Considering EPA's Self-Disclosure Policy - Choose Wisely

Date: Mar 15, 2007

Interested in having millions of dollars in potential fines eliminated and past environmental compliance mistakes or oversights forgiven? The U.S. Environmental Protection Agency's (EPA) "Incentives for Self-Policing: Discovery, Disclosure, Correction and Prevention of Violations" Policy provides a strong incentive for companies to disclose uncovered violations to the Agency. When properly implemented, the policy can be an effective tool to obtain complete relief from gravity-based penalties for violations of federal environmental regulations and to bring a company into compliance. However, companies must be judicious in using the policy. There are cases when self disclosing violations with this policy may not be the most prudent course. Keller and Heckman LLP provides you and your company the reasons why.

Qualifying for Relief Under EPA's Audit Policy

Civil monetary penalties assessed by EPA for violations of federal environmental laws are generally comprised of a gravity-based component and an economic benefit component. The economic benefit component reflects the economic gain derived from the illegal behavior while the gravity-based component represents a punitive assessment. If a company's voluntary self disclosure of violations satisfies all nine conditions of EPA's Audit Policy, then it can qualify for complete mitigation of the gravity-based component of a civil penalty. In brief, the nine conditions that must be met are:

  • Systematic Discovery - Violations must be discovered through an audit or a compliance management system. (If this condition is not met, entities may still qualify for 75 percent reduction in the gravity-based penalty.)
  • Voluntary Discovery - Violations must be discovered voluntarily and not through a legally mandated requirement.
  • Prompt Disclosure - Violations must be disclosed in writing to EPA within 21 days after forming reasonable basis to believe that a violation has occurred.
  • Independent Discovery - The violations must be discovered and disclosed prior to notice of a government inspection or investigation; notice of a citizen suit; a third party complaint; or a whistleblower report.
  • Correction and Remediation - Violations must be corrected within 60 days of discovery (unless EPA otherwise provides) and any environmental harm must be remedied.
  • Prevent Recurrence - The entity must agree in writing to take steps to prevent recurrence of violations.
  • No Repeat Violations - The specific violations (or closely related ones) may not have occurred previously within the past three years at the same facility, or within the past five years as part of a pattern at multiple facilities owned or operated by the same entity.
  • Non-qualifying Violations - These include violations that have resulted in serious actual harm, present an imminent and substantial endangerment to human health or the environment, or violated a order, or consent agreement.
  • Cooperation - The company needs to provide information as is necessary and requested by EPA to confirm it qualifies for relief.

The Agency demands strict satisfaction of all nine conditions. General or good faith compliance is typically not enough. Accordingly, disclosure is not a universal antidote for all environmental ailments. Carefully consider the facts of your situation before using this policy.

Principles to Consider Before Using EPA's Audit Policy

Better late than never is not always true. EPA requires strict compliance with the 21-day clock for reporting. Disclosing even one day late (e.g., 22 days after discovering a violation) means relief will not be available under the Audit Policy. (A more modest penalty reduction under one of the Agency's enforcement response policies (ERPs), which also provide penalty mitigation for voluntary disclosures, may be available.) Counting on the Agency to make an exception to the timing requirement is ill advised; the most likely outcome of the late disclosure will be an enforcement action for the underlying violation being disclosed.

Importantly, only a reasonable basis to conclude that a violation has or may have occurred is needed to start the clock. Likewise, disclosing violations after being informed of an upcoming Agency inspection or during an inspection is too late for relief under the Audit Policy due to the condition requiring "Independent Discovery and Disclosure." Once you learn that an inspection is pending, you will be better served by presenting current compliance efforts in the most favorable light rather than launching an untimely effort to uncover and disclose violations under the Audit Policy.

If a company intends to audit multiple facilities, securing an up front agreement with EPA regarding the logistics of how the audit will be conducted, including potential relaxation of the 21-day clock, is highly recommended.

Know thy past. It is vital that companies carefully scrutinize each facility's compliance history before attempting to invoke reliance on the Audit Policy. Failing to account for prior violations can have dire consequences and result in denial of relief under the "No repeat violations" condition. Instead of forgiveness, a civil penalty for the disclosed violation may result. Relying upon personal recollections or existing records at the individual facility may not be sufficient. Check your company's compliance history using EPA's Enforcement and Compliance History Online (ECHO) database, for example.

For Audit Policy purposes, the term violation encompasses any violation subject to a Federal, State or local civil judicial or administrative order, consent agreement, conviction or plea agreement. In addition, the term also covers any act or omission for which the regulated entity has received a penalty reduction in the past. To determine whether a prior violation may preclude reliance on the Audit Policy, one needs to consider not only when the prior violation occurred and when the party received notice of the violation from the government or a third party, but also whether the violation is the same as or closely related to any prior violations. The 3-year time period runs from the date the party receives notice (e.g., through a complaint, NOV, receipt of penalty mitigation, etc.). With respect to the 5-year time period for patterns of violations, the inquiry focuses on the date(s) the violations actually occurred. Importantly, if a facility has been newly acquired, the existence of a violation before the acquisition does not trigger the repeat violations exclusion. The compliance of others in the new family does need to be considered.

The statute of limitations (i.e., period of time during which an action may be brought) for many, but not all environmental regulatory violations is five years. Companies should take this into consideration in evaluating the merits of disclosing uncovered violations.

Be wary of the "Tip of the Iceberg." Since the "no repeat violations" condition effectively bars continual reliance on the Audit Policy, it is vital that companies use their audit "card" wisely. A hasty decision to rely upon the policy to disclose a minor or single violation when significant or multiple violations lay undiscovered may leave companies wringing their hands when the other violations are unearthed in a subsequent Agency or self inspection. Timely communication with appropriate parties within the company is critical to ensure that decisions regarding the use of the Audit Policy are well vetted and suitably deliberative.

Be ready to substantiate your systematic discovery. The systematic discovery provision of the Audit Policy mandates that violations be discovered through an environmental audit or a compliance management system. Documenting discovery through an audit is reasonably straightforward. Establishing that a potential violation was discovered using a compliance management system may be more challenging. EPA appears to be more closely scrutinizing all disclosures for compliance with this provision. As a result, there is a strong chance that the Agency will request that the entity provide evidence that the company's compliance management system meets the detailed criteria specified in the Audit Policy, which include:

  • Compliance policies, standards, and procedures that describe how employees and agents are to meet applicable requirements;
  • Assignment of overall responsibility for overseeing compliance with policies, standards, and procedures, and assignment of specific responsibility for assuring compliance at each facility or operation;
  • Mechanisms for systematically assuring that compliance policies, standards and procedures are being carried out;
  • Efforts to communicate effectively the company's standards and procedures to all employees and other agents;
  • Appropriate incentives to managers and employees to perform in accordance with the compliance policies, standards and procedures, including consistent enforcement through appropriate disciplinary mechanisms; and
  • Procedures for the prompt and appropriate correction of any violations, and any necessary modifications to the regulated entity's compliance management system to prevent future violations.

Whether the Audit Policy is right for a particular situation. It is important to note that Audit Policy relief will not be available where corporate officials are consciously involved in or willfully blind to violations, or conceal or condone noncompliance.