in the engine rooms of ships, like Carnival Triumph and Carnival Splendor, became an issue and top concern for the company, not to mention fodder for media outlets. The company then invested over half a billion dollars into the latest and greatest fire prevention and detection technologies to remedy the problem.

Then there was the matter of the environmental compliance storm. For years, routine acts of illegal discharges materialized in the lowest compartments of Carnival’s ships like warm eddies beneath the surface. But eddies, under the right conditions, can fuel hurricanes.

This particular matter in Carnival’s weather-beaten history, the one that drew Compliance Week to headquarters in February 2020, came about in 2013, and it was induced by a whistleblower named Christopher Kaeys.

 

From watchkeeper to whistleblower

Christopher Kaeys was a young marine engineer from Glasgow, Scotland, when he accepted a position as watchkeeper on Carnival’s Princess Cruise Lines. By summer 2013, Kaeys, 27, was nine months on the job. He worked on a 952-foot ship named Caribbean Princess. With a capacity of over 4,300 passengers, Caribbean Princess boasted one of the largest carrying capacities in the Princess fleet, complete with 900 balcony staterooms, a deck of mini-suites, and an outdoor movie theater.

Engine Room Photo

Source: Carnival

A look at the engine room inside a cruise ship in the Carnival fleet.

While guests enjoyed an exciting atmosphere on the upper decks, Kaeys’s job kept him in the bowels of the vessel. He worked in the engine room, where the ship’s propulsion work—and a lot more, Kaeys found out—took place.

By August 2013, Kaeys had resigned from his job and set into motion a chain of events that changed the course of Carnival’s future.

‘Broccino Corto’ and the magic pipe

While a Carnival employee, Kaeys was working under the supervision of a chief engineer who had a nickname: “Broccino Corto.” The Italian expression, which literally translates to “a person with short arms,” refers to a cheap person whose arms are too short to reach their wallet.

On Aug. 26, 2013, Caribbean Princess was headed for port in Southampton, England. That day, Broccino Corto told one of his subordinate engineers that it would be too expensive to offload the oily bilge water in port; that a shore-side superintendent wouldn’t want to approve or pay the cost; and that he refused to properly dispose of it. The frugal solution? An illegal discharge.

Approximately 16 cubic meters (4,227 gallons) of untreated bilge waste was then discharged within the Exclusive Economic Zone of England, approximately 23 nautical miles from shore. The pollution prevention equipment was circumvented using a bypass pipe—a so-called “magic pipe.” The procedure wasn’t novel; it was standard, albeit covert, procedure at this point.

In fact, it’s something that plagues the maritime industry generally, according to Chris Donald, Carnival senior vice president and environmental corporate compliance manager (no relation to Carnival CEO Arnold Donald).

“If you Google ‘magic pipe bilge water discharges,’ it literally is once a month, once every two months, where shipping companies are getting prosecuted in the U.S. by the [Department of Justice], so it’s almost an epidemic-level problem that the shipping industry faces,” explained Chris Donald.

Kaeys “was very frustrated, working on a ship where he repeatedly saw the wrong thing being done,” said Donald.

The junior engineer took action. Kaeys filmed and photographed the magic pipe as well as the tanks containing the oily bilge water.

When the ship docked in Southampton, he resigned from his position and presented the evidence to the U.K.’s Maritime and Coastguard Agency, which handed it to the U.S. Coast Guard before the ship arrived back in America.

“It’s very interesting when you look at his motivation to report the event to the authorities ashore. He wasn’t motivated by the need for financial reward. He didn’t report it to the U.S. authorities; he reported it to the United Kingdom Maritime Coastguard Agency. I don’t believe they have any program where they incentivize whistleblowers. So, it wasn’t done for money; it was done because he was super concerned about the actions that were being taken on that ship. He was also a U.K. national … so it was personal to him,” Donald mused.

“For many whistleblowers, it can be a scary situation to be in with fear of retaliation. In our case I could imagine perhaps that the whistleblower may not have felt like he had the protection of the company behind him and after speaking up he more than likely wanted to disembark the ship as quickly as possible. When the ship got to Southampton, the whistleblower disembarked while the (U.K. Maritime) Coastguard embarked to conduct an investigation,” said Donald.

Attempts to reach Kaeys for this case study were unsuccessful.

Cat’s out of the bag

When Caribbean Princess docked in New York on Sept. 14, the U.S. Coast Guard was there to greet them. After learning Kaeys had blown the whistle in England, Broccino Corto and the senior first engineer instructed senior ship engineers to dismantle the magic pipe and deny its existence.

To add further subterfuge to the matter, Broccino Corto held a sham meeting with the crew, where he pretended to look into the allegations while holding up a sign that read, “LA is listening,” according to a Department of Justice (DOJ) press release.

