EnviroNotes

On August 1, 2008, U.S. EPA published notice of its “Interim Approach” to applying the U.S. EPA’s April 11, 2000 policy on “Incentives for Self-Policing: Discovery, Disclosure, Correction and Prevention of Violations,” more commonly known as the “Audit Policy.” See 73 Federal Register 44991 (August 1, 2008). The Interim Approach describes how U.S. EPA will apply the 2000 Audit Policy to new owners of regulated facilities who discover environmental violations that commenced prior to acquisition. U.S. EPA is providing new owners additional incentives to self-disclose, correct and prevent recurrence of violations, including penalty reductions beyond those allowed under the 2000 Audit Policy as well as additional flexibility.

The Interim Approach became effective August 1, 2008. U.S. EPA is concurrently seeking comments on the Interim Approach until October 31, 2008. U.S. EPA will decide whether to finalize, alter or discontinue the Interim Approach based on comments submitted and its experience implementing the tailored incentives for new owners.

U.S. EPA reported that over 50% of the self-disclosures under the 2000 Audit Policy involved reporting violations. U.S. EPA would like to increase the use of policy to address more serious violations, such as the prior owner’s failure to install required air pollution controls. U.S. EPA believes that owners of newly acquired facilities are well-situated and motivated to audit environmental compliance and correct violations in order to achieve a “clean start.” By providing new owners with additional incentives to audit, self-disclose and correct violations at newly acquired facilities, U.S. EPA hopes to facilitate prompt corrections of violations that yield significant improvements to the environment.

Generally, the Interim Approach applies only to new owners who prior to closing the transaction: (1) were not responsible for environmental compliance and did not control operations at the facility; and (2) did not cause the violations. In addition, the violations must have originated with the prior owner. Finally, neither the buyer nor seller may have had the largest ownership share of the other entity and they must not have had a common corporate parent. The new owner must certify it meets all of these criteria.

A new owner meeting these criteria will remain eligible for the enhanced new owner incentives provided by the Interim Approach for nine months after the transaction closing date. During this nine month period, the new owner may elect to make self-disclosures of violations under two alternatives: (1) entry into an audit agreement with U.S. EPA specifying the facility to be audited, the scope of the audit, the deadline for completing the audit and the deadline for disclosing the violations; or (2) disclosure of violations individually as discovered. The key difference between the two approaches is the required time period for making disclosures. If the new owner does not enter into an audit agreement with U.S. EPA, the disclosure of individual violations as they are discovered must be made within 21 days of discovery or within 45 days of closing the transaction, whichever is longer. The audit agreement, in contrast, offers a significant advantage by allowing a longer time period for making disclosures. Entry into an audit agreement within nine months of the closing date provides an opportunity to conduct the audit and make the disclosure outside the initial nine month period. The audit agreement also would “stop the clock” as to disclosure of violations involving monitoring, sampling or auditing required by a permit or other legal requirement if the new owner enters into the audit agreement prior to the required monitoring, sampling or auditing.

The cornerstone of the Interim Approach is the additional penalty reduction made available to new owners. Under the 2000 Audit Policy, 100% of the gravity portion of the penalty may be waived if nine conditions are met. If the first of the nine conditions, discovery of violations via an environmental audit or compliance management system, is the only condition not met, a 75% reduction of the gravity component of the penalty is available. However, the 2000 Audit Policy did not reduce the economic benefit portion of the penalty, which can be significant. The Interim Approach affords new owners additional penalty relief:

• No economic benefit penalty will be assessed for the period prior to the closing date.
• Penalties for economic benefit associated with avoided operation and maintenance costs will be assessed against the new owner from the date of acquisition.
• Economic benefit penalties associated with delayed capital expenditures or with unfair competitive advantage will not be imposed on the new owner if the violations are corrected within 60 days of discovery or other time period agreed upon by U.S. EPA.

The 2000 Audit Policy sets out nine conditions which must be met in order to obtain a 100% reduction of the gravity penalty and the other benefits of the Policy. The Interim Approach modifies five of these conditions to provide flexibility for new owners.

• Violations must be discovered through either an environmental audit or compliance management system. A new owner’s pre-closing due diligence must meet all the criteria for an environmental audit established in the 2000 Audit Policy, except it need not be part of a “periodic” review.
• Violations must be discovered voluntarily. Under the 2000 Audit Policy, discovery via monitoring, sampling or auditing required by a permit or other legal requirement is not considered voluntary with the exception of Clean Air Act violations disclosed by a new owner prior to the new owner’s first annual compliance certification under a Title V operating permit. The Interim Approach allows new owners to meet this condition by disclosing the violations or entering into an audit agreement prior to the first instance of required monitoring, sampling or auditing.
• The 2000 Audit Policy requires disclosure of violations within 21 days of discovery. The Interim Approach allows new owners to disclose violations discovered prior to closing the transaction within 45 days of the closing date. Post-closing discoveries must be disclosed within 21 days of discovery or 45 days from the closing date, whichever time period is longer.
• The 2000 Audit Policy provides that certain violations are not eligible for incentives if they resulted in actual harm or imminent and substantial endangerment or violated the terms of a consent agreement or order. For new owners, such violations which began prior to acquisition are eligible for incentives unless they resulted in a fatality, community evacuation or other seriously injurious or catastrophic event.
• As is the case under the 2000 Audit Policy, a new owner must cooperate with U.S. EPA’s requests for information showing that it satisfies the nine conditions under the Policy. The Interim Approach adds that the U.S. EPA may request that a new owner also furnish information supporting its certification that it qualifies as a “new owner.”

Under the 2000 Audit Policy, violations must be corrected within 60 days of discovery. The Interim Approach clarifies that a new owner has 60 days from the closing date to correct violations discovered prior to closing.

The Interim Approach addresses some of the disincentives which may have previously limited utilization of the 2000 Audit Policy. The Interim Approach is available for settlement of civil penalties for violations of federal environmental laws; however, it does not apply to violations of Indiana environmental laws. The IDEM has its own Self-Disclosure and Environmental Audit Policy which was amended July 13, 2007, but does not include the incentives now provided to new owners by U.S. EPA.

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