IMPLEMENTATION OF CONTROLS OVER 

PAYMENTS TO MARITIME SECURITY 

PROGRAM CONTRACTORS 

Maritime Administration 

Report Number: FI-2009-001 

Date Issued: October 06, 2008 
U.S. Department of 

Memorandum

Transportation 

Office of the Secretary 

of Transportation 

Office of Inspector General 

Subject: ACTION: Report on Implementation of Controls 

Over Payments to Maritime Security Program 

Contractors, MARAD 

Report No. FI-2009-001 

Date: October 06, 2008 

From: Rebecca C. Leng 

Assistant Inspector General for Financial 

 and Information Technology Audits 

Reply to 

Attn. of: JA-20 

To: Maritime Administrator 

This report provides the results of our review of the Maritime Administration’s 

(MARAD) implementation of controls over payments to Maritime Security 

Program (MSP) contractors. The objective of this audit was to determine whether 

payments to MSP contractors were reduced if the minimum operating 

requirements were not met. 

The Maritime Security Act of 1996 established MSP for fiscal years (FY) 1996 

through 2005, and the 2003 Act reauthorized the program for FYs 2006 through 

2015. The Acts require the Secretary of Transportation, in consultation with the 

Secretary of Defense, to establish a fleet of active, commercially viable, militarily 

useful, privately-owned, U.S.-flagged vessels. The fleet’s purpose is to aid with 

national security and defense requirements during times of war or other national 

emergency. MARAD manages MSP through its Office of Sealift Support. 

MSP is currently funded at $156 million per year, increasing to $186 million per 

year by 2012. Over the next seven years, these payments will total over $1 billion. 

For more information see Exhibit A. 

We conducted this performance audit in accordance with generally accepted 

government auditing standards. Those standards require that we plan and perform 

the audit to obtain sufficient, appropriate evidence to provide a reasonable basis 

for our findings and conclusions based on our audit objectives. We believe that 

the evidence obtained provides a reasonable basis for our findings and conclusions 

based on our audit objectives. A detailed description of our audit scope and 

methodology is presented in Exhibit B. 
 2

RESULTS 

From FY 2006 through July 2008 there were over 2,000 monthly payments 

totaling $433 million, of which MARAD reduced 27 payments to MSP contractors 

by a total of $3,455,095. Based on our control testing and review of the payment 

reductions, we determined that payments to MSP contractors were properly 

reduced when the minimum operating requirements were not met and that 

MARAD’s controls are sufficient to ensure that payments to contractors are 

processed in the correct amounts. However, we have two observations for 

MARAD’s consideration that arose during the course of the audit regarding (1) 

MARAD’s assurance that MSP vessels adhered to cargo preference limitations 

and (2) MARAD’s exclusion of liquid cargo from its application of the cargo 

preference limitation. Neither of these two issues affects our results because no 

MSP vessels have carried the cargo in question. 

MARAD Procedures Did Not Include Non-Agricultural Cargo In Its 

Evaluation of the 7,500-Ton Limitation 

Per the Maritime Security Act of 2003, vessels are not paid for days engaged in 

transporting more than 7,500 tons of civilian bulk preference cargo1

 (this 

limitation does not apply to military cargo). Civilian cargo can be agricultural or 

non-agricultural. Currently, the MARAD Office of Sealift Support receives 

certification from the Office of Cargo Preference for MSP vessels carrying 

agricultural cargo only. Under current procedures, payments to MSP vessels 

carrying non-agricultural cargo would not be reduced. According to MARAD, no 

MSP vessels have carried civilian non-agricultural bulk cargo, but agreed that in 

the future, MARAD could recognize cost savings if vessels are found 

noncompliant. 

During the audit we recommended that MARAD revise the policies and 

procedures to include certification for MSP vessels that transport non-agricultural

as well as agricultural civilian bulk preference cargo. The Office of Sealift 

Support agreed with our recommendation and has modified its policies and 

procedures to include obtaining assurance that all civilian bulk preference cargo 

has been considered when determining vessel compliance with MSP cargo 

preference limitations. Further, the Office of Cargo Preference will include MSP 

vessels carrying non-agricultural cargo in its monthly certification. Therefore, we 

are not making formal recommendations in this report. 

 

1

 Bulk cargo means cargo that is loaded and carried in bulk without mark or count (large unpackaged quantities). 

Cargo Preference is a MARAD-administered Federal program that requires a minimum percentage of Federal 

oceanborne goods be transported on U.S.-flagged vessels. 
 3

MARAD Procedures Do Not Consider Liquid Cargo In Its Evaluation 

of the 7,500-Ton Limitation 

While the Maritime Security Act of 2003 does not make a distinction between dry 

and liquid cargo, MARAD’s Chief Counsel concluded that the 7,500-ton civilian 

bulk preference cargo limitation does not apply to civilian liquid cargo. 

MARAD’s Counsel did not provide sufficient reasoning why the weight limit 

would apply to dry bulk cargo but not liquid. We consulted with OIG Counsel 

who determined that, given the trade meaning and statutory usage of the term 

“bulk” (which includes liquid cargo), and without a specific exclusion for civilian 

liquid cargo, the plain language of the Act encompasses civilian liquid cargo when 

applying the 7,500-ton limitation. It is important to note that according to the 

Office of Cargo Preference, the only liquid bulk cargo currently being transported 

is fuel to the Israeli military, which is a military operation and not subject to the 

7,500-ton limitation. 

