EPA Revisions to Audit and Small Business Compliance Policies

On April 11th, 2000, EPA announced the first revisions to its policy on voluntary disclosures of violations which was originally issued on December 22, 1995 (the “Audit Policy”). The changes broaden the circumstances in which the 1995 policy may be used, clarify its application for multi-facility companies and conforms the policy to existing agency practice. The revised policy becomes effective on May 11th. The principal elements of the revised Audit policy are as follows:

•	The time for disclosing violations is extended from 10 days to 21 calendar days after discovery of violations. The 21-day period begins when any officer, director, employee or agent of a facility has an objectively reasonable basis for believing that a violation has or may have occurred. If the 21-day period has not yet expired and an entity suspects that it may not be able to meet the deadline, the entity should notify the agency about extending the disclosure period. EPA also indicated that when the 21-day period has elapsed, the agency might accept late disclosure for exceptional or complex circumstances.
•	The Audit Policy now allows for 100% mitigation of gravity-based penalties that are detected as a result of a corporate compliance audit program or environmental management system (criteria 1). Violations that are not discovered through such a systematic process may be eligible for a 75% reduction of gravity-based penalties if the reporting entity satisfies criteria 2-9 of the Audit Policy.  EPA continued to retain its discretion to seek recovery of economic benefits that an entity may have obtained as a result of its non-compliance.  
•	EPA reaffirmed that it will not recommend criminal prosecution for entities that satisfy criteria 2-9 even if they cannot meet the systematic discovery requirement of criteria 1 provided the entity acts in good faith and adopts a systematic discovery system to prevent recurring violations. When violations are detected through a compliance or environmental management system and not an individual audit, the disclosing entity should be prepared to document how its system satisfies the policy definition of such a system. The definition is based on existing codes of practice such as Chapter 8 of the U.S. Sentencing Guidelines for organizational defendants. EPA may also require organizations relying on the existence of compliance management systems to mitigate penalties to issue public descriptions of their programs to allow public input on the adequacy of the corporate program. 
•	EPA did reserve the right to recommend criminal prosecution for culpable individuals or subsidiary organizations under its 1994 Investigation Discretion Memo (available at www.epa.gov/oeca/ore/aed/comp/acomp/a11.html). However, EPA cautioned that the Department of Justice (“DOJ”) has ultimate prosecutorial discretion for criminal violations under its 1991 “Factors in Decisions on Criminal Prosecutions for Environmental Violations In the Context of Significant Voluntary Compliance or Disclosure Efforts by the Violator” and its 1999 “Guidance on Federal Prosecutions of Corporations.”.
•	The Audit Policy is limited to violations that are voluntarily discovered and not through any monitoring, sampling or auditing required by a statute, regulation, permit, judicial or administrative order, or consent decree. However, some Clean Air Act violations discovered, disclosed and corrected prior to the issuance of a Title V permit such as NSR violations may be eligible for penalty mitigation if they qualify under the September 30, 1999 “Reduced Penalties for Disclosures of Certain Clean Air Act Violations” reduced penalty policy (discussed in our November issue and available at http://www.epa.gov/oeca/ore/apolguid.html.). Discovery of the violation must take place before a government agency identifies the violation through an investigation or information from a third party. However, if the entity does not know that a government agency is already investigating the facility and makes a voluntary disclosure in good faith, EPA may permit the violation to qualify for the Audit Policy. However, the violation could still be subject to criminal prosecution.  Violations disclosed after an entity receives notice of an intent to file a complaint form a citizen group will not be eligible for penalty mitigation.  
•	It should be noted that the voluntary requirement applies to discovery of violations and not reporting. Thus, even if a violation would have to be reported under an environmental program, the violation may still be eligible for penalty mitigation if it was voluntarily discovered. 
•	The entity must remedy any harm caused by the violation and correct the violation within 60 calendar days. If the facility believes that more than 60 days will be required to correct the violation, the facility should notify EPA in writing prior to the expiration of the 60-day period. 
•	The entity must take steps to prevent recurrence of the violation. 
•	Penalty mitigation will not be available for specific violations or closely-related violations that occurred at a specific facility within the prior three years. However, the three-year rule for prior violations will not apply to purchasers of facilities who acquire a facility and discover prior violations after the closing.    
•	Violations that result in serious actual harm or create an imminent and substantial endangerment will not be eligible for penalty mitigation. However, the EPA indicated that in the 4-year history of the Audit Policy, the agency has not invoked this criteria for the purpose of denying penalty-mitigation to an entity.
•	Entities seeking penalty mitigation must cooperate with EPA and provide the agency with information it needs to determine eligibility for the Audit Policy. While the agency has refrained from routinely requesting copies of audit reports, EPA indicated in the revised policy that it may request audit reports where information contained in the reports is not readily available elsewhere and the information is necessary for determining if the conditions of the Audit Policy have been met. Where potential criminal violations are disclosed, the facility should be prepared as part of its cooperation requirement to provide access to all requested documents and employees as well as individuals who performed the audit or review, copies of portions of audit reports addressing the criminal violations. The entity must also  assist the agency with its investigation and provide any other relevant information pertaining to the violation.
•	EPA indicated that it will generally defer to state voluntary disclosure policies that are consistent with federal delegation requirements and the Auditing Policy. The EPA repeated its opposition to state programs that grant audit privilege and immunity and expressly reserved its rights to bring enforcement actions to violations of federal environmental law. 
•	The agency also clarified how the Audit Policy applies to entities with multiple facilities. For example, the 21-day reporting period may be extended to allow a reasonable time for completion of audits or reviews at multiple facilities provided EPA and the entity agree on the timing and scope of the investigation prior to their commencement and the facilities are identified in advance. For acquisitions, EPA may extend the reporting period on a case-by-case basis but in no case will the reporting period commence prior to the date of acquisition. In addition, the fact that one facility may be subject to a government investigation, inspection, information request or third-party complaint will not preclude EPA from allowing other facilities owned or operated by an entity to be eligible for the Audit Policy. Finally, a different rule for repeat violations applies to entities with multiple facilities. Where the same or closely-related violations occur at one or more facilities owned or operated by an entity within a five year period, the entity will not be eligible for Audit Policy relief.  
Commentary:  The revised policy contains some important incentives that should be considered in corporate transactions. Purchaser’s of facilities or businesses may be able to substantially reduce penalties associated with violations pre-dating the closing if they include regulatory compliance in their pre-acquisition due diligence. Since the penalty reductions can also benefit sellers in the form of increased sales price, lower holdbacks or reduced indemnity obligations, purchasers may want to consider having the seller share in the costs of the compliance audit phase of the due diligence.

