EHS Audit Basics: Who, What, Where, When, How & Why · Best Practices • Uniform Implementation...

EHS Audit Basics: Who, What, Where, When, How & Why

Joshua Belcher, Sutherland Asbill & Brennan LLP

March 4, 2015

©2014 Sutherland Asbill & Brennan LLP

Who Should Consider EHS Audits?

• Anybody with environmental health and safety obligations.

� Energy Facilities

� Chemical Facilities

� Pharmaceutical Companies

� Fuel-Oil Distributors

� Manufacturers

� Trucking Companies

� Auto Repair Shops…

� Etc.


Who Should Conduct EHS Audits?

• Dedicated or Ad Hoc Internal EHS Team� Compliance manager

� Operational lead

� In-house attorney

• Outside Contractor

• Persons with a working knowledge of the regulations and a familiarity with the operations and practices of the facility to be audited


Role for Outside Counsel?

• Attorney-Client Privilege; Attorney Work-Product

• Review of internal analysis/conclusions

• Training


What Is an EHS Audit?

• EPA� “Environmental audit” = systematic, documented, periodic and objective review

by regulated entities of facility operations and practices related to meeting environmental requirements

� “Compliance management system” = encompasses the regulated entity’s documented systematic efforts, appropriate to the size and nature of its business, to prevent, detect and correct violations.

� “Voluntary” = NOT detected through a monitoring, sampling, or auditing procedure that is required by statute, regulation, permit, order, etc.


What Is an EHS Audit?

• Texas� a systematic voluntary evaluation, review, or assessment of compliance with

environmental or health and safety laws or any permit issued under those laws conducted by an owner or operator, an employee of the owner or operator, or an independent contractor of . . . a regulated facility or operation; or . . . an activity at a regulated facility or operation


What Should an Audit Include?

• Three basic phases:

� Pre-Audit

� Site Visit

� Post-Visit


What Should an Audit Include? (cont’d)• Potential hazards and risks to personnel, facilities, the public,

customers and the environment

• Physical, chemical, biological, ergonomic and psychological health hazards

• All health, safety, technical integrity, security and environmental incidents, including near misses

• Incident investigations, including identification of root causes and preventive actions


When Should Audits Be Conducted?

• Regularly scheduled to comply with audit policy� “a systematic approach to preventing recurrence of the violation”

� “Systematic” = through voluntary audits or compliance management systems that reflect due diligence in preventing, detecting and correcting violations

• Texas – no more than every 6 months

• Upon acquisition of new facility/company


How Should Audits Be Conducted?

• Methodical (use typical due diligence list)• Interviews• Site visit• Corrective action list (within 60 days, or as expeditiously as

possible)• Follow up

• “Self-policing, discovery and disclosure [must be] conducted in good faith”


Why EHS Audits?

• Healthy part of a balanced EMS• Good hygiene – preventive measures• Protect employees• Protect the public• EPA audit policy = gravity-based penalty reductions and no

recommendation for criminal prosecution• Texas: (i) privilege from discovery, and (ii) limited immunity from

TCEQ enforcement� attaches to the reports and documents (broadly defined) generated by the

audit process from disclosure during civil, criminal and administrative proceedings


Audit

Issue Identification

Issue Resolution

Analyze Exceptions

for Cause/Effect

Group Findings for

Common Causes

Examine Groups for Underlying

Causes

Develop Actions to

Correct Underlying

Causes

Improve EMS Effectiveness

Source: U.S. Environmental Protection Agency


Challenges & Concerns

• Scheduling

• Cost

• Identifying issues � EPA reaffirms long-standing policy not to make routine requests for “audit

reports”. EPA “has not and will not” routinely request copies of audit reports to trigger enforcement investigations.

• Corrective action � No liability protections under audit policy where there is conscious disregard of

or willful blindness to obligations under the law, or when noncompliance is concealed or condoned


Ethical Considerations

• Must not hide, destroy or tamper with possible evidence following discovery of potential environmental violations


Best Practices

• Uniform Implementation

• Creating a Baseline

• Internal Accountability

• Review by Legal Counsel


SUTHERLAND’S ENERGY AND ENVIRONMENTAL PRACTICESutherland’s Energy and Environmental Group has more than 60 attorneys representing every major sector of the energy industry. Our 40-year history of excellence in serving the regulatory, compliance and policy needs of our clients is matched by the commercial and operational experience we bring to increasingly complex transactions. Complemented with our team of well-regarded, high-profile litigators, Sutherland’s energy practice is well positioned to provide the full range of legal services to our energy clients. Our clients include crude oil and natural gas refiners and producers, domestic and multinational traders, energy lenders and marketers, hedge funds and financial institutions, independent power producers and electric cooperatives, international oilfield service providers, and renewable energy developers.

ATLANTA AUSTIN GENEVA HOUSTON LONDON NEW YORK SACRA MENTO WASHINGTON, DC

Speaker Biographies

Brian Faulkner Legal Counsel – Environmental at Shell Oil Company Brian Faulkner practices environmental law as a member of Shell Oil Company's Downstream Legal group. In his role as Legal Counsel -- Environmental, Brian represents various Shell entities as well as Motiva Enterprises LLC on environmental matters involving supply and distribution assets in a variety of areas, including regulatory compliance matters, complex transactions, and environmental remediation projects.

Brian joined Shell in 2012 after practicing with a large Texas-based international law firm, where he specialized in environmental regulatory matters with a particular emphasis on the federal Clean Air Act. Brian also has wide experience with environmental litigation both in judicial proceedings and in administrative tribunals. Brian is somewhat embarrassed to admit that he enjoys thinking about administrative procedure.

Brian earned his JD in 2005 from the University of Texas School of Law, and Brian holds a BS in Chemistry from the University of Illinois. Before attending law school, Brian worked as a chemist for The Dow Chemical Company.

Jessica Keiser Vice President, Environmental Safety &Health at Tar ga Resources Corp. Vice President, Environmental Safety &Health at Targa Resources Corp.

Ms. Keiser has a Bachelor of Science in Environmental Engineering from North Carolina State University. Before coming to Texas in 2000, she worked as an environmental engineer at Milliken Chemical in Spartanburg, South Carolina. While her work was focused primarily on air and wastewater related projects, she was heavily involved in safety and Total Quality Management (TQM) efforts. In 2000, she moved to Texas to work for Trinity Consultants where she further developed her strengths in air permitting and federal Clean Air Act work for refineries, petrochemical, and batch chemical manufacturing as well as the midstream natural gas industry. While with Trinity, Ms. Keiser started up their Corpus Christi office and managed this office until March of 2006 when she joined Targa. She currently leads their ES&H organization and oversees project delivery, regulatory compliance, due diligence, and advocacy efforts.

Tracey Schwartz Senior Scientist at Geosyntec Consultants, Inc. Tracey Schwartz is a regulatory compliance specialist with Geosyntec Consultants based in their Santa Barbara, California office. She has over 20 years of experience in navigating the complexities of multi-media audits, agency strategy and negotiation, and litigation support. She started her career on the U.S. EPA RCRA/Superfund Hotline and has used that background to assist clients in developing and maintaining strong compliance program and in helping manage the differences between regulations, interpretation, and implementation.

Ms. Schwartz has specialized for over twenty years in regulatory compliance and permitting, environmental investigations, litigation support and environmental manufacturing support. As Environmental Manager for a small manufacturing and importing business, she audited forestry suppliers for sustainable practices and implemented a management system for waste minimization and conformance to corporate customer environmental requirements. She supported the U.S. EPA on their RCRA/Superfund Hazardous Waste Hotline for two years, and performed environmental impact audits and supported wildlife conservation projects in South Africa. Her consulting responsibilities have included multi-media compliance audits, due diligence for complex industrial facility acquisitions

ATLANTA AUSTIN GENEVA HOUSTON LONDON NEW YORK SACRA MENTO WASHINGTON, DC

Speaker Biographies

Continued

and divestitures, environmental support for process manufacturing and waste handling, site investigations and regulatory support.

Daniella Landers Partner at Sutherland Asbill & Brennan LLP Daniella Landers focuses her practice on a broad range of environmental compliance, transactional and litigation matters. She counsels energy companies, manufacturers, industrial facilities, financial institutions, real estate interests and other businesses on complex environmental and related land use issues, including environmental risk assessment, environmental permitting and compliance, environmental due diligence in acquisitions and transactions, management of environmental issues affecting the upstream, midstream, downstream, and renewables/alternative energy sectors, natural resources damages claims, climate change initiatives and pollution exposure disputes. Daniella is the current Chair of the firm’s Environmental team.

Daniella frequently counsels clients on corrective actions, brownfields redevelopment, environmental closures and groundwater remediation as well as assisting in the review and audit of operations to address air, water and waste compliance issues for manufacturing, industrial or waste disposal facilities. She has been seconded by clients as in-house counsel on several occasions to handle environmental issues.

A member of the firm’s Crisis Management team, Daniella helps clients navigate environmental crises and develop legal response strategies tailored to each specific situation. She handles governmental investigations of environmental matters, environmental enforcement defense, responses to citizen protest actions, cost recovery claims and Superfund litigation.

Daniella is a prolific speaker and writer on environmental and regulatory litigation issues. She has been featured in Law 360 articles and on National Public Radio (KUHF). She serves as an adjunct professor at South Texas College of Law and the University of Houston Law Center.

Joshua Belcher Associate at Sutherland Asbill & Brennan LLP Joshua Belcher advises clients in the utility, power and pipelines sectors on litigation, administrative proceedings, compliance and transactional matters. His clients include regulated electric, gas and water/wastewater utilities, their unregulated affiliates, independent power producers, developers, upstream and midstream oil and gas companies, as well as investors, industrials, municipalities and authorities.

Joshua manages complex transactional diligence with a focus on environmental, regulatory and general corporate law in mergers, acquisitions, divestitures and financings. He advises on both the development and acquisition of utility-scale and customer-sited energy projects, including combined heat and power, wind, biomass and solar facilities. He also counsels clients on state and federal regulation of hazardous liquids transportation. When controversies arise, Joshua provides representation in state and federal enforcement matters and in civil and administrative proceedings.

ATLANTA AUSTIN GENEVA HOUSTON LONDON NEW YORK SACRAMENTO WASHINGTON, DC

Reference Materials

Reference materials related to environmental health and safety audits follow in the order listed below:

1. Incentives for Self-Policing: Discovery, Disclosure, Correction and Prevention of Violations (Audit Policy) – U.S. Environmental Protection Agency (2000)

2. Audit Policy: Frequently Asked Questions – U.S. Environmental Protection Agency (2007) 3. Tailored Incentives for New Owners – U.S. Environmental Protection Agency (2008) 4. A Guide to the Texas Environmental, Health, and Safety Audit Privilege Act – Texas Commission on

Environmental Quality (2013)

Incentives for Self-Policing: Discovery, Disclosure, Correction and Prevention of Violations (Audit Policy) – U.S. Environmental Protection Agency (2000)

Reference Materials

Tuesday,

April 11, 2000

Part VII

Environmental Protection Agency Incentives for Self-Policing: Discovery, Disclosure, Correction and Prevention of Violations; Notice

19618 Federal Register / Vol. 65, No. 70 / Tuesday, April 11, 2000 / Notices

ENVIRONMENTAL PROTECTION AGENCY

[FRL–6576–3]

Incentives for Self-Policing: Discovery, Disclosure, Correction and Prevention of Violations

AGENCY: Environmental Protection Agency (EPA, or Agency). ACTION: Final Policy Statement.

SUMMARY: EPA today issues its revised final policy on ‘‘Incentives for Self-Policing: Discovery, Disclosure, Correction and Prevention of Violations,’’ commonly referred to as the ‘‘Audit Policy.’’ The purpose of this Policy is to enhance protection of human health and the environment by encouraging regulated entities to voluntarily discover, promptly disclose and expeditiously correct violations of Federal environmental requirements. Incentives that EPA makes available for those who meet the terms of the Audit Policy include the elimination or substantial reduction of the gravity component of civil penalties and a determination not to recommend criminal prosecution of the disclosing entity. The Policy also restates EPA’s long-standing practice of not requesting copies of regulated entities’ voluntary audit reports to trigger Federal enforcement investigations. Today’s revised Audit Policy replaces the 1995 Audit Policy (60 FR 66706), which was issued on December 22, 1995, and took effect on January 22, 1996. Today’s revisions maintain the basic structure and terms of the 1995 Audit Policy while clarifying some of its language, broadening its availability, and conforming the provisions of the Policy to actual Agency practice. The revisions being released today lengthen the prompt disclosure period to 21 days, clarify that the independent discovery condition does not automatically preclude penalty mitigation for multi-facility entities, and clarify how the prompt disclosure and repeat violation conditions apply to newly acquired companies. The revised Policy was developed in close consultation with the U.S. Department of Justice (DOJ), States, public interest groups and the regulated community. The revisions also reflect EPA’s experience implementing the Policy over the past five years. DATES: This revised Policy is effective May 11, 2000. FOR FURTHER INFORMATION CONTACT: Catherine Malinin Dunn (202) 564–2629 or Leslie Jones (202) 564–5123. Documentation relating to the

development of this Policy is contained in the environmental auditing public docket (#C–94–01). An index to the docket may be obtained by contacting the Enforcement and Compliance Docket and Information Center (ECDIC) by telephone at (202) 564–2614 or (202) 564–2119, by fax at (202) 501–1011, or by email at [email protected]. ECDIC office hours are 8:00 am to 4:00 pm Monday through Friday except for Federal holidays. An index to the docket is available on the Internet at www.epa.gov/oeca/polguid/ enfdock.html. Additional guidance regarding interpretation and application of the Policy is also available on the Internet at www.epa.gov/oeca/ore/ apolguid.html.

SUPPLEMENTARY INFORMATION: This Notice is organized as follows:

I. Explanation of Policy

A. IntroductionB. Background and HistoryC. PurposeD. Incentives for Self-Policing

1. Eliminating Gravity-Based Penalties 2. 75% Reduction of Gravity-Based

Penalties 3. No Recommendations for Criminal

Prosecution 4. No Routine Requests for Audit Reports

E. Conditions 1. Systematic Discovery of the Violation

Through an Environmental Audit or a Compliance Management System

2. Voluntary Discovery 3. Prompt Disclosure 4. Discovery and Disclosure Independent

of Government or Third-Party Plaintiff 5. Correction and Remediation 6. Prevent Recurrence 7. No Repeat Violations 8. Other Violations Excluded 9. Cooperation

F. Opposition to Audit Privilege and Immunity

G. Effect on States H. Scope of Policy

I. Implementation of Policy

1. Civil Violations 2. Criminal Violations 3. Release of Information to the Public

II. Statement of Policy—Incentives for Self-Policing: Discovery, Disclosure, Correction and Prevention

A. Purpose B. Definitions C. Incentives for Self-Policing

1. No Gravity-Based Penalties 2. Reduction of Gravity-Based Penalties by

75% 3. No Recommendation for Criminal

Prosecution 4. No Routine Request for Environmental

Audit Reports D. Conditions

1. Systematic Discovery 2. Voluntary Discovery 3. Prompt Disclosure

4. Discovery and Disclosure Independent of Government or Third-Party Plaintiff

5. Correction and Remediation 6. Prevent Recurrence 7. No Repeat Violations 8. Other Violations Excluded 9. Cooperation

E. Economic Benefit F. Effect on State Law, Regulation or Policy G. Applicability H. Public Accountability I. Effective Date

I. Explanation of Policy

A. Introduction On December 22, 1995, EPA issued its

final policy on ‘‘Incentives for Self-Policing: Discovery, Disclosure, Correction and Prevention of Violations’’ (60 FR 66706) (Audit Policy, or Policy). The purpose of the Policy is to enhance protection of human health and the environment by encouraging regulated entities to voluntarily discover, disclose, correct and prevent violations of Federal environmental law. Benefits available to entities that make disclosures under the terms of the Policy include reductions in the amount of civil penalties and a determination not to recommend criminal prosecution of disclosing entities.

Today, EPA issues revisions to the 1995 Audit Policy. The revised Policy reflects EPA’s continuing commitment to encouraging voluntary self-policing while preserving fair and effective enforcement. It lengthens the prompt disclosure period to 21 days, clarifies that the independent discovery condition does not automatically preclude Audit Policy credit in the multi-facility context, and clarifies how the prompt disclosure and repeat violations conditions apply in the acquisitions context. The revised final Policy takes effect May 11, 2000.

B. Background and History The Audit Policy provides incentives

for regulated entities to detect, promptly disclose, and expeditiously correct violations of Federal environmental requirements. The Policy contains nine conditions, and entities that meet all of them are eligible for 100% mitigation of any gravity-based penalties that otherwise could be assessed. (‘‘Gravity-based’’ refers to that portion of the penalty over and above the portion that represents the entity’s economic gain from noncompliance, known as the ‘‘economic benefit.’’) Regulated entities that do not meet the first condition— systematic discovery of violations—but meet the other eight conditions are eligible for 75% mitigation of any gravity-based civil penalties. On the criminal side, EPA will generally elect not to recommend criminal prosecution

Federal Register / Vol. 65, No. 70 / Tuesday, April 11, 2000 / Notices 19619

by DOJ or any other prosecuting authority for a disclosing entity that meets at least conditions two through nine—regardless of whether it meets the systematic discovery requirement—as long as its self-policing, discovery and disclosure were conducted in good faith and the entity adopts a systematic approach to preventing recurrence of the violation.

The Policy includes important safeguards to deter violations and protect public health and the environment. For example, the Policy requires entities to act to prevent recurrence of violations and to remedy any environmental harm that may have occurred. Repeat violations, those that result in actual harm to the environment, and those that may present an imminent and substantial endangerment are not eligible for relief under this Policy. Companies will not be allowed to gain an economic advantage over their competitors by delaying their investment in compliance. And entities remain criminally liable for violations that result from conscious disregard of or willful blindness to their obligations under the law, and individuals remain liable for their criminal misconduct.

When EPA issued the 1995 Audit Policy, the Agency committed to evaluate the Policy after three years. The Agency initiated this evaluation in the Spring of 1998 and published its preliminary results in the Federal Register on May 17, 1999 (64 FR 26745). The evaluation consisted of the following components:

∑ An internal survey of EPA staff who process disclosures and handle enforcement cases under the 1995 Audit Policy;

∑ A survey of regulated entities that used the 1995 Policy to disclose violations;

∑ A series of meetings and conference calls with representatives from industry, environmental organizations, and States;

∑ Focused stakeholder discussions on the Audit Policy at two public conferences co-sponsored by EPA’s Office of Enforcement and Compliance Assurance (OECA) and the Vice President’s National Partnership for Reinventing Government, entitled ‘‘Protecting Public Health and the Environment through Innovative Approaches to Compliance’’;

∑ A Federal Register notice on March 2, 1999, soliciting comments on how EPA can further protect and improve public health and the environment through new compliance and enforcement approaches (64 FR 10144); and

∑ An analysis of data on Audit Policy usage to date and discussions amongst EPA officials who handle Audit Policy disclosures.

The same May 17, 1999, Federal Register notice that published the evaluation’s preliminary results also proposed revisions to the 1995 Policy and requested public comment. During the 60-day public comment period, the Agency received 29 comment letters, copies of which are available through the Enforcement and Compliance Docket and Information Center. (See contact information at the beginning of this notice.) Analysis of these comment letters together with additional data on Audit Policy usage has constituted the final stage of the Audit Policy evaluation. EPA has prepared a detailed response to the comments received; a copy of that document will also be available through the Docket and Information Center as well on the Internet at www.epa.gov/oeca/ore/ apolguid.html.

Overall, the Audit Policy evaluation revealed very positive results. The Policy has encouraged voluntary self-policing while preserving fair and effective enforcement. Thus, the revisions issued today do not signal any intention to shift course regarding the Agency’s position on self-policing and voluntary disclosures but instead represent an attempt to fine-tune a Policy that is already working well.

Use of the Audit Policy has been widespread. As of October 1, 1999, approximately 670 organizations had disclosed actual or potential violations at more than 2700 facilities. The number of disclosures has increased each of the four years the Policy has been in effect.

Results of the Audit Policy User’s Survey revealed very high satisfaction rates among users, with 88% of respondents stating that they would use the Policy again and 84% stating that they would recommend the Policy to clients and/or their counterparts. No respondents stated an unwillingness to use the Policy again or to recommend its use to others.

The Audit Policy and related documents, including Agency interpretive guidance and general interest newsletters, are available on the Internet at www.epa.gov/oeca/ore/ apolguid. Additional guidance for implementing the Policy in the context of criminal violations can be found at www.epa.gov/oeca/oceft/audpol2.html.

In addition to the Audit Policy, the Agency’s revised Small Business Compliance Policy (‘‘Small Business Policy’’) is also available for small entities that employ 100 or fewer individuals. The Small Business Policy

provides penalty mitigation, subject to certain conditions, for small businesses that make a good faith effort to comply with environmental requirements by discovering, disclosing and correcting violations. EPA has revised the Small Business Policy at the same time it revised the Audit Policy. The revised Small Business Policy will be available on the Internet at www.epa.gov/oeca/ smbusi.html.

