In a notice published in the August 1, 2008 Federal Register, the United States Environmental Protection Agency (“EPA”) announced that it will begin following a new approach to applying its policy on Incentives for Self-Policing: Discovery, Disclosure, Correction and Prevention of Violations (65 Fed. Reg. 19618) (“Audit Policy”) to new owners that wish to make a “clean start” at newly acquired facilities.
The Interim Approach to Applying the Audit Policy to New Owners (the “Interim Approach”) encourages new owners to audit newly acquired facilities and to disclose, correct and prevent to recurrence of instances of environmental noncompliance. The Interim Approach is designed to encourage self-disclosure of violations that will, once corrected, result in significant pollutant reductions and benefits to the environment. The Interim Approach provides incentives including penalty mitigation beyond what is provided for in the Audit Policy and modifications to a number of Audit Policy conditions.
While it will be accepting comment on the Interim Approach until October 30, 2008, EPA will begin following the Interim Approach immediately. Based on the public comments received and EPA’s experience in implementing the Interim Approach, EPA will decide whether to finalize, revise or discontinue these incentives for new owners.
Entities that have recently acquired new facilities or that may in the future acquire new facilities should be aware of the Interim Approach as it provides significant incentives for new owners to address environmental noncompliance at newly acquired facilities. Interested parties may also wish to provide EPA with comments on the Interim Approach.
Of course, companies should still consider carefully when to perform full audits of facilities to be acquired. Companies should also consider whether such audits should be performed under the supervision of attorneys, in order to maintain any potential privilege claims, in the event that the company chooses not to disclose the results of the audit to EPA and any relevant state agencies.
Background
EPA’s April 2000 Audit Policy provides for the reduction and, in some cases, elimination of penalties and an EPA determination not to recommend criminal prosecution of those entities that make voluntary disclosures in accordance with the Audit Policy. In the 2000 Audit Policy and in its April 2007 guidance “Audit Policy: Frequently Asked Questions” (“FAQs”), EPA recognized that additional flexibility in the application of the Audit Policy to new owners may be appropriate. The Interim Approach, which was developed following an initial notice and comment period announced on May 14, 2007, significantly expands the incentives and flexibility provided to new owners by providing penalty mitigation beyond that provided in the Audit Policy and the modification of a number of Audit Policy conditions. In so doing, EPA hopes to capitalize on factors that may make it feasible and attractive for new owners to address issues of environmental compliance and, as a result, to increase the environmental benefits from self-disclosures.
Incentives Provided in the Interim Approach
The greatest incentive for new owners to take advantage of the Interim Approach is its treatment of penalties for new owners. Under the Interim Approach, no penalties for economic gravity or benefit will be assessed against the new owner for the period prior to acquisition. Penalties for economic benefit associated with avoided operation and maintenance costs will be assessed against the new owner only from the date of acquisition. Penalties for economic benefit associated with delayed capital expenditures or unfair competitive advantage will not be assessed if violations are corrected within 60 days of discovery or other timeframe agreed to by EPA. As a result, under the Interim Approach, a new owner is less likely to pay substantial civil penalties for disclosed instances of non-compliance.
The Interim Approach also modifies a number of Audit Policy conditions, making it more likely that a new owner will be eligible for coverage under the Audit Policy. Such modifications are described in further detail below.
Key Features of the Interim Approach
Only new owners are eligible for the benefits of the Interim Approach. Under the Interim Approach, an entity qualifies as a new owner if: (a) prior to the transaction it was not responsible for environmental compliance at the facility, did not cause the violations and couldn’t have prevented such violations; (b) the violation originated with the prior owner; and (c) prior to the transaction, neither buyer nor seller had the largest share of ownership of the other entity and buyer and seller did not have a common corporate parent. An entity that qualifies as a new owner will be considered to be such for the period within nine months of the closing, and will be eligible to receive the benefits of the Interim Approach by either entering into an audit agreement with EPA within that nine month period or promptly disclosing individual violations within that period.
In order to qualify for the Interim Approach, the new owner must meet all nine of the conditions of the Audit Policy, as tailored to new owners, and must certify to being a new owner. Significant changes from the Audit Policy include:
- Systematic Discovery – The Audit Policy requires that, in order to receive 100 percent mitigation of gravity-based penalties, violations must be discovered through an environmental audit or compliance management system. For those violations not discovered through such review, 75 percent mitigation is available if all other Audit Policy conditions are met. Under the Interim Approach, the Systematic Discovery condition will continue to apply; however, EPA will consider one-time pre-closing due diligence review to constitute systematic discovery, waiving the requirement that the review be “periodic”.
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Voluntary Discovery – The Audit Policy requires that disclosed violations must have been discovered voluntarily, not through required monitoring, sampling or auditing. In its 2007 FAQs document, EPA described a limited exception to this condition for new owners in which Clean Air Act violations discovered as part of a new owner’s reexamination of facility compliance under Title V would be treated as voluntarily discovered. The Interim Approach broadens this exception beyond Title V, such that for new owners that examine facility compliance and disclose violations or enter into an audit agreement before the first instance when monitoring, sampling or auditing is required, disclosures of violations would be treated as voluntarily discovered.
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Prompt Disclosure – The Audit Policy requires that an entity disclose any violation within 21 days of discovery unless EPA determines, on a case by case basis, that a longer period should apply. Under the Interim Approach, unless a statute or regulation requires otherwise, violations discovered pre-closing must be disclosed with 45 days after the closing and violations discovered post-closing must be disclosed within 21 days after discovery or within 45 days after the transaction closing, whichever time period is longer. If the new owner has entered into an audit agreement, violations discovered and disclosed pursuant to the agreement would be governed by the agreement’s disclosure schedule.
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Other Violations Excluded - While the Audit Policy excludes from eligibility violations which resulted in serious actual harm or may have presented an imminent and substantial endangerment to human health or the environment, under the Interim Approach, violations which did not result in a fatality, community evacuation or other seriously injurious or catastrophic event will not be excluded from Audit Policy consideration where the violation began before the new owner acquired the facility.
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No Repeat Violations - The Interim Approach follows EPA’s current interpretation of the No Repeat Violations condition, which, as articulated in EPA’s 2007 FAQs document, permits new owners to be eligible even where a newly acquired facility has had violations prior to the acquisition.
As to other conditions, the Interim Approach makes few, if any, changes to the Audit Policy.
Conclusion
By providing additional incentives and modifying conditions such that a new owner can more easily qualify for coverage under the Audit Policy, the EPA’s recently announced Interim Approach makes self-disclosure of environmental non-compliance much more attractive for new owners of regulated facilities. Further, entities that now qualify or may in the near future qualify as new owners should be aware that, in order to assess the Interim Approach, EPA intends to observe and track new owners that do not take advantage of the Audit Policy. While EPA notes that it has not established any new enforcement priority focused on recently acquired facilities, it does suggest that such facilities may potentially be ripe for inspection or enforcement attention. Given EPA’s focus on these issues, entities that have recently acquired new facilities or that may in the future acquire new facilities should seriously consider the potential benefits of discovering and disclosing instances of non-compliance under the Interim Approach.