Environmental Regulatory Objective: Auditing and Compliance or Crime and Punishment

William N. Farran III and Thomas L. Adams Jr.

Mr. Farran is environmental counsel for Rhone-Poulenc, Inc., the U.S. operations subsidiary of Rhone-Poulenc S.A., a specialty chemical, pharmaceutical, basic chemical, and agricultural chemical manufacturer. Mr. Farran previously served as senior counsel to UGI Corporation in Valley Forge, Pennsylvania, and as an associate in the government regulation section of Morgan, Lewis & Bockius in Philadelphia, Pennsylvania. Mr. Adams is a partner in the Washington, D.C., office of Dechert, Price & Rhoads. He was previously Assistant Administrator for Enforcement and Compliance Monitoring at the U.S. Environmental Protection Agency. The authors wish to acknowledge the assistance of Michael T. Fantini, who made a substantial contribution in the drafting and editing of this Dialogue.

[21 ELR 10239]

The passage of the Clean Air Act Amendments of 1990¹ and its attendant Statement of the Senate Managers once again raises the issue of the proper role and treatment of environmental self-audit programs in the field of environmental enforcement. The Statement encourages environmental audits and provides that the Environmental Protection Agency (EPA) or the United States Department of Justice (Justice), in their discretion, should refrain from using self-audit information to prove knowledge in a Clean Air Act § 113(c) criminal enforcement case where reporting obligations were met and where there was timely corrective action.² Despite this legislative encouragement, prosecutors may exercise their discretion differently; thus, appropriate legal protection is needed to support and encourage auditing programs. EPA should supply this legal protection by fashioning an overall regulatory scheme that provides a safe harbor to companies that participate in a self-audit and voluntary corrective action program.

The environmental regulatory community is at a critical juncture in the philosophy of environmental enforcement. A decision must be made whether to influence behavior primarily through the force of the recently improved arsenal of criminal penalty provisions or by also creating a legal structure under which self-policing programs can achieve improved compliance effectively.

Environmental auditing, as defined by EPA, is "a systematic, documented, periodic and objective review by regulated entities of faulty operations and practices related to meeting environmental requirements."³ In addition to being an important means of verifying compliance with environmental laws, the environmental audit may also be a valuable management tool. It may be used for cost control, risk management, and growth planning, and it also enables management to respond appropriately when new laws are adopted.⁴

Chill on Self-Assessment

The trend toward criminalizing negligent and other unintentional violations of environmental laws and regulations⁵ is placing a chill on corporate audit programs because discoveries arising from audits could be used as evidence in criminal cases against the particular company or individuals. The same trend is raising concerns about personal criminal liability among environmental managers for "honest mistakes at work" that result in permit exceedances, for instance, or among auditors who discover violations. Simply stated, talented people are being scared away from accepting responsibility in the environmental field at a time when the industry and the public need highly qualified people to tackle the challenging problems presented by modern environmental regulation.

Although high-level enforcement officials uniformly agree that criminal enforcement should be used only after [21 ELR 10240] civil enforcement efforts are exhausted, or where the conduct is so egregious as to warrant criminal penalties, the existence of statutory power to bring criminal action for unintentional misconduct forces counsel to advise employees that they could be personally exposed upon receiving knowledge of facts constituting a violation. This situation jeopardizes efforts to encourage diligence at the corporate and personal levels.

Richard Stewart, Assistant Attorney General for Environment & Natural Resources, has noted that many companies may shy away from implementing environmental auditing programs for fear of being held liable for violations that might not have been otherwise discovered. Corporate officers might choose to be left uninformed of their companies' environmental compliance status to avoid charges of "knowing violations." Stewart observed that "[an] intelligent enforcement strategy should reduce the potential disincentives for auditing consistent with maintenance of a strong enforcement program."⁶

Goal of Enforcement-Compliance

From a theoretical viewpoint, the ultimate goal of any environmental enforcement program should be compliance, rather than punishment. If the threat of penalties causes regulated entities to conclude that they have little to gain and much to lose by identifying their own compliance problems, then the enforcement program is not working well. A self-audit and voluntary disclosure program, under which companies conduct self-audits and voluntarily correct environmental violations, can assist in promoting this goal in several ways:

it may provide the government with information about environmental violations to which it may not otherwise have access. This would cut the government's investigative costs and may expedite remedial actions;

it may encourage companies to take corrective and remedial actions unilaterally. The incentive would exist from eliminating enforcement of voluntarily disclosed violations or from lower penalties for past violations;

it may create incentives for companies and their employees to devote greater resources to their environmental compliance programs. Employees would be more likely to pursue investigation of potential violations if their company had an established self-audit and corrective action program;

it may assist the government in establishing standards for specific acts or omissions that aggravate a crime, and in providing notice to regulated entities of what actions will be investigated. For example, companies will have notice that if they fail to install internal procedures, harsh penalties may be imposed for violations that could have been discovered through such internal procedures;

it may create a cooperative relationship between a company and the government, rather than an adversarial one. Specifically, a company may devote more time and effort to remediation, rather than establishing a defense to prosecution; and

it may exempt a company with a voluntary self-audit program from intense scrutiny by the government, which will likely direct its attention to companies without such programs.

