EPA's Audit Policy Spells Success for Corporate Users, EPA, the Public, and Most Importantly, the Environment

Nancy K. Stoner and Amanda A. Gibson

Editors' Summary: EPA's audit policy provides incentives for companies to develop environmental audit and compliance management systems to detect, disclose, and correct violations. When companies voluntarily discover environmental violations and disclose them to EPA, the Agency will waive or substantially reduce the applicable penalties. As part of EPA's proposal to revise this policy, the Agency conducted a survey to evaluate the policy's effectiveness. After outlining the basic tenets of the EPA audit policy, this Dialogue describes the results of the Agency's policy evaluation and explains the proposed revisions. The Dialogue then highlights how the audit policy is being integrated with the Agency's compliance and enforcement efforts. Last, the Dialogue illustrates some creative uses of the audit policy in various enforcement initiatives.

Ms. Stoner is the Director of the U.S. Environmental Protection Agency's (EPA's) Office of Planning and Policy Analysis (OPPA) within the Office of Enforcement and Compliance Assurance. Ms. Stoner served as an attorney in the Policy, Legislation, and Special Litigation Section of the Environment and Natural Resources Division of the U.S. Department of Justice from 1987 until fall 1996 when she joined EPA. Ms. Stoner obtained a B.A. from the University of Virginia in 1982 and a J.D. from Yale Law School in 1986.

Ms. Gibson is an attorney advisor in the OPPA. She received a J.D. from the George Washington University School of Law in 1991. Before joining EPA in late 1996, Ms. Gibson held jobs in private practice and clerked for U.S. Magistrate Judge Alan Kay of the U.S. District Court for the District of Columbia. The views expressed in this Dialogue are solely those of the authors and do not necessarily reflect those of EPA.

[29 ELR 10705]

Companies disclosing violations under the U.S. Environmental Protection Agency's (EPA's) environmental audit policy are overwhelmingly pleased with its implementation. According to an anonymous EPA survey sent out to companies that self-disclosed environmental violations, more than 84 percent of corporate respondents were extremely satisfied with the handling of their disclosures and the penalty mitigation they received.¹ In addition, the discovery and correction of environmental violations since the policy's inception has prompted the removal of pollutants from air and water, reductions of health and environmental risks, and improvements in the availability of public information.

EPA's audit policy, Incentives for Self-Policing: Discovery, Disclosure, Correction and Prevention of Violations,² provides incentives for companies to develop environmental audit and compliance management systems to detect, disclose, and correct violations. The EPA audit policy reflects the combination of two government interests: encouraging comprehensive, systematic audits and ensuring that environmental violations are properly disclosed and corrected. In addition, EPA strives to ensure that companies that perform the self-policing necessary to improve their compliance will not be subject to gravity-based penalties when they report their violations. Thus, when companies voluntarily discover environmental violations, promptly disclose these violations to EPA, and meet other specified conditions of the policy, EPA will waive or substantially reduce gravity-based civil penalties up to 75 percent, and in many cases up to 100 percent. Moreover, for those companies that meet the policy's conditions, EPA will not recommend the companies for criminal prosecution. As of July 1, 1999, the audit policy generated violation disclosures from approximately 485 entities at more than 1,900 facilities. In addition, penalties were waived or reduced under the policy for 199 companies at 987 facilities.

As EPA promised in the December 22, 1995, Federal Register notice announcing the audit policy, EPA is evaluating the policy's effectiveness. As part of this review process, EPA conducted an internal EPA survey, sent out a customer satisfaction survey, engaged in public outreach efforts, and solicited comments on proposed changes to the policy. In June 1998, EPA asked the EPA Regions to complete [29 ELR 10706] the internal survey to evaluate their own experiences under the audit policy and to suggest possible revisions to enhance its effectiveness. In order to obtain feedback from actual users of the audit policy, EPA sent out a customer satisfaction survey in October 1998 to 252 companies that had self-disclosed under the policy. EPA also received public input on the audit policy through focus groups and the Office of Enforcement and Compliance Assurance's Fifth Anniversary Conference. EPA then took the comments gathered in these fora and proposed audit policy revisions in a Federal Register notice published on May 17, 1999.³ The 60-day comment period closed on July 16, 1999. Revisions to the policy currently being considered support continued integration of the policy into EPA's compliance and enforcement efforts, particularly through corporatewide disclosures and targeted use of the audit policy to address particular compliance problems within particular sectors.

