25 ELR 10600 | Environmental Law Reporter | copyright © 1995 | All rights reserved

Criminal Enforcement of Environmental Laws: Part III—From Investigation to Sentencing and Beyond

Editor's Summary: In this last of a three-part series, the authors provide a "how-to" guide for responding to an environmental criminal investigation and discuss the ramifications of an environmental criminal conviction. They first describe several basic procedures that the target of a governmental investigation should follow, emphasizing that the first and best line of defense is to have in place an effective environmental self-auditing program to identify pollution threats and to correct minor problems before they become serious. The authors discuss in detail the benefits and risks of instituting a self-auditing program, including how regulators might be able to use the information generated in a routine self-audit against the company. The authors then examine the six basic methods by which the government can obtain information from a corporation during a criminal investigation: Recordkeeping and reporting obligations, informal visits or consensual inspections, items in "plain view," inspections pursuant to administrative warrant procedures, grand jury subpoenas, and search warrants. They stress that the target should be prepared to respond in a manner that is cooperative and does not obstruct the prosecution, while fully preserving its rights to protect privileged information from disclosure. The authors then discuss how, to protect itself, a company should mount its own internal investigation, focusing on issues such as retaining outside versus in-house counsel, conducting employee interviews, handling multiple representation problems, reaching joint defense agreements, protecting privileged information through attorney-client and work product protections, and negotiating global settlements. They caution that in meeting with the prosecution to discuss its view of the case or to persuade it to drop charges, defense counsel must walk a fine line between revealing too little—and thereby failing to apprise the prosecutor of problems with the case—and revealing too much—and thereby eliminating the element of surprise or compromising its ability to assert applicable privileges. The authors then address the Department of Justice's and EPA's respective policies on parallel proceedings—simultaneous criminal and civil actions against the same defendant that arise out of a single set of facts. They point out how differences between the criminal and civil investigatory mechanisms—particularly operation of the Fifth Amendment privilege against self-incrimination—create significant tactical questions for counsel and due process concerns for defendants. They also discuss the means available to mitigate the possible adverse effects of parallel proceedings, including stays and Double Jeopardy constraints.

Turning to the consequences of a criminal conviction—which play an important role in a defendant's decision whether to seek a plea agreement—the authors first discuss the cleanup obligations the entity will likely face. Next, they explain in detail the formulaic process by which criminal sentences are imposed under the U.S. Sentencing Commission's Sentencing Guidelines. The authors then examine the collateral consequences of a criminal conviction, including collateral estoppel effects in subsequent civil litigation, mandatory "blacklisting" under the Federal Water Pollution Control Act and the Clean Air Act regarding future federal contracts, suspension and debarment from government contracts, federal tax consequences, Securities and Exchange Commission disclosure obligations, and limitations on operations imposed by state "bad actor" statutes. A company defending against environmental criminal charges, the authors emphasize, must be aware of these potential collateral effects from the onset of the government's investigation and should immediately look for opportunities to minimize their adverse effects.

Finally, in a concluding note to the entire series, the authors assess the effectiveness of the federal environmental crimes program after almost two decades. They conclude that although the federal government has taken a series of steps to deter the commission of environmental crimes, there has been little apparent effort by any branch of government to think through what the appropriate level of deterrence should be. Moreover, the policy question concerning the program's proper role in achieving environmental objectives efficiently has not yet been answered. The authors conclude that EPA and Justice should determine how their criminal programs could directly support efforts to target the largest environmental risks, even if it results in a lower "body count" of criminal convictions, and that Congress should trust EPA to determine environmental priorities, rather than setting them legislatively.

John F. Cooney, Judson W. Starr, Joseph G. Block, and Thomas J. Kelly Jr. are partners in the Washington, D.C., law firm of Venable, Baetjer, Howard & Civiletti. Mr. Cooney is a former Deputy General Counsel in the Office of Management and Budget, and a former Assistant to the Solicitor General, U.S. Department of Justice. Mr. Starr is a former Chief of the Enviromental Crimes Section, U.S. Department of Justice. Mr. Block is a former Chief of the Environmental Crimes Section, U.S. Department of Justice. Mr. Kelly is a former Assistant U.S. Attorney.

Andrew R. Herrup, Valerie K. Mann, and Gregory Braker are associates at the Washington, D.C., law firm of Venable, Baetjer, Howard & Civiletti.

[25 ELR 10601]

The Conduct of an Environmental Investigation

Background

How should a company respond when the government commences an environmental criminal investigation against it? At that point, all the company knows is that the government has preliminarily determined that a regulatory violation may present a significant risk of environmental damage or may have been committed deliberately. In particular, how does a potential target defend itself when the knowledge element in environmental crimes is so minimal?

There are several basic procedures that a regulated entity that becomes the target of an environmental criminal case should follow. The first and best line of defense is to have an effective environmental self-audit program to identify and resolve problems before they become serious. Environmental auditing is not used as frequently as it should be, however, due in part to governmental reluctance to give formal protection to internal documents generated during the audit process.

Once an adversarial investigation begins, the government has many different means by which it can extract from the regulated entity information relevant to its environmental practices. To protect itself, the company must mount its own internal investigation to obtain a complete understanding of what happened and who was involved and to "reverse engineer" the government's investigation—that is, to determine what facts the prosecutor knows and what legal theories are being pursued. Experienced environmental criminal counsel can significantly contribute to the defense effort through imparting knowledge of the factors that will be relevant to the government's ultimate decision whether to indict and on what charges. Counsel can also assist a company in making the strategic decision whether to disclose to the government the results of the internal investigation in an effort to mitigate the civil regulatory consequences, or to be less forthcoming and preserve that evidence for trial.

In appropriate circumstances, the government may—but will not necessarily—simultaneously prosecute civil and criminal cases involving the same set of facts. If the civil action is delayed pending resolution of the criminal matter, the target must nevertheless conduct its own internal investigation with the constant understanding of the potential regulatory consequences and the impact the criminal resolution will have on future permit conditions and cleanup obligations.

Environmental Self-Audits—The First Line of Defense

The best method of avoiding an environmental investigation in the first instance is to establish a routine self-auditing program to detect pollution threats and correct minor problems before they become significant.

In developing an auditing program, corporate counsel should consider including the following elements:

attention to compliance issues and periodic reporting by line managers;

formal integration of environmental policies, standards, and procedures in the company's operating procedures;

creation of a system for auditing, monitoring, and reporting environmental problems and tracking resolution of compliance problems that are detected;

establishment of effective environmental training programs for corporate employees and managers;

creation of incentives that reward employee compliance efforts;

imposition of disciplinary actions on employees who violate environmental obligations; and

a commitment to continuing evaluation and upgrading of corporate environmental compliance and self-auditing programs.¹

[25 ELR 10602]

Benefits and Risks of Environmental Self-Audits

From the regulated community's perspective, voluntary auditing and disclosure has many benefits. It helps:

verify the environmental compliance of regulated facilities and evaluate the effectiveness of environmental management systems;

detect potential problems and minimize pollution that does occur;

prioritize compliance concerns and provide a method for allocating capital to address environmental problems;

generate company protocols that help facilities better manage themselves and allow headquarters to monitor more effectively the performance of plant operations;

provide a forum for employees to report information concerning violations;

enhance the company's political and public relations; and

anticipate and respond to emergency situations.

From the government's perspective, voluntary auditing helps enforcement authorities use their limited resources more efficiently by encouraging corporate vigilance regarding compliance and identification of violations without government intervention. Self-detection and reporting protects the environment and frees up enforcement resources to tackle the most egregious hidden problems.² And from the public's perspective, voluntary auditing and disclosure can create a cleaner environment and protect public health at less taxpayer expense.

The apparent risks of environmental audits, such as the government's potential use of audit findings against a company allegedly in violation of the law, fall directly on regulated entities. But the public also suffers if auditing is discouraged, insofar as pollution that could otherwise be prevented continues due to the in terrorem threat of prosecution.

Companies must therefore conduct their audit programs with awareness that if the audit discovers violations that must be reported, or if the problems are not corrected immediately, there is a risk that criminal prosecutors may later use the audit documents as a road map for proving liability. Corporate officials have long complained that the risk of increasing their personal and institutional exposure has created disincentives to pursuing proactive audit programs that would clearly protect the environment.

Applicability of Common-Law Protections for Information Disclosed in Self-Audits

There are substantial doubts whether common-law doctrines such as the attorney-client, work product, or self-evaluation privileges protect documents generated in routine environmental audits from disclosure.³

The attorney-client privilege is likely inapplicable, because it protects only confidential communications between a lawyer and client that occur in the course of providing legal advice.⁴ In order to extend the attorney-client privilege to routine audits, a corporate counsel must specifically request each audit, the auditors must not communicate extensively with employees or regulators outside counsel's presence, auditors must address all written materials to counsel (marked as privileged), counsel must have direct control over the final audit report, and counsel must actually expend a significant amount of time participating in the auditing process and record that time in some fashion.⁵ However, it is environmental consultants who often carry out many aspects of these audits; corporate counsel usually do not actively participate, because the expense and delay from their involvement are not cost-effective.⁶ The confidentiality requirement is difficult to satisfy when courts view the consultants as invasive third parties, rather than as agents of the attorney. Even when attorneys are involved, courts may well conclude that a routine audit was intended to provide unprivileged "business" advice, rather than "legal" [25 ELR 10603] advice.⁷ Case law examining application of the attorney-client privilege to routine environmental audits is sparse and inconsistent.⁸ Furthermore, decisions considering the privilege in the context of other environmental compliance activities suggest that it may not protect audit materials.⁹

Similarly, there is little prospect of protecting audit materials under the common-law self-evaluative privilege. To qualify for protection under this privilege, the party asserting it must satisfy all of the following criteria:

the information must result from a critical self-analysis undertaken by the party seeking protection;

the public must have a strong interest in preserving the free flow of the type of information sought;

the information must be of a type whose flow would be curtailed if discovery were allowed; and

the information must be prepared with the expectation that it would be kept confidential and must, in fact, be kept confidential.¹⁰

With one recent exception,¹¹ courts have refused to apply this qualified privilege to routine environmental audits, even in litigation between private parties.¹² Outside the environmental area, decisions have uniformly held that the self-evaluation privilege applies only in private actions and not when the government seeks the material.¹³ Thus, the doctrine would not seem to apply when the U.S. Environmental Protection Agency (EPA) or the U.S. Department of Justice (Justice) seeks environmental audit material through grand jury subpoenas, or the facts disclosed by those studies through regulatory reporting powers.

Finally, by definition, the work product doctrine cannot cover material produced in a routine environmental audit, as opposed to a specific audit, because the privilege protects only materials produced by or for an attorney "in anticipation of litigation."¹⁴

Steps Toward a Federal Policy on Self-Audits

Because of the enforcement risks associated with voluntary self-auditing, regulated industries have long argued that corrective federal policies are needed in order to foster environmentally beneficial and cost-effective audit programs, especially by small- to medium-sized companies. The regulated community has sought enforceable guarantees that audit documents will not be used against the disclosing company or individuals under any circumstances.

Ex ante, federal policy should encourage comprehensive corporate self-audits, because they directly protect the environment by preventing pollution. After a problem has occurred, however, prosecutors want to use audit documents to lessen the burden of proving their case, on both the fact of violation and knowledge. For over a decade, the federal policy process has been unable to resolve the difference in the before-the-fact and after-the-fact perspectives. EPA and Justice have hedged their bets by issuing policy statements that recognize the benefits of environmental audits while fully preserving prosecutors' ability to obtain and use these materials when necessary.

EPA's and Justice's first efforts to devise policies to encourage routine audits did not achieve their goals. The agencies failed to create legally enforceable rights to protect audit materials from disclosure or otherwise guarantee that companies would not be prosecuted or that penalties would be reduced for violations discovered and disclosed as a result of routine environmental audits.

EPA Policy. EPA initially published a policy statement in 1986 that identified the three critical problems an environmental audit presents, but did not resolve them satisfactorily.¹⁵

Legal effect. EPA issued the policy as agency guidance, rather than as a regulation that would be legally enforceable against the Agency in court.

Mitigation of punishment. EPA stated that it would consider good-faith efforts by regulated companies to identify and correct environmental violations, but the language it used was equivocal: "When regulated entities take reasonable precautions to avoid noncompliance, expeditiously correct underlying environmental problems discovered through audits or other means, and implement measures to prevent their recurrence, EPA may exercise its discretion to consider such actions. . . ."¹⁶

Subsequent use in criminal prosecution. EPA stated that it would not "routinely" request environmental audit reports for use in subsequent enforcement actions. But the Agency fully preserved its discretion to obtain and use a company's audit reports against it, including in a subsequent criminal investigation.¹⁷

[25 ELR 10604]

Further, the guidance required companies to cooperate fully with the government and voluntarily disclose their audit materials in order to qualify for leniency and forbearance of subsequent use.¹⁸ Such disclosure, however, might result in the disclosing entity's waiving its common-law privileges for purposes of private damage actions.¹⁹

Despite these problems, the 1986 audit policy was a useful step forward and served to frame the debate on this issue. Many companies—especially large firms—established audit policies for their own corporate reasons. Some of these companies have taken comfort in the guidance in discovering and reporting violations to regulators. Moreover, EPA applied the policy responsibly. The Agency generally honored its pledge not to initiate a criminal investigation of a company that voluntarily disclosed all materials related to a violation. It did, however, seek substantial civil penalties based on such disclosures.²⁰

In 1993, several states began to respond to the regulated community's requests for greater protection for audit material.²¹ To defuse these developments, EPA clarified its policy on audits in January 1994.²² The update was somewhat more forthcoming than the Agency's 1986 guidance. EPA stated that self-auditing and full disclosure "should be considered as mitigating factors" and that violations "fully and promptly remedied as part of a corporation's systematic and comprehensive self-evaluation program generally [would] not be a candidate for the expenditure of scarce criminal investigative resources."²³ This articulation still reserved substantial discretion to EPA, however, and ultimately did not serve to head off the movement for greater certainty. As the momentum for an audit privilege built in the states, EPA published a restatement of its principles on auditing in June 1994²⁴ and commenced a series of meetings in July 1994²⁵ to determine how it should respond to concerns regarding its existing policy.

In March 1995, EPA issued an interim final revision of its audit policy that superseded the 1986 version and attempted to provide—without creating safe harbors that would hamstring enforcement—greater assurances to companies that wished to maintain effective self-audit programs.²⁶ The latest policy applies to environmental violations that are uncovered during self-evaluation, voluntarily disclosed, and promptly corrected, provided that the company complies with certain enumerated conditions.²⁷ In particular, the violator must commit to rectify any harms, adopt measures to prevent future violations, and cooperate with the regulator.²⁸ In addition, EPA may require the violator to enter into a written agreement or consent decree to assure that the conditions are satisfied.²⁹

Further, the policy provides that EPA will not refer a self-reported violation for criminal prosecution against the company unless the investigation shows a corporate practice of concealing or condoning environmental violations, high-level corporate involvement, blindness to the violation, or serious harm to human health or the environment.³⁰

EPA's latest action is a welcome step forward because it adds real substance to the outline adopted in 1986 and commits the Agency to treating voluntary disclosures fairly. However, although the "body language" encourages audit programs, the text of the revised policy fails to resolve any of the major policy issues EPA identified in its earlier policy:

Legal effect. Like the 1986 policy, the 1995 statement is guidance and thus is unenforceable against EPA in court. Further, the 1995 guidance does not even have the same standing within the Agency as the 1986 policy it replaced. The 1995 version was signed only by the Assistant Administrator for Enforcement; the Administrator issued the 1986 version. Finally, the statement itself provides that enforcement officials are free to "act at variance with the guidance" in specific cases.³¹ It therefore fails to address the regulated community's concerns that reporting firms will always be exposed to demands for audit documents.

Mitigation of punishment. The 1995 policy provides that for voluntary disclosures, EPA will eliminate or substantially reduce (up to 75 percent) the gravity component of the civil penalty, unless the violation constitutes "criminal conduct by the regulated [25 ELR 10605] entity or any of its employees."³² This is a significant improvement over the former policy. This incentive, however, "does not apply to criminal acts of individuals managers or employers."³³ Thus, the 1995 policy does not protect individuals from prosecution under any circumstances. Nor does it mitigate the economic benefit/unjust enrichment component of civil penalties.³⁴

Subsequent use in criminal prosecutions. The 1995 policy provides that EPA will not request an environmental audit report unless a criminal or civil investigation is already underway based on information derived independently of the audit. This concession is not significant, however, because Justice retains full discretion to initiate a criminal prosecution when a violation is brought to its attention.

In sum, although the 1995 policy is an improvement on the former version, EPA's insistence on preserving its enforcement discretion through multiple exceptions to the guidelines guarantees that the issue will continue to simmer.

Justice Policy. In July 1991, Justice issued the first comprehensive guidance on its policy toward prosecution in the case of voluntary disclosure of environmental problems.³⁵ The guidance provides that it is Justice's policy "to encourage self-auditing, self-policing and voluntary disclosure of environmental violations by the regulated community by indicating that these activities are viewed as mitigating factors in the Department's exercise of criminal environmental enforcement discretion."³⁶

The guidelines detail, through extensive practical examples, factors that mitigate in a company's favor, such as voluntary disclosure and full cooperation. But the policy fails to offer clear guidance on when these factors will lead to a decision not to prosecute criminally, or on how much they can mitigate the charges or punishments Justice will seek.³⁷

The principal factors Justice will consider are:

whether the person "made voluntary, timely and complete disclosure" and whether the disclosure "substantially aided the government's investigatory process";

whether the person gave full and prompt cooperation and made all relevant information available, "including the complete results of any internal or external investigation and the names of all potential witnesses"; and

"the existence and size of any regularized, intensive, and comprehensive environmental compliance program," including an environmental compliance audit, which demonstrates a strong institutional commitment to environmental compliance.³⁸

Other relevant factors include the persuasiveness of the noncompliance, effective internal disciplinary programs for environmental violations, and the promptness and completeness of actions taken to address the violation and remedy the environmental harm.³⁹

Justice's enforcement policy has several problems. It reserves Justice's discretion to use audit documents when necessary to prove its case, regardless of whether the disclosure is voluntary and complete. The policy is not binding on the states, which have independent enforcement authority in most cases. Moreover, to the extent that it provides assurances, the policy is simply a guidance document, which is not legally binding against the agency.⁴⁰ In addition, with the delegation of greater enforcement discretion to the U.S. Attorneys, the policy against seeking access to audit documents except in extraordinary cases will no longer be centrally directed.⁴¹ Finally, concerns about the potential for criminal liability have grown with the expansion of the [25 ELR 10606] federal enforcement program and the practical elimination of a meaningful knowledge element for criminal offenses.⁴²

In sum, current EPA and Justice enforcement policies require entities that self-audit and report to place an enormous amount of trust in investigators and prosecutors. These officials retain broad discretion to determine if compliance efforts have been adequate and may seek to bypass the stated policy as they see fit. Further, the reporting party has no recourse to judicial review concerning the policies' implementation.

Efforts to Adopt a Statutory Audit Privilege

While federal agencies have reacted grudgingly on the self-audit issue, the states have plunged ahead. Since Oregon's passage of an audit privilege law in July 1993, as of this writing, at least 14 states have enacted laws providing a qualified privilege for environmental audits.⁴³ At least 20 other states are considering enacting such laws.⁴⁴

The audit privilege varies somewhat from state to state. In general,⁴⁵ it provides a qualified privilege that applies only when the audit was not required by law, the audit was not fraudulent, the company has responded properly to any noncompliance it has discovered as a result of the audit, and the company cooperates fully with enforcement personnel. In civil proceedings, the privilege is usually absolute. In criminal proceedings, audit material is typically available to a prosecutor who demonstrates a compelling need for the information through a showing similar to that necessary to obtain access to attorney work product material.⁴⁶ The privilege protects from disclosure most materials related to the audit, not just the final report. In most instances, this includes all analyses of the primary report and any documentation implementing the report.

The state legislation has created a substantial political problem for EPA, in terms of its ability to resist such legislation at the federal level and its enforcement of current problems. For states to which EPA has delegated authority to administer and enforce a federal environmental program, adoption of a self-audit privilege arguably makes the state program less effective than the federal counterpart, and thus provides a possible basis for revoking state authorization.⁴⁷ However, the political consequence for EPA of revoking state program authorization—not to mention the strain on its resources—could be severe. Accordingly, EPA has followed a "jawboning" strategy, announcing its opposition to the privilege approach and its intention to review actual enforcement decisions carefully in states with privilege laws.⁴⁸ But it has yet to initiate the revocation process against any state. The Agency has also threatened to "overfile" by initiating its own enforcement action when a state forgoes enforcement against a violator that has invoked a state statutory audit privilege. This threat is largely hollow, however, given EPA's limited enforcement resources, and is increasingly unlikely to be implemented as more states adopt audit privileges.

As of this writing, the 104th Congress is also considering legislation that would provide protection for environmental audit materials and mitigation of penalties for voluntarily disclosed violations. In the House, H.R. 1047,⁴⁹ introduced by Rep. Joel Hefley (R-Colo.), closely tracks the Colorado statute.⁵⁰ It would provide a qualified privilege that would presumptively protect audit materials and provide substantial immunity for voluntary disclosures of violations. In the Senate, S 582,⁵¹ introduced by Sens. Mark Hatfield (R-Or.) and Hank Brown (R-Colo.), would offer an audit privilege similar to that of H.R. 1047, as well as substantial immunity to companies that voluntarily disclose violations discovered as a result of routine audits.