C. Purpose The revised Policy being announced

today is designed to encourage greater compliance with Federal laws and regulations that protect human health and the environment. It promotes a higher standard of self-policing by waiving gravity-based penalties for violations that are promptly disclosed and corrected, and which were discovered systematically—that is, through voluntary audits or compliance management systems. To provide an incentive for entities to disclose and correct violations regardless of how they were detected, the Policy reduces gravity-based penalties by 75% for violations that are voluntarily discovered and promptly disclosed and corrected, even if not discovered systematically.

EPA’s enforcement program provides a strong incentive for compliance by imposing stiff sanctions for noncompliance. Enforcement has contributed to the dramatic expansion of environmental auditing as measured in numerous recent surveys. For example, in a 1995 survey by Price Waterhouse LLP, more than 90% of corporate respondents who conduct audits identified one of the reasons for doing so as the desire to find and correct violations before government inspectors discover them. (A copy of the survey is contained in the Docket as document VIII–A–76.)

At the same time, because government resources are limited, universal compliance cannot be achieved without active efforts by the regulated community to police themselves. More than half of the respondents to the same 1995 Price Waterhouse survey said that they would expand environmental auditing in exchange for reduced penalties for violations discovered and corrected. While many companies already audit or have compliance management programs in place, EPA believes that the incentives offered in this Policy will improve the frequency and quality of these self-policing efforts.

D. Incentives for Self-Policing Section C of the Audit Policy

identifies the major incentives that EPA


provides to encourage self-policing, self-disclosure, and prompt self-correction. For entities that meet the conditions of the Policy, the available incentives include waiving or reducing gravity-based civil penalties, declining to recommend criminal prosecution for regulated entities that self-police, and refraining from routine requests for audits. (As noted in Section C of the Policy, EPA has refrained from making routine requests for audit reports since issuance of its 1986 policy on environmental auditing.)

1. Eliminating Gravity-Based Penalties In general, civil penalties that EPA

assesses are comprised of two elements: the economic benefit component and the gravity-based component. The economic benefit component reflects the economic gain derived from a violator’s illegal competitive advantage. Gravity-based penalties are that portion of the penalty over and above the economic benefit. They reflect the egregiousness of the violator’s behavior and constitute the punitive portion of the penalty. For further discussion of these issues, see ‘‘Calculation of the Economic Benefit of Noncompliance in EPA’s Civil Penalty Enforcement Cases,’’ 64 FR 32948 (June 18, 1999) and ‘‘A Framework for Statute-Specific Approaches to Penalty Assessments,’’ #GM–22 (1984), U.S. EPA General Enforcement Policy Compendium.

Under the Audit Policy, EPA will not seek gravity-based penalties for disclosing entities that meet all nine Policy conditions, including systematic discovery. (‘‘Systematic discovery’’ means the detection of a potential violation through an environmental audit or a compliance management system that reflects the entity’s due diligence in preventing, detecting and correcting violations.) EPA has elected to waive gravity-based penalties for violations discovered systematically, recognizing that environmental auditing and compliance management systems play a critical role in protecting human health and the environment by identifying, correcting and ultimately preventing violations.

However, EPA reserves the right to collect any economic benefit that may have been realized as a result of noncompliance, even where the entity meets all other Policy conditions. Where the Agency determines that the economic benefit is insignificant, the Agency also may waive this component of the penalty.

EPA’s decision to retain its discretion to recover economic benefit is based on two reasons. First, facing the risk that the Agency will recoup economic

benefit provides an incentive for regulated entities to comply on time. Taxpayers whose payments are late expect to pay interest or a penalty; the same principle should apply to corporations and other regulated entities that have delayed their investment in compliance. Second, collecting economic benefit is fair because it protects law-abiding companies from being undercut by their noncomplying competitors, thereby preserving a level playing field.

2. 75% Reduction of Gravity-based Penalties

Gravity-based penalties will be reduced by 75% where the disclosing entity does not detect the violation through systematic discovery but otherwise meets all other Policy conditions. The Policy appropriately limits the complete waiver of gravity-based civil penalties to companies that conduct environmental auditing or have in place a compliance management system. However, to encourage disclosure and correction of violations even in the absence of systematic discovery, EPA will reduce gravity-based penalties by 75% for entities that meet conditions D(2) through D(9) of the Policy. EPA expects that a disclosure under this provision will encourage the entity to work with the Agency to resolve environmental problems and begin to develop an effective auditing program or compliance management system.

3. No Recommendations for Criminal Prosecution

In accordance with EPA’s Investigative Discretion Memo dated January 12, 1994, EPA generally does not focus its criminal enforcement resources on entities that voluntarily discover, promptly disclose and expeditiously correct violations, unless there is potentially culpable behavior that merits criminal investigation. When a disclosure that meets the terms and conditions of this Policy results in a criminal investigation, EPA will generally not recommend criminal prosecution for the disclosing entity, although the Agency may recommend prosecution for culpable individuals and other entities. The 1994 Investigative Discretion Memo is available on the Internet at http:// www.epa.gov/oeca/ore/ aed/comp/ acomp/a11.html.

The ‘‘no recommendation for criminal prosecution’’ incentive is available for entities that meet conditions D(2) through D(9) of the Policy. Condition D(1) ‘‘systematic discovery’’ is not required to be eligible for this incentive,

although the entity must be acting in good faith and must adopt a systematic approach to preventing recurring violations. Important limitations to the incentive apply. It will not be available, for example, where corporate officials are consciously involved in or willfully blind to violations, or conceal or condone noncompliance. Since the regulated entity must satisfy conditions D(2) through D(9) of the Policy, violations that cause serious harm or which may pose imminent and substantial endangerment to human health or the environment are not eligible. Finally, EPA reserves the right to recommend prosecution for the criminal conduct of any culpable individual or subsidiary organization.

While EPA may decide not to recommend criminal prosecution for disclosing entities, ultimate prosecutorial discretion resides with the U.S. Department of Justice, which will be guided by its own policy on voluntary disclosures (‘‘Factors in Decisions on Criminal Prosecutions for Environmental Violations in the Context of Significant Voluntary Compliance or Disclosure Efforts by the Violator,’’ July 1, 1991) and by its 1999 Guidance on Federal Prosecutions of Corporations. In addition, where a disclosing entity has met the conditions for avoiding a recommendation for criminal prosecution under this Policy, it will also be eligible for either 75% or 100% mitigation of gravity-based civil penalties, depending on whether the systematic discovery condition was met.

4. No Routine Requests for Audit Reports

EPA reaffirms its Policy, in effect since 1986, to refrain from routine requests for audit reports. That is, EPA has not and will not routinely request copies of audit reports to trigger enforcement investigations. Implementation of the 1995 Policy has produced no evidence that the Agency has deviated, or should deviate, from this Policy. In general, an audit that results in expeditious correction will reduce liability, not expand it. However, if the Agency has independent evidence of a violation, it may seek the information it needs to establish the extent and nature of the violation and the degree of culpability.

For discussion of the circumstances in which EPA might request an audit report to determine Policy eligibility, see the explanatory text on cooperation, section I.E.9.

E. Conditions Section D describes the nine

conditions that a regulated entity must


meet in order for the Agency to decline to seek (or to reduce) gravity-based penalties under the Policy. As explained in section I.D.1 above, regulated entities that meet all nine conditions will not face gravity-based civil penalties. If the regulated entity meets all of the conditions except for D(1)—systematic discovery—EPA will reduce gravity-based penalties by 75%. In general, EPA will not recommend criminal prosecution for disclosing entities that meet at least conditions D(2) through D(9).

1. Systematic Discovery of the Violation Through an Environmental Audit or a Compliance Management System

Under Section D(1), the violation must have been discovered through either (a) an environmental audit, or (b) a compliance management system that reflects due diligence in preventing, detecting and correcting violations. Both ‘‘environmental audit’’ and ‘‘compliance management system’’ are defined in Section B of the Policy.

The revised Policy uses the term ‘‘compliance management system’’ instead of ‘‘due diligence,’’ which was used in the 1995 Policy. This change in nomenclature is intended solely to conform the Policy language to terminology more commonly in use by industry and by regulators to refer to a systematic management plan or systematic efforts to achieve and maintain compliance. No substantive difference is intended by substituting the term ‘‘compliance management system’’ for ‘‘due diligence,’’ as the Policy clearly indicates that the compliance management system must reflect the regulated entity’s due diligence in preventing, detecting and correcting violations.

Compliance management programs that train and motivate employees to prevent, detect and correct violations on a daily basis are a valuable complement to periodic auditing. Where the violation is discovered through a compliance management system and not through an audit, the disclosing entity should be prepared to document how its program reflects the due diligence criteria defined in Section B of the Policy statement. These criteria, which are adapted from existing codes of practice—such as Chapter Eight of the U.S. Sentencing Guidelines for organizational defendants, effective since 1991—are flexible enough to accommodate different types and sizes of businesses and other regulated entities. The Agency recognizes that a variety of compliance management programs are feasible, and it will determine whether basic due diligence

criteria have been met in deciding whether to grant Audit Policy credit.

As a condition of penalty mitigation, EPA may require that a description of the regulated entity’s compliance management system be made publicly available. The Agency believes that the availability of such information will allow the public to judge the adequacy of compliance management systems, lead to enhanced compliance, and foster greater public trust in the integrity of compliance management systems.

2. Voluntary Discovery Under Section D(2), the violation

must have been identified voluntarily, and not through a monitoring, sampling, or auditing procedure that is required by statute, regulation, permit, judicial or administrative order, or consent agreement. The Policy provides three specific examples of discovery that would not be voluntary, and therefore would not be eligible for penalty mitigation: emissions violations detected through a required continuous emissions monitor, violations of NPDES discharge limits found through prescribed monitoring, and violations discovered through a compliance audit required to be performed by the terms of a consent order or settlement agreement. The exclusion does not apply to violations that are discovered pursuant to audits that are conducted as part of a comprehensive environmental management system (EMS) required under a settlement agreement. In general, EPA supports the implementation of EMSs that promote compliance, prevent pollution and improve overall environmental performance. Precluding the availability of the Audit Policy for discoveries made through a comprehensive EMS that has been implemented pursuant to a settlement agreement might discourage entities from agreeing to implement such a system.

In some instances, certain Clean Air Act violations discovered, disclosed and corrected by a company prior to issuance of a Title V permit are eligible for penalty mitigation under the Policy. For further guidance in this area, see ‘‘Reduced Penalties for Disclosures of Certain Clean Air Act Violations,’’ Memorandum from Eric Schaeffer, Director of the EPA Office of Regulatory Enforcement, dated September 30, 1999. This document is available on the Internet at www.epa.gov/oeca/ore/ apolguid.html.

The voluntary requirement applies to discovery only, not reporting. That is, any violation that is voluntarily discovered is generally eligible for Audit Policy credit, regardless of

whether reporting of the violation was required after it was found.

3. Prompt Disclosure Section D(3) requires that the entity

disclose the violation in writing to EPA within 21 calendar days after discovery. If the 21st day after discovery falls on a weekend or Federal holiday, the disclosure period will be extended to the first business day following the 21st day after discovery. If a statute or regulation requires the entity to report the violation in fewer than 21 days, disclosure must be made within the time limit established by law. (For example, unpermitted releases of hazardous substances must be reported immediately under 42 U.S.C. 9603.) Disclosures under this Policy should be made to the appropriate EPA Regional office or, where multiple Regions are involved, to EPA Headquarters. The Agency will work closely with States as needed to ensure fair and efficient implementation of the Policy. For additional guidance on making disclosures, contact the Audit Policy National Coordinator at EPA Headquarters at 202–564–5123.

The 21-day disclosure period begins when the entity discovers that a violation has, or may have, occurred. The trigger for discovery is when any officer, director, employee or agent of the facility has an objectively reasonable basis for believing that a violation has, or may have, occurred. The ‘‘objectively reasonable basis’’ standard is measured against what a prudent person, having the same information as was available to the individual in question, would have believed. It is not measured against what the individual in question thought was reasonable at the time the situation was encountered. If an entity has some doubt as to the existence of a violation, the recommended course is for the entity to proceed with the disclosure and allow the regulatory authorities to make a definitive determination. Contract personnel who provide on-site services at the facility may be treated as employees or agents for purposes of the Policy.

If the 21-day period has not yet expired and an entity suspects that it will be unable to meet the deadline, the entity should contact the appropriate EPA office in advance to develop disclosure terms acceptable to EPA. For situations in which the 21-day period already has expired, the Agency may accept a late disclosure in the exceptional case, such as where there are complex circumstances, including where EPA determines the violation could not be identified and disclosed within 21 calendar days after discovery.


EPA also may extend the disclosure period when multiple facilities or acquisitions are involved.

In the multi-facility context, EPA will ordinarily extend the 21-day period to allow reasonable time for completion and review of multi-facility audits where: (a) EPA and the entity agree on the timing and scope of the audits prior to their commencement; and (b) the facilities to be audited are identified in advance. In the acquisitions context, EPA will consider extending the prompt disclosure period on a case-by-case basis. The 21-day disclosure period will begin on the date of discovery by the acquiring entity, but in no case will the period begin earlier than the date of acquisition.

In summary, Section D(3) recognizes that it is critical for EPA to receive timely reporting of violations in order to have clear notice of the violations and the opportunity to respond if necessary. Prompt disclosure is also evidence of the regulated entity’s good faith in wanting to achieve or return to compliance as soon as possible. The integrity of Federal environmental law depends upon timely and accurate reporting. The public relies on timely and accurate reports from the regulated community, not only to measure compliance but to evaluate health or environmental risk and gauge progress in reducing pollutant loadings. EPA expects the Policy to encourage the kind of vigorous self-policing that will serve these objectives and does not intend that it justify delayed reporting. When violations of reporting requirements are voluntarily discovered, they must be promptly reported. When a failure to report results in imminent and substantial endangerment or serious harm to the environment, Audit Policy credit is precluded under condition D(8).

4. Discovery and Disclosure Independent of Government or Third Party Plaintiff

Under Section D(4), the entity must discover the violation independently. That is, the violation must be discovered and identified before EPA or another government agency likely would have identified the problem either through its own investigative work or from information received through a third party. This condition requires regulated entities to take the initiative to find violations on their own and disclose them promptly instead of waiting for an indication of a pending enforcement action or third-party complaint.

Section D(4)(a) lists the circumstances under which discovery and disclosure

will not be considered independent. For example, a disclosure will not be independent where EPA is already investigating the facility in question. However, under subsection (a), where the entity does not know that EPA has commenced a civil investigation and proceeds in good faith to make a disclosure under the Audit Policy, EPA may, in its discretion, provide penalty mitigation under the Audit Policy. The subsection (a) exception applies only to civil investigations; it does not apply in the criminal context. Other examples of situations in which a discovery is not considered independent are where a citizens’ group has provided notice of its intent to sue, where a third party has already filed a complaint, where a whistleblower has reported the potential violation to government authorities, or where discovery of the violation by the government was imminent. Condition D(4)(c)—the filing of a complaint by a third party—covers formal judicial and administrative complaints as well as informal complaints, such as a letter from a citizens’ group alerting EPA to a potential environmental violation.

Regulated entities that own or operate multiple facilities are subject to section D(4)(b) in addition to D(4)(a). EPA encourages multi-facility auditing and does not intend for the ‘‘independent discovery’’ condition to preclude availability of the Audit Policy when multiple facilities are involved. Thus, if a regulated entity owns or operates multiple facilities, the fact that one of its facilities is the subject of an investigation, inspection, information request or third-party complaint does not automatically preclude the Agency from granting Audit Policy credit for disclosures of violations self-discovered at the other facilities, assuming all other Audit Policy conditions are met. However, just as in the single-facility context, where a facility is already the subject of a government inspection, investigation or information request (including a broad information request that covers multiple facilities), it will generally not be eligible for Audit Policy credit. The Audit Policy is designed to encourage regulated entities to disclose violations before any of their facilities are under investigation, not after EPA discovers violations at one facility. Nevertheless, the Agency retains its full discretion under the Audit Policy to grant penalty waivers or reductions for good-faith disclosures made in the multi-facility context. EPA has worked closely with a number of entities that have received Audit Policy credit for multi-facility disclosures, and entities contemplating multi-facility auditing

are encouraged to contact the Agency with any questions concerning Audit Policy availability.

5. Correction and Remediation Under Section D(5), the entity must

remedy any harm caused by the violation and expeditiously certify in writing to appropriate Federal, State, and local authorities that it has corrected the violation. Correction and remediation in this context include responding to spills and carrying out any removal or remedial actions required by law. The certification requirement enables EPA to ensure that the regulated entity will be publicly accountable for its commitments through binding written agreements, orders or consent decrees where necessary.

Under the Policy, the entity must correct the violation within 60 calendar days from the date of discovery, or as expeditiously as possible. EPA recognizes that some violations can and should be corrected immediately, while others may take longer than 60 days to correct. For example, more time may be required if capital expenditures are involved or if technological issues are a factor. If more than 60 days will be required, the disclosing entity must so notify the Agency in writing prior to the conclusion of the 60-day period. In all cases, the regulated entity will be expected to do its utmost to achieve or return to compliance as expeditiously as possible.

If correction of the violation depends upon issuance of a permit that has been applied for but not issued by Federal or State authorities, the Agency will, where appropriate, make reasonable efforts to secure timely review of the permit.

6. Prevent Recurrence Under Section D(6), the regulated

entity must agree to take steps to prevent a recurrence of the violation after it has been disclosed. Preventive steps may include, but are not limited to, improvements to the entity’s environmental auditing efforts or compliance management system.

7. No Repeat Violations Condition D(7) bars repeat offenders

from receiving Audit Policy credit. Under the repeat violations exclusion, the same or a closely-related violation must not have occurred at the same facility within the past 3 years. The 3-year period begins to run when the government or a third party has given the violator notice of a specific violation, without regard to when the original violation cited in the notice


actually occurred. Examples of notice include a complaint, consent order, notice of violation, receipt of an inspection report, citizen suit, or receipt of penalty mitigation through a compliance assistance or incentive project.

When the facility is part of a multi-facility organization, Audit Policy relief is not available if the same or a closely-related violation occurred as part of a pattern of violations at one or more of these facilities within the past 5 years. If a facility has been newly acquired, the existence of a violation prior to acquisition does not trigger the repeat violations exclusion.

The term ‘‘violation’’ includes any violation subject to a Federal, State or local civil judicial or administrative order, consent agreement, conviction or plea agreement. Recognizing that minor violations sometimes are settled without a formal action in court, the term also covers any act or omission for which the regulated entity has received a penalty reduction in the past. This condition covers situations in which the regulated entity has had clear notice of its noncompliance and an opportunity to correct the problem.

The repeat violation exclusion benefits both the public and law-abiding entities by ensuring that penalties are not waived for those entities that have previously been notified of violations and fail to prevent repeat violations. The 3-year and 5-year ‘‘bright lines’’ in the exclusion are designed to provide regulated entities with clear notice about when the Policy will be available.

8. Other Violations Excluded Section D(8) provides that Policy

benefits are not available for certain types of violations. Subsection D(8)(a) excludes violations that result in serious actual harm to the environment or which may have presented an imminent and substantial endangerment to public health or the environment. When events of such a consequential nature occur, violators are ineligible for penalty relief and other incentives under the Audit Policy. However, this condition does not bar an entity from qualifying for Audit Policy relief solely because the violation involves release of a pollutant to the environment, as such releases do not necessarily result in serious actual harm or an imminent and substantial endangerment. To date, EPA has not invoked the serious actual harm or the imminent and substantial endangerment clauses to deny Audit Policy credit for any disclosure.

Subsection D(8)(b) excludes violations of the specific terms of any order, consent agreement, or plea agreement.

Once a consent agreement has been negotiated, there is little incentive to comply if there are no sanctions for violating its specific requirements. The exclusion in this section also applies to violations of the terms of any response, removal or remedial action covered by a written agreement.

9. Cooperation Under Section D(9), the regulated

entity must cooperate as required by EPA and provide the Agency with the information it needs to determine Policy applicability. The entity must not hide, destroy or tamper with possible evidence following discovery of potential environmental violations. In order for the Agency to apply the Policy fairly, it must have sufficient information to determine whether its conditions are satisfied in each individual case. In general, EPA requests audit reports to determine the applicability of this Policy only where the information contained in the audit report is not readily available elsewhere and where EPA decides that the information is necessary to determine whether the terms and conditions of the Policy have been met. In the rare instance where an EPA Regional office seeks to obtain an audit report because it is otherwise unable to determine whether Policy conditions have been met, the Regional office will notify the Office of Regulatory Enforcement at EPA headquarters.

Entities that disclose potential criminal violations may expect a more thorough review by the Agency. In criminal cases, entities will be expected to provide, at a minimum, the following: access to all requested documents; access to all employees of the disclosing entity; assistance in investigating the violation, any noncompliance problems related to the disclosure, and any environmental consequences related to the violations; access to all information relevant to the violations disclosed, including that portion of the environmental audit report or documentation from the compliance management system that revealed the violation; and access to the individuals who conducted the audit or review.