“The pollution in this case was the result of more than just bad actors on one ship. It reflects very poorly on Princess’s culture and management. This is a company that knew better and should have done better. Hopefully the outcome of this case has the potential not just to chart a new course for this company but for other companies as well.”

Assistant Attorney General John Cruden (2016)

“The engineers present understood that anything said might be heard by those at the company’s headquarters in Los Angeles, California, because the engine control room contained a recording device intended to monitor conversations in the event of an incident,” said the DOJ.

Per orders from their superiors, lower-level crewmembers lied to the U.S. Coast Guard authorities during the inspection. (They also lied to U.K. authorities in England.) The fictitious oil record book was presented as ostensible evidence of good-faith pollution prevention documentation. However, the concealment efforts were futile. The truth was already out.

On Dec. 1, 2016, the U.S. Attorney’s Office for the Southern District of Florida released a statement: Princess Cruise Lines Ltd., a subsidiary of Carnival, would plead guilty to seven felony charges stemming from deliberate pollution of the seas and intentional acts to cover it up. Princess would pay $40 million, the largest ever criminal penalty involving deliberate vessel pollution. For Kaeys’s role in the exposure, the U.S. courts would award the whistleblower $1 million.

In addition to confirming the use of the magic pipe to bypass the oily water separator and oil content monitor, the U.S. investigation turned up other illegal practices that had become routine over an eight-year period: the use of a salt water valve when bilge waste was being processed through the pollution filtering equipment; and the discharge of gray water (wastewater from sinks, showers, baths, washing machines, and dishwashers) overflows into the oily bilge waste back into the gray water system, which was then continuously dumped overboard.

The illegal practices found to have taken place aboard Caribbean Princess turned out to be the canary in the coal mine for Princess. It wasn’t a one-off event but rather a portentous sign of a systemic problem within the company’s compliance and ethics culture. Not only had illegal bilge water discharges taken place routinely on Caribbean Princess since 2005, one year after the ship began operations, but similar misconduct had also occurred on four other Princess ships: Star Princess, Grand Princess, Coral Princess, and Golden Princess.

“The pollution in this case was the result of more than just bad actors on one ship,” said Assistant Attorney General John Cruden in 2016. “It reflects very poorly on Princess’s culture and management. This is a company that knew better and should have done better. Hopefully the outcome of this case has the potential not just to chart a new course for this company but for other companies as well.”

The 2017 plea agreement, criminal information, and joint factual statement were filed in federal court in Miami, where Carnival is headquartered. The Justice Department had put the parent company on notice.

Déjà vu in federal court

Carnival has a long history of environmental transgressions.

In 2002, Carnival pled guilty in the U.S. District Court in Miami to criminal charges relating to falsifying records of oil-contaminated bilge water that six of its ships illegally discharged into the sea from 1996 through 2001.

“This conduct enabled Carnival Corporation to avoid spending millions of dollars that would have been spent by properly disposing of the oil contaminated waste,” a DOJ news release stated at the time.

“We were definitely not mature as an organization in terms of understanding what compliance was, structurally and programmatically. … We continued, for a long time, to look at compliance in a siloed way—based on subject matter—rather than as a culture that needed to be embraced by the company.”

Kelly Clark, former Carnival deputy chief ethics and compliance officer

Carnival paid $18 million in fines, performed community service, received five years’ probation, and submitted to a court-supervised worldwide environmental compliance plan (ECP) for each of its cruise ships.

Fifteen years later to the day, the largest cruise line operator in the world experienced déjà vu in federal court. As part of the 2017 plea agreement with Princess, cruise ships from eight Carnival cruise line brands would be under a court-approved and -supervised ECP for five years.

The commonalities stopped there. The second time around, Carnival coughed up a lot more money in fines: $40 million in 2017 (plus another $20 million in 2019) compared to $18 million in 2002. In addition, the two ECPs were structured differently.

“The first one was focused completely on the environment—primarily on policies and procedures and the implementation of them—as opposed to a holistic, enterprise-wide approach. … This one (2017) is far more robust,” Kelly Clark, former deputy chief ethics and compliance officer (CECO), explained to Compliance Week in February.

Of course, the first ECP came about in a different season of the company’s life span. Clark was working as outside counsel during the investigation leading to Carnival’s 2002 plea agreement. She enumerated several of the company’s weaknesses back then: “We were definitely not mature as an organization in terms of understanding what compliance was, structurally and programmatically. … We continued, for a long time, to look at compliance in a siloed way—based on subject matter—rather than as a culture that needed to be embraced by the company.”

Because Carnival had been operating as a loose federation at the time, the 2002 ECP was the first time the brands were encouraged to work together operationally.

“So, there definitely were some challenges there,” Clark admitted. And while there was someone at the corporate level who was charged with implementing the 2002 ECP, “he didn’t have the level of authority that [new CECO Peter Anderson] and our department have this time around.”

