Background - News & Events (Landing) 2016

Aggressive Self-Auditing Earns Industry An Enforcement Break

July 1999

Co-Authors: Richard E. Schwartz and Ellen Steen.

Mining companies contemplating self-auditing for environmental problems - but wary of EPA enforcement for violations that may be discovered - should consider with interest the special enforcement agreement between the pork industry and EPA. Announced in November 1998, the Clean Water Act Compliance Assurance Program ("CAP") enforcement agreement enables any U.S. pork producer to sign up for the industry's independent, comprehensive environmental auditing program and, in exchange, to receive pre-determined, limited civil penalties for violations of the Clean Water Act that are reported and corrected after the audit. The CAP Agreement is an instructive example of creative industry efforts to implement responsible self-policing while keeping an eye toward self-preservation.

Background: The Pork Industry's Need for an Auditing and Enforcement Program

Under §301 of the Clean Water Act, livestock producers (like any other "person," such as a mine operator) are prohibited from discharging pollutants to "waters of the U.S." from a "point source" without a permit. Even though a "point source" can be any discrete conveyance, livestock producers had particular cause for concern because the Act specifically defines "point source" to include concentrated animal feeding operations ("CAFOs").

The Clinton Administration has expressed a strong commitment to increasing the regulatory attention devoted to livestock producers under the Act, as evidenced by the Clean Water Action Plan announced jointly by EPA and the U.S. Department of Agriculture ("USDA") in March of 1998. Well before this heightened level of regulatory attention, the pork industry actively sought and participated in a nationwide, multi-stakeholder "dialogue" to establish a consensus on appropriate environmental management techniques for the pork industry. Participants in the "National Environmental Dialogue on Pork Production" included officials from EPA and USDA, heads of seven state regulatory agencies, and individual pork producers. Following a series of 24 meetings over an 8-month period, the Dialogue produced the Comprehensive Environmental Framework for Pork Production Operations (December 12, 1997), a set of recommendations for environmentally sound hog farm operations.

The Framework recommended standards and procedures to address the environmental effects of pork production comprehensively, providing workable solutions even in areas unregulated by EPA (such as odor and ground water). Implementation of the Framework, however, required a separate industry effort. Accordingly, the National Pork Producers Council ("NPPC") developed a comprehensive environmental/odor control assessment protocol for hog farms, including an audit program (referred to in the CAP Agreement as the "On-Farm Assessment Program"), using a detailed protocol and specially trained assessors to evaluate on-site the environmental practices of pork producers and identify potential problems and areas for improvement.

Having developed the audit program, NPPC turned to creating an incentive for hog farmers to use it. NPPC knew that even producers eager to improve their environmental practices would likely fear potential increased exposure to enforcement liability (by EPA, states, or citizens) if an on-farm assessment identified an unauthorized discharge or other Clean Water Act violation. To solve this problem, NPPC set out to devise a mechanism that would encourage and reward participation in the program and minimize the potentially large liabilities associated with discovery of violations.

During the winter of 1998, NPPC presented its On-Farm Assessment Program to officials at EPA's Office of Regulatory Enforcement and expressed an interest in developing a means of encouraging participation in the program. From those discussions, the answer emerged in the form of an industry-wide auditing and enforcement agreement, based on EPA's pre-existing audit policy, but tailored specifically to pork producers. Under such an agreement, farmers participating in the On-Farm Assessment Program could report any identified violations and receive specific, pre-determined penalties pursuant to a pre-negotiated Consent Agreement with EPA, provided that they corrected the violations within certain time limits. Producers would have the security of knowing in advance the penalties and the terms of enforcement against any reported violations. In addition, since enforcement for reported violations would be automatic, subsequent citizen suits for the same violations would be preempted under the Act. Finally, individual producers and the industry as a whole would benefit from improved environmental performance and corrected violations.

EPA was receptive to the idea of an industry-specific auditing and enforcement agreement in part because the agency recognized the potential environmental benefits of large-scale participation in the On-Farm Assessment Program. EPA officials also realized that independent audits of some 12,000 pork production operations - NPPC's goal - would constitute a compliance assurance effort on a scale that EPA could not approach with its limited inspection and enforcement personnel and funding. In addition, in the context of an industry still largely unregulated at the federal level (only about 2,000 of the approximately 450,000 livestock operations have Clean Water Act permits), the auditing and enforcement agreement offered EPA the opportunity to increase its knowledge and understanding of the industry. Finally, the agency saw this as an opportunity to give heightened visibility and support to the first nationwide on-farm auditing program, thereby perhaps encouraging similar voluntary efforts in other sectors.

How the CAP Agreement Works

The mechanics of the CAP Agreement are relatively simple. First, EPA offers any pork producer in the United States the opportunity to enter the Agreement. Producers may register simply by signing a copy of the CAP Agreement and sending it to EPA. By registering, a producer agrees to submit his operation to NPPC's on-farm assessment process. EPA, in turn, agrees to enforce through the CAP Agreement any qualifying violations reported by registered producers.

NPPC assigns each registered operation to an independent, trained assessment team, which gathers information from the producer and then conducts a detailed on-farm inspection of physical operations and waste management practices. The assessment team reports its findings to the producer, who then must submit a "Final Report" to EPA. If no violations are identified in the Final Report, the Agreement terminates.