F. Opposition to Audit Privilege and Immunity

The Agency believes that the Audit Policy provides effective incentives for self-policing without impairing law enforcement, putting the environment at risk or hiding environmental compliance information from the public. Although EPA encourages environmental auditing, it must do so without compromising the integrity and

enforceability of environmental laws. It is important to distinguish between EPA’s Audit Policy and the audit privilege and immunity laws that exist in some States. The Agency remains firmly opposed to statutory and regulatory audit privileges and immunity. Privilege laws shield evidence of wrongdoing and prevent States from investigating even the most serious environmental violations. Immunity laws prevent States from obtaining penalties that are appropriate to the seriousness of the violation, as they are required to do under Federal law. Audit privilege and immunity laws are unnecessary, undermine law enforcement, impair protection of human health and the environment, and interfere with the public’s right to know of potential and existing environmental hazards.

Statutory audit privilege and immunity run counter to encouraging the kind of openness that builds trust between regulators, the regulated community and the public. For example, privileged information on compliance contained in an audit report may include information on the cause of violations, the extent of environmental harm, and what is necessary to correct the violations and prevent their recurrence. Privileged information is unavailable to law enforcers and to members of the public who have suffered harm as a result of environmental violations. The Agency opposes statutory immunity because it diminishes law enforcement’s ability to discourage wrongful behavior and interferes with a regulator’s ability to punish individuals who disregard the law and place others in danger. The Agency believes that its Audit Policy provides adequate incentives for self-policing but without secrecy and without abdicating its discretion to act in cases of serious environmental violations.

Privilege, by definition, invites secrecy, instead of the openness needed to build public trust in industry’s ability to self-police. American law reflects the high value that the public places on fair access to the facts. The Supreme Court, for example, has said of privileges that, ‘‘ [w]hatever their origins, these exceptions to the demand for every man’s evidence are not lightly created nor expansively construed, for they are in derogation of the search for truth.’’ United States v. Nixon, 418 U.S. 683, 710 (1974). Federal courts have unanimously refused to recognize a privilege for environmental audits in the context of government investigations. See, e.g., United States v. Dexter Corp., 132 F.R.D. 8, 10 (D.Conn. 1990)


(application of a privilege ‘‘would effectively impede [EPA’s] ability to enforce the Clean Water Act, and would be contrary to stated public policy.’’) Cf. In re Grand Jury Proceedings, 861 F. Supp. 386 (D. Md. 1994) (company must comply with a subpoena under Food, Drug and Cosmetics Act for self-evaluative documents).

G. Effect on States The revised final Policy reflects EPA’s

desire to provide fair and effective incentives for self-policing that have practical value to States. To that end, the Agency has consulted closely with State officials in developing this Policy. As a result, EPA believes its revised final Policy is grounded in commonsense principles that should prove useful in the development and implementation of State programs and policies.

EPA recognizes that States are partners in implementing the enforcement and compliance assurance program. When consistent with EPA’s policies on protecting confidential and sensitive information, the Agency will share with State agencies information on disclosures of violations of Federally-authorized, approved or delegated programs. In addition, for States that have adopted their own audit policies in Federally-authorized, approved or delegated programs, EPA will generally defer to State penalty mitigation for self-disclosures as long as the State policy meets minimum requirements for Federal delegation. Whenever a State provides a penalty waiver or mitigation for a violation of a requirement contained in a Federally-authorized, approved or delegated program to an entity that discloses those violations in conformity with a State audit policy, the State should notify the EPA Region in which it is located. This notification will ensure that Federal and State enforcement responses are coordinated properly.

For further information about minimum delegation requirements and the effect of State audit privilege and immunity laws on enforcement authority, see ‘‘Statement of Principles: Effect of State Audit/Immunity Privilege Laws on Enforcement Authority for Federal Programs,’’ Memorandum from Steven A. Herman et al, dated February 14, 1997, to be posted on the Internet under www.epa.gov/oeca/oppa.

As always, States are encouraged to experiment with different approaches to assuring compliance as long as such approaches do not jeopardize public health or the environment, or make it profitable not to comply with Federal environmental requirements. The

Agency remains opposed to State legislation that does not include these basic protections, and reserves its right to bring independent action against regulated entities for violations of Federal law that threaten human health or the environment, reflect criminal conduct or repeated noncompliance, or allow one company to profit at the expense of its law-abiding competitors.

H. Scope of Policy

EPA has developed this Policy to guide settlement actions. It is the Agency’s practice to make public all compliance agreements reached under this Policy in order to provide the regulated community with fair notice of decisions and to provide affected communities and the public with information regarding Agency action. Some in the regulated community have suggested that the Agency should convert the Policy into a regulation because they feel doing so would ensure greater consistency and predictability. Following its three-year evaluation of the Policy, however, the Agency believes that there is ample evidence that the Policy has worked well and that there is no need for a formal rulemaking. Furthermore, as the Agency seeks to respond to lessons learned from its increasing experience handling self-disclosures, a policy is much easier to amend than a regulation. Nothing in today’s release of the revised final Policy is intended to change the status of the Policy as guidance.

I. Implementation of Policy

1. Civil Violations

Pursuant to the Audit Policy, disclosures of civil environmental violations should be made to the EPA Region in which the entity or facility is located or, where the violations to be disclosed involve more than one EPA Region, to EPA Headquarters. The Regional or Headquarters offices decide whether application of the Audit Policy in a specific case is appropriate. Obviously, once a matter has been referred for civil judicial prosecution, DOJ becomes involved as well. Where there is evidence of a potential criminal violation, the civil offices coordinate with criminal enforcement offices at EPA and DOJ.

To resolve issues of national significance and ensure that the Policy is applied fairly and consistently across EPA Regions and at Headquarters, the Agency in 1995 created the Audit Policy Quick Response Team (QRT). The QRT is comprised of representatives from the Regions, Headquarters, and DOJ. It meets on a regular basis to address

issues of interpretation and to coordinate self-disclosure initiatives. In addition, in 1999 EPA established a National Coordinator position to handle Audit Policy issues and implementation. The National Coordinator chairs the QRT and, along with the Regional Audit Policy coordinators, serves as a point of contact on Audit Policy issues in the civil context.

2. Criminal Violations Criminal disclosures are handled by

the Voluntary Disclosure Board (VDB), which was established by EPA in 1997. The VDB ensures consistent application of the Audit Policy in the criminal context by centralizing Policy interpretation and application within the Agency.

Disclosures of potential criminal violations may be made directly to the VDB, to an EPA regional criminal investigation division or to DOJ. In all cases, the VDB coordinates with the investigative team and the appropriate prosecuting authority. During the course of the investigation, the VDB routinely monitors the progress of the investigation as necessary to ensure that sufficient facts have been established to determine whether to recommend that relief under the Policy be granted.

At the conclusion of the criminal investigation, the Board makes a recommendation to the Director of EPA’s Office of Criminal Enforcement, Forensics, and Training, who serves as the Deciding Official. Upon receiving the Board’s recommendation, the Deciding Official makes his or her final recommendation to the appropriate United States Attorney’s Office and/or DOJ. The recommendation of the Deciding Official, however, is only that—a recommendation. The United States Attorney’s Office and/or DOJ retain full authority to exercise prosecutorial discretion.

3. Release of Information to the Public Upon formal settlement, EPA places

copies of settlements in the Audit Policy Docket. EPA also makes other documents related to self-disclosures publicly available, unless the disclosing entity claims them as Confidential Business Information (and that claim is validated by U.S. EPA), unless another exemption under the Freedom of Information Act is asserted and/or applies, or the Privacy Act or any other law would preclude such release. Presumptively releasable documents include compliance agreements reached under the Policy (see Section H ) and descriptions of compliance management systems submitted under Section D(1).


Any material claimed to be Confidential Business Information will be treated in accordance with EPA regulations at 40 CFR Part 2. In determining what documents to release, EPA is guided by the Memorandum from Assistant Administrator Steven A. Herman entitled ‘‘Confidentiality of Information Received Under Agency’s Self-Disclosure Policy,’’ available on the Internet at www.epa.gov/oeca/ sahmemo.html.

II. Statement of Policy—Incentives for Self-Policing: Discovery, Disclosure, Correction and Prevention of Violations

A. Purpose

This Policy is designed to enhance protection of human health and the environment by encouraging regulated entities to voluntarily discover, disclose, correct and prevent violations of Federal environmental requirements.

B. Definitions

For purposes of this Policy, the following definitions apply:

‘‘Environmental Audit’’ is a systematic, documented, periodic and objective review by regulated entities of facility operations and practices related to meeting environmental requirements.

‘‘Compliance Management System’’ encompasses the regulated entity’s documented systematic efforts, appropriate to the size and nature of its business, to prevent, detect and correct violations through all of the following:

(a) Compliance policies, standards and procedures that identify how employees and agents are to meet the requirements of laws, regulations, permits, enforceable agreements and other sources of authority for environmental requirements;

(b) Assignment of overall responsibility for overseeing compliance with policies, standards, and procedures, and assignment of specific responsibility for assuring compliance at each facility or operation;

(c) Mechanisms for systematically assuring that compliance policies, standards and procedures are being carried out, including monitoring and auditing systems reasonably designed to detect and correct violations, periodic evaluation of the overall performance of the compliance management system, and a means for employees or agents to report violations of environmental requirements without fear of retaliation;

(d) Efforts to communicate effectively the regulated entity’s standards and procedures to all employees and other agents;

(e) Appropriate incentives to managers and employees to perform in

accordance with the compliance policies, standards and procedures, including consistent enforcement through appropriate disciplinary mechanisms; and

(f) Procedures for the prompt and appropriate correction of any violations, and any necessary modifications to the regulated entity’s compliance management system to prevent future violations.

‘‘Environmental audit report’’ means the documented analysis, conclusions, and recommendations resulting from an environmental audit, but does not include data obtained in, or testimonial evidence concerning, the environmental audit.

‘‘Gravity-based penalties’’ are that portion of a penalty over and above the economic benefit, i.e., the punitive portion of the penalty, rather than that portion representing a defendant’s economic gain from noncompliance.

‘‘Regulated entity’’ means any entity, including a Federal, State or municipal agency or facility, regulated under Federal environmental laws.

C. Incentives for Self-Policing

1. No Gravity-Based Penalties

If a regulated entity establishes that it satisfies all of the conditions of Section D of this Policy, EPA will not seek gravity-based penalties for violations of Federal environmental requirements discovered and disclosed by the entity.

2. Reduction of Gravity-Based Penalties by 75%

If a regulated entity establishes that it satisfies all of the conditions of Section D of this Policy except for D(1)— systematic discovery—EPA will reduce by 75% gravity-based penalties for violations of Federal environmental requirements discovered and disclosed by the entity.

3. No Recommendation for Criminal Prosecution

(a) If a regulated entity establishes that it satisfies at least conditions D(2) through D(9) of this Policy, EPA will not recommend to the U.S. Department of Justice or other prosecuting authority that criminal charges be brought against the disclosing entity, as long as EPA determines that the violation is not part of a pattern or practice that demonstrates or involves:

(i) A prevalent management philosophy or practice that conceals or condones environmental violations; or

(ii) High-level corporate officials’ or managers’ conscious involvement in, or willful blindness to, violations of Federal environmental law;

(b) Whether or not EPA recommends the regulated entity for criminal prosecution under this section, the Agency may recommend for prosecution the criminal acts of individual managers or employees under existing policies guiding the exercise of enforcement discretion.

4. No Routine Request for Environmental Audit Reports

EPA will neither request nor use an environmental audit report to initiate a civil or criminal investigation of an entity. For example, EPA will not request an environmental audit report in routine inspections. If the Agency has independent reason to believe that a violation has occurred, however, EPA may seek any information relevant to identifying violations or determining liability or extent of harm.

D. Conditions

1. Systematic Discovery

The violation was discovered through: (a) An environmental audit; or (b) A compliance management system

reflecting the regulated entity’s due diligence in preventing, detecting, and correcting violations. The regulated entity must provide accurate and complete documentation to the Agency as to how its compliance management system meets the criteria for due diligence outlined in Section B and how the regulated entity discovered the violation through its compliance management system. EPA may require the regulated entity to make publicly available a description of its compliance management system.

2. Voluntary Discovery

The violation was discovered voluntarily and not through a legally mandated monitoring or sampling requirement prescribed by statute, regulation, permit, judicial or administrative order, or consent agreement. For example, the Policy does not apply to:

(a) Emissions violations detected through a continuous emissions monitor (or alternative monitor established in a permit) where any such monitoring is required;

(b) Violations of National Pollutant Discharge Elimination System (NPDES) discharge limits detected through required sampling or monitoring; or

(c) Violations discovered through a compliance audit required to be performed by the terms of a consent order or settlement agreement, unless the audit is a component of agreement terms to implement a comprehensive environmental management system.


3. Prompt Disclosure

The regulated entity fully discloses the specific violation in writing to EPA within 21 days (or within such shorter time as may be required by law) after the entity discovered that the violation has, or may have, occurred. The time at which the entity discovers that a violation has, or may have, occurred begins when any officer, director, employee or agent of the facility has an objectively reasonable basis for believing that a violation has, or may have, occurred.

4. Discovery and Disclosure Independent of Government or Third-Party Plaintiff

(a) The regulated entity discovers and discloses the potential violation to EPA prior to:

(i) The commencement of a Federal, State or local agency inspection or investigation, or the issuance by such agency of an information request to the regulated entity (where EPA determines that the facility did not know that it was under civil investigation, and EPA determines that the entity is otherwise acting in good faith, the Agency may exercise its discretion to reduce or waive civil penalties in accordance with this Policy);

(ii) Notice of a citizen suit; (iii) The filing of a complaint by a

third party; (iv) The reporting of the violation to

EPA (or other government agency) by a ‘‘whistleblower’’ employee, rather than by one authorized to speak on behalf of the regulated entity; or

(v) imminent discovery of the violation by a regulatory agency.

(b) For entities that own or operate multiple facilities, the fact that one facility is already the subject of an investigation, inspection, information request or third-party complaint does not preclude the Agency from exercising its discretion to make the Audit Policy available for violations self-discovered at other facilities owned or operated by the same regulated entity.

5. Correction and Remediation

The regulated entity corrects the violation within 60 calendar days from the date of discovery, certifies in writing that the violation has been corrected, and takes appropriate measures as determined by EPA to remedy any environmental or human harm due to the violation. EPA retains the authority to order an entity to correct a violation within a specific time period shorter than 60 days whenever correction in such shorter period of time is feasible and necessary to protect public health

and the environment adequately. If more than 60 days will be needed to correct the violation, the regulated entity must so notify EPA in writing before the 60-day period has passed. Where appropriate, to satisfy conditions D(5) and D(6), EPA may require a regulated entity to enter into a publicly available written agreement, administrative consent order or judicial consent decree as a condition of obtaining relief under the Audit Policy, particularly where compliance or remedial measures are complex or a lengthy schedule for attaining and maintaining compliance or remediating harm is required.

6. Prevent Recurrence

The regulated entity agrees in writing to take steps to prevent a recurrence of the violation. Such steps may include improvements to its environmental auditing or compliance management system.

7. No Repeat Violations

The specific violation (or a closely related violation) has not occurred previously within the past three years at the same facility, and has not occurred within the past five years as part of a pattern at multiple facilities owned or operated by the same entity. For the purposes of this section, a violation is:

(a) Any violation of Federal, State or local environmental law identified in a judicial or administrative order, consent agreement or order, complaint, or notice of violation, conviction or plea agreement; or

(b) Any act or omission for which the regulated entity has previously received penalty mitigation from EPA or a State or local agency.

8. Other Violations Excluded

The violation is not one which (a) resulted in serious actual harm, or may have presented an imminent and substantial endangerment, to human health or the environment, or (b) violates the specific terms of any judicial or administrative order, or consent agreement.

9. Cooperation

The regulated entity cooperates as requested by EPA and provides such information as is necessary and requested by EPA to determine applicability of this Policy.

E. Economic Benefit

EPA retains its full discretion to recover any economic benefit gained as a result of noncompliance to preserve a ‘‘level playing field’’ in which violators do not gain a competitive advantage

over regulated entities that do comply. EPA may forgive the entire penalty for violations that meet conditions D(1) through D(9) and, in the Agency’s opinion, do not merit any penalty due to the insignificant amount of any economic benefit.

F. Effect on State Law, Regulation or Policy

EPA will work closely with States to encourage their adoption and implementation of policies that reflect the incentives and conditions outlined in this Policy. EPA remains firmly opposed to statutory environmental audit privileges that shield evidence of environmental violations and undermine the public’s right to know, as well as to blanket immunities, particularly immunities for violations that reflect criminal conduct, present serious threats or actual harm to health and the environment, allow noncomplying companies to gain an economic advantage over their competitors, or reflect a repeated failure to comply with Federal law. EPA will work with States to address any provisions of State audit privilege or immunity laws that are inconsistent with this Policy and that may prevent a timely and appropriate response to significant environmental violations. The Agency reserves its right to take necessary actions to protect public health or the environment by enforcing against any violations of Federal law.

G. Applicability (1) This Policy applies to settlement

of claims for civil penalties for any violations under all of the Federal environmental statutes that EPA administers, and supersedes any inconsistent provisions in media-specific penalty or enforcement policies and EPA’s 1995 Policy on ‘‘Incentives for Self-Policing: Discovery, Disclosure, Correction and Prevention of Violations.’’

(2) To the extent that existing EPA enforcement policies are not inconsistent, they will continue to apply in conjunction with this Policy. However, a regulated entity that has received penalty mitigation for satisfying specific conditions under this Policy may not receive additional penalty mitigation for satisfying the same or similar conditions under other policies for the same violation, nor will this Policy apply to any violation that has received penalty mitigation under other policies. Where an entity has failed to meet any of conditions D(2) through D(9) and is therefore not eligible for penalty relief under this Policy, it may still be eligible for penalty


relief under other EPA media-specific enforcement policies in recognition of good faith efforts, even where, for example, the violation may have presented an imminent and substantial endangerment or resulted in serious actual harm.

(3) This Policy sets forth factors for consideration that will guide the Agency in the exercise of its enforcement discretion. It states the Agency’s views as to the proper allocation of its enforcement resources. The Policy is not final agency action and is intended as guidance. This Policy is not intended, nor can it be relied upon, to create any rights enforceable by any party in litigation with the United States. As with the 1995 Audit Policy, EPA may decide to follow guidance provided in this document or to act at variance with it based on its analysis of the specific facts presented. This Policy may be revised without public notice to reflect changes in EPA’s approach to providing incentives for self-policing by

regulated entities, or to clarify and update text.

(4) This Policy should be used whenever applicable in settlement negotiations for both administrative and civil judicial enforcement actions. It is not intended for use in pleading, at hearing or at trial. The Policy may be applied at EPA’s discretion to the settlement of administrative and judicial enforcement actions instituted prior to, but not yet resolved, as of the effective date of this Policy.

(5) For purposes of this Policy, violations discovered pursuant to an environmental audit or compliance management system may be considered voluntary even if required under an Agency ‘‘partnership’’ program in which the entity participates, such as regulatory flexibility pilot projects like Project XL. EPA will consider application of the Audit Policy to such partnership program projects on a project-by-project basis.

(6) EPA has issued interpretive guidance addressing several

applicability issues pertaining to the Audit Policy. Entities considering whether to take advantage of the Audit Policy should review that guidance to see if it addresses any relevant questions. The guidance can be found on the Internet at www.epa.gov/oeca/ ore/apolguid.html.

H. Public Accountability

EPA will make publicly available the terms and conditions of any compliance agreement reached under this Policy, including the nature of the violation, the remedy, and the schedule for returning to compliance.

I. Effective Date

This revised Policy is effective May 11, 2000.

Dated: March 30, 2000. Steven A. Herman, Assistant Administrator for Enforcement and Compliance Assurance. [FR Doc. 00–8954 Filed 4–10–00; 8:45 am] BILLING CODE 6560–50–P

Audit Policy: Frequently Asked Questions – U.S. Environmental Protection Agency (2007)

Reference Materials

In recognition of the numerous acquisitions occurring within the regulated community today, I am identifying new owners as an opportunity to meet OECA goals related to the use of the Audit Policy. The Frequently Asked Questions document recognizes owners of newly acquired facilities as uniquely situated to examine and improve performance at newly acquired facilities. Specifically, the answers to the questions posed provide that:

* Violations discovered at newly acquired facilities as part of the new owner’s reexamination of facility compliance under Title V of the Clean Air Act are considered voluntarily discovered for purposes of the Audit Policy provided the owner notifies EPA prior to submission of its first annual compliance certification. (Question 2);

* New owners may be eligible for penalty mitigation under the Audit Policy for violations at newly acquired facilities irrespective of the disclosing entity's compliance history (Question 5); and

* EPA is committed to examining the appropriate assessment of economic benefit in the acquisitions context. In the near future, EPA intends to seek public comment on whether the Agency should offer tailored incentives to new owners that self-disclose violations pursuant to the Audit Policy. (Question 9)

In addition to recognizing new owners, I want to encourage regulated entities interested in assessing and maintaining compliance with federal environmental requirements to enter into corporate-wide auditing agreements with EPA. Corporate-wide auditing agreements provide an advance understanding between EPA and the entity regarding audit and disclosure schedules, and other aspects of Audit Policy conditions. Such agreements may help to eliminate redundancies by consolidating transactions, provide additional time to determine whether suspected violations have occurred or are occurring, and maximize penalty certainty.