This Dialogue will outline the basic tenets of the EPA audit policy and will describe the results of an evaluation of the policy that EPA performed. The Dialogue next explains the Agency's proposed revisions to the audit policy. Finally, the Dialogue highlights the integration of the audit policy with EPA's compliance and enforcement efforts and illustrates how the Agency creatively uses the audit policy in various enforcement initiatives.

The EPA Audit Policy

Before EPA implemented the audit policy, the Agency regularly mitigated penalties for self-disclosed environmental violations. However, by creating the audit policy and the incentives it offers, EPA hoped to increase self-disclosures and corporate self-policing and, thus, improve environmental compliance by providing greater certainty as to how future self-disclosures would be treated.

Under the audit policy, EPA will waive gravity-based penalties if the entity satisfies the policy's conditions, including a voluntary disclosure based on a discovery made independently of any regulatory inspection or investigation.⁴ If the facility does not discover the violation systematically, i.e., through an audit or a compliance management system, but meets all other conditions, the facility will receive a 75-percent reduction of gravity-based penalties. Further, EPA will not recommend a company for criminal prosecution if the company meets discovery and disclosure conditions and if the management did not participate in, conceal, condone, or turn a blind eye to the violations.⁵ The audit policy also reinforces EPA's long held policy and practice of refraining from routine requests for environmental audit reports.

It is worth emphasizing that the audit policy's incentives are based on the waiver or reduction of the gravity-based or punitive portion of a penalty. The audit policy does not modify EPA's long-standing position that in order to preserve a level playing field for the regulated community, it is necessary to recover the economic benefit of noncompliance. EPA, therefore, recoups those cost savings from disclosing companies when they receive significant economic benefits from delayed compliance.⁶

Evaluation of the Audit Policy

The Agency's evaluation of the policy revealed that users are extremely satisfied with both the implementation and the results of the policy. According to the anonymous users survey EPA sent to 252 disclosing entities, 44 of the 50 respondents (88 percent) said that they would use the policy again, and 84 percent would recommend the policy to their clients or their counterparts. None stated that they would not use the policy again or not recommend its use to others. Comments from the users further emphasized that the policy provided a proactive mechanism for responding to a compliance problem and created a relationship of trust between the regulator and the regulated entity.

EPA found that use of the policy reduced both the actual release of pollutants and the risk of such releases. In the 3 years since the policy has been in effect, 73 of the disclosed violations involved unpermitted activities such as the unauthorized release of pollutants or the unlawful storage or disposal of waste. The discovery, disclosure, and correction of these violations removes pollutants from the affected environment, reduces the chance of chemical spills and releases, and ensures safe management of hazardous chemicals and waste. In one such instance, a Minnesota company corrected violations involving the improper storage of polychlorinated biphenyls (PCBs) and properly disposed of over 195 pounds of PCBs.

Hundreds of other disclosed violations involved deficiencies in reporting, labeling, monitoring and sampling, recordkeeping, testing, training, and production requirements. Correcting these types of violations reduces the risk of emergency situations and improves public reporting. For example, developing spill prevention plans required under the Federal Water Pollution Control Act⁷ (FWPCA) helps [29 ELR 10707] prevent spills, improving recordkeeping and reporting provides emergency response personnel with accurate information in an emergency, and improving public reporting of Toxic Release Inventory (TRI) data may encourage companies to reduce pollution at the source. In one case, a Michigan manufacturer that previously failed to file TRI reports corrected its violation and subsequently substituted its use of 2,500 pounds of chemical solvents with an environmentally preferable water-based process.

Although a majority of survey respondents reported having in place a formal environmental compliance auditing program, an environmental management system (EMS), or a compliance management system, many respondents reported that the audit policy encouraged further improvements in their systems. Some companies instituted EMS and auditing programs, while others were inspired to audit more pervasively throughout the organization. When asked what improvements were induced at least in part by the policy's incentives, respondents reported increased awareness of compliance issues, enhanced training and review of staff performance, and improved reporting. According to the internal EPA survey, 24 percent of the facilities that used the audit policy implemented employee training on environmental compliance, 43 percent implemented a management system addressing compliance requirements, and 33 percent took other steps such as increasing oversight or developing or formalizing procedures.