EPA also revised and renamed its “Policy on Compliance Incentives for Small Businesses” which was originally issued on June 3, 1996. The new policy is now called the “Small Business Compliance Policy” (the “SB Policy”) and becomes effective on May 11th. The SB Policy implements section 223 of the Small Business Regulatory Enforcement Fairness Act of 1996 (“SBREFA”). The policy applies to corporations, partnerships, businesses and other entities that employ 100 or fewer individuals on a full-time basis for all facilities and operations owned by the business.  Facilities that are operated by small municipalities or other local governments may be covered under the EPA Small Communities Policy which is available at http://www.epa.gov/oeca/scpolicy.html.
	While the SB Policy is similar to the EPA Audit Policy, there are several notable differences.

•	Under the SB Policy, EPA will waive 100% of the gravity-based component of civil penalties for violations that are discovered through audits and government-sponsored compliance assistance programs. Government agencies or any private or non-profit compliance assistance providers may conduct these compliance assistance programs. The small business does not have to have a systematic discovery program in place to receive 100% penalty-mitigation.
•	Under the old policy, violations discovered through an environmental audit had to be disclosed within 10 days of discovery but violations detected through a confidential compliance assistance program had to be “promptly” disclosed. The SB Policy lengthens the disclosure reporting period from 10 to 21 calendar days for all violations. 
•	Small businesses will have up to 180 days to correct violations and qualify for 100% penalty-mitigation instead of the 60-day period set forth in the Audit Policy. If the correction involves implementing pollution prevention protocols, the small business will have up to 360 days to complete the modifications.
•	Unlike the Audit Policy, the SB Policy does not address criminal conduct and multiple facility disclosure.
Commentary: Small businesses that do not qualify for the penalty-reduction under the SB Policy may still qualify for penalty reductions where the small business can demonstrate an inability to pay all or a portion of the penalty. EPA may consider reducing the penalty to allow the small business to continue to operate and to finance the required compliance measures. The criteria for such relief is set forth in the EPA “ Guidance on Determining a Violator’s Ability to Pay a Civil Penalty” which is available at http://www.epa.gov/oeca/ore/aed/comp/acomp/a1.html. Penalty relief may also be sought under the EPA Supplemental Environmental Projects Policy (available at http://www.epa.gov/oeca/sep/sepfinal.html) as well as under the Audit Policy