EPA is committed to working with entities interested in proactively managing their facilities and operations to correct violations with minimized costs or risks. I encourage you to assist the regulated entities to avail themselves of the incentives offered under EPA’s Audit Policy.

I very much appreciate the efforts of the Audit Policy Coordination Team (ACT) in developing this Guidance. If you have questions regarding the Audit Policy: Frequently Asked Questions, you may contact Phil Milton at (202) 564-5029 or [email protected]. This document may be found on EPA’s Audit Policy webpage at http://www.epa.gov/compliance/incentives/auditing/auditpolicy.html.

Attachment

cc: OECA Office Directors OCE Division Directors

Regional Counsel

2

Regional Enforcement Coordinators Regional Audit Policy Contacts Assistant Attorney General, Environment and Natural Resources Division,

Department of Justice (DOJ) Bruce Gelber, Chief, Environmental Enforcement Section, DOJ Deputy & Assistant Chiefs, Environmental Enforcement Section, DOJ Audit Policy Coordination Team

Audit Policy Coordination Team (ACT)

HQ: Phil Milton, Chair (OCE) Jon Silberman, Vice Chair (OPPAC)

J.T. Morgan (OCEFT)

DOJ: Anna Thode

Region 1: Joel Blumstein Region 2: John Gorman/Diane Fiorito Region 3: Betty Barnes/John Ruggero Region 4: Becky Allenbach/Paul Schwartz Region 5: Jodi Swanson-Wilson/John Steketee Region 6: Marcia Moncreiffe/Eli Martinez Region 7: Becky Dolph Region 8: David Rochlin Region 9: Daniel Reich Region 10: Meg Silver

3

Audit Policy: Frequently Asked Questions

April 2007

Office of Civil Enforcement Office of Enforcement and Compliance Assurance

U.S. Environmental Protection Agency Washington, D.C.

Explanatory Note

This document was prepared by EPA’s Audit Policy Coordination Team (ACT). The ACT is chaired by the Office of Civil Enforcement, and it is charged with making fair and nationally consistent recommendations concerning the applicability of the April 11, 2000 policy on “Incentives for Self-Policing: Discovery, Disclosure, Correction and Prevention of Violations” (referred to in this document as the Audit Policy).

The “Audit Policy: Frequently Asked Questions” highlights policy interpretations that have arisen in the Audit Program in recent years and responds to requests for clarification by the regulated community; it is intended to supplement EPA’s “Audit Policy Interpretive Guidance” (January 15, 1997) (referred to as the 1997 Guidance). This frequently asked questions document, presented as a series of Questions and Answers (Qs and As), is intended to aid in implementation of the Audit Policy. It includes discussion of many of the most significant issues raised to the ACT’s attention. The ACT welcomes comments on this document, and on additional interpretive issues that may be appropriate for resolution in future guidance. A list of ACT members is provided in the cover memo to this document.

This document provides information about how the Agency exercises its enforcement discretion. It is not final agency action and it does not create any rights, duties, obligations, or defenses, implied or otherwise, in any third parties.

This document can be found on the Internet at http://www.epa.gov/compliance/incentives/auditing/auditpolicy.html. Revisions or additions to this document also will be made publicly available at the internet.

Audit Policy: Frequently Asked Questions i April 2007

Audit Policy: Frequently Asked Questions

TABLE OF CONTENTS

Q1: WHAT REVISIONS WERE MADE TO THE ORIGINAL AUDIT POLICY WHEN EPA REVISED THE AUDIT POLICY IN APRIL 2000? ..............................................................................................................................1

Q2: TO MEET CONDITION 2 OF EPA’S AUDIT POLICY, DISCLOSED VIOLATIONS SHOULD BE DISCOVERED “VOLUNTARILY.” ARE THERE CIRCUMSTANCES IN WHICH VIOLATIONS DISCOVERED DURING THE CLEAN AIR ACT (CAA) TITLE V PERMIT APPLICATION AND ANNUAL COMPLIANCE CERTIFICATIONS COULD BE ELIGIBLE FOR PENALTY RELIEF UNDER THE POLICY?.......................................................................................................................................................................1

Q3: TO MEET CONDITION 5 OF EPA’S AUDIT POLICY, AN ENTITY MUST CORRECT AND REMEDIATE A VIOLATION WITHIN 60 DAYS OF DATE OF DISCOVERY. ARE THERE INSTANCES IN WHICH THE 60-DAY CORRECTION PERIOD MAY BE EXTENDED? WHAT HAPPENS WHEN CORRECTION IS NOT POSSIBLE? .........................................................................................................................2

Q4: CONDITION 7 OF EPA’S AUDIT POLICY EXCLUDES VIOLATIONS CONSIDERED TO BE REPEAT VIOLATIONS. THE CONDITION INCLUDES AS REPEAT VIOLATIONS THOSE DISCLOSED AS PART OF A “CORPORATE PATTERN.” HOW DOES EPA INTERPRET THE CORPORATE PATTERN EXCLUSION? ..............................................................................................................................................................3

Q5: HOW IS A NEW OWNER’S DISCLOSURE OF A VIOLATION AT A NEWLY ACQUIRED FACILITY AFFECTED BY AN EXISTING “CORPORATE PATTERN,” ESTABLISHED PURSUANT TO CONDITION 7 (“NO REPEAT VIOLATIONS”) OF THE AUDIT POLICY? ...................................................................................4

Q6: CONDITION 8 OF EPA’S AUDIT POLICY EXCLUDES VIOLATIONS THAT RESULT IN SERIOUS ACTUAL HARM TO THE ENVIRONMENT OR WHICH MAY HAVE PRESENTED AN IMMINENT AND SUBSTANTIAL ENDANGERMENT TO PUBLIC HEALTH OR THE ENVIRONMENT. HOW DOES EPA INTERPRET THIS CONDITION?.............................................................................................................................5

Q7: CONDITION 9 OF EPA’S AUDIT POLICY PROVIDES THAT AN ENTITY SEEKING PENALTY MITIGATION UNDER THE POLICY MUST COOPERATE “AS REQUIRED” BY EPA. DOES THAT CONDITION MEAN THAT THOSE ENTITIES THAT HAVE LITIGATED AGAINST EPA IN THE PAST ON OTHER MATTERS ARE PRECLUDED FROM USING THE POLICY? WHAT ABOUT ENTITIES WITH ONGOING DISPUTES WITH EPA ON OTHER MATTERS? .................................................................................5

Q8: SHOULD A DISCLOSURE BE MADE TO THE U.S. EPA, OR THE STATE IN WHICH THE VIOLATION OCCURRED? ........................................................................................................................................6

Q9: EPA’S AUDIT POLICY WAIVES 100% OF GRAVITY-BASED PENALTIES FOR DISCLOSED VIOLATIONS THAT MEET THE NINE CONDITIONS OF THE POLICY. THE POLICY STATES THAT EPA RETAINS DISCRETION TO RECOVER ANY ECONOMIC BENEFIT GAINED AS A RESULT OF NONCOMPLIANCE. HOW DOES EPA EXERCISE THAT DISCRETION? ........................................................6

Q10: WHAT HAPPENS IF EPA CONDUCTS AN INSPECTION WHILE AN AUDIT IS BEING PERFORMED BUT BEFORE DISCLOSURE IS MADE PURSUANT TO AN AUDIT AGREEMENT WITH EPA? .............................................................................................................................................................................7

Audit Policy: Frequently Asked Questions ii April 2007

Q1: What revisions were made to the original Audit Policy when EPA revised the Audit Policy in April 2000?

A1: After a two-year evaluation, EPA revised the Audit Policy based on extensive public outreach and the Agency’s experience in handling self-disclosure cases. Key revisions to the Audit Policy included: (1) lengthening the amount of time from 10 to 21 days that entities have to disclose a violation after it is discovered; (2) clarifying that a facility may qualify for Audit Policy credit even if another facility owned or operated by the same parent organization is already the subject of an inspection, investigation or information request; (3) clarifying that entities will have at least 21 days after acquisition to disclose violations discovered at newly acquired facilities; and (4) clarifying that repeat violations will not disqualify newly acquired facilities for Audit Policy credit if the violations existed prior to acquisition. See 65 Fed. Reg. 19618, 19623 (April 11, 2000).

Q2: To meet Condition 2 of EPA’s Audit Policy, disclosed violations should be discovered “voluntarily.” Are there circumstances in which violations discovered during the Clean Air Act (CAA) Title V permit application and annual compliance certifications could be eligible for penalty relief under the Policy?

A2: Generally, CAA violations discovered during activities supporting Title V certification requirements are not eligible for penalty mitigation under the Policy. The regulations implementing the Title V permit program (40 C.F.R. § 70.5) establish a legal duty for permit holders to analyze comprehensively the source’s compliance status and certify annually as to CAA compliance. Condition 2 of the Audit Policy requires that disclosed violations must not be discovered through a legally mandated monitoring or sampling requirement prescribed by statute or regulation; therefore, examination of CAA compliance accompanying a Title V annual certification is not voluntary.

In 1999, EPA clarified that in some instances, certain CAA violations discovered, disclosed, and corrected by a company prior to issuance of a Title V permit may be eligible for penalty mitigation (see “Reduced Penalties for Disclosures of Certain Clean Air Act Violations,” dated September 30, 1999, http://www.epa.gov/compliance/resources/policies/incentives/auditing/caa-tit.pdf). The 1999 memorandum states that the Policy may apply where a company “(a) reviews its prior decision regarding the application of New Source Review (NSR) and Prevention of Significant Deterioration (PSD) requirements that was made in good faith and (b) discloses to EPA a violation discovered through such a review and agrees to correct it prior to Title V permit issuance, and (c) otherwise meets conditions 3 through 9 of the Audit Policy.”

Since issuance of the 1999 memorandum, EPA has considered whether CAA violations discovered by a new owner during a compliance examination conducted subsequent to permit issuance, but prior to submission of the first Title V annual certification following acquisition, could be considered eligible for penalty mitigation under the Policy. EPA wants to encourage new owners to re-examine facility compliance and facility operations, correct violations and upgrade deficient equipment and practices. Thus, for new owners that in good faith undertake such efforts and inform the Agency of such actions, either by disclosure in writing or entry into

Audit Policy: Frequently Asked Questions 1 April 2007

an Audit Agreement, prior to submission of its first annual Title V certification, the violations disclosed would be considered voluntarily discovered for purposes of the Audit Policy. In creating an opportunity for new owners to use the Audit Policy for violations discovered during compliance examinations, EPA is not attempting to define “reasonable inquiry”1 or suggest that sources are not under obligation to disclose CAA violations detected while a Title V permit is pending or during annual certification after permit issuance. For instance, nothing within the opportunities afforded through the Audit Policy relieves a source of the ongoing obligation to comply with PSD/NSR requirements. Rather, to encourage further assessment of the compliance status of operations with which a new owner may have limited familiarity and to encourage the disclosure and correction of violations and improvement in operations at the facility, EPA is clarifying that a new owner can potentially use the Audit Policy up until the first Title V annual certification due date.

The following are examples of disclosures which EPA would consider to meet the voluntary discovery condition of the Audit Policy, if disclosed prior to the first Title V certification due date: a new owner discovers and discloses a CAA violation at a recently acquired Title V source (e.g., the prior owner had relied on inaccurate calculations and/or used an incorrect formula to make its Title V certifications, or the prior owner failed to apply for a Title V permit). Such a discovery after purchase could have resulted from re-examination of in-house documentation and/or observation of daily operations. Another example may be where a new owner discovers that a gauge relied upon by the prior owner to establish or maintain operating parameters was not properly calibrated.

EPA will consider violations such as these on a case-by-case basis to ensure that the disclosing entity is a “new owner” and qualifies for consideration under the Audit Policy. In addition, in these situations, as with all Audit Policy disclosures, if a particular disclosure does not qualify for credit under the Audit Policy, it may still be eligible for penalty mitigation pursuant to the applicable enforcement response or penalty policy.

Q3: To meet Condition 5 of EPA’s Audit Policy, an entity must correct and remediate a violation within 60 days of date of discovery. Are there instances in which the 60-day correction period may be extended? What happens when correction is not possible?

A3: The Audit Policy requires that violations be corrected within 60 days of discovery. However, EPA recognizes that not all violations can be corrected within that time frame. EPA may allow an extension for corrections that require significant expenditures, involve technically complex issues, or involve decisions for which an entity seeks or is required to obtain EPA or State input or approval. As stated in the Audit Policy (65 Fed. Reg. at 19626), if more than 60 days will be required for correction, an entity must notify EPA in writing prior to the conclusion

1 Under the regulations governing Title V permit applications and annual compliance certifications, any application form, report or compliance certification is required to contain a certification by a responsible official of truth, accuracy, and completeness. The regulations further provide that “[t]his certification and any other certification required under this part shall state that, based on information and belief formed after reasonable inquiry, the statements and information in the document are true, accurate, and complete.” 40 CFR § 70.5(d).


of the 60-day period. Examples of instances for which extensions might be sought include corrections involving changes to emissions treatment technology and restoration or replacement of certain containment systems.

Moreover, EPA also recognizes that certain violations that involve parties, facilities, or wastes over which an entity no longer has control (e.g., the transport of hazardous waste without a RCRA manifest) may not in fact be correctable by the entity. In these circumstances, violators will still be eligible for Audit Policy consideration even if the violation cannot be corrected, provided the violator adopts specific and appropriate measures to prevent recurrence and takes any other steps necessary to address the violation (e.g., carrying out any removal or remedial actions required by law).

Q4: Condition 7 of EPA’s Audit Policy excludes violations considered to be repeat violations. The condition includes as repeat violations those disclosed as part of a “corporate pattern.” How does EPA interpret the corporate pattern exclusion?

A4: Condition 7 (“No Repeat Violations”) of the Audit Policy excludes the situation in which the disclosed violation is the same as or closely related to another violation (or violations) that has occurred “within the past five years as part of a pattern at multiple facilities owned or operated by the same entity.” That exclusion is often referred to as the “corporate pattern” exclusion (although it applies to any type of entity). The repeat violation exclusion “ensures that penalties are not waived for those entities that have previously been notified of violations and fail to prevent repeat violations.” 65 Fed. Reg. 19618, 19623 (April 11, 2000).

In general terms, the Audit Policy defines a violation as one that is identified by a regulator in a settlement or order, or that has otherwise been the subject of penalty mitigation. The corporate pattern exclusion does not preclude an entity from disclosing numerous violations discovered as part of a single audit. This is because the Agency’s analysis in determining whether a “pattern” exists relates more to the nature, timing and context of discovery and disclosure than to the number of violations disclosed at any one time. Thus, for example, an entity could conduct an audit that yields the discovery and disclosure of 40 violations of the same type at numerous facilities. If those violations are discovered as part of one effort and disclosed together, EPA views those violations (as defined in the Policy and discussed in the Preamble) as one disclosure and views them as “one violation” for purposes of evaluating subsequent disclosures for corporate pattern. The reason for this view is that the disclosure and supporting audit represent one time at which the entity became aware (or was put on notice) of noncompliance - whether involving one violation or numerous violations.

Similarly, if an entity discovers violations at one facility and has reason to believe that the same or similar violations exist at other heterogeneous2 facilities, the corporate pattern prohibition would generally not preclude an entity from disclosing the additional violations sequentially, if

2 Question 3 of EPA’s “Audit Policy Interpretive Guidance” (1997) notes that the Agency will consider disclosures to be untimely where factual inferences can be drawn about other probable violations (e.g., where the violator’s operations and practices are homogeneous in nature) and they are not promptly disclosed.


the disclosures are part of a single, comprehensive look at similar violations across all of an entity’s facilities. In order to be considered part of a single comprehensive look, entities are encouraged to make use of EPA’s corporate auditing agreements, which provide a means of addressing potential noncompliance on a corporate-wide basis. Auditing agreements also allow an entity to plan a corporate-wide audit with an advance understanding between the entity and EPA regarding schedules for conducting the audit and disclosing beyond the 21-day disclosure requirement for single-facility disclosures. For more information, see the September 2000 Audit Policy Update Special Issue, “Corporate -Wide Agreements: An Effective Approach for Companies to Improve Environmental Compliance” http://www.epa.gov/compliance/resources/newsletters/incentives/auditupdate/fall2000.pdf and “Use of Corporate Auditing Agreements for Audit Policy Disclosures” (May 7, 2001). Entities disclosing violations at different facilities in more than one EPA Region should make such disclosures to EPA Headquarters.

Some companies have opted not to disclose newly discovered violations following a prior disclosure (or enforcement action) for the same or closely related violations. These companies elect not to disclose a violation, but rather to “save” their use of the Audit Policy for a yet to be discovered “more significant” closely related violation. EPA believes that companies make their decision, at least in part due to uncertainty over whether one or more past violations constitute “a pattern.” EPA encourages disclosures as a vehicle for assuring compliance with the nation’s environmental laws and evaluates the facts relevant to “corporate pattern” with that objective in mind. EPA will not deny Audit Policy treatment to subsequent violations if the disclosing company has, after being put on notice by its prior disclosure(s) or enforcement action(s), taken appropriate actions to address comprehensively the cause or causes of the previous violations. If a company has taken such actions, and a subsequent violation nevertheless occurs, EPA will not view the subsequent violation as part of a corporate pattern. Accordingly, there is no specific number of prior violations that will automatically exclude a violation from Audit Policy consideration under the corporate pattern exclusion. In the eleven year history of the program, EPA has only invoked the “corporate pattern” bar in a fraction of one percent of all cases. EPA will continue to apply this exclusion narrowly, with national oversight to ensure consistency, and with a goal of encouraging those who violate the law to disclose and correct those violations promptly. It is important to note that disclosures of any sort may be eligible for penalty mitigation, even if the Audit Policy consideration is unavailable.

Q5: How is a new owner’s disclosure of a violation at a newly acquired facility affected by an existing “corporate pattern,” established pursuant to Condition 7 (“No Repeat Violations”) of the Audit Policy?

A5: Question 15 of EPA’s “Audit Policy Interpretive Guidance” (1997) provides that separate entities are considered independently, and applicability of the Audit Policy is based on the merits of each entity’s actions. More specifically, the 1997 Guidance states that a previous owner/ operator’s actions will not be imputed to the successor. That guidance does not address the impact of the successor’s history of violations on the applicability of the Audit Policy with respect to the successor’s newly acquired facility.


EPA generally considers successors that undertake examinations of newly acquired facilities to be eligible irrespective of the successor’s history of violations at other facilities. EPA’s primary interest is to encourage newly acquired facilities to undergo a comprehensive examination of and improvements to its environmental compliance and management systems. Notwithstanding a successor’s history of violations at their other facilities, if its efforts to examine and improve upon an acquired facility’s environmental operations are thorough and are likely to result in improved compliance, EPA’s intent is to encourage such examinations.

Q6: Condition 8 of EPA’s Audit Policy excludes violations that result in serious actual harm to the environment or which may have presented an imminent and substantial endangerment to public health or the environment. How does EPA interpret this condition?

A6: Although many environmental violations involve the release of pollutants, such violations do not necessarily result in serious actual harm or present an imminent and substantial endangerment. In the context of EPA’s Audit Program, EPA takes a case-by-case approach and has rarely excluded disclosures on this basis. Of the nearly 3,500 disclosures to EPA made to date, EPA is aware of only two instances in which the Agency denied Audit Policy credit based on serious actual harm or an imminent and substantial endangerment. One of those instances involved a release that required community evacuation of the surrounding area; the other instance involved the death of an employee.

Q7: Condition 9 of EPA’s Audit Policy provides that an entity seeking penalty mitigation under the Policy must cooperate “as required” by EPA. Does that condition mean that those entities that have litigated against EPA in the past on other matters are precluded from using the Policy? What about entities with ongoing disputes with EPA on other matters?

A7: EPA considers Condition 9 solely in the context of EPA’s consideration and resolution of disclosures made pursuant to the Audit Policy. EPA’s Audit Program is a transactional one, meaning that the nature and the extent of the disclosure determines the scope of the transaction (and federal relief granted mirrors that scope), in that the relief granted is limited to the facts specific to the disclosure. With respect to this condition, EPA looks only to whether an entity cooperated with the Agency in the Agency’s consideration of the entity’s request for treatment under the Audit Policy; not whether the entity has cooperated with the Agency in past matters or whether the entity is in litigation with the Agency on other matters.