The Future of the Audit Privilege

The first principle of environmental enforcement should be how society can obtain the maximum reduction in pollution with the resources it has available. Systematic corporate self-audits could play an important role in that equation. The question is how can an audit policy and enforcement program work together to maximize environmental compliance and minimize actual pollution discharges? Such a policy should neither relax ongoing regulatory compliance and reporting obligations nor provide total immunity for violations reported.

Audits are one field which the enforcers' desire to make certain that marginal violations do not escape enforcement may well be interfering with progress in the large universe of firms trying to comply with the law. In practice, EPA and Justice rarely rely on environmental audit materials to prosecute a criminal matter, except in extreme cases. The underlying facts surrounding a violation are discoverable, regardless of the audit, and all applicable compliance and reporting obligations remain in full force. In most cases, access to audit materials simply reduces the burden on enforcement staff and presents a useful checklist to make certain that the agency has not missed any available proof.

Under these circumstances, EPA and Justice policy officials need to ask themselves how much of an administrative burden would be involved in finally agreeing to forego access to self-audit materials in marginal cases. They need [25 ELR 10607] to compare the effect of reduced efficiency in those cases against the likely environmental protection benefits if more companies are encouraged to pursue routine and secure audit practices.

Governmental Authority to Obtain Corporate Information During an Investigation

Despite the best intentions and the most comprehensive self-audit programs, environmental violations may occur at even the best-managed facilities. Once a criminal investigation of a violation is initiated, there are six basic methods by which the government can obtain information from a corporation: (1) recordkeeping and reporting obligations; (2) informal visits or consensual inspections; (3) items in "plain view"; (4) inspections pursuant to administrative warrant procedures; (5) grand jury subpoenas; and (6) search warrants. Each mechanism involves applying familiar principles of probable cause or exceptions to the warrant requirement specifically in the environmental context. The company under investigation should be prepared to respond in a manner that is cooperative and does not obstruct the prosecution, while simultaneously fully preserving its rights to protect privileged information from disclosure.

Recordkeeping and Reporting Obligations

Many environmental statutes require regulated entities to maintain records and produce them for inspection.⁵² These recordkeeping and production obligations have been upheld against due process challenges,⁵³ and are enforceable by civil and criminal penalties.⁵⁴ In addition, several statutes, including the Clean Air Act (CAA), contain provisions that allow EPA to demand production of information necessary to fulfilling its regulatory functions.⁵⁵ This authority may be used to request information from a single company or on an industrywide basis, as a prelude to a broad investigation.

Informal Visits or Consensual Inspections

An EPA inspector normally will not secure a warrant prior to visiting a site to make an inspection. Only in exceptional circumstances—such as when EPA considers a surprise inspection crucial to its enforcement goals—will the inspection attempt to obtain a warrant before seeking the company's consent to an inspection. Instead, the inspector will initially present his or her credentials and seek the consent of the owner or the person in charge. Consensual searches do not violate the Fourth Amendment's prohibition against unreasonable searches.⁵⁶ By eliminating the need to prepare papers showing probable cause, this approach conserves EPA's administrative resources. If consent is refused, then the inspector will seek an administrative warrant in court.⁵⁷

Policy developments at EPA over the past several years may make these administrative inspections more intimidating to regulated entities than they used to be. Since approximately 1990, EPA policy has increasingly emphasized a multimedia approach that analyzes a facility's overall pollution impact rather than focusing separately and sequentially on air, water, and hazardous waste emissions as if they had no relation to one other. Further, EPA and the states are attempting to minimize the burden they impose on regulated entities by cross-training personnel to conduct inspections under multiple environmental statutes. In combination, these factors may mean that a consensual administrative inspection will turn into an expansive multimedia review of a plant's entire operations, which may trigger unwarranted alarm in operating personnel who had become accustomed to a narrower, medium-specific review.

"Plain View" Searches

Under the plain view doctrine,⁵⁸ EPA need not obtain a warrant to inspect things that are observable to the public or the naked eye of an investigator who has been lawfully admitted onto a facility to conduct an inspection.⁵⁹ For example, in Dow Chemical Co. v. United States,⁶⁰ the U.S. Supreme Court held that EPA's taking of aerial photographs of a company's premises without a warrant was lawful. The company had denied EPA's request for an on-site inspection of its 2,000-acre chemical plant. Rather than obtain an [25 ELR 10608] administrative warrant, EPA hired a photographer to take pictures of the plant from various altitudes. The Supreme Court held that no warrant was required, because the aerial observation involved no physical entry and the company had no reasonable expectation of privacy in the photographed area.⁶¹

Administrative Inspections

Each major federal environmental statute provides for administrative inspections of regulated facilities.⁶² These provisions give EPA a cost-effective means of auditing the accuracy of required reports and following up on reports of violations.⁶³

Courts have repeatedly upheld against statutory and constitutional challenges the Agency's broad authority to conduct administrative inspections under these provisions. For example, in In re An Order Pursuant to Section 3013(d) RCRA, 42 U.S.C. § 6934(d),⁶⁴ the court upheld the constitutionality of the Resource Conservation and Recovery Act's (RCRA's) administrative inspection provision against a Fourth Amendment challenge. The court rejected the defendant's motion to quash an ex parte administrative warrant, noting Congress' recognition of the "'clear danger to the health and safety of the population and to the quality of the environment'" hazardous wastes pose.⁶⁵ And in National-Standard Co. v. Adamkus,⁶⁶ the court rejected an argument that under RCRA § 3007(a), EPA could only enter places where it knew hazardous waste was being or had been stored. The court held that"'the main purpose of an inspection and sampling visit is to detect the presence of hazardous wastes. If EPA could not inspect an area unless it knew hazardous wastes were stored there, EPA would be rendered effectively powerless.'"⁶⁷

The scope of EPA's administrative inspection authority is defined by Marshall v. Barlow's, Inc.,⁶⁸ which involved an analogous administrative inspection provision under § 8(a) of the Occupational Safety and Health Act.⁶⁹ There, the Supreme Court noted that administrative inspections are "searches" for Fourth Amendment purposes and that the Fourth Amendment applies to searches of commercial buildings.⁷⁰ An administrative search warrant may therefore issue only on a showing of "probable cause." However, "probable cause" for purposes of issuing such a warrant substantially differs from that needed to obtain a criminal search warrant. Under Barlow's, probable cause for an administrative search warrant may be based on either specific evidence of an existing violation or a showing that the inspection is being conducted pursuant to a neutral enforcement scheme.⁷¹ According to EPA guidance, an employee's complaint or a competitor's tip may provide "specific evidence" constituting probable cause.⁷² "Neutral scheme" probable cause may be established by a showing that the premises are being inspected pursuant to a regularly imposed schedule.⁷³ EPA has prepared descriptions of the particular neutral administrative schemes under which inspections pursuant to each of its programs are to be conducted.⁷⁴

The warrant requirement established in Barlow's is not absolute. The Supreme Court has held that in emergencies and in truly "exigent circumstances," the Fourth Amendment does not require a warrant for an entry and administrative search.⁷⁵ According to EPA guidance, emergency situations include those involving potential imminent health hazards or the potential for the destruction or dissipation of evidence.⁷⁶ No appellate decision has yet construed the scope of this emergency/exigent circumstances exception in the environmental law context.

Grand Jury Subpoenas

A company may first learn that its conduct is under criminal investigation when the government serves it a grand jury subpoena for the production of documents. Environmental prosecutors frequently issue subpoenas at the early stages of an investigation because the breadth of the grand jury's power enables them to obtain a wide range of books and records, including financial data and internal memoranda. The grand jury power complements, and does not supersede, EPA's administrative authority to demand production of documents.⁷⁷

The rules governing a subpoena duces tecum are the same in the environmental area as elsewhere. The subpoena must be both reasonable and specific.⁷⁸ A subpoena that designates the types of documents with reasonable particularity is adequate. Objections to subpoenas may be raised prior to compliance through a motion to quash. Courts, however, accord environmental prosecutors broad discretion in fashioning subpoenas. They will seldom grant a motion to quash in the face of an assertion by the government that the material sought is reasonably related to a matter under investigation. At best, the court will narrow the scope of a [25 ELR 10609] subpoena that is unreasonable or oppressive under the power granted by Fed. R. Crim. P. 17(c).

There are numerous grounds for moving to quash to a subpoena in the environmental area. Objections may challenge relevance,⁷⁹ or the fact that the subpoena requests documents that cover an unreasonable period of time.⁸⁰ A subpoena also may be challenged when it calls for privileged materials, including those covered by the attorney-client privilege or work product doctrine.⁸¹ When documents are sought from individuals, the Fifth Amendment privilege against self-incrimination may be invoked.⁸² Finally, objections may be raised if the prosecutor uses the grand jury after indictment for the sole purpose of gathering and preparing evidence for trial.⁸³

In responding to a subpoena, the company should designate one responsible officer to ensure that the response will be accurate and timely.⁸⁴ The officer should contact in-house counsel immediately, and counsel should initiate a careful review of the request to determine the focus of the investigation. The government is not obligated to—and, if asked, will not—reveal the focus or scope of its investigation. However, analysis of the request may reveal the direction of the investigation and enable the company to determine what triggered the government's interest. It may also help the company decide which of its employees to interview. If the company determines that it is the target of the investigation, it should immediately hire experienced outside counsel to defend the investigation.

Counsel should then meet with the assigned prosecutor to discuss the investigation. This meeting can provide an opportunity for counsel to establish a working relationship with the prosecutor and the investigators, and to demonstrate the corporation's willingness to be forthcoming with information. Counsel can also attempt, often successfully, to narrow the scope of the subpoena and obtain additional time to comply.

Next, counsel should meet with senior management and those directly involved with the division, facility, activity, or program described in the subpoena to identify all sources of documents responsive to the government's demand and the places in which such documents are likely to be located. The company should circulate a memorandum formally designating the officer responsible for collecting responsive documents and assigning specific employees the task of searching for and delivering these documents. The memorandum should also establish a deadline for completing the document search and designate a location to which responsive documents are to be delivered. In addition, the memorandum should clearly state that no requested documents are to be destroyed or sent to records retention, and that the government will likely perceive failure to produce responsive documents—whether intentional or not—as obstruction of justice.

After compiling all potentially responsive documents, counsel and the designated official should review each file to identify documents that must be submitted. Discovering responsive documents after production has been made is, at best, embarrassing and, at worst, can lead to obstruction of justice charges. If a large volume of material is involved, the responsive documents should be numbered and a computer database created to identify each document by number, author, recipient, date, and summary of content. The document database is particularly useful during an ongoing investigation in which the government serves more than one subpoena.

All responsive documents should be closely reviewed to determine whether they contain privileged communications or attorney work product. The protected documents should not be produced; rather, a "Vaughn" index should be submitted that identifies and describes the documents withheld, without revealing their contents.⁸⁵

If subpoenaed documents include confidential trade secrets, the company should request an agreement with the government to avoid disclosure of such material to a competitor. These documents should be clearly stamped and identified as to their sensitive nature. Finally, no document should be produced before it has been copied.⁸⁶ Counsel should retain a complete set of all documents produced.

From counsel's perspective, document production provides the opportunity to learn the nuts and bolts of the company's operations, its chain of command, and where the government's case may be strongest. Careful review of the documents will expose some of the company's vulnerabilities and allow counsel to target the internal investigation⁸⁷ and defense effort. Thus, the process of responding to the subpoena may actually provide a rare opportunity to catch up with, and then move ahead of, the government in defending the case.

Search Warrants

A search warrant provides no advance notice to the corporation or facility staff that their environmental practices are under criminal investigation.⁸⁸ Thus, it prevents the [25 ELR 10610] destruction of evidence. Unlike subpoenas for documents, search warrants do not allow the party being searched to assert privileges creatively to protect materials. The confusion that executing a search warrant causes also allows the government better access to interview flustered, unprepared employees.

As soon as agents arrive to execute a search warrant, they will provide a copy to the facility manager. The company should immediately contact counsel. Either the facility manager or counsel should attempt to secure the affidavit supporting the warrant, either by asking the agents for a copy or, if the agents refuse, by obtaining a copy from the court. In federal investigations, however, affidavits may be filed under seal and often may not be released if the government can convince the magistrate to keep the affidavit confidential.

There are two general rules regarding search warrants in environmental criminal law: (1) the allegations contained in the search warrant usually do not form the basis for the criminal charges contained in the indictment; and (2) once on the property, the government always finds some violations. Therefore, to be effective, counsel hired to defend a company needs to be experienced in what to do and how to react. Once the warrant is served, the company cannot afford to have counsel who is still on the learning curve.

Counsel should copy and carefully review the warrant itself to determine that it is specific in describing the location to be searched and the inspection functions to be performed. The company may lawfully deny government agents access to areas not specifically set forth in the warrant.⁸⁹ Counsel or a designated corporate response coordinator should establish with government agents and company employees that all inquiries arising during the inspection be directed to him or her. The designated official should escort the agents at all times and note whether the agents confine their search to the areas defined in the warrant.

A unique feature of environmental cases is that much of the government's case is driven by what is found in the soil and water on the company's property. For example, in order to prove the illegal disposal of a hazardous waste under RCRA, the government will try to demonstrate that constituents of hazardous wastes that should have been disposed of at a permitted facility are found in the soil on the entity's property. Items seized will often include soil and water samples, as well as documents and other more common forms of evidence. In order to represent the company adequately, counsel needs to record the number of samples and location from which they were taken, and if possible, to videotape the sampling. If videotaping is impractical, a designated company official or an environmental consultant should follow the government agents to photograph or otherwise record the location. Government agents may refuse to allow company representatives to follow them as they search, but most agents will allow observation from a distance.

In addition, counsel for the corporation should demand: (1) a receipt describing the samples obtained by government agents; (2) "split samples"—a portion of each sample equal in volume or weight to the portion retained by the government agents; and (3) a description of the tests that the government agents intend to perform on the samples. Although EPA has taken the position that providing split samples is not required during a criminal search, its policy is to furnish such samples.⁹⁰

The company's split sample should be sent to a qualified laboratory and subjected to the same tests that the government intends to perform. Analysis of these samples may show whether the government can establish that a substance is a "hazardous waste" or "pollutant" under the relevant laws. Additionally, if the two sets of test results differ substantially, the company may be able to contest the accuracy of the government's evidence. Because the sample's age may affect the testing, the material should be obtained on the spot or in a timely fashion, so that the company's testing can yield accurate results. If the agents refuse to provide the company with split samples, counsel should contact the Assistant U.S. Attorney whose name appears on the search warrant affidavit and request the splits. If that request is refused, the company should request a hearing before the magistrate or emergency judge.⁹¹

As soon as possible—preferably during execution of the search warrant—the company should retain an environmental consultant to assist counsel. An environmental expert can identify a laboratory to analyze the split samples and can aid in determining the locations from which the samples were obtained. He or she can help explain the facility's technical processes and identify the various waste streams involved. The consultant can also assess whether the facility is in compliance with applicable regulations. With his or her specialized knowledge of environmental issues, the consultant may, by viewing the government search, be able to determine what the prosecutor is looking for. A consultant may also facilitate a response to any regulatory deficiencies detected during the search.

In executing the search warrant, government agents will attempt to interview company employees. Most employees mistakenly believe that it is a crime to refuse to be interviewed by a government agent. One of counsel's most valuable functions during a search is to inform employees of their rights. Employees may lawfully refuse to speak to government agents, agree to be interviewed by the agents, or agree to be interviewed with the assistance of counsel. Government agents rarely explain these options to employees and, given a choice, most employees will opt for representation of counsel.

Counsel should also caution employees not to volunteer information to the investigators, while reminding them not to interfere with the search or otherwise take any actions [25 ELR 10611] that might obstruct justice, e.g., hiding or destroying documents. If the government interviews employees, counsel should debrief them promptly to understand the government's areas of interest and legal theories. Finally, while the warrant is being executed, counsel should identify privileged attorney-client communications or materials potentially covered by the government's audit policy.

Conducting an Internal Investigation

Once a company learns that the government has initiated a criminal investigation of its environmental compliance, management will often seek an independent examination by outside counsel, as well as consultants retained by counsel, to define the company's potential legal exposure and identify potential remediation options. [FN92] The conduct of internal environmental investigations is similar in many respects to those in other white-collar areas, such as securities and antitrust. The principal difference is that at the end of the review, counsel must advise the company as to how forthcoming it should be in disclosing the results to EPA, multiple state regulatory entities, and Justice—all of whom may already have access to continuing, mandatory environmental reports the company has submitted.

The Role of Counsel

Experienced environmental counsel can add significant value to the internal investigatory process by understanding the factors relevant to Justice's decision whether to seek an indictment. By "reverse engineering" the government's investigation, counsel can assess whether Justice is likely to decide to prosecute and what information or arguments might affect that decision. Counsel can also judge whether extensive disclosure of the internal review results might reduce the charges filed or turn the investigation toward a civil resolution. Moreover, counsel may be able to determine the optimal method of maintaining a viable criminal defense, while avoiding alienating the regulatory agencies that will continue to exercise material influence over the economic fortunes of the facilities involved. Finally, with an understanding of the nuances of criminal and civil enforcement and the tradeoff in the prosecutor's mind between criminal conviction and environmental cleanup, counsel may be able to engineer a "global settlement" that comprehensively resolves the company's civil and criminal liability. [FN93]

If counsel concludes that the case is likely to be resolved civilly, the company will want to be more cooperative with the government. Counsel will try to use the fact of cooperation to shift the discussion to the kind of cleanup that will be necessary; maximize the amount of (tax-deductible) money spent on actual remedial work, rather than the deadweight loss of a fine; attempt to preserve operational flexibility for the facility; and seek favorable exercise of regulatory discretion on such issues as the levels to which pollution must be cleaned up, compliance schedule, and the terms of new discharge permits. On the other hand, if counsel concludes that the case is likely to be prosecuted criminally, the company will want to be less forthcoming and operate more in the traditional mold of a criminal target. [FN94]

* Retaining Outside Counsel. Early in the course of organizing the internal investigation, the company will have to decide whether to hire outside counsel or rely on its own attorneys to conduct the review. In-house counsel have knowledge about the company's history, structure, and employees that is invaluable in identifying sources of information and assessing allegations. On the other hand, outside counsel usually have greater expertise in criminal matters and a higher level of detachment and objectivity. Further, for purposes of negotiation, prosecutors are more likely to recognize the detachment of outsiders and discount the independence and validity of the insiders' analyses.

The governing principle in most white-collar criminal investigations is that the company's general counsel should stay as far away as possible from the actual conduct of the investigation. This distance minimizes the risk that personal and political relations within the company could affect the results. Further, the review may conclude that individuals within the company are personally responsible for the violation at issue. This task—which is never easy—is nonetheless more likely to be performed dispassionately, and its results more readily accepted as valid, when impartial outsiders have drawn the adverse conclusions. Finally, retaining outside counsel minimizes in-house counsel's personal exposure if tough calls are required during the investigation about whether information must be disclosed to the prosecutor.

When there is evidence of a continuing environmental violation, however, in- house counsel may need to become personally involved in the conduct of the investigation. In-house counsel's greater familiarity with the company's operations and its personnel can be a significant asset in identifying problems, defining the business and regulatory risks, devising cost-effective remedial options, and shaping the corporate business response.

Conducting Employee Interviews

One of the most important parts of an internal investigation is to determine why the government has targeted the company, by interviewing the employees whom the government has questioned and by talking to other employees with knowledge of the facts. Thus, after deciding whether to use in-house or outside counsel, the company's first step in conducting the internal investigation should be for management to issue a letter to employees authorizing the internal investigation and informing them that they should cooperate with investigating counsel.

When conducting employee interviews, counsel should observe the following procedures:

n92 See generally Starr, supra note 88.

n93 Negotiating global settlements is discussed more fully infra.

n94 Outside counsel may well assume the worst about the governemnt's intentions. However, in-house counsel, who bear the responsibility for both regulatory affairs and criminal matters, will likely hesitate to conclude prematurely that prosecution is inevitable because of greater sensitivity toward the operational consequences of taking an adverse posture toward the government.

The attorney should explain the purpose of the investigation and request the employee's cooperation. [25 ELR 10612] The interview must be voluntary. The employee should be informed that he or she need not agree to an interview and may stop it at any time.

The employee should be informed that the interview is presumptively confidential and privileged.

The employee should be informed that the attorney conducting the interview represents the company, not the individual employee, and that the employee has the right to hire separate counsel. The employee should be clearly advised that the company may assert or waive the attorney-client privilege with respect to the interview's contents. The employee should acknowledge his or her understanding that the company has the right to decide to disclose the contents of the interview to senior managers or the government.

The attorney should not ask the employee to review or sign any memorandum of the interview, nor should the interview be tape recorded. If the matter proceeds to trial, the government may obtain all statements of testifying witnesses. The employee's signature creates a risk that the memorandum constitutes a statement that the employee witness has adopted.

Counsel should terminate the interview if it appears that the employee's personal interests could be adverse to the company's interests, e.g., the employee admits to document destruction or bypassing pollution controls.