OIG Counsel is working with MARAD’s Counsel to resolve the difference. As a 

result, we are not making any recommendations on this issue. 

ACTIONS REQUIRED 

Actions taken and planned by MARAD are responsive to our concerns and a 

formal reply to this report is not required. 

We appreciate the courtesies and cooperation of MARAD Office of Sealift 

Support representatives during this audit. If you have any questions concerning 

this report, please call me at (202) 366-1407 or Earl Hedges, Program Director, at 

(410) 962-1729. 

# 
 4

EXHIBIT A. BACKGROUND 

MSP’s Maritime Security Fleet includes 60 privately-owned vessels. Current 

funding levels allot a $2.6-million annual retainer per vessel (increases to $3.1 

million by 2012); see Table 1. 

Table 1. MSP Funding Levels Established by the 

Maritime Security Act of 2003

Fiscal Year Funding Per Vessel Total Program Funding 

2006 $2.6 million $156 million

2007 $2.6 million $156 million 

2008 $2.6 million $156 million 

2009 $2.9 million $174 million 

2010 $2.9 million $174 million 

2011 $2.9 million $174 million 

2012 $3.1 million $186 million 

2013 $3.1 million $186 million 

2014 $3.1 million $186 million 

2015 $3.1 million $186 million 

Total Program Funding $1,734,000

Each vessel operates commercially in one of two ways: between domestic and 

international ports or between international ports. Each vessel is obligated under a 

renewable 1-year operating agreement and is required to maintain a U.S. flag 

presence in international shipping channels. Vessels must comply with 

operational and program requirements as specified in the operating agreement. 

For example, each month MSP analysts evaluate vessel operators’ payment 

requests for eligibility based on the following criteria: 

1. Did the vessel operate fewer than 320 days in foreign trade during the year? 2

2. Did the vessel carry more than 7,500 tons of civilian bulk preference cargo at 

any time during the year? 

3. Was the vessel under time-charter3

 to another Federal agency? 

 

2

 MSP analysts reduce monthly payments for non-operating or drydock days during the month. At year-end, if the 320-

operating-day requirement is met, analysts make a supplemental payment to compensate for the previous reductions. 3

 Time charter is hiring of a vessel for a specific amount of time; the owner still manages the vessel, but the charterer 

selects the ports and directs the vessel where to go. 

Exhibit A. Background 
 5

If the answer to any of the above questions is “yes,” then the vessel is considered 

noncompliant and the $2.6-million annual retainer is discounted accordingly, 

based on the number of days the vessel did not comply. 

Exhibit A. Background 
 6

EXHIBIT B. SCOPE AND METHODOLOGY 

Our audit objective was to determine if payments to MSP contractors were 

reduced if the minimum operating requirements were not met. Our review 

focused on vessels entering the MSP from FY 2006 through 

FY 2008 (74 total), as well as payments made to MSP contractors during the same 

time frame (totaling $433 million as of July 22, 2008). 

We accomplished our objective by (1) meeting with MSP officials to gain an 

understanding of internal controls, (2) performing tests of controls through 

judgmental sampling, (3) testing the validity of the Lloyds of London Marine 

Intelligence Unit database (used to verify vessel operating status), and (4) 

performing follow-up of prior audit recommendations through inquiry, 

observation, and obtaining supporting documentation. As part of our testing, we 

reviewed the 27 payment reductions (see Table 2) to determine if the reductions 

were justified. 

Table 2. Monthly Payment Reductions, 

October 1, 2005 through July 22, 2008 

Fiscal Year Number of Temporary Reductions Amount of Temporary Reductions

2006 11 $1,131,721

2007 2 $50,004

2008 as of 7/22/08a 11 $1,241,467

 Total 24 $2,423,192

Fiscal Year Number of Permanent Reductions Amount of Permanent Reductions

2006 1 $ 72,373

2007 2 $959,530

2008 as of 7/22/08a N/A N/A

Total 3 $1,031,903

a The permanence of these payment reductions will be determined by MARAD after September 30, 2008. 

Temporary – If non-operating or drydock days are recorded during the month, payment is reduced. At 

year-end, MARAD determines if annual 320-days-in-operation requirement was met and, if so, issues a 

supplemental payment. 

Permanent – If vessel was under time-charter, transported excess cargo preference, or did not meet annual 

320-days-in-operation requirement, no supplemental payment is made. 

Exhibit B. Scope and Methodology 
 7

Our testing took place during June and July 2008 at MARAD Headquarters and 

local ports on the east coast of the United States. We conducted this performance 

audit in accordance with generally accepted government auditing standards. 

Those standards require that we plan and perform the audit to obtain sufficient, 

appropriate evidence to provide a reasonable basis for our findings and 

conclusions based on our audit objectives. We believe that the evidence obtained 

provides a reasonable basis for our findings and conclusions based on our audit 

objectives. 

Exhibit B. Scope and Methodology 
 8

Exhibit C. Major Contributors to This Report 

EXHIBIT C. MAJOR CONTRIBUTORS TO THIS REPORT 

Name Title 

Earl Hedges Program Director 

Ingrid Harris Project Manager 

LaKarla Lindsay Senior Auditor 

Stephen Berkeridge Auditor 

Allison Sturges Analyst 

Fritz Swartzbaugh Associate Counsel 

Michael Fruitman Communications Adviser