Also, where conditions of the Audit Policy require specific consideration of prior or ongoing enforcement activity (e.g., Condition 4: Discovery and Disclosure Independent of Government of Third-Party Plaintiff, or Condition 7: No Repeat Violations), such consideration is narrowly tailored for the purposes of that condition only.

Because one public benefit of the Audit Policy is the potential for conserving government resources, excessive delay or non-responsiveness by an entity is one indicator of limited cooperation. EPA may determine that an entity has not been responsive, timely, or open within the context of the disclosure transaction and may deny credit on that basis.


Q8: Should a disclosure be made to the U.S. EPA, or the State in which the violation occurred?

A8: Whether an entity should make a disclosure to EPA, the State, or both, depends on the type of regulation violated, availability of a State audit program, and the scope of legal relief sought by the entity. The answer is based, in part, on what the entity aims to achieve.

For violations of federal laws for which no State authorized program exists (e.g., the Emergency Planning and Community Right to Know Act), because a State possesses no legal authority to resolve violations under those statutes, disclosures should be made to EPA. For violations of federal statutes for which a State-authorized program exists (e.g., the Clean Water Act), an entity may choose to disclose to either regulator or both; however, if a resolution of the federal claim for that violation is desired, disclosure to EPA is the only means to secure it.

For States with audit programs that reflect the incentives and conditions contained in EPA’s Audit Policy, EPA develops reciprocal agreements between an EPA Regional Office and a State. Such agreements typically establish an understanding that, although each agency maintains its sovereign legal authorities, each generally intends to defer to the other’s resolution of disclosed violations. For entities not seeking a federal resolution with respect to the claim, this arrangement may provide enough assurance that it deems a disclosure to EPA unnecessary. Parties should inquire with the relevant Region or State for more information.

Q9: EPA’s Audit Policy waives 100% of gravity-based penalties for disclosed violations that meet the nine conditions of the Policy. The Policy states that EPA retains discretion to recover any economic benefit gained as a result of noncompliance. How does EPA exercise that discretion?

A9: EPA’s general commitment to recapture economic benefit assures more widespread compliance with the law by reducing the incentive to avoid or postpone compliance. A violator generally derives economic benefit by investing the money that should have been spent on compliance. Assessment of economic benefit serves to level the playing field among law-abiding entities and those that have obtained an economic benefit from their noncompliance.

EPA recognizes that there may be circumstances in which recapturing economic benefit is neither efficient nor appropriate. As stated in the Audit Policy, EPA may forgive the entire penalty for violations that meet all of the conditions of the Policy and, in the Agency’s opinion, “do not merit any penalty due to the insignificant amount of any economic benefit.” 65 Fed. Reg. 19618, 19626 (April 11, 2000). In resolving disclosures made under the Audit Policy, EPA generally defers to the relevant program penalty policies (available at http://www.epa.gov/compliance/resources/policies/civil/index.html) governing the statutory or regulatory requirement at issue. Many of EPA’s penalty policies establish de minimis penalty amounts under which collection is not routinely sought because of the resource demands that would be assumed by the Agency. Indeed, many disclosures involve recordkeeping and reporting violations which, unless numerous violations are disclosed, often do not have significant economic benefit and have thus been resolved without penalty under the Audit Policy.


In addition, it is EPA’s intention that settlements under the Audit Policy assess economic benefit after consideration of all factors of settlement. EPA uses its enforcement discretion to assess a benefit amount that is consistent with its overall approach to sector-wide compliance. The central guiding principle underlying decisions regarding assessment of economic benefit in the Audit Policy context is fairness.

Guided by the principle of fairness, EPA is examining the question of whether and to what extent a new owner, in the context of business acquisitions, gains an economic benefit from noncompliance existing at its newly acquired facilities at the time of acquisition. In the near future, EPA intends to seek public comment on whether the Agency should offer tailored incentives to new owners that self-disclose violations pursuant to the Audit Policy. In particular, the Agency is interested in receiving public comment on whether and to what extent to assess economic benefit, if any, for violations at newly acquired facilities disclosed by new owners.

Q10: What happens if EPA conducts an inspection while an audit is being performed but before disclosure is made pursuant to an Audit Agreement with EPA?

A10: EPA is unaware of any specific instances where inspections were conducted at an entity performing an audit under an audit agreement. If such an EPA inspection did take place and violations were discovered. EPA might allow Audit Policy penalty mitigation for the violations discovered, assuming such violations fell within the scope of the Audit Agreement with EPA.

While EPA may consider a facility known to be auditing to be a lower inspection priority than a facility that is not known to be auditing, whether and when to conduct an inspection does, and should, remain a matter of Agency discretion. If the Agency's inspection or other enforcement authorities were so limited, it could compromise the Agency's ability to respond to citizen complaints or site conditions posing a potentially serious threat to human health or the environment, its ability to assure the public as to the compliance status of a given facility, or provide the appearance that the audit shields an entity from inspection.

Audit Policy consideration in these circumstances would still require that the violation discovered by EPA fall within the scope of the regulated entity’s proposed audit. EPA’s discovery of such violations through its inspection will not preclude an entity from Audit Policy consideration on the basis on failing to meet Condition 4 – “Discovery and Disclosure Independent of Government or Third Party Plaintiff,” provided the date of commencement of the inspection is after the date of the Audit Agreement. If there has not been an audit agreement with or prior notification to EPA, then any violations discovered by EPA during an inspection would not be eligible for Audit Policy mitigation, even if the facility had an on-going audit at the time of the inspection and subsequently disclosed those violations.


Tailored Incentives for New Owners – U.S. Environmental Protection Agency (2008)

Reference Materials

44991 Federal Register / Vol. 73, No. 149 / Friday, August 1, 2008 / Notices

Summary: EPA expressed environmental concerns about potential water quality impacts to riparian/stream systems due to past grazing activities. EPA supports adaptive management practices proposed by the Forest Service for improve existing resource conditions impacted by grazing and long-term drought. EPA requested that the final EIS include a drought management plan and baseline data for monitoring and protecting water quality. Rating EC2. EIS No. 20080219, ERP No. D–NOA–

E39073–00, Programmatic—Coral Restoration in the Florida Keys and Flower Garden Banks National Marine Sanctuaries, Implementation, FL, TX, and LA. Summary: EPA does not object to the

proposed action, but requested additional data to clarify timeframes of coral growth and the level of effort to conduct the restoration projects. Rating LO.

Dated: July 29, 2008. Robert W. Hargrove, Director, NEPA Compliance Division, Office of Federal Activities. [FR Doc. E8–17718 Filed 7–31–08; 8:45 am] BILLING CODE 6560–50–P


[ER–FRL–8584–2]

Environmental Impacts Statements; Notice of Availability

Responsible Agency: Office of Federal Activities, General Information (202) 564–7167 or http://www.epa.gov/ compliance/nepa/. Weekly receipt of Environmental Impact

Statements Filed 07/21/2008 Through 07/25/2008. Pursuant to 40 CFR 1506.9. EIS No. 20080285, Final EIS, NPS, MT,

Avalanche Hazard Reduction Project, Issuance of Special Use Permit for the Use of Explosives in the Park, Burlington Northern Santa Fe Railway, Glacier National Park, Flathead National Forest, Flathead and Glacier Counties, MT, Wait Period Ends: 09/02/2008, Contact: Chas Cartwright 406–888–7898.

EIS No. 20080286, Final EIS, AFS, UT, Pockets Resource Management Project, Proposes to Salvage Dead and Dying Spruce/Fir, Regenerate Aspen, and Manage Travel, Escalate Ranger District, Dixie National Forest, Garfield County, UT, Wait Period Ends: 09/02/2008, Contact: Robert G. MacWhorter 435–826–5400.

EIS No. 20080287, Final EIS, BLM, UT, Moab Field Office Planning Area,

Resource Management Plan, Implementation, Grand and San Juan Counties, UT, Wait Period Ends: 09/ 02/2008, Contact: Brent Northrup 435–259–2100.

EIS No. 20080288, Draft Supplement, NOA, 00, Amendment 16 to the Fishery Management Plan for the Snapper Grouper Fishery, Additional Information to Analyze Four New Management Measures Alternatives for Gag and Vermillion Snapper, Implementation, South Atlantic Region, Comment Period Ends: 09/15/ 2008, Contact: Dr. Roy E. Crabtree 727–824–5305.

EIS No. 20080289, Final EIS, FTA, TX, Northwest Corridor Light Rail Transit Line (LRT) to Irving/Dallas/Fort Worth International Airport, Construction, Dallas County, TX, Wait Period Ends: 09/02/2008, Contact: Elizabeth Zekasko 202–366–0244.

EIS No. 20080290, Draft EIS, STB, 00, Elgin, Joliet & Eastern Railroad (Finance Docket No. 35087) Proposed Acquisition by Canadian National (CN) Railway and Grand Trunk Corporation to connect all Five of CN’s Rail lines, Chicago, Illinois and Gary, Indiana, Comment Period Ends: 09/30/2008, Contact: Phillis Johnson- Ball 202–245–0304.

EIS No. 20080291, Draft EIS, AFS, CO, Colorado Roadless Areas Rulemaking, Proposes to Promulgate a State- Specific Rule to Manage Roadless Values and Characteristics, Colorado Forests with Roadless Areas include: Arapaho and Roosevelt: Grand Mesa, Uncompahgre, and Gunnison; Manti- La Sal (portion in Colorado); Pike and San Isabel; Rio Grande; Routt: San Juan; and White River National Forests, CO, Comment Period Ends: 10/23/2008, Contact: Kathy Kurtz 303–275–5083.

EIS No. 20080292, Draft EIS, IBR, CA, Millerton Lake Resource Management Plan (RMP) and General Plan, Implementation, Fresno and Madera Counties, CA, Comment Period Ends: 09/15/2008, Contact: Robert Epperson 559–269–4518.

EIS No. 20080293, Draft EIS, IBR, CA, Cachuma Lake Resource Management Plan, Implementation, Cachuma Lake, Santa Barbara County, CA, Comment Period Ends: 09/15/2008, Contact: Sharon McHale 916–989–7172.

EIS No. 20080294, Final EIS, FHW, VA, U.S. 460 Location Study Project, Transportation Improvements from I– 295 in Prince George County to the Interchange of Route 460 and 58 along the Suffolk Bypass, Funding, U.S. Army COE Section 10 and 404 Permits, Prince George, Sussex, Surry, Southampton and Isle of Wight

Counties, VA, Wait Period Ends: 09/ 02/2008, Contact: Kenneth Myers 804–775–3353.

Amended Notices

EIS No. 20080227, Second Draft Supplement, TPT, CA, Presidio Trust Management Plan (PTMP), Updated Information on the Concept for the 120-Acre Main Post District, Area B of the Presidio of San Francisco, Implementation, City and County of San Francisco, CA, Comment Period Ends: 09/19/2008, Contact: John G. Pelka 415–561–5300. Revision to FR Notice Published:

Extending Comment Period from 07/31/ 2008 to 09/19/2008.

Dated: July 29, 2008. Robert W. Hargrove, Director, NEPA Compliance Division, Office of Federal Activities. [FR Doc. E8–17722 Filed 7–31–08; 8:45 am] BILLING CODE 6560–50–P


[EPA–HQ–OECA–2007–0291; FRL–8700–2]

Interim Approach to Applying the Audit Policy to New Owners

AGENCY: Environmental Protection Agency. ACTION: Notice; request for comment.

SUMMARY: The Environmental Protection Agency (‘‘EPA’’ or ‘‘the Agency’’) announces and requests comment on its Interim Approach to Applying the Audit Policy to New Owners (‘‘Interim Approach’’). (EPA’s April 11, 2000 policy on ‘‘Incentives for Self-Policing: Discovery, Disclosure, Correction and Prevention of Violations,’’ is commonly referred to as the ‘‘Audit Policy’’ (65 FR 19618).) This Interim Approach offers a detailed description of how EPA will apply its Audit Policy to new owners of regulated facilities. Under the Interim Approach, EPA will offer certain incentives specifically tailored to new owners that want to make a ‘‘clean start’’ at their newly acquired facilities by addressing environmental noncompliance that began prior to acquisition. This Interim Approach is designed to motivate new owners to audit newly acquired facilities and use the Audit Policy to disclose, correct, and prevent the recurrence of violations. It is also designed to encourage self- disclosures of violations that will, once corrected, yield significant pollutant reductions and benefits to the environment. The incentives tailored for new owners include penalty mitigation

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beyond what is provided in the Audit Policy, as well as the modification of certain Audit Policy conditions. Through applying a clear, transparent, and easily administered Interim Approach to resolving disclosures from new owners, the Agency seeks to use the Audit Policy to leverage its ability to make effective use of scarce government resources. If procedural and transaction costs can be minimized for regulators and self-disclosing new owners, EPA anticipates that the opportunity to work with new owners as they make clean starts at their new facilities can help secure higher quality environmental improvements more quickly and effectively than might otherwise occur.

On May 14, 2007, EPA published a Federal Register Notice entitled ‘‘Enhancing Environmental Outcomes From Audit Policy Disclosures Through Tailored Incentives for New Owners’’ (72 FR 27116) (‘‘First Notice’’) seeking public comment on whether and to what extent the Agency should consider offering tailored incentives to encourage new owners of regulated entities to discover, disclose, correct, and prevent the recurrence of environmental violations pursuant to the Audit Policy. The Agency received public comment supportive of the idea of offering tailored incentives to new owners, and decided to develop an approach to applying the Audit Policy to new owners. The Agency believes the most efficient way to effectively test this strategy, and learn from practical experience, is to implement it on an interim basis. Accordingly, the Agency has decided to begin applying the Interim Approach, effective upon publication of this Notice. EPA is concurrently seeking public comment on the Interim Approach for a period of 90 days. EPA will be reviewing public comment as it is received and will continue its dialogue with stakeholders on whether refinements to the Interim Approach are needed. In addition, the Agency will place into the public docket copies of agreements resolving violations disclosed by new owners under the Interim Approach. In any event, EPA intends to assess the effectiveness of the Interim Approach on a continual basis. Based on public comment and after the Agency has gained sufficient experience in implementing the Interim Approach, EPA will decide to finalize, revise or discontinue these tailored incentives for new owners. DATES: The Interim Approach is effective upon publication of this Notice. EPA urges interested parties to

comment on the Interim Approach in writing. Comments must be received by EPA no later than October 30, 2008. ADDRESSES: Submit your comments, identified by Docket ID No. EPA–HQ– OECA–2007–0291, by one of the following methods:

• http://www.regulations.gov: Follow the on-line instructions for submitting comments.

• E-mail: [email protected], Attention Docket ID No. EPA–HQ– OECA–2007–0291.

• Fax: (202) 566–9744, Attention Docket ID No. EPA–HQ–OECA–2007– 0291.

• Mail: Enforcement and Compliance Docket Information Center, Environmental Protection Agency, Mailcode: 2822T, 1200 Pennsylvania Ave., NW., Washington, DC, 20460, Attention Docket ID No. EPA–HQ– OECA–2007–0291.

• Hand Delivery: Enforcement and Compliance Docket Information Center in the EPA Docket Center (EPA/DC), EPA West, Room B 3334, 1301 Constitution Avenue, NW., Washington, DC. The EPA Docket Center Public Reading Room is open from 8:30 a.m. to 4:30 p.m., Monday through Friday, excluding legal holidays. The telephone number for the Reading Room is (202) 566–1744, and the telephone number for the Enforcement and Compliance Docket is (202) 566–1927. Such deliveries are only accepted during the Docket’s normal hours of operation, and special arrangements should be made for deliveries of boxed information.

Instructions: Direct your comments to Docket ID No. EPA–HQ–OECA–2007– 0291. EPA’s policy is that all comments received will be included in the public docket without change and may be made available online at http:// www.regulations.gov, including any personal information provided, unless the comment includes information claimed to be Confidential Business Information (CBI) or other information whose disclosure is restricted by statute. Do not submit information that you consider to be CBI or otherwise protected through http:// www.regulations.gov. The http:// www.regulations.gov Web site is an ‘‘anonymous access’’ system, which means EPA will not know your identity or contact information unless you provide it in the body of your comment. If you send an e-mail comment directly to EPA without going through http:// www.regulations.gov, your e-mail address will be automatically captured and included as part of the comment that is placed in the public docket and made available on the Internet. If you

submit an electronic comment, EPA recommends that you include your name and other contact information in the body of your comment and with any disk or CD–ROM you submit. If EPA cannot read your comment due to technical difficulties and cannot contact you for clarification, EPA may not be able to consider your comment. Electronic files should avoid the use of special characters, any form of encryption, and be free of any defects or viruses. For additional information about EPA’s public docket, visit the EPA Docket Center homepage at http:// www.epa.gov/epahome/dockets.htm.

Docket: All documents in the docket are listed in the http:// www.regulations.gov index. Although listed in the index, some information is not publicly available, e.g., CBI or other information whose disclosure is restricted by statute. Certain other material, such as copyrighted material, will be publicly available only in hard copy. Publicly available docket materials are available either electronically at http:// www.regulations.gov or in hard copy at the Enforcement and Compliance Docket Information Center in the EPA Docket Center (EPA/DC), EPA West, Room B 3334, 1301 Constitution Avenue, NW., Washington, DC. The EPA Docket Center Public Reading Room is open from 8:30 a.m. to 4:30 p.m., Monday through Friday, excluding legal holidays. The telephone number for the Reading Room is (202) 566–1744, and the telephone number for the Enforcement and Compliance Docket is (202) 566–1927. FOR FURTHER INFORMATION CONTACT: For further information, contact Caroline Makepeace of EPA’s Office of Enforcement and Compliance Assurance, Office of Civil Enforcement, Special Litigation and Projects Division at [email protected] or (202) 564–6012. SUPPLEMENTARY INFORMATION:

I. Background and Goals

A. Background on EPA’s Exploration of Tailored Incentives for New Owners

1. Overview of the Audit Policy

On April 11, 2000, EPA issued its revised final Audit Policy, or ‘‘2000 Audit Policy’’ (65 FR 19618). The purpose of the Audit Policy is to enhance protection of human health and the environment by encouraging regulated entities to voluntarily discover, promptly disclose, expeditiously correct and prevent the recurrence of violations of federal environmental law. Benefits available to


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1 The 2007 Frequently Asked Questions document can be found on the Internet at http:// www.epa.gov/compliance/incentives/auditing/ 2007-faqs.pdf.

2 Under the regulations governing CAA Title V permit applications and annual compliance certifications, any application, form, report or compliance certification is required to contain a certification by a responsible official of the truth, accuracy and completeness of information contained in such documents. The regulations further provide that ‘‘[t]his certification and any other certification required under this part shall state that, based on information and belief formed after reasonable inquiry, the statements and information in the document are true, accurate, and complete.’’ 40 CFR 70.5(d).

entities that make disclosures under the terms of the Audit Policy include reductions in and, in some cases, the elimination of civil penalties and an EPA determination not to recommend criminal prosecution of disclosing entities (ultimate prosecutorial discretion resides with the U.S. Department of Justice).

The Audit Policy contains nine conditions, and entities that meet all of them are eligible for 100 percent mitigation of any gravity-based civil penalties that otherwise could be assessed in settlement of the disclosed violations. (‘‘Gravity-based’’ penalty refers to that portion of the civil penalty over and above the portion that represents the entity’s economic gain from noncompliance, known as the ‘‘economic benefit.’’) Regulated entities that do not meet the first condition— systematic discovery of violations—but meet the other eight conditions are eligible for 75 percent mitigation of any gravity-based penalties. The Audit Policy includes important safeguards to deter violations and protect the environment. For example, the Audit Policy requires entities to act to prevent recurrence of violations and to remedy any environmental harm that may have occurred. Repeat violations, those that resulted in serious actual harm to the environment, and those that may have presented an imminent and substantial endangerment are not eligible for relief under the Audit Policy. Entities and individuals also remain criminally liable for violations that result from conscious disregard of, or willful blindness to, their obligations under the law.

Once a regulated entity discloses violations in writing to EPA, EPA evaluates the violations against the criteria set forth in the Audit Policy, and determines the appropriate enforcement response. For cases involving no assessment of penalties, the enforcement response for voluntary disclosures is usually a Notice of Determination (‘‘NOD’’). Audit Policy disclosures may also be resolved through an administrative consent agreement and final order, or a civil judicial consent decree. If the disclosure does not meet the conditions of the applicable policy, the matter is handled under the appropriate media-specific penalty policies, which often include penalty mitigation for voluntary disclosures.

The Audit Policy and related documents are available on the Internet at http://www.epa.gov/compliance/ incentives/auditing/auditpolicy.html. Additional guidance for implementing the Policy in the context of criminal

violations can be found at http:// www.epa.gov/compliance/resources/ policies/incentives/auditing/ auditcrimvio-mem.PDF. The Small Business Compliance Policy (65 FR 19630), published April 11, 2000, is an additional voluntary disclosure policy that provides incentives for small businesses (of 100 or fewer employees) that voluntarily discover, promptly disclose and expeditiously correct environmental violations. More information on the Small Business Compliance Policy is available at http://www.epa.gov/compliance/ incentives/smallbusiness/index.html.