Issues Concerning Multiple Representation. The conduct of individual officers and employees is always an issue in the investigation of a company. Hence, one of the most difficult questions in defending an investigation is whether these individuals should be represented by their own counsel.⁹⁵ Potential conflicts of interest arise frequently during investigations and run in both directions. For example, if the facts indicate that the employee has criminal exposure, the corporation may want to distance itself from that person. On the other hand, the employee may want to cooperate with the government and give testimony against other workers or supervisors who directed the employee's activities. In each instance, an attorney would have a conflict of interest in representing two parties with opposing interests. Therefore, separate counsel for the individual would be required.⁹⁶

The need for separate representation may be apparent at the outset or may emerge only after the facts are further developed. In some cases, it may be in the corporation's best interests to provide separate counsel for employees at the company's expense, even if separate counsel is not ethically required. For example, the government may object to corporate counsel's presence at an employee's interview and may assert the potential for conflict of interest; this objection cannot be raised if the witness is separately represented. Further, the government is less likely to suspect a corporation of obstructing the investigation if an employee is separately represented. And counsel for the employee may, consistent with its exclusive ethical obligations to the employee, be able to provide the company with information about the direction of the government's investigation. Absent an actual conflict of interest between employees, the same lawyer may be able to represent multiple workers with a common interest.⁹⁷

Once an employee is represented by independent counsel, corporate counsel should consider whether to enter into a joint defense agreement with the employee.

Joint Defense Agreements. Many environmental investigations cover activities that involve multiple corporations or multiple individuals. Often, each of the persons under scrutiny can gain from sharing information with the other potential targets through a joint defense agreement. This arrangement allows attorneys for the various parties to exchange information without waiving the attorney-client or work product privileges. Pooling of information can allow defense counsel to extend their information-gathering network, obtain factual and legal suggestions, and take advantage of each others' expertise, at considerable cost and time savings.

Courts have long recognized the joint defense privilege contained in agreements among groups of defendants or subjects of investigations.⁹⁸ Certain core elements are required to maintain the privileged status of the information exchanged: (1) the parties must share a common interest; (2) the information must have been exchanged in order to facilitate the parties' representation; and (3) the materials must still qualify as confidential at the time one attorney shares them with the group.⁹⁹ Although the agreement need not be written to be legally valid, a written arrangement clarifies each party's objectives, reduces the chances of conflicts of interest, and better protects against governmental challenges to the privilege.

All joint defense agreements must be tailored to the facts of a particular investigation and should cover both the attorneys and the clients. The agreement should include all materials shared, acknowledge that each lawyer's obligations to his or her client may prevent the sharing of all information, and provide for procedures for withdrawing from the agreement and returning documents. The agreement should extend to debriefing memoranda of witness interviews and work product generated during the investigation, and allow no disclosure of any covered documents to the government by one party without the permission of all other parties. Confidential protection should continue to apply to any material previously provided to a member who later withdraws. Finally, the agreement should preserve the right of cross-examination at trial if one of the parties later becomes a defendant and the others become witnesses against that party.¹⁰⁰

[25 ELR 10613]

Protecting Privileged Information

Issues of attorney-client privilege and work product protection arise repeatedly in the course of environmental investigations. For example, a subpoena may seek production of internal investigative reports or documents generated by an expert a company retains after a governmental search. Privilege issues are particularly important with respect to environmental consultants. Documents they prepare relating to the facility's compliance with environmental regulations will be submitted to the regulator and, thus, are not privileged. Other documents they prepare, however, may be directed toward defense of litigation and, thus, may be privileged. It is therefore important for the company to understand from the outset how the attorney-client privilege and work product protections apply to different classes of records.

In Upjohn v. United States,¹⁰¹ the Supreme Court held that the attorney-client privilege applies to communications made by corporate employees to corporate counsel in the context of an internal investigation. The company's in-house and outside counsel had initiated an investigation after receiving reports that its foreign subsidiary was engaging in illegal conduct. The government subsequently sought production of documents generated during the course of that investigation. The Sixth Circuit held that the privilege did not attach to communications made by employees who were "not responsible for directing Upjohn's actions in response to legal advice," but applied only to officials in the "control group."¹⁰² The Supreme Court reversed, rejecting the "control group" test and ruling that the privilege protects communications of even low-level employees.¹⁰³ In order to qualify for the privilege, however, the disclosures must be made within the scope of employees' duties and when the employees are aware that they are being questioned "in order that the corporation [may] obtain legal advice."¹⁰⁴

The work product doctrine insulates from discovery an attorney's mental impressions, conclusions, opinions, or legal theories contained in materials prepared "in anticipation of litigation."¹⁰⁵ Subject to waiver on a showing of substantial need, the work product doctrine will protect the confidentiality of materials generated by attorneys and by nonattorneys hired by counsel, if such materials are prepared in anticipation of civil or criminal litigation.

A number of safeguards are advisable to ensure the confidentiality of information generated as part of an internal investigation.¹⁰⁶ These include generating a formal corporate resolution establishing that counsel will be conducting an investigation for the purpose of obtaining legal advice; marking all documents pertaining to the investigation as "privileged and confidential"; and ensuring that all outside experts and investigators are retained by, and report directly to, counsel. Finally, internal investigation reports should not be distributed beyond the senior management privy to the review process. Only a few copies of the reports should be made, the copies numbered, and their whereabouts known at all times.

Disclosing the Results of the Internal Investigation

At some stage during the internal investigation, counsel should request a meeting with the prosecution to discuss its view of the case or to attempt to persuade the government that it should not charge the client with a criminal offense. Such precharging meetings are indispensable prerequisites to effective representation; counsel simply cannot wait until the client is indicted to discover the government's case.

In conducting these meetings, defense counsel must walk a fine line between revealing too little—and thereby failing to apprise the prosecutor of problems with the case—and revealing too much—and thereby eliminating the element of surprise and giving the prosecutor a road map to the case. Disclosing part of an internal investigative report may constitute a waiver of the attorney-client privilege or work product protection. Courts have held that once a company shares some of its investigatory material with the government, the privilege may be waived for all related materials if the information provided presents an unfair or skewed perspective.¹⁰⁷

The leading case on waiver is In re Martin Marietta.¹⁰⁸ During a meeting with the government, company counsel had submitted a position paper arguing against indictment of the corporation, which quoted directly from materials compiled during an internal investigation, including statements of employee witnesses. The court ruled that by revealing the statements of its employees, counsel had waived the attorney-client privilege.

In light of Martin Marietta, if the entity under investigation elects to make a written submission to the government, counsel should, at a minimum, obtain a prior express agreement from the prosecutor that the submission will not waive the attorney-client privilege or work product protection for any material disclosed. If possible, information should be presented orally because written statements are more likely to be found to constitute a waiver and be admissible at trial. Finally, counsel should attempt to bring all remarks under the protection of Fed. R. Crim. P. 11(e)(6)(D), which generally prohibits the admission of statements made in the course of plea discussions. In order to qualify for this protection, counsel should at least mention the possibility of a plea agreement as a means of resolving the investigation.

In addition, counsel should be aware of the risk that third parties in a derivative action or a related proceeding may subsequently seek disclosure of confidential material [25 ELR 10614] by arguing that the company waived the attorney-client privilege and/or work product protection when it shared the information with the prosecutor.¹⁰⁹ For example, in Westinghouse Electric Corp. v. Philippines,¹¹⁰ the Third Circuit held that disclosure of a privileged internal investigative report to the Securities and Exchange Commission (SEC) and Justice waived the attorney-client privilege and work product protection, even though the agencies had agreed to maintain the confidentiality of the material submitted. The court indicated, however, that if the disclosure had been compelled and the company had fully contested the subpoena in court, there might have been no waiver.¹¹¹ Thus, after Westinghouse, the production of an internal investigative report without contesting the subpoena apparently would not be considered compulsory disclosure, and therefore may waive the privileges in private litigation as well.

Global Settlements

A company under environmental criminal investigation often finds it advantageous to seek a simultaneous, comprehensive settlement of its criminal and civil liabilities with both the federal and state governments. By resolving all potential obligations in one proceeding, a company can put the problems behind it and focus on the future, with defined limits on its financial outlays and a compressed period of negative publicity.

Whether to seek a global settlement is a strategic decision that the company must make, based on its evaluation of civil and criminal liability at the conclusion of a thorough internal investigation. This decision calls for the exercise of fine judgment by counsel, especially when the government demands pleas to criminal charges from individuals to resolve the matter. When the liberty and careers of employees are in jeopardy, corporate counsel must incorporate these emotionally charged factors into the calculus whether a settlement is fair and advisable.

One of the most valuable functions environmental criminal counsel can serve is assessing the prospects for settlement on both the criminal and civil sides at all levels of government, and then successfully negotiating and managing the multiple independent settlements that are necessary to accomplish a complete resolution of the problem. Counsel must be aware that the government will not affirmatively seek a global settlement; the corporate defendant must initiate, negotiate, and close the agreement. Also, the window for negotiating such a resolution is limited. The prosecutor will not agree to release any claims until the government has completed its investigation of all potential charges against the company and responsible individuals. Seeking a global settlement may compel the prosecution to open up other areas it had no previous interest in investigating. Further, the government will be reluctant to waive its civil remedies and adamant about the corporation's obligation to remediate fully the effects of the pollution for which it is responsible.

A major impediment to achieving a global settlement is the number of governmental bodies the company must deal with, each of which has its own interests and priorities. Left to their own devices, these components make little effort to coordinate their responses. For example, the criminal prosecutors typically are not the same persons as those responsible for civil penalty actions. On the regulatory side, the official dealing with clean air issues usually is not responsible for hazardous waste issues, and may have little understanding of how RCRA works or how a solution that makes sense from a discrete "air" perspective may exacerbate hazardous waste problems. Further, different levels of government may be responsible for the judicial and regulatory parts of the problem. Indeed, there may be competition for primary jurisdiction, both among federal and state enforcement personnel and between EPA and state regulators. Accordingly, the indispensable prerequisite for a successful global settlement is for the target to accept these facts of life and take full responsibility for making the settlement happen.

During negotiations to resolve a criminal case, the target must also address the question of civil liability. An admission of guilt may be used as evidence against the company in a subsequent civil case and may have conclusive collateral estoppel effects.¹¹² For example, a plea of guilty to the illegal disposal of hazardous waste in a criminal case may expose a company to significant costs in a subsequent civil case to remediate the waste site, as well as to claims by citizen groups or injured employees.

Prosecutors engaged in negotiating a criminal plea cannot formally agree to terms that would bind a federal regulator with jurisdiction over a facility. Individual prosecutors vary widely in their willingness and persuasiveness in attempting to interest the regulator in a resolution acceptable to the company. Moreover, while a federal prosecutor may have good relations with state prosecutors and may be able to work out a resolution of all possible criminal charges at all levels, the federal prosecutor may have greater difficulty helping the company close a deal with independent state regulators.

The corporate target needs to understand that negotiating a global settlement can be time-consuming and expensive. The company must harmonize the priorities and bureaucratic interests of each government agency involved and bring each separate investigation to simultaneous completion. There may be some advantages in pursuing such an approach. The environmental prosecutor may consider reducing or dropping the charges in return for significant environmental cleanup commitments or agreements to install pollution control equipment enforceable through a revised permit. Once the outline of a plea agreement is reached, however, the prosecutor may have little patience with the time necessary for the company to complete negotiations [25 ELR 10615] with regulators. Understanding this fact, civil regulators might not hesitate to exploit the enhanced leverage it gives them over the target. Counsel cannot expect the prosecutor to serve as the "closer" within the government; counsel must perform that function.

One example of a successful global settlement involving the federal and two state governments is United States v. Exxon Corp.,¹¹³ which involved an oil pipeline rupture that discharged 567,000 gallons of heating oil into New York Harbor. The states of New York and New Jersey joined the United States in a memorandum of agreement (MOA) with the defendant, setting out the fines that the company would pay to the three sovereigns following its guilty plea to a Federal Water Pollution Control Act (FWPCA) violation. Under the MOA, the company agreed to pay $ 15 million in criminal and civil fines and restitution to the three governments. In return, New York and New Jersey agreed to bring no criminal charges. In a separate plea agreement with the United States alone, the company pleaded guilty to a single misdemeanor charge of negligent violation of the Act.

Parallel Proceedings

Defending an environmental criminal investigation is sufficiently complicated to test any lawyer's skill when all violations are long past. When the problems are ongoing, however, counsel may be confronted from the outset with defending parallel criminal and civil proceedings, each of which presents serious risks to the client.

Parallel proceedings are simultaneous criminal and civil actions against the same defendant that arise out of a single set of facts. Parallel proceedings questions arise frequently in the environmental area, due to ongoing compliance obligations and the easy cross-over from civil to criminal enforcement resulting from the de minimis intent requirement. No appellate case has yet addressed these issues in the environmental context, in part because EPA and Justice have long had policies in place that restrict the circumstances under which their staffs may institute parallel proceedings.

Parallel proceedings are a double-edged sword creating procedural and substantive problems for both the government and the entity under investigation. These problems arise when the government wishes to file a civil action to enjoin long ongoing environmental violations and accelerate the remediation process, while simultaneously conducting an investigation to determine if the infractions should be prosecuted criminally. Civil discovery is far broader and less restrictive than criminal investigation, and there is substantial basis for concern that the government could use civil discovery as a means of avoiding the many protections afforded in criminal cases. The differences between the criminal and civil investigatory mechanisms create substantial tactical questions for counsel and concerns about due process for defendants.

When parallel proceedings are instituted, the target and its defense counsel face difficult issues in coordinating their activities to address the conflicting demands of the two enforcement mechanisms.

Difficulties Created by Parallel Proceedings

For the Entity Under Investigation

For the target, some problems from overlapping investigations are obvious from the outset, while others take some time to surface.

First, the company must be prepared to negotiate and litigate on multiple fronts. Responding to the demands of several agencies is expensive and ties up corporate staff time. Second, information released or witness statements made in one context, either voluntarily or due to regulatory reporting obligations, may have adverse effects in the other context. Third, strategies that are appropriate in the criminal area may hurt efforts on the civil side, and vice versa. For example, both Justice's voluntary disclosure policy¹¹⁴ and the U.S. Sentencing Commission's proposed sentencing guidelines for organizations¹¹⁵ provide incentives to disclose and benefit from leniency on the criminal side, but this may constitute a near confession of judgment in any civil suit the regulator may choose to bring.

RCRA provides a good example of how a company's regulatory compliance obligations may affect its response to a grand jury investigation. A plant's continued operations may be jeopardized if the regulator uses its authority to suspend or revoke the company's permit based on an alleged violation. Thus, even before a determination has been made regarding the legality of its past environmental practices, civil enforcement authorities may pressure or legally require the company to remediate a situation, change its disposal method, or obtain a new or revised permit.

The repercussions of these actions could be significant on both the civil and criminal sides. For example, the defense in the criminal case may well be that the waste generated at the facility is not hazardous waste at all. If it is hazardous, however, the company must obtain a manifest and an EPA identification number, and must ship the waste to a permitted hazardous waste facility. Once a dispute arises about the proper characterization of the waste, the conservative approach is to satisfy the civil regulator and manifest the waste as hazardous. But on the criminal side, the changes necessary to resolve all doubts about continuing compliance may be interpreted by the government as an admission that the prior conduct was illegal. The prosecutor may subpoena information relevant to the modifications and use it against the company before the grand jury and at trial.¹¹⁶

On the other hand, voluntary remediation has many benefits. It demonstrates a positive corporate environmental stance, and thus may be an important factor in demonstrating why no criminal charges should be filed. It may also lessen the chances of the government instituting injunctive action. How to strike the proper balance between these risks is a difficult question in every case, as a matter of both business judgment and legal strategy.

[25 ELR 10618]

To complicate the problem, EPA or the state authorities overseeing the ongoing compliance and remediation efforts may not be directly involved in the criminal prosecution. Moreover, the corporate officials responsible for managing the cleanup may not be the ones responsible for working with criminal counsel. This division of authority can result in statements or actions that compromise the company's efforts to assert its legal rights in the criminal proceeding. For example, employees involved in the civil cleanup effort may be willing to answer leading questions or respond to hypothetical questions in a manner that may produce devastating admissions on the criminal side.

Thus, companies involved in parallel proceedings need to coordinate their responses carefully. It is particularly important that counsel involved in the criminal matter reviews any reports or certifications before they are submitted to civil regulators. In such circumstances, counsel must make certain that a response is truthful but does not inadvertently create further problems, given the difference in perspective between the two enforcement schemes.

Another important difference between criminal and civil proceedings involves application of the Fifth Amendment privilege against self-incrimination. The Supreme Court has held that the fact that an individual has invoked the privilege and declined to answer questions may not be used against that individual in a criminal case.¹¹⁷ Thus, no prosecutor, judge, or jury may draw an inference that a person is guilty from the fact that he or she has invoked the privilege. A litigant in a civil case is not accorded the same level of protection, however. Although a person retains the absolute right to decline to answer questions, the fact finder in a civil case may draw an adverse inference from the person's silence.¹¹⁸

The difference between the two systems places the subject of parallel proceedings on the horns of a dilemma. In a civil case, the privilege against self-incrimination may be waived if not invoked.¹¹⁹ Statements an individual makes in the civil (or administrative) proceeding could then be used in the criminal case as evidence against the individual or his or her employer. But if the individual invokes the right to decline to answer questions, that silence could be the basis of a negative inference in the civil proceeding, and thus a significant factor in the determination whether to impose a penalty and cleanup obligations.

For the Government

At first glance, parallel proceedings would appear to have several attractive features for the government. They can promote environmental compliance through civil injunctions and large monetary penalties, accelerate the start of remediation and mandate cleanup terms, and deter future violations by imposing criminal sanctions. Thus, whenever the environmental problem sparking a criminal investigation is ongoing, the government will almost always start from the assumption that it should also bring a civil case. Indeed, a criminal prosecutor might encourage the filing of an injunctive action to demonstrate that the environmental harm is substantial.

On the other hand, there are several significant reasons why the government may decide—from a tactical viewpoint as well as from concern with fairness to the potential defendants—not to institute a parallel proceeding:

* in the case of a small violation, two cases may be inefficient use of scarce enforcement resources;

* the defense may use civil discovery to gain information about the criminal investigation;

* the need to create a wall between civil and criminal proceedings, and the documentation of the civil discovery process necessary to avoid problems under Fed. R. Crim. P. 6(e),¹²⁰ may inappropriately delay and complicate the proceedings;

* additional delay may be encountered if the defendant files a motion seeking dismissal on the ground of bad-faith use of compulsory processes;

* prior imposition of large civil penalties may lead to dismissal of an indictment on double jeopardy grounds; and

* the prosecutor will have to guard against potential constitutional violations, which are always a possibility in parallel proceeding situations.¹²¹

At bottom, most of the problems stem from the fundamental differences in the fact-gathering mechanisms of criminal investigation and civil discovery. Criminal investigations are conducted by grand juries. The law imposes substantial secrecy obligations on these investigations in order to preserve the integrity of the process and witness confidentiality. These restrictions place substantial limitations on the ability of government investigators to disclose information obtained in the grand jury process to other federal officials. These constraints also prevent counsel for potential defendants from determining directly what information the government is presenting to the grand jury, and thus shield the government's theory of the case from disclosure. On the other hand, civil enforcement actions are conducted under the ordinary rules of discovery. These rules provide for early, mutual release of information and do not place significant limits on the extent to which federal personnel may share material obtained through discovery with other law enforcement agents.

The adverse effect that the principle of grand jury secrecy can have on parallel environmental proceedings was demonstrated in United States v. Gold,¹²² where criminal charges of falsifying registration material for a pesticide were dismissed because of prosecutorial misconduct. A single government attorney acted as an EPA staff attorney, a special [25 ELR 10617] attorney for Justice, and a grand jury witness. The court found that the attorney's presence in the grand jury room compromised its secrecy, due to the conflict of interest arising from his various roles. This defeat taught EPA and Justice a lesson about criminal procedure and maintaining separate roles for their personnel.

Agency Procedures Governing the Institution of Parallel Proceedings

In recognition of the difficult tactical and legal questions that a decision to institute parallel proceedings presents, Justice and EPA have long maintained policies on when such proceedings may be authorized. The policies are largely intended to prevent errors that inadvertently lead to limitation or dismissal of criminal charges, and are of particular importance to entities under investigation.

Justice Guidelines

Justice will not institute parallel proceedings unless there are compelling reasons why both civil and criminal sanctions are appropriate.¹²³ It takes the position that an environmental criminal proceeding generally should be brought and resolved before a civil action, because the criminal charges entail greater punishment and have more of a deterrent effect. The agency wants to avoid circumstances in which a court gives a more lenient sentence so as not to compound a large prior civil penalty. Moreover, the Speedy Trial Act ¹²⁴ dictates that criminal cases must be tried expeditiously; on the other hand, civil proceedings may—and often do—lag. Finally, a criminal conviction may have collateral estoppel effect in a subsequent civil case against the defendant.¹²⁵

For these reasons, Justice policy prescribes that civil cases ordinarily should not proceed at the same time as a criminal investigation, unless one of the following factors is present:

1. The civil violations are ongoing and of such concern to the public health or to the environment as to call for preliminary or accelerated permanent injunctive or cost recovery relief.

2. The assets of the defendant are in danger of dissipation. . .

3. There is only a marginal relationship between the civil violations and the illegal conduct that is the subject of the criminal proceeding.

