On August 1, 2008, the U.S. Environmental Protection Agency (EPA) announced in the Federal Register the launch of an “Interim Approach to Applying the Audit Policy to New Owners” (the “Interim Approach”). Interim Approach to Applying the Audit Policy to New Owner, 73 Fed. Reg. 44,991 (Aug. 1, 2008). The Interim Approach will offer incentives to new owners looking to make a “clean start” at newly acquired facilities by addressing environmental noncompliance that began prior to acquisition. The Interim Approach is based on EPA’s April 11, 2000, policy on “Incentives for Self- Policing: Discovery, Disclosure, Correction and Prevention of Violations” (the “2000 Audit Policy”) (Incentives for Self-Policing: Discovery, Disclosure, Correction and Prevention of Violations, 60 Fed. Reg. 19,618 (Apr. 11, 2000)), but it provides additional incentives tailored to the unique circumstances facing new owners of regulated facilities. These additional incentives include penalty mitigation greater than what is available under the 2000 Audit Policy, and an expanded range of violations that may be eligible for Interim Approach consideration. Much like the 2000 Audit Policy, the purpose of the Interim Approach is to encourage new owners to audit newly acquired facilities, and then disclose, correct and prevent the recurrence of violations. In exchange, EPA will reduce or eliminate the gravity-based portion of civil penalties EPA could have otherwise assessed to settle the disclosed violations. According to the Federal Register, EPA hopes that the Interim Approach will encourage self-disclosures of violations that, once corrected, will “yield significant pollutant reductions and benefits to the environment.” 73 Fed. Reg. at 44,991.
Overview of Interim Approach
Who is a “New Owner”?
The Interim Approach applies only to “new owners” of facilities. To be considered a “new owner,” an entity must certify to three criteria: (1) “[P]rior to the transaction, the new owner was not responsible for environmental compliance at the facility which is the subject of the disclosure, did not cause the violations being disclosed and could not have prevented their occurrence”; (2) “the violation which is the subject of the disclosure originated with the prior owner”; and (3) “prior to the transaction, neither the buyer nor the seller had the largest ownership share of the other entity, and they did not have a common corporate parent.” 73 Fed. Reg. at 44,995. These criteria are designed to prevent new entities created by corporate spin-offs or owners with prior control from qualifying as “new owners.”
After an owner certifies to the above three criteria, it is considered “new” (and therefore eligible for “new owner” treatment and benefits) for nine months following the date of the closing. During that nine month period, an owner can make disclosures under the Interim Approach in either of two ways: (1) by entering into an audit agreement with EPA; or (2) by making individual violation disclosures. 73 Fed. Reg. at 44,996-97. If a new owner chooses to enter into an audit agreement with EPA, it must commit in writing to audit a specific facility or facilities; the scope of the audit, including the regulatory programs to be covered; dates of completion of the audit; and the dates of disclosure of any violations found. EPA must accept the terms of the new owner’s proposed audit agreement, and reserves the right to negotiate with the new owner over the scope, timing and sequence of the audits and disclosures. 73 Fed. Reg. at 44,997.
If a new owner wants to avoid negotiating an audit agreement with EPA, it can instead disclose violations as they are found. Under this option, the new owner must promptly disclose any violations within 21 days of discovery, or within 45 days of the closing — whichever is longer. 73 Fed. Reg. at 44,996.
What is the Greater Penalty Mitigation?
The Interim Approach provides greater penalty mitigation than the 2000 Audit Policy. While the 2000 Audit Policy allows for reduced penalties in exchange for self-reporting, penalties are usually not reduced below the level necessary for EPA to recapture the economic benefit the violator received as a result of the violations. EPA has speculated that its ability to recapture economic benefit penalties is one of the reasons that there have been fewer 2000 Audit Policy disclosures than expected. Accordingly, the Interim Approach has adopted the following approach to economic penalty mitigation: (1) “[N]o penalties for economic benefit or gravity will be assessed against the new owner for the period before the date of acquisition”; (2) “penalties for economic benefit associated with avoided operation and maintenance costs will be assessed against the new owner from the date of acquisition”; and (3) “penalties for economic benefit associated with unfair competitive advantage will not be assessed against the new owner if violations are corrected in accordance with the [2000 Audit Policy] (i.e. within 60 days of the date of discovery or another reasonable timeframe to which EPA has agreed).” 73 Fed. Reg. at 44,998.
What is the Expanded Range of Violations that may be Eligible for Interim Approach Consideration?
The Interim Approach provides an expanded range of violations that may be eligible for Interim Approach consideration. The 2000 Audit Policy contains nine conditions that must be met for a violation to be eligible for 2000 Audit Policy consideration and, therefore, penalty mitigation. The Interim Approach modifies five of the nine conditions to allow EPA more flexibility in applying the 2000 Audit Policy in the new owner context. For a new owner to be eligible for Interim Approach consideration, it must meet the nine conditions discussed below.
Five Modified Conditions
Condition 1 – Systematic Discovery
The 2000 Audit Policy requires that eligible violations be discovered through an environmental audit or a compliance management system. As defined in the 2000 Audit Policy, an environmental audit must include a periodic review element. The Interim Approach recognizes that an owner’s pre-closing due diligence may meet the definition of an environmental audit, but that pre-closing due diligence is necessarily a one-time event (i.e. not periodic). Accordingly, the Interim Approach waives the periodic review element of the Systematic Discovery condition for new owners. 73 Fed. Reg. at 44,999-45,000.
