U.S. EPA and the many state EPA's have adopted environmental audit policies or laws to encourage companies to review and disclose instances of non-compliance. (See prior post- Why Businesses Should Consider an Environmental Audit?)
Last week, I participated in a webinar discussing environmental audits. It was a good panel discussion which explored many of the complex issues associated with performing audits and whether to voluntarily disclose non-compliance. Below is a summary of some of the considerations when deciding whether to perform an audit and/or voluntarily disclose violations.
Pro's of Performing an Environmental Audit or Voluntarily Disclosing Violations
- Return to Compliance w/o Fear of Enforcement- Audit and disclosures provide companies the ability to wipe the slate clean. Companies no longer have to fear inspections or large penalties if the non-compliance is discovered as a result of an EPA investigation. Audits can provide a company the ability to proactively address compliance issues.
- Civil Penalty Forgiveness- U.S. EPA's audit policy provides between 75% to 100% of forgiveness of gravity based civil penalties if a company performs and audit and meets EPA's nine conditions in its policy. Many state audit laws and policies provide similar incentives.
- Limit Likelihood of Criminal Prosecution- Companies that voluntarily disclose violations have the potential to avoid criminal prosecution. If the company meets EPA's audit conditions and the audit and disclosure were performed in good faith. Also, companies must take steps to prevent recurrence of the violation.
- Audit Report/Materials Confidential- Many states provide a privilege over the environmental audit report and possibly the materials associated with the audit. U.S. EPA does not provide a privilege over audit materials, but generally commits to not use the audit materials against the company.
- Mergers/Acquisitions- Audit policies provide even greater incentives to new owners to perform audits and make voluntarily disclosures. EPA's new owner audit policy provides an opportunity to fix problems and make a fresh start post-acquisition.
Con's of Performing an Environmental Audit or Voluntarily Disclosing Violations
- Not a "Shield" from Enforcement- U.S. EPA's federal audit policy is simply guidance, not the law. Therefore, U.S. EPA may elect to not provide penalty forgiveness. Also, there are many exceptions under both federal and state environmental audit policies and laws.
- Must Be Prepared to Fix Violations Uncovered- Generally, its not wise to perform an audit if there are insufficient funds to correct the violations once discovered.
- Violations Become Public- Even if the company qualifies for state or federal civil penalty reductions or avoids a penalty all together, the violations still become public once disclosed to regulators. Disclosures may prompt 3rd party lawsuits.
- Limited Scope of Criminal Leniency- There are a number of limitations and exceptions on the U.S. EPA's audit policy with regard to criminal violations. Also, the Department of Justice has the ability to exercise independent prosecutorial discretion. (Link to DOJ factors in deciding whether to criminally prosecute). Similar exceptions exist at the state level.
- State and Federal Independent Enforcement Authority- State and federal EPA's have independent enforcement authority. Companies must choose whether to disclose violations under both State audit laws/policies as well as EPA's federal audit policy.
- Privilege Issues- The privilege issues (including: a-c privilege, attorney work product and audit privilege laws) are very complex. Careful attention must be paid to how audits are performed and their results communicated if the company wants to maintain confidentiality and privilege over related records and communications.
- Inspection Post-Disclosure- It is very likely that the U.S. EPA and/or the state EPA will perform an inspection of the facility following a voluntary disclosure. Facility records and operations should be in good shape in advance of any inspection.
- Disclosure Timeframes- The timeframe for making a voluntary disclosure can be very short (i.e. 21 days for most violations under EPA's audit policy). This does not provide much time for the company to make a determination as whether to voluntarily disclose. Also, potential violations may be identified without the ability to determine whether an actual violation has taken place within the disclosure timeframes.