4. There is an imminent statute of limitations deadline for the filing of a civil action.¹²⁶

If the government chooses to pursue parallel proceedings, it must conform to Fed. R. Crim. P. 6(e), which prohibits, with few exceptions, the disclosure of matters occurring before a grand jury. Although civil use of grand jury materials is not per se illegal, the Supreme Court has interpreted Rule 6(e) to prohibit federal prosecutors from disclosing grand jury matters to other Justice attorneys for use in a civil suit, unless the government can demonstrate a particularized need for the materials on the civil side.¹²⁷ Therefore, Justice's policy requires that evidence be obtained through channels other than the grand jury subpoena, such as searches, interviews, and administrative Inspector General subpoenas issued through EPA.¹²⁸

Matters uncovered in administrative inquiries or produced in civil discovery are not subject to the same limitations on subsequent use. As long as the investigation was "objectively reasonable" or civil discovery was not used exclusively as an information-gathering device for a criminal prosecution, Justice or EPA litigators may share civil investigative information with criminal prosecutors without limitation.¹²⁹ There is no bar to sharing the fruit of civil discovery with a federal or state prosecutor if there was "a good faith civil or administrative basis for conducting the discovery."¹³⁰ Similarly, information gathered from an administrative inspection may be shared with prosecutors, so long as the inspection was "objectively reasonable" under Camara v. Municipal Court¹³¹ and Barlow's.¹³² Furthermore, if the government has obtained the civil information without using any formal discovery or compulsory means, e.g., by voluntary production or proffer, it may share the material "regardless of whether there was a 'good faith' basis for seeking the information, as long as the government did not deceive the defendant about its intentions" for using the information.¹³³

EPA Policy

EPA's policy on parallel proceedings provides that "the pendency of a criminal proceeding is not necessarily a sufficient reason to fail to seek appropriate" injunctive relief when necessary to obtain compliance with the law or impose remedial obligations.¹³⁴ When a criminal proceeding is contemplated or pending, both the regional counsel and the [25 ELR 10618] head of the region's Criminal Investigative Division must agree before a parallel civil enforcement proceeding may be filed. However, if the civil action is to be filed in federal district court, rather than as an agency administrative action, EPA policy "continues to require that the request for referral of a parallel proceeding to the Department of Justice be routed through EPA-[Headquarters] for Assistant Administrator approval."¹³⁵

EPA policy also cautions that for double jeopardy reasons, it is preferable to avoid assessing federal civil penalties against a person who is likely to be prosecuted criminally. Normally, a civil penalty claim should be stayed, i.e., not assessed or collected, against a person who is a target of a criminal investigation until the criminal matter is resolved.¹³⁶

Protection Against Abuse of Parallel Proceedings

If the government institutes parallel proceedings the potential defendants will usually be powerless to overturn that decision or stop the civil action altogether. There are, however, means available to mitigate the possible adverse effects.

Stays

The preferred defense strategy is to seek a stay or postponement of the civil action, pending resolution of the parallel criminal matter.¹³⁷ Even at the investigatory stage of the criminal proceedings, the argument can be made that a stay is required to avoid presenting individuals with the Hobson's choice of either waiving the Fifth Amendment privilege against self-incrimination by answering civil discovery and thereby prejudicing defense of the criminal action, or invoking the privilege and thereby prejudicing defense of the civil action.¹³⁸ Thus, an alternative approach is for the target to seek a stay of civil discovery until the government decides whether to indict.¹³⁹

Decisions in other regulatory areas, such as securities and antifraud, demonstrate courts' hesitancy to restrict the government's ability to enforce the law based only on an anticipatory claim that a subsequent action by the government might conceivably harm the defendant's rights.¹⁴⁰ In these areas, the party seeking a stay must demonstrate a clear hardship or inequity arising out of the need to go forward on both fronts. In reaching its decision, a court will balance the harm to the moving party in the absence of the stay against the harm that may result from granting the stay.¹⁴¹ Those seeking a stay must show that a criminal investigation is active or that indictment is likely, and must clearly demonstrate how continuation of civil or administrative discovery would compel them to assert the Fifth Amendment privilege. Any evidence of actual government misconduct in the two matters to date can be an effective factor in persuading a court to stay the civil matter.¹⁴²

Double Jeopardy Constraints

The aspect of the Double Jeopardy Clause that prohibits multiple punishments for the same act provides some protection against civil sanctions that are imposed for punishment purposes after final judgment has been entered in a criminal case.

The Supreme Court has ruled that the Double Jeopardy Clause does not preclude the government from imposing both civil and criminal sanctions based on the same behavior, as long as the civil sanction serves only a remedial purpose.¹⁴³ The same sovereign may not, however, impose multiple punishments for the same offense if the purported civil sanction actually serves the criminal purpose of punishment.¹⁴⁴

Although a court will generally allow civil penalties that are greater than the loss the defendant's action caused, a penalty may be so excessive as to constitute a second punishment. In Halper v. United States,¹⁴⁵ the Supreme Court held that a civil penalty that was not rationally related to the government's actual damages constituted criminal punishment and, thus, was barred by the Double Jeopardy Clause.¹⁴⁶ The Court concluded that the post-conviction civil penalty of 220 times the government's actual loss did not serve a remedial purpose, but inappropriately furthered the criminal goal of punishment.¹⁴⁷

The Halper prohibition against double punishment does not apply to suits by private entities or to penalties imposed sequentially [25 ELR 10619] by a state and the federal government.¹⁴⁸ Under the dual sovereignty doctrine, the Double Jeopardy Clause does not apply to suits brought by separate sovereigns.¹⁴⁹ For these reasons, in order to minimize the risk that a sizable settlement in an administrative action might be construed to bar subsequent criminal penalties, government counsel negotiating a civil settlement often insist that the agreement explicitly recognize the possibility of subsequent criminal proceedings.

Consequences of an Environmental Criminal Conviction

Entry of a judgment of guilty, whether by plea or after trial, does not end the defendant's ordeal; in many respects, a determination of guilt represents only the mid-point in the process. The consequences of conviction are potentially severe, in terms of the sentence that may be imposed on the individual or corporation, the costs of the remedial obligations it will be required to undertake, and the collateral effects on its ability to conduct its future affairs. Individuals convicted of an environmental crime face a high probability of a significant term of imprisonment, even for a first offense. Prosecutors are well aware of the stringency of these penalties, and they effectively use these threats to persuade environmental violators to enter into plea agreements.

Remedial Obligations and Negotiated Pleas

An entity that is found guilty of an environmental crime will be compelled to clean up any pollution remaining from the violation. The costs of remediation frequently exceed the fines involved, often by substantial amounts.¹⁵⁰ A corporation will inevitably be required to make large capital expenditures upon conviction, whether as part of the criminal sentence or as a consequence of a subsequent civil suit. This consideration often plays a substantial role in both the company's decision whether to seek a plea agreement and the prosecutor's charging decision.

During an environmental investigation, the government will likely seek evidence of all pollution generated by the facilities involved or disposed of on those sites. Both the prosecutor and the civil regulatory agency will be interested in cleaning up all the contamination detected, whether or not it forms the basis of the criminal charges. Further, an environmental prosecutor, as distinguished from a conventional prosecutor, may seek to maximize the combination of criminal penalties and cleanup benefits, rather than focusing strictly on sentence length and fine amount. An environmental prosecutor may thus be willing to trade a significantly greater cleanup commitment than could be required by law in return for foregoing criminal charges against the company and/or individuals, or reducing the severity or number of counts filed.

Accordingly, corporations and municipalities faced with the inevitability of cleaning up the pollution they have caused may decide to "make a virtue of necessity" and seek a negotiated resolution, based on their willingness to undertake a comprehensive remediation program. The prosecutor may be attracted to such a resolution if it benefits the environment directly, through prompt elimination of contaminants, rather than indirectly through deterrence of potential violators. The prosecutor does not act with a free hand, however, and may need the concurrence of federal and state civil regulators on many of the cleanup terms that have critical cost implications.

For the polluter, the principal attraction of this approach—besides the possibility of reduced charges—is the greater flexibility that may be afforded in the plea context on such critical terms as the level of cleanup, cleanup techniques, the timetable, and post-closure obligations. A negotiated plea agreement provides opportunities for substantial cost savings vis-a-vis an adverse judgment entered after litigation. Further, with the prosecutor's cooperation, it may be possible to structure the agreement in a manner that makes most, if not all, the out-of-pocket costs tax deductible.¹⁵¹ The company must realize, however, that all aspects of its environmental performance will be in play in these discussions, including prior disposals, other operations, or discharges to other media that are not part of the contemplated charges or included in the criminal complaint.

The degree of cooperation the company demonstrates during the investigative process may significantly affect the prosecutor's willingness to consider a consensual resolution. None of these benefits is likely to be achieved unless the prosecutor is convinced of the company's good faith and the permit writer has confidence in the company's reliability. Effective environmental criminal counsel must therefore understand the difficult balancing act it must play in conducting the defense of the investigation. Counsel must organize the defense in a manner that fully presents the company's position on the merits, without turning either the prosecutor or the civil regulator against the client. To preserve opportunities to turn the solution toward negotiations over the scope of the cleanup and the terms of the permit governing future operations, relations must not have been cast in an adversarial, scorched-earth posture.

Finally, because settlement must be reached with all federal and state criminal and regulatory agencies, counsel must eliminate the risk that the cleanup resolution may later be undone by another enforcement authority initiating proceedings on the same issues.

Criminal Sentences

Individuals and organizations convicted of federal environmental crimes are sentenced pursuant to sentencing guidelines¹⁵²—mechanical formulas whose purpose is to deny [25 ELR 10620] judges discretion in sentencing and produce uniformity in punishments imposed for similar crimes.¹⁵³

The U.S. Sentencing Commission issued guidelines for the sentencing of individuals convicted of criminal offenses, including environmental crimes, in 1987.¹⁵⁴ The guidelines have broken down judges' former reluctance to imprison individuals convicted of environmental offenses and have produced significantly longer sentences than the few imposed before their issuance. Experience under the guidelines demonstrates that even first-time offenders can expect to serve significant prison terms. Thus, if indicted, individuals have relatively greater incentives to fight the charges through trial because they are likely to be imprisoned if they plea bargain. On the other hand, companies with operating facilities have significant incentives to settle, because of both the cost of litigation and the importance of maintaining working relations with the civil regulator.

Defense counsel still has an important, if diminished, role to play at the sentencing stage. It is important for the lawyer to advise his or her client before indictment or trial about the guidelines' likely impact on a conviction and how that factor can influence the prosecutor's negotiating strategy. This advice can prove essential in helping a client decide whether to cooperate with an investigation, seek a plea agreement, or negotiate a global settlement.

Criminal Sentences for Individuals

The sentencing guidelines for individuals provide for assigning a numerical value to a crime through a three-step process that considers (1) a base offense level, (2) specific offense characteristics, and (3) adjustments for other factors. Adding and subtracting numbers derived at each step leads to a final offense number, which corresponds to a narrow range of sentences on a grid that applies equally to all types of criminal offenses. The district judge is generally obliged to sentence a defendant convicted of an environmental crime to a specific term of imprisonment within the narrow confines allowed for the offense level calculated under the formula.¹⁵⁵ Downward departures from the guidelines are permitted under very limited circumstances, and Justice may appeal the court's application of any downward departure.¹⁵⁶

Base Offense Level. The first step in determining the sentence is selecting the most appropriate offense category and its associated base offense level. There are six general types of offenses listed for environmental crimes, only three of which are broadly applicable:¹⁵⁷

Knowing endangerment resulting from mishandling hazardous or toxic substances, pesticides or other pollutants: Base offense level 24;¹⁵⁸

Mishandling of hazardous or toxic substances or pesticides: Recordkeeping, tampering, and falsification: Base offense level 8;¹⁵⁹ and

Mishandling of other environmental pollutants: Recordkeeping, tampering, and falsification: Base offense level 6.¹⁶⁰

For example, if the offense involved illegal disposal of polychlorinated biphenyls (PCBs), a hazardous substance, the base offense level would be eight, the level prescribed under § 2Q1.2 for violations involving hazardous or toxic substances or pesticides. If, on the other hand, the offense involved the illegal disposal of oil or petroleum byproducts, the base offense level would be six, as prescribed under § 2Q1.3 for mishandling of "other pollutants."

Specific Offense Characteristics. The base offense level is then typically increased by a certain number of levels if there are "specific offense characteristics"—i.e., aggravating circumstances—involved.¹⁶¹ These characteristics include ongoing, continuous, or repetitive discharges of the substance;¹⁶² substantial likelihood of death or serious bodily injury as a result of the wrongdoing;¹⁶³ the requirement of a substantial expenditure for cleanup;¹⁶⁴ or the failure to obtain a permit.¹⁶⁵ For example, if a person convicted of mishandling hazardous wastes is found to have created a substantial likelihood of death or serious injury, the offense level would be increased [25 ELR 10621] by nine,¹⁶⁶ which could translate into a several-month increase in the required sentence.

Adjustments for Other Factors. After the base offense level is calculated and any points for specific offense characteristic are added, the guidelines allow for downward or upward "departures" from the offense level.¹⁶⁷ Departures under Chapter 2 of the guidelines may be appropriate if, for example, the violation resulted from negligent rather than knowing behavior (downward departure);¹⁶⁸ the offense involved highly hazardous substances (upward departure);¹⁶⁹ or the offense resulted in a substantial cleanup expense (upward departure).¹⁷⁰ In addition, on motion of the government stating that the defendant provided substantial assistance in pursuing other persons who committed a crime, the court may depart downwardly from the guidelines.¹⁷¹

Once the Chapter 2 adjustments are applied, additional adjustments are possible. Chapter 3 provides for adjustments to the offense level to take into account other factors, which apply to all offenses, not just environmental crimes. These factors account for the defendant's role in the offense. The sentence can be adjusted upwardly if the defendant was an organizer or leader of the offense,¹⁷² or impeded the investigation, prosecution, or sentencing of the offense,¹⁷³ or downwardly, if the defendant accepted responsibility for his or her actions.¹⁷⁴ Finally, Chapter 5 determines the actual sentence by applying a criminal history number (from I to VI) to the offense levels on a sentencing table.¹⁷⁵

Determining the Sentence. The base offense level, specific offense characteristics, and adjustments are then totaled, and the corresponding sentencing range is determined from a chart.¹⁷⁶ Sentences run from 0 to 6 months for crimes with a total offense level of 1; 6 to 30 months for crimes with a total offense level of 10; to life imprisonment for crimes with a total offense level of 43. Most environmental violations receive sentences toward the lower end of the sentencing table. However, environmental offenders are being sent to prison at a much greater rate and for longer periods of time than before the guidelines were promulgated. A fine table determines the nature of the criminal fine to be imposed, which is calculated from the base level as adjusted.¹⁷⁷ The court is required to impose a fine on an individual defendant in all cases unless the violator establishes that he or she is unable to pay.¹⁷⁸

Probation and Restitution. The sentencing judge may also determine, in accordance with Chapter 5 of the guidelines, to impose probation and full restitution to the victims of the offense.¹⁷⁹ Probation, however, may be imposed only if the offense falls within Zone A of the sentencing table (up to offense level eight for a defendant with a criminal history level of I). Similarly, the court has discretion to sentence a violator to probation plus some type of nonprison confinement, such as home detention, only if the offense falls within Zone B (up to offense level 10 for a defendant with a criminal history level of I). In the limited circumstances in which probation is available, the court may impose a broad range of conditions.¹⁸⁰ However, probation is never available for crimes classified in Zones C and D (minimum sentence of eight months).¹⁸¹

For environmental crimes, the base offense levels under subpart 2Q are comparatively low—six to eight for offenses other than knowing endangerment.¹⁸² After specific offense characteristics and adjustments—which can increase the base offense level by up to 17 levels—are applied, however, many defendants are not eligible for probation. If the offense level is nine or above, under the sentencing table the court must sentence the offender to prison. Thus, even first-time [25 ELR 10622] offenders are now exposed to significant jail time for environmental crimes.¹⁸³

Double Counting. The guidelines allow for "double counting," which occurs when base offense levels and specific offense characteristics incorporate the same elements.¹⁸⁴ Double counting happens frequently for environmental crimes. For example, a base offense level of six is associated with an FWPCA felony conviction for discharging a pollutant without a permit; a specific offense characteristic, which increases the offense level by four, may also apply to failure to obtain a permit.¹⁸⁵ Thus, the same activity may simultaneously determine the offense level and constitute an aggravating factor that increases that level. And the increase in offense level from 6 to 10 for a person with a criminal history category of I would produce an increase in the jail sentence from 0-6 months to 6-12 months.¹⁸⁶

Courts have upheld the double-counting characteristic against constitutional challenges in environmental cases. For example, in United States v. Goldfaden,¹⁸⁷ the Fifth Circuit allowed a four-level addition to the defendant's offense level for an FWPCA felony conviction for discharging hazardous and industrial waste into a city sewer system without a permit. The appellate court found that the sentencing court had appropriately followed the relevant guideline provision when it added the four levels. The Fourth Circuit reached the same conclusion in United States v. Ellen,¹⁸⁸ finding that "'the Sentencing Commission plainly understands the concept of double counting, and expressly forbids it where it is not intended.'"¹⁸⁹ Because "'the Guidelines are explicit when double counting is forbidden . . . an adjustment that clearly applies to the conduct of an offense must be imposed unless the Guidelines expressly exclude its applicability.'"¹⁹⁰

Criminal Sentences for Organizations

General Organizational Guidelines. In November 1991, the Sentencing Commission added a new Chapter 8 to the guidelines to address situations in which fines, restitution, and probation may appropriately be applied to corporations convicted of criminal offenses.¹⁹¹ The organizational guidelines specifically exempt environmental crimes from their financial penalty provisions because the Commission needed to give further consideration to the problems of adapting its neutral sentencing principles to this context.¹⁹² The parts of the organizational guidelines concerning restitution, remediation, community service, and notice to victims do, however, apply to companies convicted of environmental crimes.¹⁹³

Although the financial penalty section of the organizational guidelines does not currently apply to environmental crimes,¹⁹⁴ these provisions do apply to convictions for false statements, conspiracy, and mail or wire fraud, which may be charged in conjunction with, or in lieu of, environmental offenses. Further, the restitution and probation sections are applicable for environmental crimes committed on or after November 1, 1991.¹⁹⁵ The degree of latitude the probation provision affords sentencing courts is so great that some corporate violators may find the terms of probation more onerous than the fines. The guidelines allow the sentencing court to impose, as a condition of probation lasting up to [25 ELR 10623] five years,¹⁹⁶ a requirement that the organization publicize the nature of its offense;¹⁹⁷ periodically submit information regarding remedial programs to the court;¹⁹⁸ be assigned probation officers to monitor its operations;¹⁹⁹ develop a compliance program;²⁰⁰ submit to regular or unannounced examinations of its books, records, and premises;²⁰¹ or perform community service.²⁰²

A recent case illustrates how the organizational guidelines might be applied to sentence companies convicted of environmental offenses. A cruise ship line prosecuted for discharging oil from its vessels in violation of the FWPCA reached a plea agreement in which it explicitly acknowledged the applicability of the organizational guidelines (except the fine provisions). Along with imposing a $ 500,000 fine, the plea agreement placed the company on organizational probation for five years and required it to establish and maintain an effective environmental compliance program (including hiring an independent environmental and maritime consultant); to make quarterly reports on the program to the court; and to assume all costs associated with implementation, maintenance, and court oversight of the program.²⁰³

Proposed Federal Sentencing Guidelines for Organizations Convicted of Environmental Offenses. In December 1991, after several failed attempts to formulate appropriate organizational guidelines for environmental crimes, the Sentencing Commission appointed an Advisory Working Group (AWG) on Environmental Sanctions to consider further how general principles governing criminal punishment could be applied to organizational fines. On March 5, 1993, the AWG released a working draft of recommendations concerning guidelines for organizations convicted of environmental crimes.²⁰⁴ After extensive public comment, the AWG released a second draft on November 16, 1993, which was sent to the full Commission for consideration.²⁰⁵

The AWG's proposed guidelines, which would be a new Chapter 9 of the existing sentencing guidelines, contain both fine and probation sections.²⁰⁶ The fine provisions are completely new, whereas the probation provisions will replace the probation provisions in Chapter 8 that currently apply to crimes committed by organizations.

The draft guidelines use the maximum statutory fine as the starting point in determining the criminal fine. They provide for possible downward adjustment depending on the elements and the characteristics of the offense and the presence of any mitigating factors. However, the presence of aggravating characteristics will limit the downward adjustment, if any. For the most part, the procedure of determining fines under the draft guidelines closely follows that of Chapter 2 of the current guidelines. Courts will have less discretion, however, to depart upwardly or downwardly from the draft guidelines.

Under the draft guidelines, the first step is generally to determine the primary offense level by applying specific offense characteristics to the base offense level for each listed violation.²⁰⁷ This requires determining the type of environmental offense.²⁰⁸ As under Chapter 2 of the current guidelines, numerical values—or levels—are assigned to the types of offenses and to the specific offense characteristics. The level assigned to the types of offenses is referred to as the "base offense level."²⁰⁹ The facts of each offense determine how these levels will be added. The values of specific offense characteristics may change depending on the type of offense, and certain specific offense characteristics do not apply to all types of offenses.²¹⁰

Once the primary offense level has been determined, courts should apply culpability factors, which include both aggravating and mitigating factors.²¹¹ These factors are also assigned numerical values that are added to, or subtracted from, the primary offense level. Aggravating factors include management involvement in the offense, an organization's criminal and civil compliance histories, violations of orders, concealment, and the absence of a corporate compliance program or other organized effort to comply with environmental requirements.²¹² Mitigating factors include a corporate commitment to environmental compliance, cooperation and self-reporting of the violation, and remedial assistance.²¹³ [25 ELR 10624] Application of aggravating and mitigating factors to the primary offense level results in the total offense level for the violation.