Safe Harbor

In recognizing the benefits of a self-audit and voluntary corrective action program, the government should not discourage environmental due diligence, but should affirmatively and expressly encourage the self-policing and corrective action efforts that would be embodied in such a program. Specifically, EPA and Justice should establish, through regulations, a safe harbor for companies that implement a bona fide environmental audit program under which prompt corrective action is taken to address violations discovered by the audit. This safe harbor may provide that EPA will not seek, or will reduce, any civil penalty where: (1) the violation is unintentional; (2) the regulated entity voluntarily reports the violation before EPA discovers the problem; (3) the regulated entity takes prompt and effective action to remediate the problem and prevent its recurrence; and (4) the violation does not result in any actual harm to human health or the environment. The safe harbor may also preclude prosecutors from using self-audit information to prove knowledge in criminal enforcement cases, or it may provide an affirmative defense to companies, allowing them to reduce or eliminate their civil or criminal liability. The safe harbor, however, would neither shield the company from civil enforcement, nor shield individuals who obtained culpable knowledge outside of the audit process from criminal enforcement.

Present Trends Encouraging but Incomplete

EPA's approach to this issue is headed in the right direction, but more governmental action is needed. In 1982, EPA considered issuing guidelines allowing companies to submit an audit program, meeting EPA guidelines, to the state for approval. Incentives would be in place for companies with such programs, such as a waiver of penalties, less frequent certifications by the companies' officers, and possibly, fewer inspections by the government.⁷

After this approach met resistance, EPA published a policy statement addressing auditing issues and setting forth the basic elements of effective environmental auditing.⁸ In the statement, EPA recognized the effectiveness of audits and expressly encouraged regulated entities to adopt sound environmental management practices, including auditing programs. While EPA did not promise to forego inspections, reduce enforcement responses, or offer other incentives to companies with audit programs, it did suggest that environmental auditing could produce such results. On the issue of enforcement generally, EPA recognized that it will take a case-by-case approach, and stated:

Whenregulated entities take reasonable precautions to [21 ELR 10241] avoid non-compliance, expeditiously correct environmental problems discovered through audits or other means, and implement measures to prevent their recurrence, EPA may exercise its discretion to consider such actions as honest and genuine efforts to assure compliance.⁹

Although this policy statement encourages regulated entities to adopt environmental audit programs, the incentives of and protection given such programs should be set forth in law.

EPA recently issued a new policy on EPA settlements.¹⁰ In this policy, EPA recognized that, during settlements of environmental enforcement cases, the final assessed penalties may be reduced where the defendants undertake a "supplemental environmental project." Environmental auditing may constitute such a project if it is "designed to seek corrections to existing management or environmental practices whose deficiencies appear to be contributing to recurring or potential violations."¹¹ According to EPA, such audit projects further the Agency's "legitimate goal of encouraging compliance with and avoiding, as well as detecting, violation of federal environmental laws and regulations."¹²

TSCA Disclosure Program

One environmental statute, the Toxic Substances Control Act (TSCA),¹³ does provide incentives for companies to conduct self-audits and correct violations. Specifically, EPA has provided policy guidance on a voluntary disclosure program regarding civil penalties under TSCA § 5. This program provides for an automatic 25-percent penalty deduction when a § 5 violation is disclosed prior to the company's notification of a pending inspection and EPA's receipt of information relating to the violation. An additional 25-percent penalty reduction may be granted to companies that report the potential violation within 30 days of having reason to believe that they may be in violation. Finally, the penalty may be further reduced, at EPA's discretion, by an additional 15 percent if the company takes all steps reasonably expected and requested to mitigate the violation.¹⁴ This program encourages companies to conduct self-audits, and clearly acts as an incentive to companies to voluntarily disclose environmental violations to the government. Such a program should be embodied in regulations and incorporated into all federal environmental laws.¹⁵

Release Reporting Examples

Reporting requirements present similar opportunities for voluntary self-audit and corrective action. Many environmental statutes require the "person in charge of the facility" to report certain information to one or more government agencies. Examples are release reporting requirements under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA)¹⁶ and the Emergency Planning and Community Right-to-Know Act (EPCRA or SARA Title III).¹⁷ Under EPA interpretations,¹⁸ this duty may not exclusively fall upon the plant manager or similar lead manager for a particular site, but instead may fall upon one of several individuals, such as the unit operator, the foreman, the supervisor, or plant management, depending on the circumstances.

