Focus on Explosives: Failures and Fees
Co-Authors: Edward M. Green and Mike Gill.
The mining industry accounts for 89% of the more than 5.5 billion pounds of explosives used each year in the United States. Over two-thirds of that total amount is used in coal mining, 13% in quarrying and non-metal mining, and 8% in metal mining. As the major consumers, by far, of explosives, mining companies find themselves at the forefront of the Nation's multifaceted efforts to protect Americans from both foreign and domestic terrorist activity. This role has been heightened since November 25, 2002, by Congressional enactment of the Safe Explosives Act (“SEA”) as part of the Homeland Security Act.
To summarize briefly, the SEA mandates that, for the first time, all users of explosive materials must have a federal permit or license. The SEA also expands the categories of persons who are prohibited from possessing explosives. And the SEA requires that persons “authorized to possess explosive materials” (“employee possessors”) and persons “responsible for the use and management of explosive materials” (“responsible persons”) must be identified by their employers to the federal Bureau of Alcohol, Tobacco, and Firearms and Explosives (“ATF”), so that the ATF can carry out a background check and clearance of each individual to ensure that he or she is not a person prohibited from possessing explosive materials (“prohibited person”). By establishing this nationwide permitting and licensing scheme and its accompanying new background check and clearance system, the SEA aims to operate as a screen to prevent explosive materials from falling into the hands of terrorists.
Recent Adverse Developments
Now, two and one-half years after the SEA's enactment, two disappointing and troublesome developments have occurred. First, at the end of March, the Inspector General of the Department of Justice (in which the ATF now resides) issued a scathing report finding critical deficiencies in the ATF's implementation of the background check and clearance process intended to ensure that prohibited persons are denied access to explosives. Second, the Bush Administration, in its budget proposal for FY 2006, released in late January, proposed a user fee “on all explosives manufactured in or imported into the United States” (emphasis added). The fee would be set at a rate of $0.02/pound, thereby generating $120 million each year, or $600 million over five years. This fee, plus current explosives licensing fees, “would provide full offset for the [ATF's] regulation of the explosives industry. The fee would be set in regulation, and could be increased as deemed necessary by the Attorney General.”
As we discuss below, both of these developments pose significant potential problems for mining companies.
The Inspector General's Report
The most troubling aspect of the Inspector General's Report is its overall finding of “critical deficiencies” in the ATF's implementation of the background check and clearance process required by the SEA. According to the Inspector General, this has prevented ATF from ensuring that prohibited persons are denied access to explosives. The Inspector General also found that ATF Inspectors responsible for inspecting explosives permittees and licensees have not received adequate training, resulting in inconsistent regulatory enforcement.
In connection with the background check and clearance process deficiencies, the Inspector General noted that to get help in carrying out its responsibility to conduct background checks of responsible persons and employee possessors, the ATF had entered into an agreement with its sister agency, the FBI, to have that agency perform the background checks for ATF. However, a comparison of ATF and FBI data found that the ATF had failed to follow up on over half of the individuals whose FBI background checks had flagged as possible prohibited persons. Because ATF never completed its determination of whether these individuals were prohibited persons, they were still authorized to use and have access to explosives. In addition, according to the Inspector General, the ATF did not even request FBI background checks on all potentially prohibited persons submitted to ATF by license and permit applicants.
In another troubling development, the Inspector General found that many explosives licensees and permittees have not reported hiring new employee possessors – this in spite of the fact that, under the SEA, licensees and permittees have a continuing obligation to notify the ATF of any changes in responsible persons or employee possessors. This includes not only situations when an employee is terminated or when an individual's job changes, but also when new employees are hired.
As for the finding of the Inspector General that ATF Inspectors have received inadequate training, especially telling is the reported observation of one licensee operating nationwide who stated that his company was unable to develop a consistent corporate policy to comply with ATF regulations because ATF Inspectors conduct inspections and interpret regulations differently at various locations around the country. The Inspector General also found that ATF's procedures are not adequate to ensure that Inspectors check for employee possessors who may have become prohibited persons since their initial ATF background checks were carried out.