To calculate the fine, the draft guidelines set up a fine table in which each offense level corresponds to a percentage of the maximum available statutory fine.²¹⁴ An offense level of 24 or more requires the court to sentence an organization to 100 percent of the maximum statutory fine, while an offense level of 0 to 6 requires the court to sentence an organization to 10 percent of the maximum statutory fine. Thus, for example, the court could sentence an organization whose conduct resulted in an offense level of 20 to between 70 and 90 percent of the maximum statutory fine. The draft guidelines, however, generally limit mitigation to 50 percent of the offense level.²¹⁵

The probation section of the draft guidelines largely mirrors that of the current organizational guidelines. The draft guidelines, however, allow courts to impose more stringent and detailed remedial programs and to order violating organizations to publicize their offense and the punishment imposed.²¹⁶

Although the draft organizational guidelines were released almost two years ago, the Sentencing Commission has taken little action on the proposal and has not focused on the issue in some time. Thus, it is unlikely that the Commission will submit a final proposal to Congress in the foreseeable future. Should the draft guidelines become effective in a form that resembles the current version, however, companies convicted of an environmental crime will ultimately face tougher financial penalties.

Collateral Consequences

Consequences collateral to an environmental conviction may have more significant adverse effects on a corporation than the criminal penalties, particularly for companies that have federal government contracts. A corporation charged with an environmental crime must consider the potential negative effects of conviction on several fronts, including collateral estoppel effects in subsequent civil litigation regarding the environmental cleanup; mandatory " blacklisting" for future federal contracts under the FWPCA and the CAA; suspension and debarment from government contracts; federal tax consequences; SEC disclosure obligations; and potential disqualification from holding environmental operating licenses under state "bad actor" statutes. These impacts can be so devastating to the future conduct of a business that prosecutors have substantial leverage to compel companies to accept a criminal plea in the hope of receiving favorable exercise of discretion on these other matters. A corporation defending against environmental criminal charges must be aware of these potential collateral effects from the onset of the government's investigation and should immediately look for opportunities to minimize their adverse effects.²¹⁷

Collateral Estoppel Effects in Subsequent Civil Litigation

Under the common-law doctrine of collateral estoppel, a party may not relitigate an issue that has been decided in a prior action in which the question was necessarily determined by the final judgment.²¹⁸ Once a defendant is convicted of a criminal offense, collateral estoppel generally will prevent it from relitigating the facts underlying the essential elements of the offense in any subsequent civil action.²¹⁹

Most environmental statutes provide ample grounds for civil damages actions seeking restitution, cleanup of pollution, and restoration of the natural environment resulting from the acts that led to criminal conviction.²²⁰ Federal and state governments may bring such actions themselves, and many statutes authorize citizen suits for damages. In either case, a defendant convicted of an environmental crime is subject to "offensive" use of collateral estoppel, which would preclude it from relitigating the facts that established the environmental violation. For example, a party whose property was harmed by an illegal disposal of hazardous waste could invoke collateral estoppel in a civil action against a party convicted of that disposal, to prevent the defendant from litigating most issues relevant to the determination of liability.²²¹ Further, collateral estoppel can be used "defensively" by third parties to defeat any lawsuits that a convicted polluter brings against them for the events giving rise to the conviction.²²²

[25 ELR 10625]

The collateral estoppel effect of criminal judgments is often the decisive factor in a corporation's decision to plead guilty to a criminal charge and seek a global settlement. Several tactics have emerged to attempt to lessen the collateral estoppel effects of a plea, but their success depends entirely on the cooperation of the prosecution in its charging decision. For example, conviction on a plea of nolo contendere, rather than a plea of guilty, will reduce the collateral estoppel consequences, because a nolo plea is generally inadmissible in a subsequent federal civil or criminal proceeding.²²³ Prosecutors are rarely satisfied with a nolo plea, however, and such a disposition may be available only in unusual cases.²²⁴

Another strategy to lessen the collateral estoppel effect is to negotiate a plea to a strict liability crime, where possible, to avoid preclusion on the issue of negligence in a subsequent private damages action. Conviction of a strict liability crime establishes the fact of the occurrence, but not any intent, because the crime has no mental element.

Mandatory "Blacklisting" Under the FWPCA and the CAA

The FWPCA and the CAA prohibit federal agencies from entering into new contracts with,or issuing any grants to, an entity convicted of crimes under those statutes, pursuant to a mandatory blacklisting procedure.²²⁵ The listing applies for a finite period of time and operates prospectively, not retroactively. Accordingly, a criminal conviction does not require cancellation of contracts, grants, or other forms of assistance already awarded to the facility, but does preclude all federal agencies from entering into new arrangements until EPA removes the listing.

FWPCA § 508(a) prohibits all federal agencies from entering into any contract with any person who has been convicted of a criminal offense under FWPCA § 309(c) "if such contract is to be performed at any facility at which the violation which gave rise to such conviction occurred, and if such facility is owned, leased, or supervised by such person. . . ."²²⁶ This provision also prohibits participation in any federal loan, loan guarantee, grant, or other assistance program. Listing under § 508(a) applies only to the particular facility involved, and not to the entire division or company to which the facility belongs.

CAA § 306 contains a similar provision, based on the FWPCA, that requires mandatory listing for a criminal conviction under § 113(c).²²⁷ The 1990 CAA Amendments give EPA discretion to extend the listing beyond the facility at which the violation occurred and apply it to other facilities owned or operated by the convicted person or entity.²²⁸ No similar discretionary authority exists under the FWPCA.

The listing program is administered by the EPA Assistant Administrator for Compliance, the official responsible for the original criminal referral to Justice. The EPA regulations implementing the FWPCA and the CAA.²²⁹ provide for maintenance of a List of Violating Facilities, which is published in the Federal Register and disseminated to all federal agencies monthly. Publication on the list bars the facility or broader entity from receiving any new federal contract or subcontract. This exclusion is enforced by a federal acquisition regulation (FAR) that requires each bidder for a contract to certify, subject to the provisions of the False Statements Act,²³⁰ that the bidder is not ineligible to receive the award.²³¹

In order to remove a facility or entity from the list, the Assistant Administrator must certify that the necessary remedial action has been taken to correct the conditions giving rise to the violation.²³² Removal action may be initiated by the company or by the listing official.²³³ After receiving a delisting request, the Assistant Administrator will request a review and recommendation from the applicable EPA regional office before making a final decision. If the listing [25 ELR 10626] official refuses to remove the facility from the list, the facility's owner or operator may request a removal hearing, at which it must demonstrate by a preponderance of the evidence that the condition giving rise to the listing has been corrected.²³⁴

Under a 1991 EPA policy statement, correction of the "conditions giving rise to the violation" requires the adoption of an appropriate "corporate attitude" toward future compliance with environmental laws and regulations.²³⁵ EPA identified several criteria it will consider in determining whether such an attitude exists, including:

the existence of written procedures defining the company's environmental standards, which are consistently enforced through disciplinary mechanisms;

an effective program to apply these standards, such as a monitoring and auditing system, and methods by which employees can report environmental problems without retribution; and

a program for prevention and immediate correction of future environmental problems, which may include an independent environmental audit to ensure that there are no other problems at the facility.²³⁶

Through these "attitude adjustment" factors, EPA seeks to assure, as consideration for release from the list, that the violator will adopt prospective environmental practices that are more stringent than EPA can require under its ordinary statutory powers.

The Exxon Bayway case demonstrates the extensive steps that may be required before a major facility is delisted. This oil pipeline was listed in March 1991 as a result of its plea to an FWPCA misdemeanor for a major oil spill.²³⁷ The facility was delisted 10 months later, after the company spent $ 18 million to remove the spilled oil, settled federal and state civil and natural resource damage claims for $ 10 million, paid $ 5 million in criminal fines, closed the facility for 3 months, and conducted a $ 25 million environmental study that led to initiation of a host of safeguards to prevent future oil spills.²³⁸

In sum, a company facing an FWPCA or CAA criminal charge must consider the practical consequences of the facility's inability to receive federal contracts or grants for a period of time. This concern can play an instrumental role in any plea negotiations. In particular, a company contemplating a plea will want to determine if EPA will discuss how the "facility" subject to mandatory listing would be defined. For CAA pleas in particular, the company also must determine whether EPA will forego exercise of its discretion to extend the listing beyond the offending facility.

Suspension and Debarment From Government Contracts

Federal agencies (and each state) have authority to suspend and debar companies from receiving future contracts and grants when the contractor's responsibility is deemed compromised, even if no criminal conviction occurs. Thus, environmental violations can have significant adverse economic effects on a government contractor, even if the violations do not result in criminal charges. Imposition of such sanctions is virtually assured, however, if a company is convicted of an environmental crime.

Suspension is an interim refusal to deal with a contractor pending receipt of further information. It temporarily disqualifies a contractor from receiving government contracts or having contracts renewed or extended until the basis for the suspension is resolved. Although it is typically based on the return of an indictment, suspension can occur whenever evidence exists to believe that a contractor has committed an offense that may give rise to debarment.²³⁹ If a company is indicted for an environmental crime, it will likely be suspended until the indictment is resolved.

Debarment is the disqualification of a contractor for a set period of time—typically from one to three years. Thus, the debarment period may be longer than the listing period. The decision to debar and the length of the sanction are within the discretion of the debarring official. The length is based on the nature of the basis for debarment, any mitigating circumstances, and any remedial actions that the contractor has taken. If a company is convicted of an environmental crime, it will likely be proposed for debarment. If the company is not already suspended, the notice of proposed debarment will bar the company from receiving contracts until a final decision is made by the debarring official. Debarment may apply to all of the company's activities, not just to the offending facility.

Suspension and debarment are discretionary administrative procedures to protect the government from undesirable contractors, by excluding the entities from receiving new federal contracts or participating in federal assistance programs based on evidence that the contractor lacks "present responsibility."²⁴⁰ Suspension and debarment by any one agency is effective throughout the federal government, and results in the entity's disqualification from all new federal awards during the period the action is in effect.²⁴¹ The contractor's name is placed on a consolidated list that is circulated to all federal agencies monthly and is available on-line. The prohibition against awarding a new contract, consenting to a subcontract, or renewing an existing contract with the disqualified entity is enforced through the FAR [25 ELR 10627] certification requirement.²⁴² While the action's effect is governmentwide, its scope may be limited to particular organizational elements, or extend to the entire company, depending on the facts and the policy of the agency taking the action.²⁴³

The suspension and debarment regulations recommend that when multiple agencies have an interest in a particular company, one agency should be designated as the lead agency to consider suspension or debarment action.²⁴⁴ There are no set rules, however, for determining which agency will take the lead in a particular case. Normally, considerations such as primary contacts—either through contracts or federal assistance programs with a particular federal agency—or a particular interest arising out of the underlying actions giving rise to the potential suspension or debarment, are determinative in designating the lead agency.

In the last several years, EPA has become increasingly aggressive in taking suspension or debarment actions against companies that have been accused or convicted of environmental crimes. If the violation does not arise out of a particular government contract or program, but exclusively concerns the violation of an environmental law or regulation, EPA has consistently taken the lead agency role. In such a context, other federal agencies will typically defer to EPA's Assistant Administrator for Compliance.

The decision to suspend or debar can be limited to the particular organizational element responsible for the offense, extended to other organizational components, or applied to the entire corporation.²⁴⁵ The debarring agency will normally limit the scope of the sanction to the organizational element responsible for the misconduct, unless the evidence shows that other elements or corporate headquarters were involved in the events leading to debarment. If other elements of the corporation remain eligible to receive contracts, however, they may not contract with the debarred component.

The company may present argument and evidence in opposition to the proposed debarment before a final decision is reached.²⁴⁶ A final agency decision to debar is reviewable in federal court, although judicial relief is rarely granted. In certain circumstances, the agency may entertain a petition to reduce the length of a debarment.²⁴⁷ For example, a post-violation change in the ownership of the facility responsible for the wrongdoing is an acceptable ground for discretionary reduction of the term of debarment.²⁴⁸

A company facing an environmental criminal charge should carefully consider the effects of suspension and debarment on its business. EPA and most other federal agencies will negotiate with a company under investigation to resolve the government's concerns regarding the company's integrity without using suspension or debarment; this is not so with listing. The government may be willing to forego suspension and debarment procedures if it is assured of the company's "present responsibility" through other means, such as a settlement agreement that imposes certain conditions on the business. The lead agency may require the company's agreement to operating restrictions, removal or discipline of those responsible for the wrong-doing, and implementation of training and compliance programs. Consequently, settlement discussions in the criminal case and the debarment action may proceed on separate tracks. However, many settlement discussions begin only after a post-indictment suspension has been imposed, which significantly reduces the company's bargaining leverage.

Federal Tax Consequences

A criminal fine, including a fine paid pursuant to a plea of nolo contendere, is not deductible from gross income as an ordinary and necessary business expense under § 162(a) of the Internal Revenue Code.²⁴⁹ However, federal tax regulations provide that amounts paid to the government as "compensatory damages" do not constitute fines or penalties and thus are deductible.²⁵⁰

The case law provides conflicting guidance on the factors that allow a restitutionary payment in a criminal case to be treated as tax deductible. Deductibility determinations are fact-specific and depend on whether the payment is characterized primarily as punitive or compensatory.²⁵¹ Thus, the terms of a plea agreement or sentence may affect the deductibility of a restitutionary payment. With the prosecutor's cooperation, the defendant may be able to structure a restitutionary payment to increase the likelihood of deductibility.²⁵² The prosecutor's ability to affect the extent to which a payment is deductible or a deadweight loss to the company is both an inducement to the business to enter a plea and a source of significant leverage for the government in negotiations.

[25 ELR 10628]

In Stephens v. Commissioner,²⁵³ the deductibility analysis turned on whether the restitutionary payment was ordered instead of, or in addition to, punishment. The Second Circuit held that when restitution is imposed in addition to a specific fine and prison sentence, an inference is raised that the primary purpose of the restitution is compensatory.²⁵⁴ The court thus held that the payment at issue was deductible.

In contrast to Stephens, the Sixth Circuit in Kraft v. United States²⁵⁵ denied a deduction for a restitutionary payment, notwithstanding the fact that it was in addition to a sentence of imprisonment and the imposition of a fine. The plea agreement required the taxpayer to pay restitution to a private party. The Sixth Circuit held that because the payments arose out of a criminal proceeding, they constituted a penalty and were not deductible.²⁵⁶ If, as Kraft implies, the criminal nature of the underlying proceeding alone is sufficient to result in a determination of nondeductibility, then a defendant facing an environmental criminal charge should attempt to arrange for the restitutionary payment to be made in the context of a parallel civil damages action.

In Allied-Signal, Inc. v. Commissioner,²⁵⁷ the Tax Court held that a restitutionary payment made before sentencing, with the firm expectation of a lower sentence as a quid pro quo, was not tax deductible. Prior to sentencing, the defendant, which had pleaded nolo contendere without a plea agreement, made a multimillion-dollar contribution to an environmental fund that benefitted the state. It argued that the payment should be deductible because the payment was voluntary and was made primarily to compensate the state rather than to punish the defendant. The Tax Court rejected those arguments, holding that the payment was involuntarily made as a quid pro quo for a lower fine, and that its primary purpose was punishment.²⁵⁸

As a result of these decisions, a company seeking to resolve environmental criminal charges in part through restitutionary payments can increase the likelihood—though not the certainty—that they will be characterized as tax-deductible compensatory payments by eliminating any indication—in the plea agreement or elsewhere—that the payments are involuntary. The settlement agreement should also state explicitly that restitution is intended to compensate the receiving entity, and not to punish or deter the defendant.²⁵⁹

SEC Disclosure Obligations

The SEC is increasingly concerned with proper disclosure of environmental violations by publicly held companies.²⁶⁰ There are two main sources of these companies' duty to disclose their environmental liabilities: Periodic disclosure requirements and general antifraud provisions.

The SEC's reporting system is centered around Regulation S-K, which lists periodic reporting requirements for registrants.²⁶¹ The provisions of Regulation S-K most relevant to environmental matters are: (a) Item 101, which requires a description of business; (b) Item 103, which requires disclosure of material legal proceedings; and (c) Item 303, which is management's discussion and analysis (MD&A) of financial condition and results of operations.

Under Item 101, the registrant must provide a general description of its business and disclose material effects that compliance with federal, state, and local environmental laws may have on its capital expenditures, earnings, and competitive position.²⁶²

Under Item 103, disclosure is required if the registrant, its subsidiary, or its property is subject to a proceeding that:

is material to the registrant's business or financial condition;

is primarily a claim for damages, or concerns potential monetary sanctions, capital expenditures, deferred charges or charges to income and the amount involved, exclusive of interest and costs, exceeds 10 percent of the current assets of the registrant and its subsidiaries on a consolidated basis; or

involves a governmental authority as a party and involves potential monetary sanctions, unless the registrant reasonably believes that the proceeding will result in no monetary sanctions or sanctions which, exclusive of interest and costs, are less than $ 100,000.²⁶³

A registrant must disclose to its shareholders information about its material environmental liabilities, including pending administrative or judicial proceedings, as well as proceedings that are known to be contemplated by the government.²⁶⁴ A company considering entering a plea to an environmental crime should discuss with its securities counsel whether, based on its knowledge of contemplated proceedings by the government, the company is required to make public disclosure pursuant to the instructions to Item 103.

Under Item 303, the MD&A narrative discussion of the registrant's financial condition should include those "material events and uncertainties known to management that would cause reported financial information not to be necessarily indicative of future operating results or future financial condition."²⁶⁵ The MD&A Interpretive Release expands [25 ELR 10629] the disclosure requirement to include disclosure of known uncertainties unless management can determine in an objectively reasonable assessment that a material effect is not reasonably likely to occur.²⁶⁶

Beyond specific periodic disclosures, general antifraud provisions prohibit the inaccurate representation of a registrant's environmental record. In United Paper Workers International Union v. International Paper Co.,²⁶⁷ a shareholder suit, the court found that the company committed a proxy rule violation by materially misrepresenting its environmental record.

State "Bad Actor" Provisions

A "bad actor" provision is a statute or regulation that denies a license, permit, or other benefit to a person or company based on poor regulatory compliance history. A company facing an environmental criminal charge should carefully review whether its operations are covered by federal or state licensing or regulatory statutes that impose sanctions if the regulated entity, its owners, its key employees, or its affiliates are convicted of a crime.

Virtually all adverse "bad actor" consequences are imposed at the state level.²⁶⁸ A majority of states has enacted statutes under which a history of poor environmental compliance, particularly an environmental criminal conviction, can jeopardize a person's right to hold operating permits, especially if the permit holder or applicant does not make a substantial effort to correct the condition that led to the violation.²⁶⁹ These provisions arise primarily in the hazardous waste area as a result of initiatives to address the penetration of organized crime into solid waste disposal. To enforce these restrictions, several states, including Indiana, New Jersey, and Ohio, require affirmative disclosure of compliance history by the hazardous waste license applicant.²⁷⁰ Failure to disclose compliance history properly can provide independent grounds in some states for denial or revocation of hazardous waste permits.

Denial of a crucial permit under a bad actor provision could effectively put a party out of business. Therefore, the target has significant incentives to structure any plea in a manner that minimizes the adverse effects on the target's qualifications to do business prospectively. Because disqualification is generally discretionary, permit holders are well advised to discuss the likely consequences with civil regulators well in advance of agreeing to any criminal plea.

Conclusion

The federal government has taken a series of spontaneous, incremental steps to deter commission of environmental crimes. Congress has increased the probability that violations will be detected by augmenting EPA and Justice appropriations for enforcement, converting the CAA to a permit program, and expanding the range of sanctions and the severity of potential sentences. The Sentencing Commission has increased both the likelihood that terms of imprisonment will be imposed on individual offenders and the expected length of such terms. In addition, courts have interpreted environmental laws to require proof only of a minimal showing of awareness, substantially easing the prosecutor's burden at trial. In a complementary measure, civil enforcement efforts have tailored the damages sought to offset any economic benefits the polluter derived from illegal discharges. Each of those steps has increased the deterrent effect of the laws.²⁷¹

At the same time, there has been little apparent effort by any branch of government to think through what the appropriate level of deterrence should be. Nor has there been any systematic effort by Congress or the agencies to analyze whether the current level of enforcement is producing excessive societal costs through, for example, creating incentives for inefficient investment in redundant pollution control equipment, over-deterrence of productive activity, or creation of unnecessary obstacles to environmental auditing. These assessments are commonplace in other regulated fields, such as securities and antitrust law, but have not been undertaken in the environmental area.