The audit policy also has increased the Agency's awareness of new compliance issues. The internal survey revealed that in 27 instances, EPA learned of new environmental issues relating to compliance as a result of audit policy disclosures. Some of these disclosures caused both EPA and industry to become aware of undetected environmental problems prevalent among specific industries. For example, disclosures by the GTE Corporation alerted the Agency to problems specific to the telecommunications industry.⁸ A 1998 settlement entered into with GTE under the policy resolved 600 Emergency Planning and Community Right-To-Know Act⁹ (EPCRA) and FWPCA spill prevention violations at 314 GTE facilities in 21 states, and was the largest Agency settlement reached through EPA's self-disclosure policy.

Proposed Revisions to the Audit Policy

In response to the Agency's experience with the audit policy and input received from stakeholders, EPA has proposed revisions to increase the opportunities for taking advantage of the policy.¹⁰ The proposed revisions can be divided into four areas: discovery, disclosure, enforcement coordination, and implementation.

Discovery

To claim relief under the existing audit policy, the violation must have been systematically discovered, either through an environmental audit or through due diligence. In addition, the violation must have been discovered voluntarily, meaning that it could not have been discovered through a legally mandated requirement, such as through a permit requiring monitoring and reporting.

In a proposed revision to the policy, the term "due diligence" would be replaced by the term "compliance management systems" because the latter term is used more commonly by EPA and industry to refer to a systematic management plan. Moreover, EPA does not want to create confusion with the term "due diligence" in the mergers and acquisitions context. The proposed revision would also clarify that, like the environmental audit method of systematic discovery, the "compliance management system" must be documented. EPA intends that EMS, including those certified under the International Organization for Standardization 14001 standard, would qualify under the audit policy if the EMS contains a sufficient focus on compliance issues.

Disclosure

The prompt disclosure of violations under the current policy must occur within 10 days of when the violation occurred or may have occurred, but EPA proposed to extend the prompt disclosure requirement to 21 calendar days. EPA proposed this change to increase the use of the audit policy by those companies that cannot analyze potential violations and decide whether to disclose them within a 10-day period. Extension of the disclosure time period was the most frequent suggestion by users. In addition, the internal survey indicated that a large percentage of those that were ineligible under the policy because of an untimely disclosure disclosed violations 11 to 21 days after they discovered the violation. EPA also proposed to clarify when a violation "may have occurred" and when the disclosure period begins to run.

Under the existing policy, the violation also must be discovered independently and be disclosed before the commencement of any government investigation or information request, citizen suit, filing of third-party complaint, whistle-blower reporting, or imminent discovery by a regulatory agency. In the proposed revisions, EPA proposed to clarify that audit policy relief for a facility is not necessarily precluded by an inspection, investigation, or information request at another facility owned by the same parent except in cases where EPA commenced a broad investigation to address multifacility compliance. This revision should encourage companies to perform facilitywide audits and to disclose and correct violations even if one facility is already under investigation.

In an effort to encourage disclosures of potential criminal violations, EPA proposed to extend the benefits of the policy to a disclosing entity in the criminal context regardless of how discovery is made. Additional proposed revisions include clarifying the meaning of "cooperation" with EPA in the civil and criminal context, clarifying that penalty relief may still be available under other enforcement policies for "good-faith" disclosures that do not meet policy conditions, and clarifying "intent" for purposes of excluding from the [29 ELR 10708] policy those violations that constitute an imminent and substantial endangerment.

Enforcement Coordination

Another group of proposed revisions to the policy involve enforcement coordination. EPA proposed to add to the policy a description of processes currently used for handling civil and criminal disclosures. The revised policy would include a description of the responsibilities of the Audit Policy Quick Response Team, an Agency team that addresses nationally significant issues and ensures consistent application of the policy, and the Voluntary Disclosure Board, the central body for considering those disclosures that are potentially criminal in nature. In addition, EPA proposed to add explanatory text stating that if a facility discloses to EPA a violation of a program that a state is approved or authorized to administer, EPA will inform the relevant state agency and consult with it as to the appropriate response.