Condition 2 – Voluntary Discovery Condition
The 2000 Audit Policy requires that the disclosed violation be discovered voluntarily and not because it was required to be identified through legally mandated monitoring, sampling or auditing protocol. The Interim Approach expands on what is considered a “voluntary” discovery. New owners who disclose a violation before the first instance when the monitoring, sampling or auditing is required remain eligible for Interim Approach treatment. 73 Fed. Reg. at 45,000.
Condition 3 – Prompt Disclosure
The 2000 Audit Policy requires that the violation be disclosed in writing within 21 days of discovering that the violation has, or may have, occurred. The Interim Approach recognizes the immediate and competing priorities a new owner must address in the days following a closing, and therefore extends the time in which a new owner can make a disclosure. For violations discovered pre-closing, a new owner must disclose the violations to EPA within 45 days after the closing. For violations discovered post-closing, a new owner must disclose the violations within 21 days of discovery or within 45 days after closing — whichever is longer. New owners who enter into audit agreements with EPA are required to disclose violations pursuant to the agreed upon schedule. 73 Fed. Reg. at 45,001.
Condition 8 – Other Violations Excluded
The 2000 Audit Policy provides that certain violations, including those that “resulted in serious actual harm, or may have presented an imminent and substantial endangerment, to human health or the environment” are not eligible for 2000 Audit Policy consideration. The Interim Approach provides that absent a fatality, community evacuation or other seriously injurious or catastrophic event, a violation that otherwise resulted in serious actual harm or an imminent and substantial endangerment during the previous ownership remains eligible for Interim Approach consideration. By modifying Condition 8 in this way, EPA is hoping that new owners disclose and then correct significant past violations — one of the main goals of the Interim Approach. 73 Fed. Reg. at 45,003.
Condition 9 – Cooperation
The 2000 Audit Policy requires regulated entities to cooperate with EPA and provide EPA with information necessary to allow EPA to determine whether the violations are eligible for treatment under the 2000 Audit Policy. The Interim Approach modifies this condition only to make clear that the regulated entity must cooperate with and provide any requested documentation to EPA to determine eligibility under the Interim Approach. Specifically, EPA may request a discloser under the Interim Approach to provide EPA with documentation to support the discloser’s claim that it is a “new owner.” 73 Fed. Reg. at 45,003-04.
Four Unmodified Conditions
Condition 4 – Discovery and Disclosure Independent of Government or Third Party Plaintiff
Regulated entities must undertake discovery of violations of their own accord. Both the 2000 Audit Policy and the Interim Approach (collectively, the “Policies”) require that violations be discovered and disclosed voluntarily before EPA or another governmental agency or third party would have identified the violation. 73 Fed. Reg. 45,001-02.
Condition 5 – Correction and Remediation
The Policies require the regulated entity to correct the identified violation within 60 calendar days of discovery, certify in writing that the violation has been corrected and take appropriate measures to remedy any environmental or human harm caused by the violation. If the violation is one that cannot be corrected within 60 days (i.e. it involves a significant expenditure, it involves technically complex issues or it requires approval from other sources), EPA may grant an extension of time. 73 Fed. Reg. at 45,002.
Condition 6 – Prevent Recurrence
The Policies require the regulated entity to “agree in writing to take steps to prevent a recurrence of the violation after it has been disclosed and corrected.” 73 Fed. Reg. at 45,002.
Condition 7 – No Repeat Violations
The 2000 Audit Policy provides that repeat violations are exempt from Policy consideration. This means that the same or a closely related violation cannot have occurred at the same facility within the past three years or, in the case of a multi-facility organization, as a pattern of violations at one or more facilities within the past five years. EPA is not modifying this condition for new owners because the preamble to the 2000 Audit Policy already states “[i]f a facility has been newly acquired, the existence of a violation prior to the acquisition does not trigger the repeat violations exclusion” as to the new owner. 65 Fed. Reg. at 19,623.
EPA’s Interim Approach was effective upon release on August 1, 2008. EPA plans to assess the effectiveness of the Interim Approach on an ongoing basis. It will measure the success of the Interim Approach based on three indicators: (1) “number of new owner disclosures resolved”; (2) “pounds of pollutants estimated to be reduced, treated or eliminated”; and (3) “dollars invested in improved environmental performance or improved environmental management practices.” 73 Fed. Reg. at 45,005. To encourage new owners to make disclosures under the Interim Approach, EPA will post for review in the public docket any agreement it reaches with new owners under the Interim Approach.
It is obviously too soon to predict how successful this Interim Approach will be in practice. One issue presented is whether the nature of disclosures between parties to a transaction will change. EPA received comments suggesting that prior facility owners whose buyers disclose pursuant to the Interim Approach should receive enforcement protection. EPA decided that seller protection is not appropriate. It is EPA’s position that sellers have ample opportunity to make disclosures while they own facilities and, therefore, EPA expressly reserves the right to pursue sellers following a transaction as circumstances may warrant. 73 Fed. Reg. at 45,001. As a result, if a seller knows its buyer will be making self disclosures, there is a real potential that the nature of the deal could change.
EPA will be accepting public comments on the Interim Approach until October 30, 2008.