Environmental compliance lead Chris Donald, who was working shipboard as an engineer in 2002, echoed Clark’s perception that a lack of centralized oversight left the corporation open to subsequent pitfalls.

“The first ECP didn’t really get at the human factor aspect, the cultural aspect, and it absolutely did not get at the need for a robust ethics and compliance program. I think that was the mistake of the first ECP: by design, it didn’t make sure key people like me had a line of sight onto every ship,” Donald explained.

Still, the first ECP had its successes.

“My personal perception is the team that was managing compliance with the original ECP did a really good job at the time. So much so that we were allowed to come off probation before the end of the five-year period. That’s a big deal,” Donald said.

The second ECP, though, is set up for greater success in no small part because of one important distinction: This one requires a court-appointed monitor (CAM). The first one did not.

“The CAM, the TPA (third-party auditor), the probation officer, and [U.S. District Judge Patricia] Seitz in the courtroom—they’ve walked us down a path that says, ‘Don’t just look at environmental compliance. Look at all compliance more broadly. Bring your fragmented compliance leaders together onto one team, with a chief ethics and compliance officer, and make this into a world-leading, best-in-class ethics and compliance program,’” said Donald.

“I wish we had done it the first time around,” Donald admitted. “If we had, I doubt we would have had this second ECP. But we’re here, and Pete’s at the helm, and he’s driving forward in it. We’re still in the infancy stage of developing it, but it’s starting to feel pretty special already.”

What it’s like working under a court-appointed monitor

For companies under fire, working with a CAM is akin to standing before a God-like figure who can cast fire and brimstone at the wave of their hand. While the analogy might sound highfalutin, the truth behind it is that it is critical for a company under a monitorship to work effectively and have a positive relationship with its assigned monitor. Acting resentful or in any way antagonistic toward a CAM is a surefire way of getting one’s company in deeper trouble with the DOJ, financial and otherwise.

People want a monitor “because it creates an incredible force that can’t be resisted. Budgetary concerns that might have existed absent the monitor tend to go away. If the monitor tells you to do something, the CEO generally feels compelled to do it, absent rare circumstances. Business decisions and business calculus can fall to the wayside, and it all becomes about devoting all the resources that are required to get it right.”

David Ring, former government-appointed monitor, speaking generally

Pulling back the curtain on the intimidating mystique, what specific functions does a CAM perform in a monitorship?

“The starting point in thinking about a CAM is this: you get a monitor because somebody doesn’t trust you—either the government, the court, or both,” explained David Ring, partner-in-charge at law firm Wiggin and Dana with years of experience as a government-appointed monitor. In other words, “the company is not trusted to get its act together on its own, so there needs to be some sort of supervision to make sure the company is doing what it needs to do.”

A monitor’s role falls into one of two broad categorizations: police officer and facilitator.

Regarding the policing component, the monitor’s responsibility is to oversee the company through its remediation.

“The monitor is going to interface between the company and any regulator that is involved,” said Ring. For the duration of the probation period, he or she will write reports that go to the DOJ and then ultimately to court. Essentially, the gist of the function is: “We’re looking at what you’re doing, we’re testing it, we’re keeping you honest, and then we’re reporting on how you’re doing,” explained Ring. The monitor’s report is often sealed. Although there are no surprises in court (the company sees the report ahead of time and can comment on it), if it’s sealed then the public will not be able to see it (unless the judge decides to publish it).

A subcategory of this function is to oversee any external audits taking place. In a court agreement where a company is placed on probation, third-party audits are typically required. This is certainly true for Carnival. The CAM, then, makes sure the audits are being done in a way that is suitable and on the level.

An additional thorn in a company’s backside is that working with a CAM means the process of remediation will be that much more onerous—and pricey. “Companies under monitorship typically end up spending a lot more money to remediate than those without,” Ring divulged.

Even though working with a CAM gets a bad rap in corporate circles, Ring believes there are certain subsets of individuals within companies who secretly welcome the “police” presence. Those people tend to work in legal departments.

People want a monitor “because it creates an incredible force that can’t be resisted. Budgetary concerns that might have existed absent the monitor tend to go away. If the monitor tells you to do something, the CEO generally feels compelled to do it, absent rare circumstances. Business decisions and business calculus can fall to the wayside, and it all becomes about devoting all the resources that are required to get it right,” said Ring.

Thus, even though business leaders, perhaps especially compliance officers, recognize that working with a monitor is really hard, it can also allow them to get done what they need to get done with less resistance from management, because “the monitor becomes the vanguard of the change management,” said Ring.