Implementation

In the Federal Register notice proposing the audit policy revisions, EPA revealed that the most frequent suggestion from users regarding the policy's implementation was to expedite the time it takes for EPA to resolve a case once a disclosure has been made. EPA acknowledges partial responsibility for processing delays, but in some cases it has had difficulty gathering information necessary to process audit policy disclosures in a timely manner. Among other steps, EPA intends to encourage the use of disclosure checklists developed by EPA and used by disclosing entities to increase the efficiency of information collection.

EPA also solicited comment on whether the Agency should merge the audit policy with its policy on Compliance Incentives for Small Businesses¹¹ (small business policy). Under the small business policy, which defines a small business as an entity with 100 or fewer employees, the Agency will eliminate the entire civil penalty imposed on a small business if the business satisfies the policy's conditions. The Agency is interested in learning whether small businesses would be more likely to audit and disclose violations if the two policies are merged.

Another proposed revision to the audit policy would support the Agency's effort to integrate the audit policy with other enforcement and compliance assistance programs. EPA proposed that violations discovered under an environmental audit or compliance management system during participation in an agency partnership program, such as Project XL, would be considered to have been discovered voluntarily. EPA does not want to foreclose the opportunity of penalty mitigation for those entities voluntarily participating in an Agency partnership program.

Audit Policy Trends

The Agency's proposed changes advocate integrating the audit policy into the Agency's compliance and enforcement efforts. EPA's experience suggests that companies are more likely to take advantage of incentives to disclose and correct violations when the incentives are offered as part of an integrated enforcement and compliance assistance strategy. In particular, the Agency has begun to use the policy to encourage corporatewide disclosures and to address particular compliance problems within particular sectors. EPA intends that the proposed changes to the systematic discovery of and the disclosure period for environmental violations will facilitate corporatewide disclosures.¹² EPA also will continue to offer compliance assistance tools such as audit protocols to encourage greater use of self-policing.

EPA encourages multifacility disclosures because they effectively leverage Agency resources, allow regulated entities to review their operations holistically, and achieve an important benefit for the environment. The Agency has facilitated these multifacility disclosures by participating in advance negotiations with companies to reach an understanding of how the audit policy will be applied. In some cases, EPA has agreed to extend the current 10-day disclosure period in order to allow results from a multifacility audit to be processed. For example, under an Agency agreement with the Arizona Chemical Company, Arizona Chemical will perform an audit at six of its facilities to determine its compliance with the Toxic Substances Control Act.¹³ The audit agreement provides the company with 12 months to complete the audit and 15 to 60 days to correct the violations depending on the nature of the violation. In addition, the agreement stipulates penalties with respect to violations ineligible for audit policy relief, and it caps the total penalty liability at $ 1 million.

In the corporatewide initiative that stemmed from the disclosures by GTE, EPA entered into settlements with 10 telecommunication companies that corrected spill prevention and hazard notification violations at 400 facilities. EPA is negotiating with other companies in this sector and expects more settlements to follow.

EPA also intends to pursue an initiative involving the air-line industry following a settlement it entered into in July 1999 with the AMR Corporation, a holding company for various subsidiaries including American Airlines. The settlement resulted from American Airlines' disclosure that it had violated Clean Air Act § 211(g)¹⁴ and its implementing regulations by using diesel fuel in its motor vehicles with a sulfur content greater than 0.05 percent by weight. American Airlines' nationwide audit revealed that it and several of its affiliates were fueling motor vehicles at 10 different locations with high-sulfur content jet fuel and selling the fuel to other airport operators for their use in diesel motor vehicles. Under the settlement, American Airlines will pay a civil penalty of $ 95,000, which reflects the economic benefit of the violations. American Airlines also agreed to undertake a supplemental environmental project in which the airline will replace existing gasoline-powered belt loaders with 12 electric-powered belt loaders at the Logan International Airport in Boston, Massachusetts. The project is expected to reduce air pollutant emissions significantly. For example, [29 ELR 10709] the reduction in carbon monoxide (CO) emissions is estimated to be 644 tons annually, which is the amount of CO emitted by 11,000 cars meeting current emission standards.