Such multiple reporting obligations would not present a practical problem in situations where prerequisites to reportability clearly are satisfied and an immediate report is made. However, frequently there are facts concerning an event that must be gathered and analyzed to determine whether an incident or discharge falls within applicable permit limits, is above or below reportable quantity thresholds, or is within the scope of previously filed "continuous release" reports, for instance. A simple example is where laboratory data must be analyzed to determine whether the indicated concentrations in a discharge at the estimated flow rates translates into a release in excess of the reportable quantity (above applicable permit limits). Therefore, even though the duty to report may fall on several people, the necessary determinations frequently involve participation of and technical analysis by others, and may take time to complete.

Performing reportability reviews is an important part of the regulatory program because a cavalier decision to report virtually all operating incidents would flood the system such that it could not respond when needed. This is why reportable quantities and reporting exemptions are established as an integral part of the programs. Clearly, it would be contrary to the public interest for the emergency response mechanisms to be set into motion by the "false alarm" of a relatively minor event and be occupied when a true emergency arises.

However, each individual who arguably has a personal obligation to report is put into the uncomfortable position of having to rely on others for critical information on the reportability issue. Where legitimate reportability issues are being diligently pursued, it is inappropriate and contrary to the underlying regulatory philosophy to place people in such a position.

It seems logical that EPA should graft the concept presently in use in the TSCA reporting system, and the corresponding personal reporting exemption, onto other regulatory provisions by means of a general regulation. The regulation would discharge the personal liability of employees where issues are reported to a Compliance Assessment Team, chartered by senior corporate management to review [21 ELR 10242] compliance issues and make appropriate determinations. Such a regulation would provide appropriate certainty to employees, encourage high-level reporting of events, promote consistency of results, and heighten the level of decisionmaking within organizations.

EPA has acknowledged these difficulties and the wisdom of such a proposal in the TSCA § 8 program, and has issued policy guidance to the effect that an individual can discharge the personal obligation to report where he reports to a specifically designated Substantial Risk Review Committee that is chartered to make reportability determinations.

In its Statement of Interpretation and Enforcement Policy concerning notification of substantial risk under TSCA § 8(e), EPA stated:

Many commentators expressed the view that to apply these requirements to officers and employees of a business organization would result in ill-considered, premature reports and would unfairly subject employees to conflicting responsibilities as individual respondents and as corporate agents.

The September 9 proposal would have applied the Section 8(e) requirements to commercial establishments as well as to employees capable of appreciating the pertinent information, but stipulated enforcement priorities intended to encourage corporate processing and centralized reporting of such information. The intent was to ensure that pertinent information obtained by employees is promptly and appropriately considered while minimizing duplicative or ill-considered submissions.

The Agency now feels that these objectives would be best served by allowing commercial establishments — under certain conditions designed to ensure full disclosure — to assume exclusive responsibility for reporting to EPA any substantial risk information obtained by individual officers or employees. Accordingly, this policy statement stipulates that individual officers and employees will have fully discharged their Section 8(e) obligations once they have notified the designated responsible company supervisor or official of pertinent information … [under an officially established internal procedure].¹⁹

The TSCA § 8(e) program has worked satisfactorily, and should be adopted generally under the water, air, Resource Conservation and Recovery Act, TSCA, and other programs administered by the Agency.

Role of Privilege/Confidentiality

A collateral issue that a company must face when implementing a self-audit program is whether the information yielded by the audit may be kept confidential. Confidentiality is crucial because the audit may reveal processes that are regarded as trade secrets, or it may reveal previous violations that could expose the companies' officers or employees to liability. The sensitive information revealed by an audit could be protected by the attorney-client privilege or by the work product doctrine. There may also exist a "self evaluation privilege," which may provide qualified immunity to a company's self-audit. Such immunity, however, may yield to disclosure when good cause is shown, especially in the context of litigation. Although the scope and desirability of privilege or confidentiality is the subject of continuing debate, there are steps management may take to preserve or maximize the confidentiality of audit results. Such steps may include: having an attorney conduct the audit, structuring the information flow so confidentiality is maintained, and keeping limited access to audit reports.²⁰ Regardless of the decision as to the structure of the audit, the safe harbor concept can be preserved. If the audit program was conducted under legal privilege and there was a question as to whether a company's audit program or promptness in taking corrective action meets the criteria, EPA could obtain an in camera inspection of the audit report or the audit program by a judge.