As for the facilitator role of the CAM’s position, the monitor will sometimes help the company fix itself according to the standards set by the courts. However, that function depends on how the court agreement is structured, as well as on the monitor. Sometimes, companies are lucky enough to get a “good” CAM, who wants to work with the company and facilitate its remediation. Other times, not.

“When a company is in a really bad situation, oftentimes it’s because it can’t figure out how to fix itself. A monitor typically has experience in understanding how [it’s done], so the monitor can help provide direction to the company and set more granular requirements than those that were established by the court or DOJ,” said Ring.

A company’s operational problems are often a manifestation of deeper-seated issues, namely in the realm of ethics and culture.

“You really can’t fix the operational issues, the regulatory issues, without fixing the ethics and cultural issues,” Ring said.

“A lot of times in the [court] agreements, you will see references to enhancements to the ethics program at the company, and oftentimes the monitor will have domain over that as well. But even if it doesn’t explicitly say it—and I know this from my experience serving as a monitor—I’m looking at the ethics stuff because you can spend a lot of money and a lot of time fixing the operational pieces, but if people aren’t calibrated correctly in terms of their mindset, they’re still going to violate the rules, and you’re still going to have problems,” said Ring.

‘A recidivist criminal’

Within a year after Carnival was convicted of violating environmental laws and put on probation in 2017, its pattern of illegal behavior persisted. The corporation’s ships continued to illegally discharge more than a half-million gallons of treated sewage, gray water, oil, and food waste and burned heavy fuel oil in ports and waters close to shores around the world, the Miami Herald reported. In spring 2019, U.S. District Judge Patricia Seitz published a previously confidential report that flagged more than 800 incidents from April 2017 to April 2018.

“This case demonstrates the importance of identifying and correcting compliance problems at their source. Carnival sought to avoid the discovery of problems during audits rather than learn from them.” 

Assistant Attorney General Jeffrey Bossert Clark

To Carnival’s credit, the monitor’s report stated the violations were largely unintentional. For example, more than 150 incidents were the result of items like furniture accidentally going overboard or being thrown by passengers. The report also emphasized the company’s cooperation on board and ashore, and that the company had expended considerable efforts to meet probationary requirements. Yet, serious problems, particularly within Carnival’s internal investigations, remained.

During the first year of probation, Carnival had tried to prevent any negative findings on its ships by preemptively sending operations personnel to ships to prepare them for the court-ordered independent inspections. When this was first discovered in December 2017, Judge Seitz directed the practice to cease and ordered additional inspections as a consequence. However, without seeking court approval, Carnival again sent unauthorized personnel to ships to prepare them for audits, according to the DOJ.

Referring to Carnival as “a recidivist criminal” in 2019, Judge Seitz published the confidential CAM’s report “so the public could see what this criminal defendant [was] doing,” she said.

Then, in June 2019, the DOJ threw down the gauntlet again. A new statement was publicly released: Princess Cruise Lines Ltd. and parent company Carnival would pay another $20 million for violating the terms of its probation. In the press release, Carnival admitted it was guilty of committing six violations: failing to appoint a chief corporate compliance officer; discharging plastic in Bahamian waters; falsifying environmental training records; trying to circumvent the legal process required by the environmental compliance plan; and secretly sending teams to ships ahead of independent inspections … twice.

“This case demonstrates the importance of identifying and correcting compliance problems at their source. Carnival sought to avoid the discovery of problems during audits rather than learn from them,” said Assistant Attorney General Jeffrey Bossert Clark for the DOJ’s Environment and Natural Resources Division.

Under the new terms of the new settlement, Carnival would not only pay $20 million but also:

  • Issue a statement to all employees in which Carnival’s CEO accepted management’s responsibility for the probation violations;
  • Restructure the company’s corporate compliance efforts, including appointing a new chief corporate compliance officer, creating an executive compliance committee across all cruise lines, adding a new member to the board of directors with corporate compliance expertise, and training its board of directors;
  • Pay for 15 additional independent audits per year conducted by the third-party auditor and court-appointed monitor (on top of the approximately 31 ship audits and six shore-side audits that were already performed annually);
  • Comply with new reporting requirements, including notifying the government and court of all future violations, and specifically identifying foreign violations and the country impacted; and
  • Make major changes in how the company uses and disposes of plastic and other non-food waste.

On top of everything else, Carnival would have to submit and implement needed changes to its corporate structure under a very strict—and very expensive—timeline. The corporation would have to pay up to $10 million per day for missing a deadline.

Now public exposure was at a high, and the threat of future reputational damage loomed large. Carnival had a lot of work to do: clean up its cruise lines; centralize control within its Miami headquarters; revamp its corporate compliance structure; and foster a new, ethical culture globally. The clock was ticking. The search for a new chief corporate compliance officer to navigate the murky waters of this maiden voyage was on.

Read on—Chapter 4: Carnival moves ethics and compliance to the fore