EPA also will continue to use the audit policy to address particular compliance problems in specific sectors. EPA will offer the incentives of the audit policy to companies in a designated sector that EPA believes have significant compliance problems. Facilities in that sector that fail to take advantage of the audit policy and remain in noncompliance will be more likely candidates for an Agency inspection or investigation. Sector-based initiatives are supported by direct evidence that an inspection presence provides a direct incentive for auditing and correcting environmental problems.¹⁵

One compliance incentive program recently launched by the Agency addresses the industrial organic chemical sector. This sector was chosen in part because it was a priority sector for EPA's enforcement and compliance assurance program in fiscal years 1998 and 1999. In August 1998, EPA launched the program by issuing letters to approximately 1,000 industrial organic chemical facilities. To participate in the program, facilities had until January 31, 1999, to perform voluntary environmental audits of their operations, identify potential areas of noncompliance, and report these findings to EPA. EPA has received approximately 45 self-disclosures involving all major environmental statutes under this program. Many of the self-disclosures covered multiple facilities.

In another effort to integrate compliance assistance and enforcement, EPA plans to issue 15 voluntary environmental compliance audit protocol manuals. EPA is developing these protocols to encourage businesses to perform comprehensive and thorough audits and to disclose potential violations under the audit policy. Although they were intended originally to assist the industrial chemical sector, many of the protocols apply to all regulated entities. Each protocol provides guidance on key regulatory requirements and terms, offers an overview of federal laws affecting a particular environmental management area, and includes a checklist containing detailed procedures for conducting a review of facility conditions. To date, EPA has released four protocols, one on the Comprehensive Environmental Response, Compensation, and Liability Act,¹⁶ one on EPCRA, and two covering the Resource Conservation and Recovery Act.¹⁷ The remaining protocols will cover a range of environmental management areas including pesticide management and spill prevention control.

Conclusion

As the audit policy evaluation has shown, the policy has achieved benefits for all stakeholders involved—corporate users, the government, the public, and the environment. Corporate users of the policy have expressed great satisfaction with its implementation, and that satisfaction is borne out by the number of companies disclosing and correcting violations. EPA also is pleased with the results to date—more and more companies are performing comprehensive, systematic audits and achieving compliance with the environmental laws. The public has benefitted from greater information and lower health hazards. And most importantly, the environment has benefitted from less pollution and decreased risk of future degradation.

1. Eighty-eight percent of the respondents stated that they would use the policy again, and 84 percent stated that they would recommend the policy to their clients and counterparts. U.S. EPA, EVALUATION OF "INCENTIVES FOR SELF-POLICING: DISCOVERY, DISCLOSURE, CORRECTION AND PREVENTION OF VIOLATIONS" POLICY STATEMENT, PROPOSED REVISIONS AND REQUEST FOR PUBLIC COMMENT, 64 Fed. Reg. 26745, 26746 (May 17, 1999) (available on EPA's website at http://www.epa.gov/fedrgstr/EPA-GENERAL/1999/May/Day-17/g12369.htm and from the ELR Document Service, ELR Order No. AD-4143) [hereinafter PROPOSED POLICY REVISIONS].

2. 60 Fed. Reg. 66706 (Dec. 22, 1995), ADMIN. MAT. 35639 (available on EPA's website at http://www.epa.gov/fedrgstr/EPA-GENERAL/1995/December/Day-22/pr-451.txt.html and from the ELR Document Service, ELR Order No. AD-3125) [hereinafter AUDIT POLICY].

3. PROPOSED POLICY REVISIONS, supra note 1, at 26745.

4. AUDIT POLICY, supra note 2, at 66706. The audit policy imposes certain conditions to prevent abuses of its use. These conditions are: (1) systematic discovery of the violation; (2) voluntary discovery of the violation; (3) prompt disclosure; (4) independent discovery and disclosure of the violation; (5) expeditious correction and environmental remediation; (6) the facility's agreement to prevent recurrence of the violation; and (7) the facility's cooperation with the investigation of the claim. Certain violations are ineligible for consideration under the policy, such as: (1) repeat violations; (2) violations that result in serious harm or present an imminent and substantial endangerment; and (3) violations of an order or consent decree. EPA's audit policy is intended to be used only in the context of settlement negotiations and is not intended for use in pleading, at hearing, or at trial. For further guidance on meeting these conditions, see U.S. EPA, AUDIT POLICY INTERPRETIVE GUIDANCE (Jan. 1997) (available on EPA's Office of Enforcement and Compliance Assurance's (OECA's) website at http://www.epa.gov/oeca/audpolguid.pdf and from the ELR Document Service, ELR Order No. AD-3124).