In an April 4, 2005 response to the Inspector General's Report, the ATF said that the Report “does not adequately recognize ATF's many accomplishments in implementing the [SEA] . . . . ATF recognizes [, however,] that there are discrepancies resulting from this review that need to be immediately and appropriately addressed. We are committed to doing so.”
User Fee on Explosives
As for the Administration's proposed user fee on explosives, while President Bush is certainly not the first to propose user fees as a way of increasing revenue without raising taxes, fortunately, such proposals rarely survive the Congressional budget process. In this instance, the Administration's FY 2006 budget proposal included at least 15 new or increased fees in different areas. To some extent, these proposals represent bookkeeping legerdemain because they are counted not as revenue but as a reduction in spending since they pay for government activities without taking money from general government revenues. Presidents have found them to be popular budget tools because the fees have the effect of reducing the total outlays the President is proposing.
The President's budget proposal, however, is merely the first step in a complicated budget process. Without getting into the details of that process, key to this “smoke and mirrors” explosives user fee proposal is that it is only a proposal. And once the inches-thick FY 2006 budget proposal was released and began to be analyzed by various interest groups, the Safety & Security Alliance for Explosives initiated a campaign to defeat the Administration's proposed explosives user fee. This coalition, led by the Institute of Makers of Explosives and joined by such industry groups as the National Mining Association, the National Stone, Sand & Gravel Association and the Industrial Minerals Association – North America, has worked hard to educate the Congress and media as to why the explosives fee proposal should be defeated. To date, this effort has been successful. In late April, the final budget resolution adopted by the House of Representatives and the Senate did not include any new user fees.
Opponents of the explosives user fee cannot declare victory, however, because Congressional budget processes allow for reconciliation of the recently passed budget resolutions. Thus, until the beginning of this fall, the industry will have to remain vigilant in order to ensure that the Congress does not adopt the Administration's proposed explosives user fee.
What Does All This Mean for Mining Companies?
The ATF considers itself one of the Nation's preeminent law enforcement agencies. Until the SEA became law at the end of 2002, the ATF occupied a well-respected position at the U.S. Department of the Treasury. Now that it has been transferred to the Department of Justice, the ATF finds itself in a rivalry for funding, personnel, and attention with the much larger and much richer FBI. The stinging criticism of the Inspector General's Report is exacerbated in the minds of ATF employees, we suspect, by the fact that it is FBI data that served as the basis for many of the Inspector General's criticisms. And it is certainly true, based on our communications with ATF officials, that the ATF is unhappy that the Administration has proposed that its funding be wholly supported by a user fee, while leaving its sister agency, the FBI, to be funded by general revenues. Indeed, the President's FY 2006 budget proposal would increase the FBI's funding from general revenues by nearly $600 million – the total amount to be raised by the proposed explosives user fee over five years. It is not surprising, therefore, that according to a recent report in the Wall Street Journal, one senior ATF agent said: “This gives us an idea of where we stand in this administration. I guess we'd better print bake sale and car wash signs.”
In our view, since the SEA was passed, the ATF has been working hard to implement it, without any significant new resources or personnel. The ATF has worked hard to facilitate compliance by explaining the new requirements of the SEA to mining companies. The Agency has developed and published required regulations and forms to implement the SEA, and, in most respects, implementation of the SEA appears to have gone smoothly.
Still, the ATF clearly is under significant stress now. And this means that mining companies can expect ATF Inspectors to be more rigorous and demanding than they have been in the past, especially when mining companies submit their applications for permit and license renewals, as they must do every three years. Mining companies, therefore, need to be especially attentive to complying fully with all the statutory and regulatory requirements of the SEA and other provisions of federal explosives law, lest they fall victim to an increasingly aggressive ATF as it seeks to prove its critics wrong.