Although the environmental crimes program is now almost two decades old, the policy question of its proper role has not yet been answered. The enforcement agencies concentrate on prosecuting individual cases and rarely discuss the systemic effects of their actions. Through 1994, Congress followed the sentiment, once articulated by Mae West, that "too much of a good thing is wonderful." Courts, reasoning by analogy,have concluded that Congress must have intended environmental crimes to be public welfare offenses and have deferred to Congress on the policy implications of that interpretation. As the environmental crimes program enters its adolescence, seasoned observers are beginning to question whether the ambiguity of its policy principles remains appropriate.²⁷²

At an administrative level, the structure Congress has adopted virtually assures future controversy about how many and what kinds of environmental criminal cases should be brought. Congress has enacted statutes that, as construed by the courts, take a popular principle near to its limit by making virtually every environmental violation subject to criminal prosecution. As commonly happens, Congress has quietly cut back on the realization of the ideal by appropriating enough money to pursue only a fraction of the potential criminal cases. The disparity between the potential reach of the criminal provisions and the expected actual degree of implementation will inevitably generate friction. In prior years, the conflict could be minimized by [25 ELR 10630] increased annual appropriations for enforcement, but this solution is problematic in an era of tight-fisted fiscal policy. Unless clearly articulated principles are put in place, this disparity will leave policy officials vulnerable to internal and external criticism that they are not bringing enough prosecutions, as Justice learned in 1993-1994. In addition, the open-ended nature of internal agency standards for authorizing prosecutions—which is so useful to policy officials on a day-to-day basis—facilitates second-guessing of their charging decisions in close cases.

EPA and Justice have announced some preliminary steps toward articulating a comprehensive enforcement policy. In recent speeches, senior officials have declared that criminal efforts will be directed toward particular industries; will focus on pollution affecting minorities and low-income populations; will follow a multimedia approach, rather than a medium-specific basis; and will take an ecosystem (geographic) approach where appropriate.²⁷³

These steps are minor implementation details adapted from civil permit programs. They do not begin to substitute for an answer to the core question: "What independent role should criminal enforcement play in the administration of the environmental protection laws?" The consequences of continuing to rely on a seat-of-the-pants approach are starkly displayed in the environmental auditing area. There, the absence of a policy framework has precipitated a sterile, legalistic debate that bears little relationship to the actual issue of how the environment can best be protected.

When this long overdue policy analysis is finally conducted, prominent aspects of the current approach will be shown to be clearly correct. These include the primary focus on prosecuting entities operating outside the permit system, ensuring the low-cost detection of regulatory violations by vigorously policing the integrity of the reporting system, and imposing on violators substantial fines and remedial obligations keyed to the economic benefits of a violation. Difficult policy problems will arise concerning whether prosecutions should be filed against companies operating within the permit system when violations are not covered up, but are disclosed by internal audits or periodic reports. The policy rationale for criminal prosecution in these cases will be problematic because (1) the risk of detection is already high, thereby creating incentives for prompt remediation by the source; and (2) absent a requirement for proof of intent to violate the law, there is a substantial risk of overdeterrence, which may drive companies and municipalities to make inefficient spending choices to minimize the risk of individual criminal prosecution for operational-level personnel.²⁷⁴

These considerations suggest that for entities within the prermit system, Justice and EPA should focus carefully on systematic evasion or departure from the permit and evidence of concealment, misrepresentation, or obstruction in the data-gathering and reporting process. The same considerations also mean that companies and municipalities must pay special attention to the integrity of their regulatory compliance programs and to early, accurate disclosure of any violations that are detected. The most important role environmental counsel can play is in assisting regulated entities to establish effective environmental compliance and auditing programs to prevent or minimize problems at the front end.

Finally, to the extent that EPA and Justice have discretionary enforcement resources, they should take advantage of the flexibility to target criminal prosecutions on the most important pollution problems facing society. On the civil side, EPA and the states are denied this basic authority; they must instead respond to priorities established by Congress in law or by environmental groups in litigation. As internal and external EPA groups concluded in the early 1990s, the resulting system dedicates extensive resources to risks that scientists rank as rather low (such as local groundwater pollution by hazardous waste) and few resources to the most significant environmental risks (such as breakdown of the stratospheric ozone layer). EPA and Justice should determine how their criminal programs could directly support efforts to attack the largest environmental risks, even at the cost of a lower statistical "body count" of criminal convictions. They should defer prosecution of local risks to energized state enforcement programs. Effective use of this freedom might be an important object lesson for Congress of the benefits to be gained by trusting the EPA to determine environmental priorities, rather than codifying the targets in legislation.

1. These elements are derived from ADVISORY WORKING GROUP ON ENVIRONMENTAL SANCTIONS, PROPOSED FEDERAL SENTENCING GUIDELINES FOR ORGANIZATIONS CONVICTED OF ENVIRONMENTAL OFFENSES (Nov. 16, 1993) § 9D1.1(a) [hereinafter DRAFT ENVIRONMENTAL SENTENCING GUIDELINES]; see 58 Fed. Reg. 65764 (Dec. 16, 1993) (notice of public availability). See infra notes 204-16 and accompanying text. Counsel may also wish to consult the International Environmental Management Standards set forth in ISO 14000, developed by the International Standards Organization. Comprehensive guidance to the actual nuts and bolts of an effective environmental compliance and self-auditing program can be found in FRANK B. FRIEDMAN, PRACTICAL GUIDE TO ENVIRONMENTAL MANAGEMENT (6th ed. 1995).

2. Congress clearly recognized these benefits in considering the criminal enforcement provision of the Clean Air Act (CAA) Amendments of 1990, 42 U.S.C. § 7413, ELR STAT. CAA § 113:

Nothing in subsection 113(c) is intended to discourage owners and operators of sources subject to this Act from conducting self-evaluations or self-audits and acting to correct any problems identified. On the contrary, the environmental benefits from such review and prompt corrective action are substantial and section 113 should be read to encourage self-evaluation and self-audits.

Owners and operators of sources are in the best position to identify deficiencies and correct them, and should be encouraged to adopt procedures where internal compliance audits are performed and management is informed. Such internal audits will improve the owners' and operators' ability to identify and correct problems before, rather than after, government inspections and other enforcement actions are needed.

H.R. CONF. REP. No. 952, 101st Cong., 2d Sess. 348 (1990).

3. By contrast, materials generated in a specific corporate audit after an actual environmental discharge are generally fully protected from disclosure under the work product doctrine, because such after-the-fact reviews are normally conducted by counsel "in anticipation of litigation." See infra note 14 and accompanying text.

4. E.g., United States v. White, 950 F.2d 426 (7th Cir. 1991).

5. See Ohio-Sealey Mattress Mfg. Co. v. Kaplan, 90 F.R.D. 21, 28 (N.D. Ill. 1980).

6. Given the expense and delay of counsel's full involvement, some companies have devised practices that are less intensive but provide some degree of protection from the privilege. First, the moment a routine audit turns up a potential problem, it is made a separate project and counsel is involved. This puts the entity in a better position to claim attorney-client privilege, or even work product privilege, because legal advice is thereafter more clearly the focus of any future efforts related to the problem. Second, counsel reviews any final audit report carefully to make sure that the information is not framed in an unnecessarily inculpatory fashion. Third, some companies routinely destroy audit materials on a scheduled basis. Careful internal controls are necessary, however, because this activity could easily be construed as obstruction of justice if the material concerns a current investigation. Fourth, audit reports are distributed strictly on a "need to know" basis to avoid violating confidentiality requirements. The most important principle, however, is that the company must be prepared to disclose fully and voluntarily all violations that are discovered, pay the penalties, and remediate completely any resulting contamination.

7. See Simon v. G.D. Searle & Co., 816 F.2d 397, 403 (8th Cir.) (business documents, such as internal risk-management estimates, sent to corporate officers and lawyers are not automatically privileged), cert. denied, 484 U.S. 917 (1987); see also 4 MOORE'S FEDERAL PRACTICE P26.11[2] at 175-77 (1995).

8. See, e.g., United States v. Chevron, No. 88-6681, 1989 U.S. Dist. LEXIS 12267 (E.D. Pa. Oct. 16, 1989) (privilege rejected); Olen Properties Corp. v. Sheldahl, Inc., 24 ELR 20936 (C.D. Cal. Apr. 12, 1994) (privilege upheld).

9. See, e.g., U.S. Postal Serv. v. Phelps Dodge Ref. Corp., 852 F. Supp. 156 (E.D.N.Y. 1994) (preparation of a waste management plan viewed as an "environmental" service, not a "legal" service, and therefore not protected); In re Grand Jury Matter, 147 F.R.D. 82 (E.D. Pa. 1992) (environmental studies of soil and remediation of property were not privileged even though in-house counsel participated substantially in the process, because many of the tasks could have been performed by nonattorneys).

10. Bredice v. Doctors Hosp., Inc., 50 F.R.D. 249, aff'd on reh'g, 51 F.R.D. 187 (D.D.C. 1970), aff'd, 479 F.2d 920 (D.C. Cir. 1973).

11. See Reichhold Chems., Inc. v. Textron, Inc., 25 ELR 20307 (N.D. Fla. 1994) (privilege upheld).

12. See Koppers Co. v. Aetna Casualty & Sur. Co., 847 F. Supp. 360 (W.D. Pa. 1994) (privilege denied); United States v. Dexter Corp., 132 F.R.D. 8 (D. Conn. 1990) (privilege denied).

13. See, e.g., FTC v. TRW, Inc., 628 F.2d 207 (D.C. Cir. 1980); Emerson Elec. Co. v. Schlesinger, 609 F.2d 898 (8th Cir. 1979); United States v. Noall, 587 F.2d 123 (2d. Cir. 1978); Reynolds Metals Co. v. Rumsfeld, 564 F.2d 663 (4th Cir. 1977).

14. Hickman v. Taylor, 329 U.S. 495 (1946); see generally Jeffrey F. Ghent, Annotation, Developments, Since Hickman v. Taylor, of Attorney's "Work Product" Doctrine, 35 A.L.R.3d 412 (1971); Depositions & Discovery, 23 AM. JUR. 2d § 55 (1983) (Statements of Reports Prepared in the Regular Course of Business). The work product doctrine can, however, apply to specific audits. See supra note 3.

15. U.S. EPA, Environmental Auditing Policy Statement, 51 Fed. Reg. 25004 (July 9, 1986).

16. Id. at 25007 (emphasis added).

17. "EPA's authority to request an audit report, or relevant portions thereof, will be exercised on a case-by-case basis where the Agency determines it is needed to accomplish a statutory mission, or where the Government deems it to be material to a criminal investigation." Id.

18. Id.

19. Courts are divided over whether documents disclosed to the government in an enforcement action remain eligible for common-law privileges against disclosure to third parties in other actions. See, e.g., Westinghouse Elec. Corp. v. Philippines, 951 F.2d 1414 (3d Cir. 1991) (privilege waived); In re Martin Marietta Corp., 856 F.2d 619 (4th Cir. 1988) (privilege waived); Permian Corp. v. United States, 665 F.2d 1214 (D.C. Cir. 1981) (privilege waived); Diversified Indus., Inc. v. Meredith, 572 F.2d 596 (8th Cir. 1977) (en banc) (upholding privilege on limited waiver theory). The implications of disclosure are discussed more fully infra.

Because waiver is a court-constructed doctrine, a change in agency rules or policy to allow for "limited waiver" would not be binding law. The only way to protect audit materials from third parties is either by EPA and Justice not requiring their disclosure in the first place or by Congress enacting a "limited waiver" statute. Thus, this risk is beyond the agencies' power to resolve, even with a binding rule.

20. There have been several important cases showing that the post-disclosure risk of civil punishment is real. See, e.g., $ 1.05 Million Fine Against Coors May Deter Corporate Environmental Audits, Firm Says, 24 Env't Rep. (BNA) 570 (July 30, 1993); United States v. Chevron, No. 88-6681, 1989 U.S. Dist. LEXIS 12267 (E.D. Pa. Oct. 16, 1989); United States v. Dexter Corp., 132 F.R.D. 8 (D. Conn. 1990); U.S. Postal Serv. v. Phelps Dodge Ref. Co., 852 F. Supp. 156 (E.D.N.Y. 1994). Similarly, a recent Price Waterhouse survey discovered 25 cases in which government agencies or third parties sought confidential audit information to prove a company's liability. Jim Moore & Nancy Newkirk, Not Quite a Giant Step, ENVTL. F., May/June 1995, at 16.

21. See infra notes 43-48 and accompanying text.

22. Memorandum from Earl E. Devaney, Director, Office of Criminal Enforcement, to All EPA Employees Working in or in Support of the Criminal Enforcement Program. The Exercise of Investigative Discretion (Jan. 12, 1994) [hereinafter Devaney Memorandum].

23. Id. at 6.

24. U.S. EPA, Notice of Public Meeting on Auditing, 59 Fed. Reg. 31914 (June 20, 1994) (noting that Colorado, Indiana, Kentucky, and Oregon had enacted "self-evaluative" privileges for audit reports).

25. U.S. EPA, Restatement of Policies Related to Environmental Auditing, 59 Fed. Reg. 38455 (July 28, 1994) (notice).

26. U.S. EPA, Voluntary Environmental Self-Policing and Self-Disclosure Interim Policy Statement, 60 Fed. Reg. 16875 (Apr. 3, 1995).

27. Id. at 16876-77.

28. Id. at 16877.

29. Id. The policy sets forth the conditions a company must satisfy to enjoy the policy's two principal benefits—reduced civil penalties and nonreferral for criminal prosecution. Id. at 16877-78.

30. Id.

31. Id. at 16879.

32. Id. at 16878. The policy also includes the Agency's intended response to a company's good-faith efforts to disclose and rectify environmental problems. Id. at 16876-77.

33. Id. at 16878.

34. There are at least two reasons why this approach fails to resolve industry concerns. First, the de minimis intent element for criminal violations means that virtually all violations may be prosecuted criminally. Thus, the "criminal conduct" exception can be read as swallowing the leniency the guidance suggests. Second, the policy applies only to disclosures that are not otherwise required by law. For companies that have obtained permits and are covered by reporting requirements, this exception would take away many of the policy's apparent benefits. In addition, there are numerous other reporting obligations under a wide array of environmental statutes that are outside the policy's scope. Thus, this approach may inadvertently treat more harshly companies that are doing their best to comply with the law.

35. U.S. DOJ, FACTORS IN DECISIONS ON CRIMINAL PROSECUTIONS FOR ENVIRONMENTAL VIOLATIONS IN THE CONTEXT OF SIGNIFICANT VOLUNTARY COMPLIANCE OR DISCLOSURE EFFORTS BY THE VIOLATOR (July 1, 1991) [hereinafter FACTORS IN DECISIONS ON CRIMINAL PROSECUTIONS].

36. Id. at 1.

37. The proposed environmental sentencing guidelines for organizations set forth in detail the criteria for a model environmental compliance and auditing program. DRAFT ENVIRONMENTAL SENTENCING GUIDELINES, supra note 1. They provide for substantial mitigation of a criminal fine for a company that is convicted despite having such a program in place. This serves as small consolation to most companies, whose good-faith efforts ought to protect them from any criminal prosecution to begin with. Furthermore, the proposed guidelines do nothing to address companies' other major disincentive to voluntary auditing and disclosure—the prospect of sizeable civil penalties.

38. FACTORSIN DECISIONS ON CRIMINAL PROSECUTIONS, supra note 35, at 4-5.

39. Id. at 5-6.

40. Id. at 14-15; see also United States v. Caceres, 440 U.S. 741 (1979) (violation of Internal Revenue Service internal regulation not a basis for excluding tape recordings from evidence when neither Constitution nor federal law requires compliance with regulation). Like EPA's policy, Justice's guidance is not legally enforceable in court. It also requires companies to "cooperate" completely and to disclose audit materials in order to retain any hope of leniency. Compliance with this requirement effectively constitutes a waiver of common-law privileges if private parties seek access to internal investigation materials that companies have turned over to prosecutors. See United States v. Billmyer, 57 F.3d 31, 36-37 (1st Cir. 1995).

41. Even before this delegation of power, however, individual prosecutors occasionally used the threat to seek access to audit material as leverage to force plea bargains. Under the January 1993 bluesheet revision to the U.S. Attorneys Manual, review of requests for access to audit documents was one of the priority areas reserved for centralized review in Washington. See OFFICE OF THE ATTORNEY GENERAL, BLUESHEET REVISION TO THE U.S. ATTORNEYS' MANUAL ON ENVIRONMENTAL CRIMES (Jan. 12, 1993) [hereinafter 1993 BLUESHEET REVISION]. This policy was subsequently reversed by Attorney General Reno. See OFFICE OF THE ATTORNEY GENERAL, BLUESHEET REVISION TO THE U.S. ATTORNEYS' MANUAL ON ENVIRONMENTAL CRIMES 1 (Aug. 23, 1994) [hereinafter 1994 BLUESHEET REVISION]. Under the new policy, main Justice has no formal role in such decisions by U.S. Attorneys.

42. See generally Cooney et al., Criminal Enforcement of Environmental Laws: Part I, 25 ELR 10459 (Sept. 1995); Cooney et al., Criminal Enforcement of Environmental Laws: Part II—The Knowledge Element in Environmental Crimes, 25 ELR 10525 (Oct. 1995).

43. See 1995 Ark. Acts 350; COLO. REV. STAT. § 13.25-126.5 (1994); 1995 Idaho Sess. Laws 359; ILL. ANN. STAT. ch. 415, para. 5/52.2 (Smith-Hurd 1994); IND. CODE § 13-10-3-1 (1994); 1995 Kan. Sess. Laws 204; KY. REV. STAT. ANN. § 224.01-040 (Baldwin 1994); 1995 Minn. Sess. Law Serv. 168 (West); 1995 Miss. Laws 627; OR. REV. STAT. § 468.963 (1993); 1995 Tex. Sess. Law Serv. 219 (Vernon); 1995 Utah Laws 304; 1995 Va. Acts 564; 1995 Wyo. Sess. Laws 58. On April 17, 1995, the Governor of Arizona vetoed an audit privilege bill (S.B. 1290) passed by the legislature.

44. See 25 Env't Rep. (BNA) 2186, 2188 (Mar. 10, 1995).

45. See, e.g., COLO. REV. STAT. § 13.25-126.5; OR. REV. STAT. § 468.963.

46. See, e.g., OR. REV. STAT. § 468.963.

47. See Cooney et al., Criminal Enforcement of Environmental Laws: Part I, 25 ELR 10459, 10476-77 (Sept. 1995) (discussing revocation of EPA-authorized state programs in the context of the Resource Conservation and Recovery Act (RCRA)).

48. See 25 Env't Rep. (BNA) 2412 (Apr. 7, 1995) (statement by EPA Administrator Carol M. Browner).

49. H.R. 1047, 104th Cong., 1st Sess. (1995). The bill was cosponsored by, among others, Minority Whip Tom DeLay (R-Tex.), Judiciary Committee Chairman Henry Hyde (R-Ill.), and Natural Resources Committee Chairman Don Young (R-Alaska).

50. COLO. REV. STAT. § 13.25-126.5 (1994).

51. S. 583, 104th Cong., 1st Sess. (1995).

52. For example, the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) requires maintenance of records relating to the location and condition of a facility where hazardous waste has been stored, plus the identity and characteristics of such waste. 42 U.S.C. § 9603(d), ELR STAT. CERCLA § 103(d). The Federal Insecticide, Fungicide, and Rodenticide Act (FIFRA) requires pesticide producers to maintain certain records regarding their operations and products. 7 U.S.C. § 136f(a), ELR STAT. FIFRA § 8(a). The Federal Water Pollution Control Act (FWPCA) requires regulated facilities to maintain records as a condition to obtaining a discharge permit. 33 U.S.C. § 1318(a), ELR STAT. FWPCA § 308(a). The Toxic Substances Control Act (TSCA) requires chemical manufacturers to maintain records relating to the environmental and health effects of the chemical substances they produce, plus records of significant adverse environmental or physical reactions alleged to be caused by their chemicals. 15 U.S.C. § 2607, ELR STAT. TSCA § 8.

53. See, e.g., United States v. Tivian Labs., Inc., 589 F.2d 49, 9 ELR 20008 (1st Cir. 1978).

54. During the 1980s and early 1990s, EPA allowed the clearances for many of its record retention obligations to lapse, in violation of the Paperwork Reduction Act. Under the Act's public protection provision, EPA cannot bring enforcement actions for violations of paperwork requirements whose Officeof Management and Budget clearance numbers have lapsed. 44 U.S.C. § 3512. This led to the demise of several pending cases and the noninstitution of many others.

55. See 42 U.S.C. § 7414(a), ELR STAT. CAA § 114(a) (EPA may require emission sources to establish and maintain records, to file reports, to install and use monitoring devices, and to provide such other information as the Agency may reasonably require).

56. Schneckloth v. Bustamonte, 412 U.S. 218 (1973).

57. Indeed, an investigator's proposal to obtain prior judicial authorization requires preapproval from the appropriate EPA regional office. Memorandum from Assistant Administrator for Enforcement, to Regional Administrators et al., Conduct of Inspections After the Barlow's Decision 2 (Apr. 11, 1979) [hereinafter Memorandum on Conducting Inspections]. The memorandum refers to the U.S. Supreme Court's decision in Marshall v. Barlow's, Inc., 436 U.S. 307, 8 ELR 20434 (1978). See infra notes 68-71 and accompanying texts.

58. See Coolidge v. New Hampshire, 403 U.S. 443 (1971) (in arresting defendant, police did not require a warrant to seize automobiles in plain view in driveway); Horton v. California, 496 U.S. 128 (1990) (seizure of evidence not described in warrant but in plain view is permissible, even though discovery of the evidence was not inadvertent).

59. The Memorandum on Conducting Inspections provides that "an inspector's observations from the public area of a plant or even for certain private property not closed to the public are admissible. Observations made before presentation of credentials while on private property which is not normally closed to the public are admissible." Memorandum on Conducting Inspections, supra note 57, at 12 n.18.

60. 476 U.S. 227, 16 ELR 20679 (1986).

