EPA’s Audit Policy
A Meaningful and Potentially Fleeting Opportunity to Reduce Penalties, Mitigate Enforcement Risks, and Wipe the Slate Clean
Kelley Drye Client Advisory
February 19, 2020
After the election of President Trump, the U.S. Environmental Protection Agency (“EPA”) signaled that it would increasingly focus on improving compliance through mechanisms, including voluntary self-correction, that achieve environmental goals more quickly and in a less costly, adversarial, and time-consuming manner than traditional enforcement—meaning compliance assistance, rather than heavy-handed enforcement. As part of this pivot, EPA is once again actively encouraging facilities to utilize the Agency’s Audit Policy, which allows for substantial (near 100% in many cases) penalty reductions for violations that are self-disclosed and promptly corrected.

In announcing the launch of the new campaign, EPA declared the Agency’s “renewed emphasis on encouraging regulated entities to voluntarily discover, promptly disclose, expeditiously correct, and take steps to prevent recurrence of environmental violations.” More specifically, in the months since the initiative was launched, EPA has sought to expand use of the Audit Policy by:
 
  • Promoting use of the Agency’s online “eDisclosure” program;
  • Reminding the regulated community of the additional flexibility available to new owners who self-disclose violations (“the New Owner Policy”); and,
  • Expressly noting that the Audit Policy does not require advance notice to EPA and does not impose time limits on Audit completion.


EPA has been explicitly promoting the significant benefits to facilities that utilize the Audit Policy. These real and meaningful benefits include:
 
  • Elimination of 100% of the gravity-based civil penalty that otherwise might apply (in the vast majority of Audit Policy disclosures, EPA will only seek to recover the “economic benefit” portion of a potential penalty);
  • Waiver of the economic benefit component of a potential penalty where EPA deems it insignificant; and,
  • Additional clarity by defining allowable violation correction time periods.


Enforcement figures just reported by EPA on February 13, 2020 suggest the Agency’s shift in emphasis from heavy-handed enforcement towards compliance assistance is being implemented in earnest and that the regulated community has indeed responded to EPA’s promotion of the Audit Policy:
 
  • Civil Injunctive Relief
    • $20.84 billion in FY17 to $4.43 billion in FY19
  • Civil Penalties
    • $1.7 billion in FY17 to $360.8 million in FY19
  •  Site Inspections
    • 11,885 in FY17 to 10,320 in FY19
  • Civil Enforcement Initiations
    • "2,500 in FY17 to "1,600 in FY19
  • Self-Reported Violations under Audit Policy
    • 1,062 in FY17 to 1,901 in FY19

Of these figures, the 79% increase in self-reported violations (conducted pursuant to the Audit Policy) over just two years is perhaps the most striking. The current Administration’s statements with respect to enforcement and compliance clearly have convinced many regulated entities to audit their environmental compliance programs and disclose violations to EPA under the Trump Administration, rather than allow potential unidentified violations to be discovered by a more aggressive EPA in a subsequent administration.

Background on EPA’s Self-Disclosure Policies

Audit Policy - Issued in 2000, EPA’s Audit Policy encourages companies to voluntarily discover potential violations through self-auditing, disclose them to the EPA, promptly correct them, and prevent their future recurrence. In exchange, companies receive a reduction or elimination of civil penalties and a determination by the EPA not to recommend criminal prosecution to the U.S. Department of Justice.

There are nine conditions for penalty mitigation: (1) systematic discovery through an internal or external audit or compliance management program; (2) voluntary discovery of the violation; (3) disclosure to the EPA within 21 days of discovery; (4) independent discovery and disclosure; (5) correction and remediation within 60 days from the date of discovery; (6) prevention of recurrence of the violation; (7) the violations are not repeat violations; (8) the violations do not result in serious actual harm, an imminent and substantial endangerment, and do not violate an administrative or judicial order or consent agreement; and (9) cooperation by the disclosing entity.

New Owner Audit Policy - EPA has also renewed its emphasis on the New Owner Audit Policy, which has already been an effective means of achieving compliance for new owners that have acquired over 1,000 facilities. The New Owner Policy offers benefits and incentives for those companies who wish for a fresh start at their newly acquired facility. The Policy encourages new owners of facilities to assess potential violations and address environmental noncompliance that began prior to acquisition by offering additional penalty mitigation.

By proactively addressing environmental noncompliance that began pre-acquisition, new owners may: (1) enter into audit agreements incorporating disclosure reporting more appropriate to their unique situation; (2) have the economic benefit penalties waived that might have otherwise applied to delayed expenditures; and (3) enjoy more generous treatment of violations discovered through monitoring/sampling already legally required (such as pursuant to the Clean Air Act).

Considerations When Using the Audit Policy

Although the current EPA is committed to simplifying and streamlining use of the Audit Policy, the Audit Policy is not entirely devoid of prescriptive procedures, hard deadlines, or other mandates. Before undertaking an environmental compliance audit for the purpose of potentially submitting a self-disclosure to EPA, companies should first determine the scope of the proposed audit, evaluate whether they qualify as a “new owner” under the New Owner Audit Policy, and consider whether it is necessary to enter an Audit Agreement with EPA.

Also, while the Audit Policy can significantly reduce enforcement risk, there remains some level of risk inherent in the self-scrutiny of environmental compliance. Companies should therefore remain mindful of mechanisms to more fully protect themselves from liability and to obtain maximum penalty mitigation. For instance, companies should consider having the audit process managed by counsel to help protect the confidentiality of findings and conclusions pending decisions on corrective actions and/or disclosures under the “Attorney/Client Privilege.” The scope and conduct of the audit should also be well-defined and systematic, including documentation of findings and timely review of conclusions to ensure that violations are promptly disclosed within the 21-day time requirement of the Audit Policy. An audit should be structured and documented appropriately to help facilitate disclosures that maximize the timeframes to implement remedies.
 
Companies should also be strategic about which potential noncompliance issues to disclose to EPA and which potential issues need only be corrected on a going-forward basis. Different compliance issues present different enforcement risks and different opportunities to mitigate that risk through disclosure.

Companies should also be mindful that, under many environmental statutes, EPA shares permitting and enforcement authority with state agencies. Determining what potential noncompliance issues to disclose— and to whom—can often depend on whether the state has an audit policy, how that policy is implemented, knowledge about the enforcement posture of the state regulators, and the company’s relationship with permitting authorities.

How Kelley Drye Can Help

Kelley Drye’s attorneys are the foremost experts in the federal and state environmental laws and regulations applicable to heavy industrial and manufacturing facilities.

We have conducted dozens of environmental audits at many different types of industrial and manufacturing facilities, such as steel mills, leather tanners, chemical manufacturers, engine manufacturers, electronic manufacturers, and food production facilities, as well as in other industries. Our Audit Policy experience also includes audits conducted pursuant to transactions as well as the development and implementation of systematic environmental compliance audit programs.

Our team has extensive experience facilitating disclosures to EPA and negotiating penalty mitigation through the EPA’s Audit Policy. In addition to our substantive expertise, our longstanding experience representing manufacturers, heavy industry and mineral extraction companies also has made us trusted advocates at the EPA and state agencies. We have strong, well-established relationships at both the EPA headquarters and the regional offices that we can leverage to aid companies in securing flexibility and favorable treatment under the Audit Policy.

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For more information about this client advisory or if you would like to discuss how to structure an effective environmental audit or compliance management program, please contact:
 
Wayne J. D’Angelo                        Joseph J. Green
202.342.8525                                   202.342.8849
WDAngelo@KelleyDrye.com        JGreen@KelleyDrye.com