5. AUDIT POLICY, supra note 2, at 66706, 66707. See also U.S. EPA, IMPLEMENTATION OF THE ENVIRONMENTAL PROTECTION AGENCY'S SELF-POLICING POLICY FOR DISCLOSURES INVOLVING POTENTIAL CRIMINAL VIOLATIONS (Oct. 1, 1997), ADMIN. MAT. 35692 (available on OECA's website at http://www.epa.gov/oeca/oceft/audpol2.html and from the ELR Document Service, ELR Order No. AD-3709).

6. Federal courts have recognized the role of economic benefit in preventing profit from wrongdoing. See United States v. Municipal Auth. of Union Township, 929 F. Supp. 800 (M.D. Pa. 1996), aff'd, 150 F.3d 259, 28 ELR 21415 (3d Cir. 1998) (economic benefit was a primary basis for appeal); United States v. Smithfield Foods, 972 F. Supp. 338 (E.D. Va. 1997).

7. 33 U.S.C. §§ 1251-1387, ELR STAT. FWPCA §§ 101-607.

8. Federal environmental requirements applicable to telecommunication companies include the regulation of hazardous waste generation under Subtitle C of the Resource Conservation and Recovery Act (RCRA); the regulation of underground storage tanks under Subtitle I of RCRA; FWPCA § 311, which requires businesses that handle, transport, or store oil to prepare and update written Spill Prevention, Control, and Countermeasures Plans; and Emergency Planning and Community Right-To-Know Act (EPCRA) §§ 311 and 312, which require businesses to notify state agencies and local fire departments of certain chemicals at their facilities.

9. 42 U.S.C. §§ 11001-11050, ELR STAT. EPCRA §§ 301-330.

10. PROPOSED POLICY REVISIONS, supra note 1.

11. U.S. EPA, COMPLIANCE INCENTIVES FOR SMALL BUSINESSES, 61 Fed. Reg. 27984 (June 3, 1996), ADMIN. MAT. 35649 (available on EPA's website at http://www.epa.gov/oeca/smbusi.html and from the ELR Document Service, ELR Order No. AD-2941).

12. Note that in the proposed revisions, an entity that desires to make a multifacility disclosure beyond the 21-day period must reach agreement with EPA before commencing the audit. PROPOSED POLICY REVISIONS, supra note 1, at 26752.

13. 15 U.S.C. §§ 2601-2692, ELR STAT. TSCA §§ 2-412.

14. 42 U.S.C. § 7545(g), ELR STAT. CAA § 211(g).

15. Survey results demonstrate that measuring compliance internally and correcting compliance problems before they are discovered by a regulatory agency factors high in corporate environmental priorities. In a 1995 Price Waterhouse survey, 96 percent of respondents identified finding and correcting problems before they are discovered by an inspection as motivation for conducting audits. PRICE WATERHOUSE LLP, THE VOLUNTARY ENVIRONMENTAL AUDIT SURVEY OF U.S. BUSINESS (1995). In a 1998 survey by the National Conference of State Legislatures, 90 percent of respondents ranked "measuring compliance with environmental requirements, and identifying problems internally and correcting them before they are discovered during an inspection by a regulatory agency" as being very important reasons for auditing. LARRY MORANDI, NATIONAL CONFERENCE OF STATE LEGISLATURES, STATE ENVIRONMENTAL AUDIT LAWS AND POLICIES: AN EVALUATION (1998). See also Nancy K. Stoner & Wendy J. Miller, National Conference of State Legislatures Study Finds That State Environmental Audit Laws Have No Impact on Company Self-Auditing and Disclosure of Violations, 29 ELR 10265 (May 1999). In the 1998 Audit Policy User's Survey, the second most frequently cited reason for disclosing violations under the audit policy was "to take proactive measures to find and address compliance problems before EPA discovered them."

16. 42 U.S.C. §§ 9601-9675, ELR STAT. CERCLA §§ 101-405.

17. Id. §§ 6901-6992k, ELR STAT. RCRA §§ 1001-11011.