If a producer reports violations to EPA pursuant to the CAP Agreement, then EPA and the producer enter into the pre-negotiated Consent Agreement/Order, which sets forth applicable penalties and requires the producer to remedy the reported violations. The Consent Agreement/Order is structured to provide smaller penalties (ranging from $250 to $1,000) for violations corrected within an accelerated correction period and larger penalties (from $2,500 to $10,000) if correction takes longer. Whether or not the producer receives the reduced penalty by correcting the violation quickly, the producer must remedy the violation before a final correction deadline provided in the Agreement. This deadline may be one or two years, depending on the type of violation. Failure to remedy a violation by this deadline will subject the producer to full liability for that violation, including the potential for the maximum penalty available under the Clean Water Act (currently $27,500 per day).

Confidentiality of Audit Materials and Information

An issue of critical importance to both NPPC and EPA during negotiations was the precise nature of any confidentiality protection afforded the results of individual on-farm assessments. Producers might agree to open their operations to scrutiny by trained, independent assessors, but they would still want to maintain the confidentiality of the findings of those assessors. EPA has opposed the establishment of any outright privilege for audit results, but its long-standing policy has been to refrain from requesting such materials. Recognizing the importance of the issue in encouraging producers to participate in the program, EPA agreed to provisions in the CAP Agreement designed to protect the confidentiality of information about individual assessment results.

Accordingly, the CAP Agreement is structured so that the only producer-specific assessment information provided to EPA is that contained in the final report: a statement that an assessment has been completed and an identification of any CWA violations that are being reported. The Agreement provides that EPA may seek other assessment information or documents only to the extent needed to verify the circumstances of a reported violation, or if it has an independent reason to believe that an unreported violation has occurred, and then it may seek information only about the putative violation. The CAP Agreement also states EPA's position that these confidentiality protections promote the goals of the Clean Water Act, which should assist farmers in resisting efforts by other governmental entities or individuals to force disclosure of assessment materials.

Effect on State Enforcement Activities

Throughout negotiations over the CAP Agreement, EPA was sensitive to the role that state regulators might wish to play in the program and to potential concerns of states over EPA's enforcement of violations that might otherwise be enforced by the state (where the state had received delegated authority to implement the Clean Water Act). EPA enforcement would preclude state enforcement for the same violations, because dischargers generally cannot be subject to two separate enforcement actions for the same violation. Thus, states would be unable to pursue additional civil penalties for violations reported to EPA and corrected pursuant to the CAP Agreement. Accordingly, the CAP Agreement expressly provides that states may implement the Agreement by agreeing in writing to be bound by its terms. States choosing to implement the CAP Agreement would comply with the provisions of the Agreement that apply to EPA, and the states, instead of EPA, would receive all reports of violations from producers, and enter into consent agreements with producers reporting violations.

Limitations of the CAP

Both EPA and NPPC wanted the CAP Agreement to encourage producers to assess and improve their environmental practices, but not to provide refuge for previously discovered or dangerous violations, or for willful polluters. Accordingly, although the CAP Agreement was designed to provide incentives to participate in the On-Farm Assessment Program, it provides a haven with carefully drawn limitations.

First, violations that were already known to EPA or the state prior to the beginning of the assessment or that were already the subject of a citizen suit are not covered. Second, even for eligible violations, EPA retains its authority to sue for injunctive relief if a violation is causing harm to public health or the environment. Finally, EPA may recommend criminal prosecution if it finds management-level concealment of, condoning of, or willful blindness to, the violation. These latter two limitations, respectively, ensure that EPA retains its authority to act to end a violation where necessary and prevent the use of the Agreement as a shield for willful violations.

A Model for Others?

EPA officials have indicated that the CAP Agreement for pork producers may become a model for similar programs in other industries. This openness to additional applications is appropriate, given the powerful compliance assurance mechanism it provides. The Agreement shows that industry-specific or even company-specific CAPs can reap much greater benefits in terms of the reporting and correction of violations than the generally available EPA self-auditing policy.

In fact, although a CAP is essentially a specific application of EPA's audit policy, it has significant advantages over the general policy. Many businesses may fear the uncertainties associated with self-auditing and voluntary disclosure to EPA in the absence of up-front assurances as to the particular enforcement action that will be taken by the agency. Although the audit policy provides for the waiver of gravity-based penalties when violations are reported, "economic benefit" penalties still apply, and companies cannot know in advance the measure of economic benefit EPA will attribute to a given violation.

The pork producers' CAP Agreement represents a good example of the kind of creative solutions that can be achieved cooperatively between EPA regulators and an industry striving to improve its environmental performance. The CAP framework can provide businesses with a tailoring of the general policy that can make it more suitable for them and more user-friendly. Thus, by obtaining advance EPA approval of the industry's auditing process and clarification of the specific enforcement response and penalty amounts that will apply to covered violations, the pork producers achieved a unique level of liability-limiting security that can only result in a higher level of both auditing, disclosure, and compliance to the benefit of EPA, the industry, and the environment. The mining industry may reasonably ask whether there are lessons to be learned from the pork producers.

[Crowell & Moring LLP represented the pork producers in the development and negotiation of the CAP Agreement.]

Richard E. Schwartz
Senior Counsel – Washington, D.C.
Phone: +1 202.624.2905