61. Id. at 237-38, 16 ELR at 20682-83.

62. See 42 U.S.C. § 6927(a), ELR STAT. RCRA § 3007(a); 42 U.S.C. § 9604(e), ELR STAT. CERCLA § 104(e); Id. § 7414(a), ELR STAT. CAA § 114(a); 33 U.S.C. § 1318(a), ELR STAT. FWPCA § 308(a); 15 U.S.C. § 2610, ELR STAT. TSCA § 11; 7 U.S.C. § 136g, ELR STAT. FIFRA § 9.

63. The times at which these inspections may be performed are left to the Agency's reasonable discretion. For example, CERCLA authorizes EPA to enter facilities "at reasonable times." 42 U.S.C. § 9604(e)(3), ELR STAT. CERCLA § 104(e)(3). RCRA provides for mandatory biennial inspection of all permitted facilities and authorizes permissive administrative inspections "at all reasonable times." 42 U.S.C. § 6927(a) and (e), ELR STAT. RCRA § 3007(a) and (e).

64. 550 F. Supp. 1361, 13 ELR 20370 (W.D. Wash. 1982).

65. Id. at 1363, 13 ELR at 20371 (quoting H.R. 1491, 94th Cong., 2d Sess. 3, reprinted in U.S.C.C.A.N. 6238, 6241).

66. 881 F.2d 352, 19 ELR 21144 (7th Cir. 1989).

67. Id. at 360, 19 ELR at 21148 (quoting the district court's opinion in National-Standard Co. v. Adamkus, 685 F. Supp. 1040, 1049, 18 ELR 21455, 21460 (N.D. Ill. 1988)).

68. 436 U.S. 307, 8 ELR 20434 (1978).

69. 29 U.S.C. § 657(a).

70. Barlow's, 436 U.S. at 311-15, 8 ELR 20434 at 20435-36.

71. Id. at 320-21, 8 ELR at 20437.

72. Memorandum on Conducting Inspections, supra note 57, at 7.

73. Id.

74. Id. at 11.

75. See Michigan v. Clifford, 464 U.S. 287, 293 (1987) (aftermath of a fire presents exigencies that do not tolerate the delay necessary to obtain an administrative search warrant).

76. Memorandum on Conducting Inspections, supra note 57, at 5.

77. See 42 U.S.C. § 7414(a), ELR STAT. CAA § 114(a); 33 U.S.C. § 1318(a), ELR STAT. FWPCA § 308(a).

78. Hale v. Henkel, 201 U.S. 43 (1906); United States v. Reno, 522 F.2d 572 (10th Cir. 1975); 2 CHARLES A. WRIGHT, FEDERAL PRACTICE AND PROCEDURE CRIMINAL § 275 (2d ed. 1982).

79. See United States v. Reed, 726 F.2d 570 (9th Cir.), cert. denied, 469 U.S. 871 (1984).

80. See United States v. Lieberman, 608 F.2d 889, 904 (1st Cir.), cert. denied, 444 U.S. 1019 (1979).

81. See Upjohn Co. v. United States, 449 U.S. 338 (1981); In re Grand Jury Subpoenas Duces Tecum, 773 F.2d 204 ((8h Cir. 1985).

82. Braswell v. United States, 487 U.S. 99 (1988); see also Fisher v. United States, 425 U.S. 391 (1976). Only an individual may assert the Fifth Amendment privilege against self-incrimination as grounds for objecting to a subpoena that calls for the production of documents; the privilege is not available to corporations, partnerships, or even sole proprietorships.

83. See United States v. Gibbons, 607 F.2d 1320 (10th Cir. 1979); United States v. Beasley, 550 F.2d 261 (5th Cir.), cert. denied, 434 U.S. 938 (1977).

84. With respect to the Fifth Amendment privilege against self-incrimination, the Supreme Court has recognized the testimonial aspects of producing even corporate documents. Under United States v. Doe, 465 U.S. 605 (1984), the actual production of documents by an individual is testimonial in nature. Any incriminating information in the documents produced may thus be imputed to the individual producing the documents, waiving any privilege against self-incrimination as to that information. See In re Grand Jury Subpoena Duces Tecum Dated June 13, 1983 and June 22, 1983, 722 F.2d 981 (2d Cir. 1983). Therefore, when designating a custodian of records in order to authenticate corporate documents, counsel must first assess the officer's potential personal liability.

85. See Vaughn v. Rosen, 484 F.2d 820 (D.C. Cir. 1973), cert. denied, 415 U.S. 977 (1974).

86. Counsel should also determine whether producing copies of documents, rather than originals, is acceptable.

87. Conducting an internal investigation is discussed more fully infra.

88. See generally JUDSON W. STARR, THE KNOCK ON THE DOOR: PREPARING FOR AND RESPONDING TO A CRIMINAL INVESTIGATION (Chemical Manufacturers Association 1991).

89. See United States v. McCain, 677 F.2d 657, 660 (8th Cir. 1982).

90. The law is narrower; it does not require EPA to share the actual samples so that the owner can perform independent testing to detect pollutants. If any analysis is made of samples taken at a site, "the results of such analysis shall be furnished promptly to the owner [or] operator. . . ." 42 U.S.C. § 6927(a), ELR STAT. RCRA § 3007(a) (emphasis added); see also United States v. Protex Indus., Inc., 874 F.2d 740, 745-46, 19 ELR 21061, 21063 (10th Cir. 1989) (government's failure to provide defendant with the results of laboratory analyses provides no defense to criminal charges under RCRA).

91. In any criminal investigations, it is difficult to determine the government's focus and ability to prove its allegations because of grand jury secrecy rules and limited discovery available to the target before indictment. In the environmental area in particular, if the corporation does not obtain the split samples from the search and quickly follow up with any employees whom the government contacted, it will never be able to keep pace with the investigation.

95. This issue may arise in both the government's investigation and the company's internal investigation.

96. See, e.g., Wheat v. United States, 486 U.S. 153 (1988) (district court properly refused to permit lawyer with a potential conflict of interest to represent criminal defendant, even though the client was willing to waive the conflict arising from multiple representation of persons indicted for one conspiracy); see also MODEL RULES OF PROFESSIONAL CONDUCT Rule 1.13(d).

97. FED. R. CRIM. P. 44(c); see also Wheat, 486 U.S. at 163 (trial court has substantial latitude in refusing waivers of conflicts of interest, even in cases in which "a potential for conflict exists which may or not burgeon into an actual conflict as the trial progresses").

98. See United States v. Schwimmer, 892 F.2d 237 (2d Cir. 1989), cert. denied, 112 S. Ct. 55 (1991).

99. Hunydee v. United States, 355 F.2d 183 (9th Cir. 1965); Continental Oil Co. v. United States, 330 F.2d 347 (9th Cir. 1964).

100. See, e.g., United States v. Anderson, 790 F. Supp. 231 (W.D. Wash. 1992) (defendant's participation in joint defense agreement that limited counsel's access to confidential information on cross-examination did not present conflict of interest requiring counsel's disqualification).

101. 449 U.S. 383 (1981).

102. The court of appeals found that the privilege applied only to communications with the "control group"—those "officers and agents . . . responsible for directing [the company's] actions in response to legal advice." United States v. Upjohn Co., 600 F.2d 1223, 1225 (6th Cir. 1979).

103. Upjohn, 449 U.S. at 394.

104. Id.

105. Hickman v. Taylor, 329 U.S. 495, 508 (1947).

106. See generally Richard Marmaro, Protecting the Results of Internal Corporate Investigations, 1 White Collar Crime Rep. No. 4, July/Aug. 1987.

107. See, e.g., Westinghouse Elec. Corp. v. Philippines, 951 F.2d 1414, 1426 n.12 (3d Cir. 1991) ("When a party discloses a portion of otherwise privileged materials while withholding the rest, the privilege is waived only as to those communications actually disclosed, unless a partial waiver would be unfair to the party's adversary.").

108. 856 F.2d 619, 623-26 (4th Cir. 1988), cert. denied, 490 U.S. 1011 (1989).

109. See, e.g., United States v. Billmyer, 57 F.3d 31 (1st Cir. 1995) (disclosing to the government results of an internal investigation conducted by counsel waived the privilege and therefore compelled the company to produce the documents in response to a subpoena served by former corporate employees who were indicted based in part on that disclosure).

110. 951 F.2d 1414 (3d Cir. 1991).

111. Id. at 1427 n.14. Following the reasoning in Permian Corp. v. United States, 665 F.2d 1214 (D.C. Cir. 1981), the Third Circuit explicitly rejected the holding in Diversified Indus., Inc. v. Meredith, 572 F.2d 596 (8th Cir. 1978) (en banc), that voluntary disclosure to the government constitutes only a limited waiver of the attorney-client privilege. Westinghouse, 951 F.2d at 1423-27.

112. The possible collateral civil consequences of a criminal conviction are discussed in detail infra.

113. No. 91-131 (D.N.J. Mar. 20, 1991) (commonly known as the Exxon Bayway case). See infra note 237 and accompanying text.

114. FACTORS IN DECISIONS ON CRIMINAL PROSECUTIONS, supra note 35, at 3-4.

115. DRAFT ENVIRONMENTAL SENTENCING GUIDELINES, supra note 1, proposed § 9C1.2(a).

116. In the authors' experiences, several months into criminal investigations, prosecutors have subpoenaed all documents that reflect any changes in the method of operation of the specific environmental practice that is the subject of the grand jury investigation. See FED. R. EVID. 407.

117. Kastigar v. United States, 406 U.S. 441 (1970).

118. Baxter v. Palmigiano, 425 U.S. 308, 316-320 (1976) (drawing an adverse inference in a civil case is not an impermissible consequence of the exercise of the privilege against self-incrimination).

119. United States v. Kordel, 397 U.S. 1 (1970),

120. Rule 6(e) generally prohibits the disclosure of matters occuring before a grand jury.

121. See, e.g., United States v. Fields, 592 F.2d 638, 643 (2d Cir. 1978), cert. denied, 442 U.S. 917 (1979) (Food and Drug Administration's insistence that defendant answer interrogatories while grand jury investigation was underway did not violate Fifth Amendment right against self-incrimination); United States v. LaSalle Nat'l Bank, 437 U.S. 298 (1978) (parallel civil and criminal investigations in tax area are valid.)

122. 470 F. Supp. 1336, 9 ELR 20713 (N.D. Ill. 1979).

123. U.S. DOJ, Land and Natural Resources Division, Directive No. 5-87, Guidelines for Civil and Criminal Parallel Proceedings (Oct. 13, 1987), ELR ADMIN. MAT. I 35159 [hereinafter Direcrive No. 5-87]. Institution of parallel procedures was one of the issues specifically reserved for resolution by Washington in the January 1993 Bluesheet Revision, supra note 41, which was later superseded by teh 1994 Bluesheet Revision, supra note 41.

124. 18 U.S.C. §§ 3161-3174.

125. See infra notes 218-24 and accompanying text.

126. Directive No. 5-87, supra note 123, at 2, ELR Admin. Mat. I at 35159.

127. United States v. Sells Eng'g, Inc., 463 U.S. 418; United States v. Doe, 481 U.S. 102 (1987).

128. Directive No. 5-87, supra note 123, at 3, ELR Admin. Mat. I at 35159.

129. Id. at 4, ELR Admin. Mat. I at 35159.

130. Id.; see also United States v. LaSalle Nat'l Bank, 437 U.S. 298 (1978).

131. 387 U.S. 523 (1967).

132. Directive No. 5-87, supra note 123, at 4, ELR Admin. Mat. I at 35159.

133. Id. at 5, ELR Admin. Mat. I at 35159. The directive also notes that "Miranda warnings are unnecessary during civil discovery." Id. Therefore, it instructs government attorneys to give the following standard response to witness inquiries about criminal liability: "[T]he United States is free to choose civil, criminal or administrative enforcement and any decision to take one type of action does not preclude another type of action." Id., |$X{ELR Admin. Mat. I at 35160|||}; see also United States v. Mitchell, |$W{966 F.2d 92|L|400490|}, 22 ELR 21291 (2d Cir. 1992) (statements made to EPS investigators may be suppressed in a criminal case only if defendant shows by clear and convincing evidence that agents affirmatively misled him as to the true nature of the investigation).

134. Memorandum from Steven A. Herman, Assistant Administrator, to All Assistant Administrators et al., Parallel Proceedings Policy (June 24, 1994), |$X{ELR Admin. Mat. 35599|||}.

135. Id. at 3 n.3, ELR ADMIN. MAT. I at 35599 n.3. The policy also notes that "DOJ policy affects the Agency's ability to pursue a civil judicial action that is related to a pending investigation." Id.

136. Id. at 4, ELR ADMIN. MAT. I at 35599.

137. The intermediate strategy of allowing the civil matter to go forward but imposing a protective order on its fruits to prevent their use in the criminal case was recognized in Martindell v. ITT Corp., 594 F.2d 291 (2d Cir. 1979), but later disapproved in In re Grand Jury Proceedings, 995 F.2d 1013 (11th Cir. 1993).

138. E.g., SEC v. Dresser Indus., Inc., 628 F.2d 1368 (D.C. Cir.) (en banc), cert. denied, 449 U.S. 993 (1980) (the SEC's use of civil investigative warrants was lawful even though it had previously referred allegations about the company to Justice for criminal investigation).

139. See In re Grand Jury Proceedings, 995 F.2d at 1018 n.11 (The "civil trial court may stay discovery until the grand jury investigation is completed.").

140. See, e.g., Dresser Indus., 628 F.2d at 1368.

141. See, e.g., Golden Quality Ice Cream Co. v. Deerfield Specialty Papers, Inc., 87 F.R.D. 53, 56 (E.D. Pa. 1980) (resolution of stay issue requires balancing "the interests of the public in the pending civil and criminal litigation" against other factors, including defendant's Fifth Amendment rights).

142. If the government seeks a stay, however, a court is likely to grant it. See, e.g., United States v. Hugo Key & Son, Inc., 672 F. Supp. 656, 18 ELR 20272 (D.R.I. 1987) (staying proceedings in a civil CAA case pending resolution of parallel criminal investigation so as to prevent harm to paramount government interest, including protecting informants' identity against disclosure in civil discovery). The government's arguments for a stay would appear stronger if a stay is necessary to prevent the statute of limitations from expiring on civil charges pending resolution of the criminal matter.

143. See, e.g., Helvering v. Mitchell, 303 U.S. 391 (1938).

144. E.g., United States v. Morgan, 51 F.3d 1105 (2d Cir. 1995) (double jeopardy protection attaches only if civil sanction is "overwhelmingly disproportionate" and "bears so little relationship to making the government whole as to shock the conscience of the court").

145. 490 U.S. 435 (1989).

146. In a prior criminal case, the defendant had pleaded guilty to 65 false claims for Medicare reimbursement overcharges of $ 9 each. Invoking the doctrine of collateral estoppel, the district court granted summary judgment to the government in a subsequent civil false claims case. The civil statute provided for a penalty of $ 2,000 per violation.

147. Halper, 490 U.S. at 451.

148. See United States v. Louisville Edible Oil Prods., Inc., 926 F.2d 584, 21 ELR 20690 (6th Cir.), cert. denied, 112 S. Ct. 177 (1991) (Halper doctrine does not apply when different sovereigns impose sanctions under their respective laws for the same act).

149. Petite v. United States, 361 U.S. 529 (1960); see also Cooney et al., Criminal Enforcement of Environmental Laws: Part I, 25 ELR 10459, 10474 (Sept. 1995).

150. For example, in the Exxon Valdez case, the company made $ 100 million in restitutionary payments earmarked for restoration projects in Alaska related to the oil spill for which it pleaded guilty to violations of FWPCA §§ 301(a) and 309(c)(1)(A), 33 U.S.C. §§ 1311(a) and 1319(c)(1)(A); the Refuse Act, 33 U.S.C. §§ 407 and 411; and the Migratory Bird Treaty Act, 16 U.S.C. §§ 703 and 707(a). United States v. Exxon Corp., No. A91-015CR (D. Alaska Mar. 22, 1991).

151. The tax deductibility of criminal penalties is discussed more fully infra.

152. U.S. SENTENCING COMMISSION, GUIDELINES MANUAL (Nov. 1994) [hereinafter SENTENCING GUIDELINES].

153. "The Guidelines bind judges and courts in the exercise of their . . . responsibility to pass sentence in criminal cases." Mistretta v. United States, 488 U.S. 361, 391 (1989).

154. Despite intensive efforts over the last eight years, however, the Commission has not yet been able to devise comparable guidelines for the fines that should be imposed on corporations convicted of environmental crimes, due to the difficulty of adapting general sentencing principles to crimes that involve economic externalities and a de minimis mental element. See infra note 192.

155. The court "shall impose a sentence of the kind, and within the range" established by the applicable guidelines. 18 U.S.C. § 3553(b).

156. The general "departure" guidelines, which apply to all the guidelines, are found at SENTENCING GUIDELINES, supra note 152, § 8K. The application notes following each of the specific environmental offenses list possible departures applicable to each. See application notes accompanying id. §§ 2Q1.1, 2Q1.2, 2Q1.

157. The other three offenses are tampering or attempted tampering with public water system, threatened tampering with public water system, and hazardous or injurious devices on federal lands. See id. §§ 2Q1.4, 2Q1.5, 2Q1.6.

158. Id. § 2Q1.1.

159. Id. § 2Q1.2.

160. Id. § 2Q1.3.

161. In very limited circumstances, application of specific offense characteristics might decrease the base offense level. For example, under § 2Q1.2, if a person mishandles a hazardous or toxic substance but the offense is merely a recordkeeping or reporting violation, the base level may be decreased by two levels. Id. § 2Q1.2(b)(6).

162. Id. §§ 2Q1.2(b)(1)(A) (hazardous waste), 2Q1.3(b)(1)(A) (nonhazardous waste). See United States v. Suarez, 15 F.3d 1094 (9th Cir. 1994) (trial court required to impose either a six-level increase under § 2Q1.3(b)(1)(A) for an "ongoing, continuous or repetitive discharge," or a four-level increase under § 1.3(b)(1)(B) "if the offense otherwise involved a discharge"). Compare United States v. Strandquist, 993 F.2d 395, 23 ELR 21429 (4th Cir. 1993) (actual environmental contamination not required for "ongoing, continuous or repetitive" discharge under § 1.3(b)(1)(A)) and United States v. Goldfaden, 959 F.2d 1324, 22 ELR 21069 (5th Cir. 1992) (actual environmental contamination not necessary under § 1.2(b)(1) to increase offense level for repetitive discharges), conviction on remand aff'd, 987 F.2d 225, 23 ELR 20774 (5th Cir. 1993) with United States v. Ferrin, 994 F.2d 658, 23 ELR 20854 (9th Cir. 1993) (no enhancement under § 1.2(b)(1) for discharge that did not cause environmental contamination).

163. SENTENCING GUIDELINES, supra note 152, §§ 2Q1.2(b)(2), 2Q1.3(b)(2).

164. Id. §§ 2Q1.2(b)(3), 2Q1.3(b)(3).

165. Id. §§ 2Q1.2(b)(4), 2Q1.3(b)(4).

166. Id. § 2Q1.2(b)(2).

167. These adjustments are found in the application notes that follow each subpart. Commentary that interprets or explains a guideline is authoritative and binding on a court, much like an agency's interpretation of its own rules, unless the commentary violates the U.S. Constitution or a federal statute, or is inconsistent with, or a plainly erroneous reading of, the guideline. Stinson v. United States, 113 S. Ct. 1913, 1915 (1993).

168. SENTENCING GUIDELINES, supra note 152, § 2Q1.2, Application Note 4.

169. Id., Application Note 8.

170. Id., Application Note 7.

171. Id. § 5K1.1.

172. Id. § 3B1.1(a); see also United States v. Goldsmith, 978 F.2d 643, 23 ELR 20281 (11th Cir. 1992) (upholding two-level increase because defendant was a supervisor, even though three men working for him were not prosecuted); United States v. Dean, 969 F.2d 187, 22 ELR 21296 (6th Cir. 1992) (affirming enhancement of sentence under § 3B1.1(b) because defendant was a manager or supervisor of criminal activity involving five or more participants; "participants" included those on an equal footing with defendant or his superiors, and not merely his subordinates), cert. denied, 113 S. Ct. 1852 (1993); United States v. Irby, 944 F.2d 902 (4th Cir. 1991) (affirming two-level increase under § 3B1.1(c) because defendant supervised an employee whom he directed to discharge raw sewage illegally).

173. SENTENCING GUIDELINES, supra note 152, § 3C1.1; see also United States v. Weitzenhoff, 1 F.3d 1523, 23 ELR 21322 (9th Cir. 1993), reh'g denied, opinion amended, 35 F.3d 1275, 24 ELR 21504 (1994) (two-level enhancement for obstruction of justice based on perjury during trial), cert. denied sub nom. Mariani v. United States, 115 S. Ct. 939 (1995).

174. SENTENCING GUIDELINES, supra note 152, § 3E1.1.

175. Id. § 5, Part A. A defendant's Criminal History Category is determined by the total criminal history points calculated from id. § 4, Part A.

