In 2012 the United States Environmental Protection Agency (EPA) announced that due to budget constraints, it planned to reduce investment in its self-policing Audit Policy for disclosing violations of federal environmental laws. In welcome news to the regulated community, EPA recently announced that it will not only keep the program, but modernize it by unveiling eDisclosure, a new centralized electronic portal created to streamline submission of certain voluntary disclosures. EPA has targeted the rollout of the system for the fall of 2015.
Although EPA is changing the process for self-disclosures, it has emphasized that eDisclosure’s introduction will not change the substantive requirements to qualify for the different self-disclosure policies. The new life breathed into the Audit Policy, New Owner Policy and Small Business Compliance Policy will likely be met with approval by many in the regulated community that have benefitted from reduced federal enforcement or penalties through voluntary self-disclosures over the past two decades.
Background of Audit Policy
In 1995 EPA issued a policy called “Incentives for Self-Policing: Discovery, Disclosure, Correction and Prevention of Violations” (Audit Policy). 60 Fed. Reg. 66706 (December 22, 1995). In 2000 it revised the Audit Policy and made changes to the related Small Business Compliance Policy (applicable to entities with 100 or fewer employees). 65 Fed. Reg. 19618 (April 11, 2000). Under these policies, entities that meet all nine conditions, such as systematic and voluntary discovery of violations, prompt disclosure (within 21 days of discovery) and taking corrective action within a prescribed timeframe (typically within 60 to 90 days of discovery), are eligible for total mitigation of the gravity-based portion of civil penalties and no recommendation for criminal prosecution.
The Audit Policy does not offer immunity from economic benefit penalties, i.e., penalties based upon the financial benefits obtained through noncompliance. If an entity meets all policy conditions except detection of the violation through a systematic discovery procedure, it may still be eligible for a 75 percent reduction in gravity-based penalties. However, violations that cause serious actual harm or present an imminent and substantial endangerment are not eligible for penalty mitigation or immunity.
In 2008 EPA announced a supplemental policy for new owners of regulated facilities, called the “Interim Approach to Applying the Audit Policy to New Owners” (New Owner Policy). 73 Fed. Reg. 44991 (August 1, 2008). The New Owner Policy allows new owners to obtain a fresh start by disclosing violations up to nine months after the closing of a transaction, depending on the circumstances. The requisite conditions in the New Owner Policy generally track those in the Audit Policy, with some modifications to reflect the different circumstances a new owner confronts, such as allowing disclosure to take place within 45 days of closing if the violation was discovered pre-closing, and the longer of 21 days after discovery or within 45 days of closing for violations discovered up to nine months after closing.
For many years, the Audit Policy and New Owner Policy have provided the regulated community an opportunity to obtain immunity or mitigation of penalties for various violations of federal environmental laws and have been a meaningful factor in encouraging entities to implement audit programs and environmental management systems.
2015 eDisclosure Portal Announced
In 2012 EPA issued enforcement guidance announcing plans to reduce investment in the Audit Policy to a “limited national presence” starting in 2013, due to “lean budget times” at EPA. This surprising announcement triggered substantial concern in the regulated community, which was further fueled by EPA not providing details regarding its future intentions for the Audit Policy program.
Following more than two years of relative silence, in May 2015 EPA introduced plans for a centralized, web-based portal devoted to electronic disclosures under the Audit Policy, and to a lesser extent, the New Owner Policy. EPA held two webinars in June 2015 to provide some details regarding the new portal, dubbed eDisclosure, which the agency targets for launch in the fall of 2015.
According to EPA, the substance of the Audit Policy and New Owner Policy will not change, but eDisclosure will streamline the process for making disclosures. In fact, once launched, eDisclosure will be the only way to submit disclosures under the Audit Policy, except for disclosures that contain Confidential Business Information (CBI), as discussed below. EPA’s present position on the New Owner Policy is that disclosures may be made either through eDisclosure or through the traditional manual process, but certain aspects of the New Owner Policy (e.g., negotiating audit agreements with EPA) must be completed outside of the eDisclosure system.
In the recent webinars, EPA described how parties will utilize eDisclosure through a three-step process. The first step requires parties to register through EPA’s Central Data Exchange (CDX) and complete the identity-proof process, unless a party has already completed CDX registration for submitting other information (e.g., Emergency Planning and Community Right-to-Know Act (EPCRA) and Risk Management Program submissions).
Following registration, parties must complete the eDisclosure form by providing all required information within 21 days of discovering the violation. EPA is still designing the eDisclosure portal, but anticipates a mix of drop-down choices for some entries and text boxes to provide narrative explanations for other fields. It is important to note that EPA does not intend eDisclosure to be capable of processing CBI. Parties with disclosures containing CBI should continue to manually submit this information according to the provisions at 40 CFR Part 2.
eDisclosures will fall into one of two categories:
- Tier 1 Disclosures are EPCRA violations that meet all of the Audit Policy or Small Business Compliance Policy conditions, but expressly exclude release reporting violations under Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) § 103 and EPCRA § 304. Also excluded from Tier 1 Disclosures are EPCRA violations that EPA determines to include significant economic benefit to the regulated entity.
- Tier 2 Disclosures are all non-EPCRA violations, all EPCRA violations expressly excluded from Tier 1 and EPCRA violations where all Audit Policy conditions are met except Condition 1 (violation was not discovered through a systematic audit).
The third step of the process requires that disclosing parties submit a Compliance Report through eDisclosure within the required timeframes (60 days from disclosure under the Audit Policy and 90 days under the Small Business Compliance Policy, with limited extensions possible for Tier 2 violations only). The Compliance Report requires parties to certify that they have met all policy conditions, and that they have corrected the disclosed violation.
EPA’s response to an eDisclosure will vary based on the Tier of the disclosure. For Tier 1 Disclosures, the submission will prompt the automatic issuance of an electronic Notice of Determination (eNOD), which will indicate the violation has been resolved and EPA will not seek civil penalties. In contrast, EPA will issue an electronic Acknowledgement Letter (AL) for Tier 2 Disclosures, which will confirm the agency’s receipt of the disclosure and tell the disclosing entity that EPA will determine eligibility for penalty mitigation (i.e., assess whether a party meets the relevant Audit Policy conditions) if and when it considers taking enforcement action.
Consistent with the Audit Policy and Small Business Compliance Policy, certain violations are not eligible for eDisclosures, including criminal violations and violations that cause serious harm or present an imminent and substantial endangerment.
Continued Benefits for Businesses
The Audit Policy, New Owner Policy and Small Business Compliance Policy have been important options for businesses seeking to mitigate or avoid civil penalties for many environmental violations, and the policies have supported EPA’s goal of encouraging parties to correct and prevent violations. While the eDisclosure portal is not intended to revamp the self-disclosure program, it will likely provide a standardized and efficient process for self-reporting. Perhaps more importantly, EPA’s investment in designing and implementing the system confirms that the Audit Policy is not in jeopardy of extinction, as was the case only a few years ago.
EPA’s Audit Policy website provides more details and materials from the recent eDisclosure webinars. EPA will issue a Federal Register notice concurrent with the rollout of the eDisclosure portal.