Conclusion

Environmental auditing is no longer a trendy management tool, but rather has become an acknowledged part of professional business planning. The benefits of having companies conduct self-audits and voluntarily correct environmental violations must be recognized and accepted. The responsibility for maximizing these benefits rests with EPA. Thus, EPA should fashion an overall regulatory scheme to encourage regulated companies to participate in a self-audit and voluntary corrective action program.

This regulatory scheme, providing a safe harbor to companies, may take several forms. It may allow for a penalty reduction contingent on the companies' due diligence and prompt corrective actions, similar to the program in TSCA. It may provide that prosecutors may not use self-audit information to prove knowledge in a criminal enforcement case, as suggested in the Senate Managers Statement accompanying the 1990 Clean Air Act Amendments. Or it may provide an affirmative defense for companies, allowing them to reduce or eliminate their civil or criminal liability by a showing of good faith or due diligence. Although EPA's policy recognizes the benefits of environmental audits, and expressly encourages regulated companies to conduct self-audits, additional governmental action is needed to remove the chill imposed by enforcement uncertainty, and to affirmatively encourage such programs. Although EPA and Congress are headed in the right direction, their efforts still fall short of what is needed in today's environmental business and enforcement climate.

1. Pub. L. No. 101-549, 104 Stat. 2399 (1990).

2. Statement of Senate Managers, 136 CONG. REC. S16933, 16951 (daily ed. Oct. 27, 1990). The Statement provides that:

Voluntarily initiated environmental audits should be encouraged and, in the course of exercising prosecutorial discretion under the criminal provisions of subsection 113(c), the Administrator and the Attorney General of the United States should, as a general matter, refrain from using information obtained by a person in the course of a voluntarily initiated environmental audit against such person to prove the knowledge element of a violation of this Act if — (1) such person immediately transmitted or caused the transmission of such information to the Administrator or the State air pollution control authorities, as appropriate; (2) such person corrected or caused the correction of such violation as quickly as possible; and (3) in the case of a violation that presented an imminent and substantial endangerment to public health or welfare or the environment, such person immediately eliminated or caused the elimination of such endangerment to assure prompt protection of public health or welfare or the environment.

3. Environmental Auditing Policy Statement, 51 Fed. Reg. 25004 (July 9, 1986), ELR ADMIN. MATERIALS 35001.

4. See R. HALL & D. CASE, ALL ABOUT ENVIRONMENTAL AUDITING (1987).

5. See, e.g., Clean Air Act § 113(c)(4), 42. U.S.C. § 7413(c)(4), ELR STAT. CAA 50; Federal Water Pollution Control Act § 309(c)(1), 33 U.S.C. § 1319(c)(1), ELR STAT. FWPCA 036.

6. Address by Richard Stewart, Environmental Enforcement Conference (Jan. 8, 1991). See ENVTL. POL'Y ALERT, Jan. 23, 1991, at 44.

7. See New Environmental Audit Plan: Staff Adds Flexibility, Keeps Inspections, INSIDE EPA WEEKLY REPORT, Feb. 12, 1982.

8. Environmental Auditing Policy Statement, 51 Fed. Reg. 25004 (July 9, 1986), ELR ADMIN. MATERIALS 35001.

9. Id. at 25007, ELR ADMIN. MATERIALS 35004.

10. See EPA Policy On The Use Of Supplemental Environmental Projects In Enforcement Settlements (Feb. 12, 1991).

11. Id.

12. Id.

13. 26 U.S.C. § 2601-2671, ELR STAT. TSCA 001-056.

14. See TSCA § 5 Enforcement Response Policy (Aug. 5, 1988).

15. Voluntary disclosure programs have been enacted by several other government agencies, including the Federal Aviation Administration (FAA), the Department of Defense, the Internal Revenue Service, and the Securities Exchange Commission. The FAA policy provides that the FAA will not seek a civil penalty where: (1) the certificate holder voluntarily discloses a violation before the FAA learns of it; (2) the violation is not intentional; (3) the violation does not indicate a lack of basic qualification of the certificate holder; (4) the certificate holder has taken immediate corrective action; and (5) the certificate holder agrees to implement remedial measures to preclude recurrence of such violation.

16. CERCLA § 103, 42 U.S.C. § 9603, ELR STAT. CERCLA 011.

17. EPCRA §§ 311-313, 42 U.S.C. §§ 11021-11023, ELR STAT. EPCRA 005.

18. See 48 Fed. Reg. 23552 (May 25, 1983). See also United States v. Carr, 880 F.2d 1550, 19 ELR 21137 (2d Cir. 1989).

19. 43 Fed. Reg. 11110 (Mar. 16, 1978).

20. R. HALL & D. CASE, supra note 5.