2. How the Audit Policy Has Been Applied to New Owners

Historically, EPA has recognized that additional flexibility in Audit Policy implementation may be appropriate for new owners. The 2000 Audit Policy addressed new owners and repeat violations, focusing on pre-acquisition violations at the newly acquired facility: ‘‘[i]f a facility has been newly acquired, the existence of a violation prior to acquisition does not trigger the repeat violations exclusion’’ as to the new owner (65 FR at 19623). In addition, the Audit Policy states that, in the acquisitions context, EPA will consider extending the prompt disclosure period on a case-by-case basis. It also states that the 21-day disclosure period will begin on the date of discovery by the acquiring entity, but in no case will the period begin earlier than the date of acquisition. See 65 FR at 19622.

EPA’s primary interest is to encourage owners of newly acquired facilities to undertake a comprehensive examination of and improvements to a facility’s environmental compliance and its compliance management systems. Notwithstanding a new owner’s history of violations at its other facilities, if its efforts to examine and improve upon an acquired facility’s environmental operations are thorough and are likely to result in improved compliance, EPA’s intent is to encourage such examinations.

On April 30, 2007, EPA issued the ‘‘Audit Policy: Frequently Asked Questions (2007)’’ document (‘‘Frequently Asked Questions’’) which recognizes that new owners are uniquely situated to examine and improve performance at newly acquired facilities.1 Specifically, EPA’s Answer to Question 2 of the 2007 Frequently

Asked Questions document provides that:

• For new owners that in good faith undertake a compliance evaluation and inform the Agency of such actions, either by disclosure in writing or entry into an Audit Agreement, prior to submission of its first annual Title V certification, the violations disclosed would be considered voluntarily discovered for purposes of the Audit Policy.

Generally, Clean Air Act (CAA) violations discovered during activities supporting Title V certification requirements are not eligible for penalty mitigation under the Policy. Condition 2 of the Audit Policy requires that disclosed violations must not be discovered through a legally mandated monitoring or sampling requirement prescribed by statute or regulation; therefore, examination of CAA compliance accompanying a Title V annual certification is not voluntary.2 However, EPA wants to encourage new owners to examine facility operations to determine compliance, correct violations, and upgrade deficient equipment and practices. Thus, for new owners that in good faith undertake such efforts and inform the Agency of such actions, either by disclosure in writing or entry into an audit agreement with EPA prior to submission of the facility’s first annual Title V certification under new ownership, the violations disclosed would be considered voluntarily discovered for purposes of the Audit Policy.

EPA’s Answer to Question 5 of the 2007 Frequently Asked Questions document also provides that:

• New owners may be eligible for penalty mitigation under the Audit Policy for violations at newly acquired facilities irrespective of the disclosing entity’s compliance history at other facilities.

3. First Federal Register Notice and Public Comment Process on This Topic

EPA’s First Notice was issued to solicit public input and information to be used in helping EPA better understand and formulate decisions about issues associated with offering


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tailored Audit Policy incentives to new owners. The Agency identified for comment a series of questions: (1) Should EPA offer tailored incentives to encourage new owners of regulated entities to discover, disclose, correct, and prevent environmental violations; (2) how should the Agency determine who is a new owner; (3) what incentives should the Agency consider offering in order to encourage new owners to self- audit and disclose; and (4) if such tailored incentives are offered, what measures should the Agency use in determining whether and to what extent self-audits by and disclosures from new owners are achieving significant improvements to the environment. Formal notice and comment on such policy matters are not required, but the Agency thought it prudent to invite public input, given the significant objectives EPA hopes to achieve and its desire to develop any incentives in a transparent and inclusive way.

EPA set up an electronic docket to facilitate the comment process for the First Notice and to make all the comments readily available to the public. The Agency also held two public meetings, in Washington, DC and San Francisco, California to facilitate oral comments. In addition, the day after each public meeting, the Agency invited a diverse and balanced group of industry, government, academic and interest group participants to smaller working sessions to discuss the same questions and issues that were posed in the First Notice. The working sessions were designed to give the Agency an opportunity to hear the views of a variety of individuals with different perspectives and experiences in a relatively informal and frank atmosphere, where remarks would be summarized but not attributed to individual participants. No consensus of opinion was sought or presented.

The written comments, transcripts of the public meetings and summaries of the comments made during the working sessions, as well as the Notice itself are available in the docket at http:// www.regulations.gov, Docket ID No. EPA–HQ–OECA–2007–0291, or at the EPA Docket Center for which the physical address is listed above.

EPA received thoughtful and informative comments in response to the First Notice that helped the Agency as it considered whether to proceed in developing an approach to applying the Audit Policy to new owners, and how to structure such an approach to meet the goals described below in section I.B.

B. EPA’s Development of an Interim Approach to Applying the Audit Policy in the New Owner Context

While EPA’s Audit Policy program has been a successful effort to date, resolving disclosed violations involving over 3,500 entities and nearly 10,000 facilities, its potential as a tool to promote compliance, and in particular to produce significant pollutant reductions, has still not been fully realized. More than half of these Audit Policy disclosures have involved reporting violations which, while important for public information and safety purposes, may not produce significant reductions in pollutant emissions once the violations are corrected. Consistent with EPA’s strategic plan, the Agency is seeking ways to increase the number of Audit Policy self-disclosures that have the potential to yield significant environmental benefits while effecting compliance with federal environmental requirements. In developing and implementing an approach to applying the Audit Policy to new owners, the Agency has two primary goals: (1) To secure the prompt correction of environmental violations, and (2) to achieve significant pollutant reductions and improvements to the environment as efficiently and expeditiously as possible.

Based in part on its recent experience with corporate auditing agreements and disclosures following acquisitions, the Agency believes that encouraging the new owners of regulated facilities to assess, disclose, and address environmental compliance at their newly acquired facilities presents a promising opportunity to achieve significant improvements to the environment in an expeditious and efficient way. EPA believes that when a new owner takes control of a facility, a host of factors may make it feasible and attractive for a new owner to focus on, and invest in, assessing and addressing environmental compliance issues. New owners may be well-situated to make an environmental ‘‘clean start’’ because they may already be auditing and assessing their new facilities, may have funding available to fix problems, and have an opportunity to manage and reduce risk by addressing and disclosing noncompliance.

Although EPA believes there are compelling reasons that new owners may be motivated to address noncompliance at their facilities, the Agency recognizes that there may be factors that new owners otherwise interested in using the Audit Policy perceive as disincentives. New owners

may still have to pay substantial civil penalties under the Audit Policy, unless the economic benefit portion of the penalty is insignificant. Therefore, new owners may be reluctant to call EPA’s attention to compliance issues at their newly acquired facilities when they themselves may not be fully aware of all the compliance issues presented. Particularly when many and/or complex facilities are involved, it may be difficult for new owners to have a reasonable idea of the full spectrum of compliance issues.

In addition, the Agency’s experience with implementing the Audit Policy, especially with regard to corporate auditing agreements, suggests that one of the major reasons a company may be hesitant to self-audit and disclose under the Audit Policy is uncertainty about how the Agency will treat such self- disclosures. EPA is currently making an effort to provide greater overall certainty and consistency in the Audit Policy’s implementation, and the recently-issued 2007 Frequently Asked Questions document should help provide greater certainty about how the Agency will apply the Audit Policy to a particular set of facts. Nevertheless, there is likely still some hesitation on the part of new owners to self-disclose violations, because of concerns about exactly how such disclosures will be handled by the Agency.

In the Interim Approach to applying the Audit Policy to new owners, described in this Notice, EPA is offering certain incentives to further encourage new owners to discover, disclose, correct and prevent the recurrence of violations that began prior to their acquisition. The incentives include penalty mitigation beyond what the Audit Policy generally provides and the clearly-stated modification of certain Audit Policy conditions. The Agency recognizes that there are equitable and policy arguments that a new owner should not be penalized for the full economic benefit relating to violations that arose before a facility was under its control, if that new owner is willing to promptly address such violations and make changes to ensure that the facility stays in compliance in the future. EPA anticipates that such incentives may make the difference in the willingness of new owners to come forward and commit to improving environmental compliance and reduce impacts on the environment.

Through implementing a clear, transparent, and easily administered approach to resolving disclosures from new owners, the Agency seeks to use the Audit Policy to leverage its ability to make effective use of scarce


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government resources. If procedural and transaction costs can be minimized for regulators and self-disclosing new owners, EPA expects that the opportunity to work with new owners as they make clean starts at their new facilities can help secure higher quality environmental improvements more quickly and effectively than might otherwise occur.

The Agency intends to assess, on an ongoing basis, whether this is in fact a useful approach, yielding worthwhile results, and to consider whether such incentives produce any unintended adverse results, such as discouraging appropriate due diligence, timely compliance and/or the achievement and maintenance of a fair and level playing field. The approach will be implemented on an interim basis, with opportunity for changes or discontinuation, if warranted.

II. Interim Approach To Applying the Audit Policy To New Owners

To further the goals described above in section I.B., EPA has developed an Interim Approach to applying the Audit Policy to new owners, which is described in this section. Comments that the Agency received from the public in response to the First Notice on this topic were supportive of developing tailored Audit Policy incentives for new owners. Many comments did include caveats that any successful approach would need to be reasonable, simple, certain and clear, with a predictable and streamlined resolution process that still allowed flexibility, where appropriate. The Agency decided that the most efficient way to effectively test and refine the approach would be to implement it on an interim basis, and reap the benefit of practical experience. Accordingly, with this Notice, EPA is announcing that the Agency will implement the Interim Approach, effective immediately. In addition, EPA is concurrently seeking comment on the overall design and specific elements of the Interim Approach, as well as on any relevant issues or considerations which may not appear to be reflected. In some sections, certain issues are specifically raised for comment.

The Agency is now calling the initial phase of this project an Interim Approach rather than a pilot program. As EPA reviewed public comments, it appeared that certain misunderstandings arose from the concept of a ‘‘program.’’ Many commenters incorrectly perceived that the Agency was considering some sort of award or special status program which would bestow benefits on accepted members once they had

‘‘applied’’ and met eligibility requirements. To others, the term ‘‘pilot’’ appeared to imply, again incorrectly, that the use of this settlement approach would be a limited experiment, open only to a select group of new owners. Thus, EPA is now describing the first phase of applying of the Audit Policy to new owners as an Interim Approach. However defined, EPA intends to test the approach, and decide to continue, change, or abandon it, once the Agency has sufficient information and feedback to evaluate its effectiveness.

A. Definition of ‘‘New Owner’’ EPA has developed a set of criteria

defining which entities are eligible to be considered new owners under the Interim Approach.

1. Interim Approach to Defining ‘‘New Owner’’

For purposes of the application of this tailored Interim Approach, an entity will be considered a ‘‘new owner’’ where it certifies to the following criteria:

a. Prior 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;

b. The violation which is the subject of the disclosure originated with the prior owner; and

c. 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.

2. Discussion of the ‘‘New Owner’’ Definition

In its First Notice, EPA sought comment on what should constitute a ‘‘new owner’’ for purposes of being offered tailored incentives under the Audit Policy. Commenters on the First Notice generally urged EPA to define a ‘‘new owner’’ broadly and to consider that a wide range of transactions might potentially produce a qualifying new owner. While most commenters recommended that the Agency make no distinctions between asset, stock, or merger transactions, most did not believe that either new entities created in corporate ‘‘spin-offs’’ or owners who had prior control over the facility should qualify as new owners.

The Agency intends that this Interim Approach apply only to new owners that did not control operations at the facility before the transaction, and only to violations that the new owner did not

initiate. The first criterion of the definition of ‘‘new owner’’ asks the new owner to confirm the history of its relationship to the facility at issue, and to the violations being disclosed. EPA intends that this criterion be interpreted broadly, and in a common sense manner. For purposes of interpreting this criterion, the Agency’s focus will be on ownership, or managerial, or operational control of the environmental operations at the facility. EPA will assume, for purposes of interpreting this criterion, that responsibility for environmental compliance or for any violations may be shared by corporate entities, controlling stockholders and operators and does not, for example, lie solely with individual employees or contractors at the facility.

The second criterion specifies that the ‘‘new owner’’ approach will only be applied to violations that did not originate with the new owner, as opposed to violations that are wholly new and began after the transaction. For example, if the new owner were to install a new oil storage tank and fail to provide for required secondary containment pursuant to 40 CFR 112, such action would trigger a wholly new violation. If the new owner disclosed this violation to EPA, the Agency would not apply the new owner approach to resolve the disclosure, but would treat it as a regular Audit Policy matter. New owners should bear in mind that even if such violations would not qualify for new owner penalty mitigation and benefits, they may nonetheless be eligible for Audit Policy consideration.

The third criterion serves several functions. Notwithstanding that a new owner might be willing and able to certify under the first criterion that it lacked actual control of operations at the facility, the Agency is proposing to exclude all new owners that had the largest pre-transaction ownership interest in the facility. Drawing this clear line at ‘‘largest ownership share’’ is intended to help ensure that the Agency is faced with fewer scenarios that raise questions about the extent of influence that the new and previous owners may have had over each other. Such questions might necessitate just the sort of analysis of corporate history and the terms of the transaction the Agency seeks to avoid because of efficiency and ambiguity concerns, and would raise transaction costs for all parties involved. This criterion excludes corporate spin-offs, because it excludes situations where a seller had the largest pre-transaction ownership share of the new owner entity, or was the new owner’s corporate parent. The third criterion would allow participation by a


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new owner which, prior to the transaction, was a silent or inactive partner in a joint venture, and then purchased the rest of the business and became the active owner, so long as its prior share was less than the largest, and the new owner can certify to the first criterion. It would also allow participation by a new owner which is the product of a merger, so long as neither party had previously held the greatest ownership share of the entity with which it merged. In the case of stock transactions, EPA intends that ‘‘largest ownership share’’ be interpreted to mean ownership of the largest number either of shares of stock or of voting rights. The third criterion also bars situations where the buyer and the seller had a common corporate parent. EPA assumes, for purposes of interpreting this criterion, that the corporate parent was in control of the prior owner, the ‘‘new’’ owner, and facility operations. Accordingly, where two companies have a common corporate parent and one subsidiary buys another, the acquiring entity is not sufficiently ‘‘new’’ to warrant this tailored application of the Audit Policy.

The Agency’s intent is to minimize the resources necessary to apply the Audit Policy to new owners, and sought a simple and direct way to identify owners who want to make a clean start for their newly acquired operations. EPA considered and preliminarily concluded that the expenditure of resources necessary to research and analyze corporate transactions would be so great as to be unworkable, and would detract from efficient and effective resolution of violations. Thus, the Agency decided, as a policy matter, to rely generally on a self-certification from the new owner that it meets the criteria in section II.A.1. New owners should be aware that this certification will be required as a condition to resolving disclosed violations.

Most public comments about the certification issue advised that any required certifications not be so burdensome or complex as to chill new owners’ interest in coming forward to the government. The eligibility criteria above are clear and straightforward, and the certification will simply be included along with the certifications made by the self-disclosing entity that all Audit Policy conditions, as applied to new owners, have been met. This approach is designed to be sufficiently uncomplicated and manageable, while seeking to ensure that only appropriate new owners benefit from the Agency’s Interim Approach.

Commenters did suggest that the Agency might adopt a range of pre-

existing methods for defining ‘‘new owner,’’ which included: (1) Using the ‘‘no affiliation’’ or ‘‘bona fide prospective purchaser’’ definitions found in the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), as amended by the Small Business Liability Relief and Brownfields Revitalization Act (Pub. L. 107–118, 115 Stat. 2356, ‘‘the Brownfields Amendments’’); (2) requiring that the transaction occurred at ‘‘at arms’’ length;’’ (3) adopting the change of ownership standards used for various federal environmental statutes; (4) relying on verification of ownership change by other regulatory agencies such as the Internal Revenue Service or Securities and Exchange Commission; (5) seeking assurance from the new owner that the transaction was not conducted to avoid penalties; (6) applying a ‘‘management test;’’ and (7) using the definitions with which the State of New Jersey implements its Industrial Site Recovery Act (N.J.S.A. 13:1K–6 and N.J.A.C. 7:26B).

Consideration of all of these approaches was instructive and useful in developing the criteria. However, for a variety of reasons, EPA found that none of them seemed appropriate to adopt wholesale in the new owners context. Given the different scenarios to which the suggested definitions were meant to apply, and EPA’s desire to provide clarity and certainty to the public, the Agency decided to adopt a bright-line approach that is easily understood and applied by regulator and regulated alike.

The Agency hopes to be inclusive enough to maximize the number of facilities brought into compliance under the Audit Policy, and to ensure sufficient opportunities to fully test the Interim Approach. This definition of new owner is solely intended to apply to the application of the Audit Policy in the context of the Interim Approach. However, since the Agency is concerned that only appropriate new owners be eligible for the benefits of this approach, EPA specifically invites comment on the criteria for defining ‘‘new ownership’’ and whether the standard above is appropriate.

B. Timing for Availability of New Owner Incentives: For How Long Is an Owner ‘‘New?’’

1. Two Scenarios: Audit Agreement or Prompt Disclosure Within Nine Months of Closing

Under this Interim Approach, EPA will consider an owner ‘‘new,’’ and eligible for ‘‘new owner’’ treatment and

benefits, for nine months after the date of the transaction closing. For nine months after the date of the transaction closing, the new owner can choose to make disclosures in two different contexts, which are described in detail in sections a. and b. below. The new owner can choose to enter into an audit agreement which will specify the facility or facilities to be audited, the scope of regulatory programs covered, dates for completion of audits and disclosure of violations. Alternatively, the new owner can choose to make disclosures individually, as violations are discovered, but each disclosure would have to be made promptly, within 21 days of discovery, or within 45 days of the closing, whichever is longer. See section II.E.3., ‘‘Prompt Disclosure Condition,’’ below. A new owner could also elect to make separate individual disclosures as described below in section II.B.1.b., and then decide to enter into an audit agreement and make further disclosures under that agreement. Of course, such an audit agreement would need to be entered into within nine months of the closing date for the transaction.

a. New Owner Enters into an Audit Agreement with EPA, within Nine Months of the Closing, and Receives ‘‘New Owner’’ Audit Policy Consideration, for Violations Disclosed Pursuant to that Agreement.

An audit agreement provides the opportunity to tailor timeframes and expectations to the new owner’s unique situation. While the audit agreement approach is optional, it is highly recommended if the circumstances or complexity of facilities would likely require more time to audit or if a new owner expects to be making more than one disclosure to EPA. An audit agreement also reduces uncertainty, for both the new owner and EPA, as it specifies the timeframes for completing the audit, the facilities covered, the environmental requirements to be evaluated, and when the discovered violations will be disclosed.

Most importantly, and consistent with EPA practice, an audit agreement ‘‘stops the clock’’ with regard to the Prompt Disclosure condition, for violations discovered and disclosed pursuant to the agreement. An audit agreement also ‘‘stops the clock’’ with regard to the disclosure of violations that involve required monitoring, sampling or auditing, if the new owner enters into an audit agreement prior to the first instance when such action is required. See section II.E.2., ‘‘Voluntary Discovery Condition,’’ below.

‘‘Entering into an audit agreement’’ means that (1) the new owner has


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committed in writing to audit a specific newly acquired facility or facilities, (2) the new owner has specified the scope of regulatory programs to be covered, dates for completion of the audits and dates for the disclosure of violations found, and (3) EPA has accepted those terms. EPA reserves its right to negotiate with the new owner about the scope, timing and sequence of the audits and disclosures. An audit agreement may be entered via a formal bilateral agreement or through an exchange of letters, provided the letters reflect a meeting of the minds and contain the appropriate information and commitments.

EPA does not intend that entering into an audit agreement be a lengthy or resource-intensive process for either new owners or the Agency. While the Agency will not disqualify a new owner whose audit agreement was not finalized before the end of the nine- month period because of delay on the part of EPA, new owners seeking an agreement should approach the Agency as early as possible, sufficient to allow a reasonable time to finalize an audit agreement with EPA.

b. New Owner Audit Policy Treatment Will Be Available for Violations Disclosed Within Nine Months After the Transaction Closing, as Long as the New Owner Discloses and Corrects Each Violation Promptly, and Meets All Other Conditions of the Audit Policy.

If a new owner prefers not to commit to performing audits and making disclosures within particular timeframes, it need not choose the audit agreement option, and can make individual disclosures as they are found, during the nine months following acquisition. This option may give a new owner more control over, and privacy concerning, its auditing, but to be eligible for new owner Audit Policy incentives, each violation found must be disclosed and corrected promptly, as described below in sections II.E.3. ‘‘Prompt Disclosure Condition,’’ and II.E.5. ‘‘Correction and Remediation Condition.’’ This option also requires that the new owner disclose any violations that involve required monitoring, sampling or auditing prior to the first instance when such action is required, in order to meet the Voluntary Discovery condition, and be eligible for Audit Policy consideration, as described in section II.E.2. ‘‘Voluntary Discovery Condition.’’ Of course, each disclosure would also have to meet the other six Audit Policy conditions, as applied to new owners.