176. Id. § 5A.

177. Id. § 5E1.2. In addition, under the Alternative Fines Act, the government has the option of seeking, instead of the maximum permitted by the environmental statutes, fines of up to twice the profits realized by the company as a result of noncompliance, and/or twice the harm caused to injured parties. 18 U.S.C. § 3571. The most prominent use of this statute was in the case involving the Ashland Oil tank collapse. The government accepted a nolo contendere plea and obtained a fine of $ 2.25 million. United States v. Ashland Oil, Inc., No. 88-146 (W.D. Pa. Mar. 9, 1989); see also United States v. Ashland Oil, Inc., 20 ELR 20399, 20399 n.1 (W.D. Pa. June 19, 1989).

178. SENTENCING GUIDELINES, supra note 152, § 5E1.2(a).

179. Id. §§ 5B (probation), 5E1.1 (restitution).

180. Id. §§ 5B1.3, 5B1.4. Probation may not be imposed in lieu of imprisonment for Class A and B felonies, or if the statute establishing the offense precludes probation. Id. § 5B1.1(b). A Class A felony is punishable by death or life imprisonment; a Class B felony is punishable by imprisonment for 25 years or more. 18 U.S.C. § 3559.

181. SENTENCING GUIDELINES, supra note 152, § 5B1.1, Application Note 2.

182. See United States v. Goldfaden, 959 F.2d 1324, 22 ELR 21069 (5th Cir. 1992) (trial court improperly applied a base level of eight under § 2Q1.2 for the mishandling of "hazardous and toxic substances," since the conviction was for discharge of industrial waste, which should have been considered "other environmental pollutants" with a base level of six under § 2Q1.3), conviction on remand aff'd, 987 F.2d 225, 23 ELR 20774 (5th Cir. 1993).

183. See United States v. Weitzenhoff, 1 F.3d 1523, 23 ELR 21322 (9th Cir. 1993), reh'g denied, opinion amended, 35 F.3d 1275, 24 ELR 21504 (1994) (first-time offenders sentenced respectively to 33 and 21 months imprisonment), cert. denied sub nom. Mariani v. United States, 115 S. Ct. 939 (1995); Goldfaden, 959 F.2d at 1324, 22 ELR at 21069 (first-time offender sentenced to 33 months imprisonment); United States v. Irby, 944 F.2d 902 (4th Cir. 1991) (first-time offender sentenced to 33 months imprisonment).

184. The practice of double counting has been frequently criticized on policy grounds. In 1992, the Sentencing Commission published a proposed amendment to the guidelines to eliminate this practice. See 57 Fed. Reg. 97 (Jan. 2, 1992). The amendment was never enacted.

185. See, e.g., United States v. St. Angelo, 993 F.2d 229 (4th Cir. 1993); United States v. Mills, 904 F.2d 713 (11th Cir. 1990).

186. SENTENCING GUIDELINES, supra note 152, § 5, Part A (sentencing table).

187. 959 F.2d 1324, 22 ELR 21069 (5th Cir. 1992), conviction on remand aff'd, 987 F.2d 225, 23 ELR 20774 (5th Cir. 1993).

188. 961 F.2d 462, 22 ELR 21282 (4th Cir.), cert. denied, 113 S. Ct. 217 (1992).

189. Id. at 468, 22 ELR at 21285 (quoting the nonenvironmental case of United States v. Williams, 954 F.2d 204, 208 (4th Cir. 1992)).

190. Id. (quoting Williams, 954 F.2d at 207).

191. SENTENCING GUIDELINES, supra note 152, §§ 8B1.1 (restitution), 8C (fines), 8D (probation).

192. Id. § 8C2.1 (background); see also Ilene H. Nagel & Winthrop M. Swenson, The Federal Sentencing Guidelines for Corporations: Their Development, Theoretical Underpinnings, and Some Thoughts About Their Future, 71 WASH. U. L.Q. 205, 256 (1993).

Three major policy problems make it difficult for the Commission to determine the amount of the fine that should be imposed on a corporation convicted of an environmental offense. First, defining and computing the amount of loss—a key factor in assessing the seriousness of an offense under the organizational guidelines—is extremely difficult for environmental crimes. Unlike other white-collar crimes such as securities fraud, there is not necessarily a correlation between the gain to the defendant and the loss to society from an environmental crime. The economic rationale for regulation of pollution is based on externalities, i.e., the costs that pollution imposes on the society that are not reflected in the cost of the product to its owner. Externalities dominate the penalty calculus as well. Environmental violations that produce small economic gains to the defendant may result in large harm to the public. The costs of remediating an illegal discharge are often many times greater than what it would have cost the defendant to dispose of the waste legally. The sentencing principles break down in the face of these environmental externalities.

Second, the intent element is also an important factor in the principles that the guidelines ordinarily apply in determining the appropriate amount of a fine for an organization. However, the degree of knowledge necessary to obtain an environmental criminal conviction is minimal. Further, the environmental harm caused by the violation is often disproportionate to the defendant's mental state. For example, a negligent violation such as the Exxon Valdez spill can cause massive environmental degradation, whereas a willful violation may not result in any environmental harm at all.

Third, environmental violations are subject to overlapping enforcement schemes and greater collateral sanctions than are violations of other laws. An extensive system of civil enforcement exists at both the state and federal levels. This system attempts to capture directly, through the "economic benefit to the violator" part of the civil penalty calculus, the monetary gain the violator realizes from failing to comply with the law. Further, because the government can obtain extensive remedial relief, including money damages, the harm to the environment often can be largely corrected through civil enforcement. And because the cost of cleanup may greatly outweigh the initial cost of compliance, the threat of civil liability works as an effective deterrent in the environmental area. Finally, the collateral consequences of an environmental conviction are substantial and contribute to an effective degree of deterrence and punishment as well.

193. SENTENCING GUIDELINES, supra note 152, § 8C2.1 (commentary).

194. Id. § 8C2.1 (background).

195. Id. § 8A1.1, Application Note 1.

196. Id. § 8D1.2.

197. Id. § 8D1.4(a) (policy statement).

198. Id. § 8D1.4(c)(3).

199. Id. § 8D1.4(b) (1) (policy statement).

200. Id. § 8D1.4(c)(1) (policy statement). The guidelines place substantial emphasis on the devlopment of an effective compliance program. Indicators of such a program include compliance standards and procedures reasonably capable of reducing the prospect of criminal conduct, assignment of a high-level employee with responsibility to oversee these standards, steps to communicate standards and procedures effectively, and consistent enforcement of the standards. Id. § 8A1.2, Application Note (k). This is of particular importance in the environmental crimes area because the existence of an effective compliance program may substantially mitigate any potential fine that might be imposed under the court'scurrent discretionary authority.

201. Id. § 8D1.4(b)(2) (policy statement).

202. Id. § 8D1.3(b).

203. United States v. Palm Beach Cruises, S.A., No. 94-8049 (S.D. Fla. Aug. 30, 1994) (plea agreement).

204. See Memorandum from Advisory Working Group on Environmental Sanctions to Interested Members of the Public, Working Draft Recommendations (Mar. 5, 1993) (releasing and soliciting public comment on the working draft).

205. DRAFT ENVIRONMENTAL SENTENCING GUIDELINES, supra note 1. The Commission, however, was unable to resolve this issue and, thus, has never acted. Accordingly, sentencing judges still apply criminal fines to corporations based on their discretion within the range permitted by the statute under which the corporation was convicted or under 18 U.S.C. §§ 3553 and 3572, rather than under a uniform formula devised by the Commission. As long as this state of affairs persists, defense counsel will continue to play an important role in attempting to persuade the court to use this power as lightly as possible.

206. Id. proposed §§ 9E and F.

207. Id., proposed § 9A 1.2(a)(2). If the organization is operated primarily for a criminal purpose or primarily by criminal means, courts should not apply offense levels and should determine a fine sufficient to divest the organization of all of its net assets. Id., proposed §§ 9A1.2(a)(1) and 9B1.1.

208. Id., proposed § 9B2.1(a).

209. For example, the base offense level for the mishandling of hazardous or toxic substances is eight. Id., proposed § 9B2.1(b)(2)(A). This same base offense level applies to the mishandling of hazardous or toxic substances under § 2Q1.2 of the existing guidelines.

210. For example, as under Chapter 2 of the existing guidelines, if a person mishandles a hazardous or toxic substance and the offense results in a substantial likelihood of death or serious bodily injury, nine levels would be added to the base offense level. Id., proposed § 9B2.1(b)(2)(B)(ii). Thus, the proposed provision would produce the same result as existing § 2Q1.2(b)(2).

211. Id. proposed § 9C.

212. Id., proposed § 9C1.1.

213. ld., proposed § 9C1.2. To grant mitigation under § 9C1.2(a) for environmental compliance, the sentencing court must conclude that each of the following seven factors was substantially satisfied: (1) line management's attention to compliance; (2) integration of environmental policies, standards, and procedures; (3) auditing, monitoring, reporting and tracking systems; (4) regulatory expertise, training, and evaluation; (5) incentives for compliance; (6) disciplinary procedures; and (7) continuing evaluation and improvement. An organization can obtain additional mitigation if, in addition to meeting the above factors, it has implemented additional programs or components that demonstrate its commitment to environmental compliance. Id., proposed § 9D1.1.

214. Id. proposed § 9E1.1.

215. ld., proposed § 9E1.2(b).

216. Id., proposed § 9F.

217. See generally David T. Buente Jr. et al. The Civil Implications of Environmental Crimes, in A.L.I.-A.B.A., CRIMINAL ENFORCEMENT OF ENVIRONMENTAL LAWS 395 (1994).

218. See, e.g., Montana v. United States, 440 U.S. 147, 153 (1979). This doctrine applies only to issues necessarily decided by the adjudication of liability, not to factual determinations made by the judge at sentencing to support a restitution order. United States v. Palma, 760 F.2d 475 (3d Cir. 1985).

219. Even if collateral estoppel does not apply, a prior bad act may be admissible in a subsequent federal case under Fed. R. Evid. 404(b), which permits evidence of a prior crime, wrong, or act to be admitted to prove motive, opportunity, intent, preparation, plan, knowledge, identity, or absence of mistake or accident. Fed. R. Evid. 609 also allows for impeachment of a witness by evidence of conviction of a felony.

220. See, e.g., 33 U.S.C. § 1321(b), (c), ELR STAT. FWPCA § 311(b), (c); 42 U.S.C. §§ 6924(u), 6928(h), ELR STAT. RCRA §§ 3004t(u). 3008(h).

221. In addition, the Victim and Witness Protection Act provides that a defendant convicted of an offense for which restitution has been ordered is estopped from denying the essential allegations of the offense in a subsequent action for damages brought by the victim. 18 U.S.C. § 3664(e).

222. Many federal environmental statutes authorize states to administer and enforce federal requirements, resulting in concurrent state and federal authority. See, e.g., 33 U.S.C. § 1342(b), ELR STAT. FWPCA § 402(b); 42 U.S.C. § 6926, ELR STAT. RCRA § 3006; id. § 7410, ELR STAT. CAA § 110.

The question is periodically raised whether under the state authorization process of federal environmental laws, the United States and state enforcement authorities should be considered in privity with each other, so that the defendant may assert collateral estoppel against a subsequent federal action based on the same facts as an unsuccessful prior state enforcement action. See United States v. ITT Rayonier, Inc. 627 F.2d 996, 10 ELR 20945 (9th Cir. 1980); William D. Benton, Application of Res Judicata and Collateral Estoppel to EPA Overfiling, 16 B.C. ENVTL. AFF. L. REV. 199 (1988). But see Aminoil U.S.A., Inc. v. California State Water Resources Control Bd., 674 F.2d 122, 12 ELR 20594 (9th Cir. 1982). The issue arose recently in In re Beaumont Co., No. RCRA-III-238 (EPA Oct. 20, 1994), in which an EPA administrative law judge held that pursuant to RCRA § 3006(d), the state was EPA's representative in the prior state enforcement proceeding, so that EPA was collaterally estopped from pursuing RCRA charges against a company after resolution of a state proceeding that resulted in minimal sanctions.

In the civil context, invoking collateral estoppel against the federal government would appear clearly wrong under statutes such as the FWPCA, where parallel EPA and state programs are in force at all times, and highly questionable even under statutes such as RCRA, where the state program operates "in lieu of" the federal program. In the criminal context, the dual sovereignty doctrine appears to preclude any use of collateral estoppel to block a subsequent criminal action by the other level of government. See United States v. Louisville Edible Oil Prods., Inc., 926 F.2d 584, 21 ELR 20690 (6th Cir.), cert. denied, 502 U.S. 859 (1991).

223. See FED. R. CRIM. P. 11(e); FED. R. EVID. 410. The laws of many states, however, do permit introduction of nolo pleas as evidence of guilt.

224. Justice's policy against accepting nolo pleas was established in a directive issued by Attorney General Herbert Brownwell in 1953. See DEPARTMENT OF JUSTICE MANUAL § 9-16.010 (1993 Supp.). Although a court may accept such a plea over Justice's objections, it will not do so when it would not serve the public interest. See United States v. American Bakeries Co., 284 F. Supp. 871, 873-74 (W.D. Mich. 1968).

225. 33 U.S.C. § 1368(a), ELR STAT. FWPCA § 508(a); 42 U.S.C. § 706, ELR STAT. CAA § 306. Under Agency rules, EPA also has discretion to list a facility even in the absence of a criminal conviction, but has rarely exercised this power. Discretionary listing is based on a determination that there is a record of continuing or recurring noncompliance with federal, state, or local clean water or air standards. 40 C.F.R. § 15.11. The effect of listing is generally the same, regardless of whether it occurs automatically by operation of law or by exercise of discretion. EPA rules do, however, provide procedures to challenge a proposed discretionary listing. 40 C.F.R. § 15.12.

226. 33 U.S.C. § 1368(a), ELR STAT. FWPCA § 508(a) (emphasis added); id. § 1319(c), ELR STAT. FWPCA § 309(c).

227. 42 U.S.C. § 7606, ELR STAT. CAA § 306; id. § 7413(c), ELR STAT, CAA § 113(c).

228. Id. § 7606(a), ELR STAT. CAA § 306(a). The term "facility" is defined expansively in 40 C.F.R. § 15.4 to give the Assistant Administrator authority to consider all operations at one location or site that are part of the same facility. EPA has not issued a regulation to define how and when it will exercise its authority under the CAA to extend listing beyond the particular facility involved in a violation.

229. 40 C.F.R. pt. 15.

230. 18 U.S.C. §§ 1001-1027.

231. 48C.F.R. § 52.209-5. EPA's rules explicitly apply the listing sanction to subcontracts as well. 40 C.F.R. § 15.4. Federal agency heads have authority to exempt certain contracts or grants from the listing disqualification, based on the "paramount" interests of the United States. Id. § 15.51(c)(2). Such exemptions are rare and must be reported to Congress.

232. Id. §§ 15.20, 15.22(b).

233. Id. § 15.22(a).

234. Id. § 15.24. Even if the conditions creating the violation have been completely corrected by the time of conviction, the facility must still be listed for some period of time. As a matter of policy, EPA has refused to entertain any request to be removed from the list, or to review corrective actions regarding the violation, prior to placing the facility on the list. The policy of not considering remedial actions before the date of listing, coupled with a period of observation necessary to determine whether the proper "corporate attitude" exists, means that upon conviction of an FWPCA or CAA violation, the offending facility will spend a minimum of four to six months on the list, even if it cures the problem immediately and demonstrates an exemplary attitude.

235. U.S. EPA, Policy Regarding the Role of Corporate Attitude, Policies, Practices, and Procedures, in Determining Whether to Remove a Facility from the EPA List of Violating Facilities Following a Criminal Conviction, 56 Fed. Reg. 64785, 64786, ELR ADMIN. MAT. I 35411 (Dec. 12, 1991).

236. Id. at 64787, ELR ADMIN. MAT. I at 35412.

237. See supra note 113 and accompanying text.

238. In re Exxon Corp. (Exxon Bayway), No. 02-91-L034 (EPA Feb. 4, 1992) (delisting determination).

239. See 48 C.F.R. § 9.407-2.

240. 48 C.F.R. §§ 9.104-1(d), 9.406-2(a)(5), 9.407-2(a)(5).

241. EPA has suspension and debarment authority over a company's procurement and nonprocurement relationships with the federal government. 48 C.F.R. subpt. 9.4 (procurement), 40 C.F.R. pt. 32 (nonprocurement).

242. 48 C.F.R. § 9.405-2(a) permits an agency to contract with a suspended or debarred entity only if "the acquiring agency's head or a designee states in writing the compelling reasons" for doing so.

243. 48 C.F.R. § 9.406-1(b) provides that these sanctions apply to "all divisions or other organizational elements of the contractor, unless the . . . decision is limited by its terms to specific divisions, organizational elements, or commodities." Like many other agencies, EPA has shown a preference for taking action against the lowest possible operating unit or division involved in the criminal action.

244. 48 C.F.R. § 9.402(c); 40 C.F.R. § 32.115(c).

245. 48 C.F.R. § 9.406-1(b).

246. Id. § 9.406-3.

247. Id. § 9.406-4(c).

248. Id. § 9.406-4(c)(3).

249. 26 U.S.C. § 162(a), (f); Treas. Reg. § 1.162-21(b)(1)(i). A nondeductible "fine or similar penalty" includes an amount paid as a civil penalty or in settlement of actual or potential liability for a fine or penalty. Treas. Reg. § 1.162-21(b)(1)(ii), (iii). See True v. United States, 894 F.2d 1197 (10th Cir. 1990) (FWPCA civil penalties nondeductible); Colt Indus. Inc. v. United States, 11 Cl. Ct. 140 (1986) (FWPCA civil penalties nondeductible), aff'd, 880 F.2d 1311 (Fed. Cir. 1989).

250. Treas. Reg. § 1.162-21(b)(2). If such fines are paid under a plea of nolo contendere, however, they are not deductible. Thus, a nolo plea is useful only for collateral estoppel, and not for tax purposes.

251. See Waldman v. Commissioner, 88 T.C. 1384 (1987), aff'd, 850 F.2d 611 (9th Cir. 1988). The court employed a "primary purpose" test to determine whether a restitutionary payment was a nondeductible penalty or a deductible compensatory payment. The court found that even though the payment was made to a private party, it was still subject to the same treatment as if it were paid to the government, because the payment was a judicially controlled diversion of money. This decision is thus relevant to structuring any environmental restitution with private parties as part of settling an environmental criminal claim.

252. The Exxon Valdez plea agreement, for example, was consciously designed to take advantage of the tax deductibility of compensatory payments. There, the restitution was expressly stated to be "exclusively remedial, compensatory, and non-punitive, and . . . separate and distinct from the fines . . . ." United States v. Exxon Corp., Plea Agreement No. A90-015 (Sept. 26, 1991), at 9.

253. 905 F.2d 667 (2d Cir. 1990).

254. Id. at 673.

255. 991 F.2d 292 (6th Cir. 1993).

256. Id. at 298-99.

257. 63 T.C.M. (CCH) 2672 (1992), aff'd, 54 F.3d 767 (3d Cir. 1995).

258. Id. at 2681-83.

259. The availability of insurance payments under standard corporate comprehensive general liability policies may also be affected by a guilty plea or conviction, on grounds similar to those concerning tax deductibility. Most policies exclude reimbursement for fines or penalties, which are not considered "damages." The critical questions are (1) what defines arestitutionary payment, as opposed to a penalty, under the insurance contract, and (2) whether the answer is different when the loss is caused by an action for which the insured has been held criminally liable.

260. See Richard Y. Roberts & Kurt R. Hohl, Environmental Liability Disclosure and Staff Accounting Bulletin No. 92, 50 Bus. LAW. I. 2 (Nov. 1994).

261. 17 C.F.R. §§ 229.10 to 229.915.

262. Id. § 229.101.

263. See id. § 229.103, Instruction 5.

264. See Roberts & Hohl, supra note 260, at 2 n.6.

265. 17 C.F.R. § 229.303, Instruction 3.

266. See Release Nos. 33-6835, 34-26831 (May 18, 1989), 54 Fed. Reg. 22427 (May 24, 1989).

267. 985 F.2d 1190 (2d Cir. 1993).

268. There is a narrow bad actor provision under TSCA. Under § 6(e)(1), poor environmental compliance of the applicant, its principals, and its key employees may lead to the denial of an application to store PCBs for disposal. 15 U.S.C. § 2605(e)(1), ELR STAT. TSCA § 6(e)(1); see also 40 C.F.R. § 761.65(d), as amended by 58 Fed. Reg. 59372 (Nov. 9, 1993).

269. See, e.g., N.J. STAT. ANN. § 13:1E-133.1(a); TEX. ADMIN. CODE tit. 31, § 305.66(g).

270. See IND. CODE ANN. § 13-7-10.2-3(b); N.J. STAT. ANN. § 13: 1E-127(e); OHIO REV. CODE ANN. § 3734.41(D).

271. See Gary S. Becker, Crime and Punishment: An Economic Approach, 76 J. POL. ECON. 169 (1966).

272. See Adam Babich, DOE's Promising First Step, NAT'L ENVTL. ENFOR. J. 1, 7 (July 1995).

273. See, e.g., Remarks by Assistant Attorney General Lois Schiffer, A.L.I.-A.B.A. Conference on Criminal Enforcement of Environmental Laws, Washington, D.C. (Oct. 20-21, 1994).

274. See Robert Cooter, Prices and Sanctions, 84 COL. L. REV. 1523, 1524-25 (1984); Stephen M. Bundy & Einer Elhauge, Knowledge About Legal Sanctions, 92 MICH. L. REV. 261, 269-74 (1993).

25 ELR 10600 | Environmental Law Reporter | copyright © 1995 | All rights reserved