EPA Proposes Significant Expansion of Audit Policy to Encourage Environmental Clean Up at Newly Acquired Facilities

Late last week, the U.S. Environmental Protection Agency detailed its new Interim Approach to its Audit Policy, aimed at encouraging companies that acquire facilities to disclose, correct, and prevent the recurrence of violations. 73 Fed. Reg. 44,991 (Aug. 1, 2008). Specifically, the Interim Approach proposes to apply EPA's "Incentives for Self-Policing: Discovery, Disclosure, Correction and Prevention of Violations" ("Audit Policy") to "new owners" of facilities. The new policy would effectively apply to settlement of claims for civil penalties for any violation under the federal environmental statutes that EPA administers.

The Audit Policy was promulgated in 2000 to enhance protection of human health and the environment by encouraging companies to voluntarily discover, disclose, correct and prevent the recurrence of violations of federal environmental law. Under the Audit Policy, EPA established safeguards to deter violations and protect the environment, such as requiring facilities to prevent recurrence of violations and remedy any environmental harm. Although entities and individuals remain criminally liable for violations that result from the conscious disregard to obligations under the law, by voluntarily disclosing any violations, they become eligible for mitigation, and even elimination, of civil penalties and recommendations against criminal prosecution.

Like the Audit Policy, the Interim Approach offers incentives to encourage discovery and disclosure of violations, but is specifically aimed at new owners. The Interim Approach includes penalty mitigation beyond what the Audit Policy generally provides, including all or partial mitigation of economic benefit and gravity-based civil penalties, and modifies select Audit Policy conditions as they apply to new owners. Accordingly, a new owner that is willing to promptly address pre-existing violations and make changes to ensure future compliance in conformance with the Interim Approach, would not be penalized for the full economic value relating to those violations. To do so, a new owner may either enter into an agreement under the Audit Policy to specify facilities to be audited or individually disclose violations as they are discovered. EPA hopes that by working with new owners, the Agency will secure higher quality environmental improvements more quickly and effectively.

EPA's new approach has two primary goals: 1) to secure prompt correction of violations and 2) to achieve pollutant reductions. EPA believes new owners are uniquely situated to make an environmental "clean start" because they are already assessing their facilities, and likely have both the funding and opportunity to fix any issues and reduce risk. The Interim Approach is thus an attempt to eradicate any perceived disincentives to disclosure, such liability for civil penalties and uncertainty about EPA's treatment of disclosures that existed under the prior Audit Policy. As incentive for new owners, entities participating in the new Interim Approach will be eligible to have the penalties for economic benefit or gravity waived for the period before the date of acquisition. Instead, penalties associated with economic benefit associated with a voided operation and maintenance costs will be assessed against the new owner from the date of acquisition. Moreover, penalties for economic benefit associated with delayed capital expenditures or with unfair competitive advantage will not be assessed against the new owner if the violations are corrected within 60 days of the date of discovery, or as agreed with EPA. Other conditions contained in the Audit Policy are also modified or provided greater flexibility of application.

As drafted, the Approach is designed to test the efficacy of the incentives implemented after public comments. That is, EPA will assess the effectiveness of the Interim Approach based on the number of new owner disclosures resolved, the pounds of pollutants estimated to be reduced or treated, and the dollars invested in improved environmental performance or management practices. EPA will also observe those recently acquired facilities that neither make new owner disclosures nor take advantage of the Audit Policy. After gathering sufficient information and feedback, EPA will decide to continue, change or abandon the Interim Approach.

The Interim Approach represents the next logical step in expanding the Agency's priority of proactive enforcement - specifically, providing greater incentives for regulated entities to self-report and self-correct past potential violations. By proposing additional benefits to new owners of existing facilities, EPA has removed a significant impediment to prior self-disclosures to those new owners - concerns over liability for past violations for which they were not originally responsible. EPA seeks public comment specifically aimed at improving the overall design and specific elements of the Interim Approach. Entities that engage in transactions (either as buyers or sellers) involving potentially affected facilities should submit comments in order to support the Agency's proposal or provide additional thoughts on how best to implement this proposed expansion of the Audit Policy. The comment docket will be open for a period of 90 days from publication of this Federal Register notice.