2. Discussion of Timing

In the First Notice, EPA asked for comment on the issue of how long after acquisition an owner should be considered ‘‘new’’ for purposes of being eligible for new owner Audit Policy benefits. While some commenters suggested six months, the majority recommended one year or more, up to three years. Commenters described the challenges of making decisions about auditing and disclosing when, after an acquisition, there are many immediate and competing priorities.

The Agency recognizes that post- transaction demands may make it difficult to focus corporate attention on an immediate evaluation of environmental compliance issues, especially when the company would have to make a potentially expensive commitment to conduct audits and address noncompliance. The Agency believes that requiring such potentially high-stakes decision-making too quickly after the transaction, before the new owner has had the chance to operate its facility, would mean that fewer new owners would come forward, notwithstanding that, given more time for consideration and analysis of the situation, some would have indeed used the Audit Policy. Since EPA’s intent is to encourage new owners to audit and disclose, and work with the Agency to correct problems, it seems advisable to provide sufficient time for decision- making.

However, the Agency is concerned that compliance may be unduly delayed if new owner benefits are offered for a year or more. The longer the Agency allows for the new owner to decide to make disclosures, or to enter into an audit agreement, the longer it may be before violations are identified, disclosed, and corrected. The potential for an audit agreement schedule to allow time frames for auditing and disclosures well beyond nine months, depending on the scope and nature of the overall auditing plan, could only exacerbate this potential issue. Notwithstanding that such extended timeframes may be approved only if the new owner is making a significant commitment to audit and fix many and/ or complex facilities, there is potential for a significant passage of time before the disclosed violations are fully corrected. On the other hand, the longer a new owner delays coming forward, the more likely it is that certain violations which would have been eligible if disclosed earlier, because the new owner was coming forward before the first instance when ‘‘otherwise required’’ monitoring, sampling or

auditing was due, could no longer be given Audit Policy consideration. See Section II.E.2. ‘‘Voluntary Discovery Condition.’’ In addition, as discussed below in Section II.D., the Agency would assess penalties for the economic benefit of costs saved from not having to operate or maintain controls and equipment, from the date of acquisition until the corrections are complete. Thus, the longer new owners take to undertake and complete an audit, and to disclose and correct violations found, the higher the penalty associated with avoided operation and maintenance costs would be.

Because of the above considerations, although the majority of commenters asked that new owners be considered ‘‘new’’ for at least a year after the transaction, EPA decided to give ‘‘new owners’’ a nine-month window of time to come forward to the Agency, and benefit from the new owner approach to penalty mitigation and application of the Audit Policy conditions. If a new owner makes disclosures after the nine- month window has passed, and has not entered into an audit agreement which extends the disclosure schedule, the disclosure may still be eligible for regular Audit Policy treatment, although the ‘‘new owner’’ benefits will not be available. EPA requests comment on whether more or less time would be advisable.

3. Flexibility Regarding Approach and Commitment to Auditing and Disclosures

On a related issue, commenters also asked for flexibility in the level of commitment to auditing and disclosure that a new owner need make when it comes forward to EPA, including when and how that commitment would be required. Some commenters suggested a tiering approach based on the level and complexity of the expected disclosures. Other commenters reflected the misapprehension that the Agency was envisioning a ‘‘program’’ to which a new owner would first need to apply, and be credentialed as a new owner, separate from any firm intention or commitment to actually audit or make disclosures. Since the Agency’s focus is on the actual disclosure of violations and commitment to audit and correct violations, EPA believes that designing any precursory or ‘‘place-holding’’ steps, such as self-identifying as a new owner or merely indicating potential interest in auditing, would be unnecessary and a waste of effort for both EPA and the new owner.


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3 The specific amount is $209,530 and was generated by the current version of the Agency’s BEN computer model using the following assumptions: (1) The violator was in the average maximum tax bracket of 40%; (2) the violator’s cost of money (i.e., the discount/compound rate) was the current BEN default value of 9.4%; and (3) inflation was based on the Plant Cost Index published in Chemical Engineering magazine. The BEN computer model can be found at http:// www.epa.gov/compliance/civil/econmodels/ index.html.

4 A release and covenant not to sue is a legal mechanism under which EPA agrees to relinquish any potential claims to initiate a lawsuit against a party for any of the violations settled under the agreement, where that party complies with all of the terms of the settlement agreement.

C. Interim Approach to the Calculation and Assessment of Penalties

EPA’s Interim Approach to implementation of the Audit Policy is designed to address the fact that new owners may still have to pay substantial civil penalties under the Audit Policy. Although 100 percent of the gravity portion of the penalty may be mitigated under the Audit Policy, the economic benefit portion may still be significant. The Agency recognizes that there are equitable and policy arguments that a new owner should not be penalized for the full economic benefit relating to violations that arose before a facility was under its control, if that new owner is willing to promptly address such violations and make changes to ensure that the facility stays in compliance in the future.

The uncertainties associated with the calculation and assessment of economic benefit may be factors that new owners otherwise interested in using the Audit Policy perceive as disincentives. In this section, EPA discusses an approach to calculating and assessing economic benefit in the new owner context.

1. Interim Approach to the Calculation and Assessment of Penalties

a. No penalties for economic benefit or gravity will be assessed against the new owner for the period before the date of acquisition.

b. Penalties for economic benefit associated with avoided operation and maintenance costs will be assessed against the new owner from the date of acquisition.

c. Penalties for economic benefit associated with delayed capital expenditures or with unfair competitive advantage will not be assessed against the new owner if violations are corrected in accordance with the Audit Policy (i.e., within 60 days of the date of discovery or another reasonable timeframe to which EPA has agreed).

2. Background of Economic Benefit Recapture

The imposition of civil penalties that recapture the economic benefit of noncompliance is a cornerstone of the EPA’s civil penalty program. Benefit recapture has been a part of the Audit Policy since it was first issued on the premise that, even in self-audit and disclosure situations, penalties should not be reduced below the level necessary to recapture economic benefit when a violator has achieved an unfair economic advantage over its complying competitors. Accordingly, the Audit Policy provides that EPA reserves the right to assess any economic benefit

which may have been realized as a result of noncompliance, even where the entity meets all Audit Policy conditions. The Audit Policy further provides that the Agency may waive the economic benefit component of the penalty where the Agency determines that the economic benefit is insignificant.

Violators obtain an economic benefit from violating the law by delaying compliance, avoiding compliance, or obtaining an unfair competitive advantage. When violators delay compliance, they have the use of the money that should have been spent on compliance to put into profit-making investments. Simply put, violators ‘‘gain’’ the returns on the amount of money that should have been invested in pollution control equipment. A typical example is where a factory delays installation of a required wastewater treatment facility. If the wastewater treatment facility costs $1,000,000 to install, and the violator waits three years past the required date to comply, the violator has saved over $200,000 by delaying compliance.3

A second type of economic benefit is derived when a violator avoids the annual costs it would have incurred had it complied in a timely manner. A typical example would be where a factory avoids the operation and maintenance costs for the above- mentioned wastewater treatment plant for the three years the polluter was out of compliance.

The third type of economic benefit is derived from the violator obtaining an unfair competitive advantage. Economic benefit associated with unfair competitive advantage might arise in a number of new owner scenarios. An example could involve a newly acquired facility with permit limits on its hours of operation and/or throughput. The new owner may discover that its facility is operating two hours beyond its permit limit each day in order to achieve more output. The funds made from that extra output would also constitute unfair competitive advantage economic benefit.

3. Discussion of Calculation and Assessment of Penalties

In the First Notice, the Agency asked for comment on the issue of how economic benefit should be calculated for disclosures by new owners. Many commenters addressed the issue of penalties to recapture economic benefit, and the issue of whether they should be eliminated or reduced in the new owner situation. Some commenters posited that the new owner does not actually receive any economic benefit from the previous owner’s delayed or avoided compliance. On the other hand, it is possible that benefit does accrue; for example, it may be reflected in the purchase price. Notwithstanding arguments over whether economic benefit could inure to a new owner, it is difficult to accurately determine the amount of any such benefit. There are also equitable and policy arguments that a new owner should not be penalized for economic benefits relating to violations that originated when a facility was not in its control, and the new owner is willing to self-disclose and expeditiously correct the violations, and make changes to ensure future compliance. The Agency has speculated that one of the reasons that there have been relatively few Audit Policy disclosures of violations requiring the installation of significant environmental controls may relate to the potential size of penalties to recapture economic benefit. There may be significant economic benefit associated with corrections requiring expensive environmental controls, and companies may well consider it prudent to quietly fix their problems, without advising EPA (or the state) or seeking input from regulators. However, new owners investing tens of millions of dollars to correct violations that began prior to their ownership may want to involve EPA and receive a covenant not to sue 4 for those violations as part of a settlement. As a matter of course, EPA settlements typically release and covenant not to sue for the alleged violations resolved under the settlement agreement.

By providing certainty to the economic benefit assessment, EPA’s intent is to increase the number of disclosures of significant violations, which will allow the Agency to participate in developing the approach to correcting such violations and


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5 The ‘‘Audit Policy Interpretive Guidance,’’ issued on January 15, 1997, can be found at http:// www.epa.gov/compliance/resources/ policies/civil/rcra/audpolintepgui-mem.pdf. The 1997 Interpretive Guidance was developed to answer frequently asked questions regarding the implementation of the original Audit Policy issued in 1995 (60 FR 66,706 (December 22, 1995)). The 2007 Frequently Asked Questions document describes the differences between the original Audit Policy and the 2000 Policy and is intended to supplement the 1997 Interpretive Guidance.

securing appropriate environmental benefit. To further this goal, and because of the equities of the new owner situation, the Agency believes it is appropriate to modify its approach to calculating and assessing economic benefit with respect to disclosures from new owners.

One issue raised in the First Notice was whether EPA should take into account possible purchase price adjustments attributable to environmental compliance liabilities in designing the Agency’s approach to new owners. Such consideration of adjustments to purchase price could potentially factor into the Agency’s approach to calculating and assessing penalties in the new owner context. However, no commenters recommended that EPA try to incorporate a consideration of possible purchase price adjustments into the approach to new owners. Some commenters asserted that purchase price is often set at the outset of negotiations and that, especially in larger transactions, environmental compliance costs or savings are immaterial to the pricing of the transaction. Commenters pointed out that, even in the event that there were negotiations to adjust pricing, confidentiality issues may preclude its consideration by the Agency, and inquiries into if and how price may have been adjusted may chill participation in this Interim Approach. The Agency is also concerned that it would be prohibitively costly and difficult, if not impossible, for EPA to accurately and effectively analyze whether a price adjustment attributable to environmental issues occurred, or to conclusively determine how large it was. Incurring such time-intensive transaction costs, which would likely still yield inconclusive results, would detract from EPA’s goals of leveraging its resources to secure higher quality environmental improvements more quickly and effectively than might otherwise occur. Accordingly, under this Interim Approach, EPA does not intend to consider adjustments to purchase price.

Commenters offered various suggestions for ways to approach the issue of penalties for economic benefit including: Waiving any pre-closing penalties; calculating penalties from the date the audit is complete; beginning the calculation of penalties only after a reasonable period for achieving compliance; calculating penalties starting a year after the end of the audit; and offsetting penalties by the cost of the audit, or by the cost of corrective measures. EPA has considered a variety of options and the Interim Approach

focuses on two elements. First, for the reasons stated above, EPA will not seek penalties for economic benefit associated with capital expenditures, assuming the violations are promptly corrected. Second, because the new owner does clearly benefit from not having to operate and maintain controls and equipment before they are installed and functioning, the Agency will assess penalties for economic benefit associated with those savings, starting from the date the facility was acquired until the corrections are complete. EPA considers this a fair approach, and, because such penalties for avoided costs will rise the longer it takes to complete auditing, disclosures, and correction, one that may help motivate new owners to avoid delays. EPA does not intend to offset the cost of performing audits from any penalties for economic benefit since, especially for newly acquired facilities, auditing is generally a means by which to assess and assure compliance, and a cost of doing business in a responsible manner. In addition, there are situations where auditing may be required as a matter of compliance (e.g., Risk Management Plans under Clean Air Act 112(r)(7)), and where EPA considers it inappropriate to credit the cost of the audit against assessed penalties.

As is the case in the settlement of any violation, EPA may provide additional flexibility in assessing economic benefit on a case-by-case basis, if the Agency believes it is warranted and appropriate given the facts in a particular situation. As EPA has already stated in its Answer to Question 9 of the 2007 Frequently Asked Questions document, the Agency intends to consider all factors of settlement in assessing economic benefit in Audit Policy cases, and fairness is the central guiding principle underlying Agency decisions regarding the assessment of economic benefit.

D. Interim Approach to Application of Certain Audit Policy Conditions to New Owners

This section describes EPA’s Interim Approach to applying the nine conditions of the Audit Policy to new owners. The Agency is proposing to apply five conditions differently in the new owner context (Condition D.1. Systematic Discovery; Condition D.2. Voluntary Discovery; Condition D.3. Prompt Disclosure; Condition D.8. Other Violations Excluded; and Condition D.9. Cooperation). For the sake of clarity and completeness, this section discusses the Agency’s usual approach to applying the remaining Audit Policy conditions (Condition D.4. Independent Discovery; Condition D.5. Correction and

Remediation; Condition D.6. Prevent Recurrence; and Condition D.7. No Repeat Violations), as described in the 2000 Audit Policy, the 2007 Frequently Asked Questions document and/or the Audit Policy Interpretive Guidance (‘‘1997 Interpretive Guidance’’),5 although the Agency does not intend to alter the approach it has taken to their application or interpretation in the new owners context.

In order for the Agency to offer the incentives of this Interim Approach to applying the Audit Policy, the new owner would have to meet all nine of the following conditions, as tailored for new owners, as well as certify to the criteria of the new owner definition.

1. Systematic Discovery Condition (Condition D.1.)

The Systematic Discovery condition of the Audit Policy provides that violations be discovered through either an environmental audit or a compliance management system (CMS), if disclosing entities are to receive 100 percent mitigation of gravity-based penalties (if a violation is discovered outside such a review, and meets all the other Audit Policy conditions, 75 percent mitigation is available). The Audit Policy definition of ‘‘Environmental Audit’’ is a systematic, documented, periodic and objective review by regulated entities of facility operations and practices related to meeting environmental requirements. A ‘‘Compliance Management System’’ encompasses the regulated entity’s documented systematic efforts, appropriate to the size and nature of its business to prevent, detect, and correct violations. For the full definitions of ‘‘Environmental Audit’’ and ‘‘CMS,’’ see section II.B. of the Audit Policy at 65 FR 19625.

a. Interim Approach to Systematic Discovery Condition in the New Owner Context

In the new owner context, EPA recognizes that pre-closing due diligence may meet all the elements of the Audit Policy definition of ‘‘Environmental Audit,’’ with the exception of the periodic review element. EPA recognizes that a new owner’s pre-closing due diligence


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6 The Audit Policy’s Voluntary Discovery exclusion does not apply to violations that are discovered pursuant to audits that are conducted as part of a comprehensive environmental management system (EMS) required under a settlement agreement. See 65 FR at 19621 (April 11, 2000).

7 See supra note 2.

review is by its nature a one-time event, and will waive the element of the Systematic Discovery condition that calls for that review to be ‘‘periodic.’’ In all other aspects, for new owner disclosures, EPA will apply the Systematic Discovery condition and standards in the usual manner.

b. Discussion of Systematic Discovery In the First Notice, EPA asked for

comment on whether the Agency should require that new owners have performed a certain level of pre-transaction due diligence to qualify for new owner benefits. Public comments on this issue reflected the fact that mergers and acquisitions vary widely in size, type and circumstance. Many commenters asserted that the level of environmental due diligence review a prospective buyer can perform is largely determined by the size, scope, speed and circumstances of negotiations, and can range from in-depth inquiries to scenarios where very little information can be gathered. Commenters indicated that a buyer’s pre-purchase information on regulatory compliance is often imperfect and incomplete. Commenters asserted that any pre-condition from EPA that a certain level of due diligence must have been performed to make disclosures as a new owner would simply inhibit such disclosures from buyers, rather than encourage more due diligence. In addition, commenters posited that, aside from the fact that some buyers may simply be unable to perform the requisite due diligence, many would be concerned about how EPA might interpret the sufficiency of their efforts, and thus dissuaded from making disclosures. Some commenters recommended requiring the CERCLA ‘‘all appropriate inquiry’’ standard for prospective purchasers. However, that standard, with its emphasis on identifying contamination, was developed for a different situation.

EPA does not see a compelling reason to layer more or different review conditions onto the Audit Policy standards that currently exist. The Agency has concerns about the resources that would be needed to analyze and verify whether any new standard of review had been met. Moreover, EPA does not wish to deviate from the original intent of the Audit Policy and this condition. The only circumstance that warrants a different approach in the new owner context is that a prospective buyer would not have had an opportunity to perform periodic reviews of a facility it does not yet own. For that reason, EPA will not require that a new owner’s pre-closing review meet the ‘‘periodic’’ element in order to

be considered for full penalty mitigation.

2. Voluntary Discovery Condition (Condition D.2.)

The Voluntary Discovery condition of the Audit Policy provides that the disclosed violation must have been identified voluntarily, and not through a legally mandated monitoring, sampling, or auditing procedure that is required by statute, regulation, permit, judicial or administrative order, or consent agreement. The Audit Policy provides three examples of discovery which would not be ‘‘voluntary’’ such that they would be ineligible for penalty mitigation: emissions violations detected through a required emissions monitor; violations of a National Pollutant Discharge Elimination System (NPDES) discharge limit found through prescribed monitoring; and violations found through a compliance audit required to be performed by the terms of a consent order or settlement agreement.6

Generally, Clean Air Act violations discovered during activities supporting Title V certification requirements are not eligible for penalty mitigation under the Policy based on the Voluntary Discovery condition.7 The Answer to Question 2 of EPA’s 2007 Frequently Asked Questions document described a limited exception to this condition for new owners. Clean Air Act violations discovered at newly acquired facilities as part of the new owner’s reexamination of facility compliance under Title V are considered voluntarily discovered for purposes of the Audit Policy, provided that the new owner either discloses the violation in writing or enters into an audit agreement with EPA before the new owner’s first annual compliance certification under new ownership.

a. Interim Approach to Voluntary Discovery Condition

Under the Interim Approach, EPA is expanding its interpretation of the Voluntary Discovery condition of the Audit Policy in the new owner context, previously limited to compliance with Title V of the Clean Air Act, to allow consideration of all violations which would otherwise be ineligible for Audit Policy consideration under this condition. EPA wants to encourage new

owners to broadly examine facility compliance and facility operations, correct violations found, and upgrade deficient equipment and practices, as soon as possible. Thus, for new owners that undertake such efforts and either disclose violations or enter into an audit agreement with an auditing and disclosure schedule, before the first instance when the monitoring, sampling or auditing is required, the disclosures would not be disqualified from Audit Policy consideration because of the Voluntary Discovery condition.

Providing this limited window for disclosure, prior to the first required instance of monitoring, sampling, or auditing, would provide a one-time ‘‘catch-up’’ period for new owners to use the Audit Policy for violations found through activities that are already required. For example, an entity could perform its Annual Comprehensive Site Compliance Evaluation required by the NPDES General Industrial Stormwater Permits and Stormwater Pollution Prevention Plans (SWPPP) prior to its due date, and discover and disclose violations for Audit Policy consideration. Of course, this eligibility for Audit Policy consideration would not affect the new owner’s independent obligation to make appropriate and timely notifications and reports to regulatory authorities.

b. Discussion of Voluntary Discovery In the First Notice, EPA asked for

comment on whether the Agency should allow Audit Policy consideration of violations that might otherwise be excluded when the disclosures come from new owners. Most commenters supported the idea of allowing new owners to be eligible for penalty mitigation consideration for ‘‘non- voluntarily’’ discovered violations by expanding the Agency’s interpretation of the Voluntary Discovery condition to other statutes and regulations, beyond the Clean Air Act Title V scenario described in EPA’s 2007 Frequently Asked Questions document. While voluntary discovery is fundamental to EPA’s Audit Policy, the approach to new owners is aimed at encouraging new owners’ quick and thorough scrutiny of all operations and required practices, and providing this opportunity may make new owners proactive in checking for compliance issues as soon as possible. Thus, the Agency is willing to give new owners this limited ‘‘catch-up’’ period to monitor, sample and audit, and will allow otherwise ineligible violations to receive Audit Policy consideration, if the new owner (a) promptly discloses the violations or (b) enters into an audit


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agreement with an auditing and disclosure schedule before the date the monitoring, sampling, or auditing would be required.

3. Prompt Disclosure Condition (Condition D.3.)

The Audit Policy provides that the regulated entity fully must disclose the specific violation in writing to EPA within 21 days (or within such shorter time as may be required by law) after the entity discovered that the violation has, or may have, occurred. The Audit Policy defines discovery as the time at which there is an objectively reasonable basis for believing that a violation has, or may have, occurred.

The preamble of the Audit Policy states that, in the acquisitions context, EPA will consider extending the prompt disclosure period on a case-by-case basis. It also states that the 21-day disclosure period will begin on the date of discovery by the acquiring entity, but in no case will the period begin earlier than the date of acquisition. See 65 FR at 19622.

As EPA currently implements the Audit Policy, if an entity enters into an audit agreement with the Agency, ‘‘the clock stops’’ with regard to the Prompt Disclosure condition for any violations discovered thereafter and disclosed in accordance with the agreement.

a. Interim Approach to Prompt Disclosure Condition

Under the Interim Approach, EPA will allow limited flexibility in applying the Prompt Disclosure condition in the new owner context. For violations discovered pre-closing, prompt disclosure to EPA would have to be made within 45 days after the transaction closing to be considered for new owner incentives. For violations discovered post-closing, the new owner would have to disclose violations within 21 days after discovery or within 45 days after the transaction closing, whichever time period is longer. If a new owner has entered into an audit agreement with EPA, violations discovered and disclosed pursuant to that agreement would be governed by the disclosure schedule in the agreement. Of course, if a statute or regulation requires that a violation be reported or disclosed more quickly than the time frames above, disclosures must be made within the time limit established by law.

b. Discussion of Prompt Disclosure Although EPA did not, in the First

Notice, specifically ask for comment on the Prompt Disclosure condition, several commenters requested that

violations discovered in pre-acquisition due diligence be considered promptly disclosed if disclosures were made between 30 and 60 days after closing. Commenters described the many immediate and competing priorities that may distract from focusing corporate attention on a decision to make voluntary disclosures to a regulatory agency. Commenters noted that without adequate time for the new management to consider whether to self-disclose the issues found in pre-transaction due diligence reviews, the default decision may be to not engage with EPA, but rather to quietly fix problems found. EPA recognizes that the time period immediately following a transaction closing may be quite turbulent and that, notwithstanding the fact that the new owner had information about violations before acquisition, it may be a particularly difficult time to make speedy decisions about coming forward to EPA. To encourage new owners to decide to disclose due diligence findings, and in the spirit of the 2000 Audit Policy preamble language discussed above, the Agency will now allow new owners up to 45 days after acquisition to disclose and meet the Prompt Disclosure condition.

A few commenters requested that the post-closing timeframes for disclosure be extended from 21 days. With one exception, EPA does not see a compelling reason to change current implementation of the Audit Policy, since it provides adequate timeframes for regulated entities to meet the prompt disclosure condition. Any new owner concerned about its ability to meet the Prompt Disclosure condition can enter into an audit agreement during the first nine months after acquisition and ‘‘the clock will stop’’ with regard to prompt disclosure for violations discovered thereafter and disclosed in accordance with the agreement. EPA is willing to appropriately tailor timeframes and expectations for auditing and reporting to the new owner’s particular situation (e.g., number and complexity of facilities, scope of audit).

However, if the new owner chooses not to enter into an audit agreement during the nine months after acquisition, disclosures would have to be made promptly either within 21 days of discovery or within 45 days of the closing, whichever is later. Otherwise, if EPA held that all violations found post- transaction had to be disclosed within 21 days, any problems found soon after closing would need to be disclosed earlier than the violations already discovered in pre-acquisition due diligence. To avoid this unintended result, EPA will allow the new owner to

make disclosures by whichever date is later. For example, if a new owner discovered a violation a week after acquisition, prompt disclosure can be made within 45 days of the closing.

4. Discovery and Disclosure Independent of Government or Third Party Plaintiff Condition (Condition D.4.)

The Audit Policy states that violations must be discovered and identified before EPA or another government agency likely would have identified the problem. This condition provides that regulated entities must take the initiative to find violations on their own and disclose them promptly instead of waiting for an indication of pending enforcement action or third-party complaint. The Audit Policy lists the circumstances under which discovery and disclosure will not be considered independent. Discovery and disclosure must be made before the beginning of a federal, state or local agency inspection, investigation or information request; notice of a citizen suit; the filing of a complaint by a third party; the reporting of the violation to EPA (or other government agency) by a ’’whistleblower’’ employee; or imminent discovery of the violation by a regulatory agency. However, where EPA determines that a facility did not know it was under civil investigation, and EPA determines that the entity is otherwise acting in good faith, the Agency may exercise its discretion to reduce or waive civil penalties under the Audit Policy.

EPA encourages multi-facility auditing and does not intend that the ‘‘independent discovery’’ condition preclude the availability of the Audit Policy when multiple facilities are involved. Thus, for entities that own or operate multiple facilities, the fact that one facility is already the subject of an investigation, inspection, information request or third-party complaint does not preclude the Agency from exercising its discretion to make the Audit Policy available for violations self-discovered at other facilities owned or operated by the same regulated entity.

a. Interim Approach to Independent Discovery Condition

EPA is not changing its current interpretations of the Discovery and Disclosure Independent of Government or Third Party Plaintiff condition as applied to new owner disclosures.

b. Discussion of Independent Discovery Although EPA did not, in the First

Notice, specifically ask for comment on the Independent Discovery condition,


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8 See ‘‘Processing Requests for Use of Enforcement Discretion,’’ Memorandum from Steven A. Herman (March 3, 1995), which can be found on the Internet at http://www.epa.gov/ compliance/resources/policies/civil/io/proreq- hermn-mem.pdf.

one commenter suggested that disclosures of violations found during due diligence that were raised by third parties or governmental agencies should not be disqualified from Audit Policy consideration under this condition. The Agency disagrees. For example, in a matter involving a new owner, it is possible that potential violations have already been reported by the seller or included by the seller in a report to a regulatory agency, especially when the seller had been under an obligation to perform monitoring, sampling, or auditing. Because the new owner’s disclosure of those violations would not have occurred prior to ‘‘imminent discovery’’ by the government or the commencement of a government investigation, EPA would be unable to apply Audit Policy penalty mitigation. Also, if a government agency has initiated an investigation and the facility’s prior owner were aware of this, such issues would be considered ‘‘known,’’ and the new owner would not receive Audit Policy consideration and new owner benefits. An underlying objective of the Audit Policy is to conserve government resources and those of citizen plaintiffs by encouraging the regulated community to self-police. That objective would be thwarted, in part, if the Agency conferred Audit Policy benefits on a new owner on notice that its facility is already under investigation. While EPA does not want to expend its limited resources to conduct fact-finding on the extent to which a new owner was aware of a pending civil investigation prior to disclosure, the Agency may exercise its discretion to waive or reduce penalties for new owners if EPA determines that (1) the new owner did not know that its newly acquired facility was under investigation and (2) the new owner is otherwise acting in good faith.

The Agency, of course, encourages the cooperative and speedy resolution of known violations. Even if the violation was ineligible for the Audit Policy, the Agency will generally consider the willingness of a new owner to address and correct problems a positive factor in determining the appropriateness of any EPA enforcement response, penalty assessment or resolution.

5. Correction and Remediation Condition (Condition D.5.)

Under the Audit Policy, the regulated entity must correct the disclosed violation within 60 calendar days from the date of discovery, certify in writing that the violation has been corrected, and take appropriate measures as required by law to remedy any

environmental or human harm due to the violation.

In both the 2000 Audit Policy and the 2007 Frequently Asked Questions document, EPA recognizes that not all violations can be corrected in the 60-day time frame. EPA may allow for an extension of time for corrections that require significant expenditures, involve technically complex issues, or involve decisions for which an entity seeks or is required to obtain EPA, state or local input or approval. If more than 60 days will be needed to correct the violation, the entity must notify EPA in writing before the end of the 60-day period.

a. Interim Approach to Correction and Remediation Condition

EPA is not changing its current interpretation of the Correction and Remediation condition in the context of new owner disclosures.

Where violations are discovered by the new owner prior to acquisition, EPA will consider the date of the transaction closing as the date of discovery, for purposes of interpreting the Correction and Remediation condition. Thus, for violations found before the new owner owned the facility, correction would need to be completed within 60 days from the date of the acquisition closing, although EPA may agree to a longer period of time if appropriate and warranted.

b. Discussion of Correction and Remediation

Although EPA did not, in the First Notice, specifically ask for comment on the Correction and Remediation condition, many commenters discussed it. While some commenters sought extensions to 90 or 120 days from the 60-day prompt correction period, other commenters supported maintaining the Agency’s current interpretation, and some commenters from the regulated community acknowledged that violations frequently can be handled case-by-case under today’s existing disclosure process (e.g., under the Audit Policy). One commenter urged that, in designing any tailored incentives for new owners, the Agency take care that any new owner approach not be used by the disclosing entity as a means to delay compliance.

One of EPA’s primary goals in developing the approach to new owners is to secure pollutant reductions and environmental improvements as quickly as possible, and a blanket extension of the 60-day correction period would undercut that aim. However, especially in the context of an audit agreement involving complex facilities and technical issues, the Agency is willing

to consider tailoring a compliance schedule appropriate for the situation and circumstances.

One commenter requested that EPA issue enforcement discretion letters to allow the continued operation of noncompliant facilities while they wait for ‘‘completion of required acts.’’ EPA’s standing policy on enforcement discretion only allows the Agency to approve such a ‘‘no action assurance’’ in extremely unusual circumstances where it is clearly necessary to serve the public interest and where no other mechanism can adequately address the situation.8 In the scenario described, an appropriate approach already exists, since under EPA’s current application of the Audit Policy the Agency recognizes that not all violations can be corrected within 60 days of discovery. EPA may allow an extension for corrections that require significant expenditures, involve technically complex issues, or involve decisions for which an entity seeks or is required to obtain EPA or state input or approval (e.g., permits). While the Agency may consider a permit application adequate to address timing under the correction condition under the Audit Policy, ultimately any resolution of the underlying violation will be conditioned on the timely and full achievement of compliance, and that caveat will be clearly stated in any settlement or resolution documents. Where a violation cannot be fully corrected until a permit is received by the new owner, EPA may require the new owner to implement interim measures or controls as part of the settlement document.

6. Prevent Recurrence (Condition D.6.)

Under the Prevent Recurrence condition, the disclosing entity must agree in writing to take steps to prevent a recurrence of the violation after it has been disclosed and corrected. Preventative steps may include, but are not limited to, improvements to the entity’s environmental auditing efforts or compliance management system.

a. Interim Approach to Prevent Recurrence Condition

EPA is not changing the Prevent Recurrence condition of the Audit Policy as applied to new owner disclosures.


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b. Discussion of Prevention of Recurrence

No comments were received on the Prevent Recurrence condition. A fundamental goal of the Audit Policy is to create incentives for regulated entities to not only look for and correct environmental violations, but to put systems and practices in place to prevent the recurrence of the violation disclosed. EPA will continue to apply this condition to require new owners to agree take steps to prevent the recurrence of violations disclosed. An underpinning of the significant penalty mitigation offered under the Audit Policy is the assurance from the disclosing entity that the problem that gave rise to the violation has in fact been fully addressed, and EPA sees no reason to propose a different approach for new owners.

7. No Repeat Violations Condition (Condition D.7.)

Condition 7 of the Audit Policy provides that repeat violations are not eligible for Audit Policy benefits. Specifically, under the No Repeat Violations condition, the same or closely-related violation must have not occurred at the same facility within the past three years. For purposes of this condition, the term ‘‘violation’’ includes any violation subject to a federal, state or local civil judicial or administrative order, consent agreement, conviction or plea agreement. Recognizing that minor violations are sometimes settled without a formal action in court or in an administrative enforcement proceeding, the term also covers any act or omission for which the regulated entity has received a penalty reduction. When the facility is part of a multi-facility organization, the Audit Policy is not available if the same or closely-related violation occurred as part of a pattern of violations at one or more of these facilities within the last five years.

As articulated in the preamble to the Audit Policy, ‘‘[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. See 65 FR at 19623 (April 11, 2000). Most recently, in the Answer to Question 5 of EPA’s 2007 Frequently Asked Questions document, the Agency stated that new owners that undertake examinations of newly acquired facilities generally will be eligible under the No Repeat Violations condition of the Audit Policy irrespective of the new owner’s history of violations at other facilities that were not recently acquired.

a. Interim Approach to No Repeat Violations Condition

EPA is not changing its current interpretations of the No Repeat Violations condition as applied to new owner disclosures.

b. Discussion of No Repeat Violations

Several comments discussed the Repeat Violations condition, and all support the Agency’s current interpretation. The Repeat Violations exclusion benefits both the public and law-abiding entities by ensuring that penalties are not waived for those entities that have previously been on notice of violations, and failed to prevent repeat violations.

8. Other Violations Excluded Condition (Condition D.8.)

The Audit Policy provides that certain violations are not eligible for the incentives available under the Policy. In order to be eligible for Audit Policy consideration, the violation cannot be one which (a) resulted in serious actual harm, or may have presented an imminent and substantial endangerment, to human health or the environment, or (b) violates the specific terms of any judicial or administrative order, or consent agreement.

a. Interim Approach to Exclusion of Violations Condition for Violations Which Resulted in Serious Actual Harm or May Have Presented an Imminent and Substantial Endangerment

Under EPA’s Interim Approach, absent a fatality, community evacuation, or other seriously injurious or catastrophic event, where the violation that gave rise to serious actual harm or imminent and substantial endangerment began before the new owner acquired the facility, EPA will not exclude new owners’ disclosures of such violations from Audit Policy consideration because of the Other Violations Excluded condition.

This eligibility for Audit Policy consideration and penalty mitigation would not affect either the new owner’s independent obligation to notify appropriate regulatory authorities in the event of a release or the new owner’s liability for the violation and its correction. In all circumstances, EPA reserves its authority and ability to take enforcement action to abate any endangerment or address violations, including the issuance of appropriate orders.

b. Discussion of Serious Actual Harm and Imminent and Substantial Endangerment

Although EPA did not, in the First Notice, specifically ask for comment on the Other Violations Excluded condition, the Agency received several comments about allowing Audit Policy consideration for violations that may have caused ‘‘serious actual harm.’’ Commenters contended that unless EPA were more flexible in implementing this condition, the Agency would not receive disclosures of significant violations, since a new owner could not be confident of receiving any Audit Policy consideration.

The incentives for new owners are specifically aimed at encouraging the disclosure and correction of these potentially more serious violations. EPA’s goal is to motivate new owners to find and disclose violations, which will, once corrected, result in significant environmental protection and benefit. For example, EPA wants to encourage new owners to identify and correct New Source Review violations, and put in place the required environmental controls avoided by previous owners.

EPA recognizes that such significant violations may meet the threshold of what results in serious actual harm or may have presented an imminent and substantial, and that the Audit Policy specifically excludes such violations. EPA’s waiver, absent catastrophic events, of part (a) of Condition D.8. in the new owner context, is intended to allow and invite new owner disclosures of significant violations which began before acquisition, without either undermining the Agency’s ability to invoke its imminent and substantial endangerment authorities to address similar violations, or compromising EPA’s ability to allege that similar violations resulted in serious actual harm.

The Agency believes the specific goals and equities of the new owner context warrant the decision to create an exception for the Interim Approach to allow the disclosure of serious violations by new owners, with the caveats described above in section II.D.8.a. However, EPA seeks further comment on creating this exception.

9. Cooperation (Condition D.9.)

Under the Audit Policy, the regulated entity must cooperate as required by EPA and provide the Agency with the information it needs to determine Policy applicability. With respect to this condition, EPA looks only to whether an entity cooperated with the Agency in the consideration of the entity’s request


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for treatment under the Audit Policy, not whether the entity has cooperated with the Agency in past matters or whether the entity is in litigation with the Agency on other matters.

a. Interim Approach to Cooperation Condition

EPA is modifying the Cooperation condition of the Audit Policy only to make clear that the disclosing entity must cooperate with EPA and provide such information as is necessary and requested by EPA to determine the applicability of the Audit Policy, as modified by this Interim Approach. In particular, EPA may ask an entity seeking new owner benefits to provide information to support its submission that it is a ‘‘new owner’’ as defined under Section II.A.

b. Discussion of Cooperation

No comments were requested or received concerning the Cooperation condition. However, because the Interim Approach applies only to ‘‘new owners’’ and modifies certain conditions of the Audit Policy, the Agency wants to make clear that regulated entities seeking treatment under the Interim Approach will be expected to cooperate by providing information as necessary and requested by EPA to determine whether such entities are entitled to new owner benefits. In all other respects, EPA will continue to apply the Cooperation condition, as articulated in the Audit Policy and EPA’s Answer to Question 7 of the 2007 Frequently Asked Questions document, to violations disclosed pursuant to the Interim Approach. See 65 FR at 19623.

E. Other Issues Related to the Interim Approach

1. Consideration of Indemnification Agreements

Most commenters did not recommend that the Agency take indemnification agreements into account in designing its approach to new owners’ disclosures. They noted the confidential nature of such agreements, and urged that EPA not try to investigate arrangements for risk allocation between a buyer and seller that are properly determined by the marketplace. Many commenters asserted that the analysis of such indemnification agreements would be complex, costly and time-consuming. As EPA’s focus is on the effective use of scarce government resources to achieve compliance and significant environmental benefits, the Agency does not intend to scrutinize or consider indemnification agreements a new owner may have arranged.

2. Effect on Merger and Acquisition (M&A) Activity

EPA does not believe there is a high probability that implementing an Interim Approach to resolving Audit Policy disclosures from new owners would have a noticeable effect on merger and acquisition activity. The Agency did receive comments suggesting that encouraging new owners to disclose violations might lead sellers to either avoid buyers likely to audit and disclose, or to include ‘‘no-tell’’ clauses in their transaction or indemnity agreements, making indemnification contingent on the new owner refraining from any disclosures of environmental or other violations to the government.

However, EPA also received comments asserting that consideration of environmental compliance liabilities, as opposed to environmental contamination and clean-up liabilities, is generally not a driving force in, or important element of, M&A transactions. In addition, the Agency received comments suggesting that such incentives for new owners might have a beneficial effect on negotiations, encouraging prospective sellers to address violations before closing, or giving prospective buyers leverage to negotiate for the seller to correct violations found during due diligence. If sellers were to include ‘‘no tell’’ clauses in their transaction or indemnity agreements, such clauses may well be voidable as contrary to the public interest.

3. Approach to Sellers

EPA received comments urging it to provide enforcement protection to the prior owners of facilities whose new owners have disclosed noncompliance under the Audit Policy. However, EPA does not believe that this would be appropriate. Moreover, the Agency does not intend to allow sellers the same penalty mitigation benefits as new owners, as requested by some commenters, or to require joint disclosures from buyer and seller. A seller that did not discover, disclose and correct violations when it operated a facility should not be a beneficiary of the Audit Policy, simply because the facility’s new owner decides to undertake such actions. The opportunity to properly operate the facility and to address noncompliance, including through use of the Audit Policy, was available to the seller while it operated the facility. Resolving the violations with the new owners should provide the appropriate environmental controls and improvements necessary to reduce pollution and ensure ongoing

compliance at the facility. Nevertheless, the Agency reserves its rights to pursue sellers where the circumstances and equities warrant.

4. Recognition as an Incentive Some commenters supported the idea

of recognition from EPA as an incentive to motivate disclosures from new owners, but others noted the potential for publicity to be misunderstood or misinterpreted. Some types of recognition suggested, such as logos and public promotions, seemed more appropriate for an Agency award program. Other ideas, such as access to an ombudsman who would keep internal lists of participants and seek to resolve company disputes with regulators, seemed unsuitable as recognition for having used the Audit Policy to disclose and resolve violations, notwithstanding the Agency’s appreciation of a new owner’s choice to come forward. Some commenters suggested making recognition optional, or letting the new owners choose the sort of recognition to receive, but these concepts pose sufficient implementation difficulties to make them unattractive options for the Agency. EPA does recognize the voluntary nature of the new owner’s choice to come forward to the government and will seek to appropriately reflect that in Agency statements concerning the disclosure and correction of violations by new owners.

5. State and Local Coordination Commenters noted that lack of

coordination or inconsistencies with state programs, and state audit policies where they exist, may dissuade new owners from coming forward to EPA, and that new owners might choose instead to deal with states, especially where states are authorized to implement federal regulatory programs. EPA recognizes that state and local regulatory agencies are partners in implementing the enforcement and compliance assurance program, and has established ways of coordinating and working together with our state and local partners. When consistent with EPA’s policies on protecting confidential and sensitive information, the Agency will share with state and local agencies information relating to the disclosure of violations of federally- authorized, approved or delegated programs. Whether a new owner should make a disclosure to EPA, the state, or both, depends on the type of regulation violated, availability of a state audit program, whether multiple facilities located in different states are involved,


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9 See ‘‘Restrictions on Communicating with Outside Parties Regarding Enforcement Actions,’’ Memorandum from Granta Y. Nakayama (March 8, 2006), which can be found on the Internet at http://www.epa.gov/compliance/resources/policies/ civil/io/commrestrictions- nakayamamemo030806.pdf.

10 See ‘‘Confidentiality of Information Received under the Agency’s Self-Disclosure Policy,’’ Memorandum from Steven A. Herman (January 16, 1997), which can be found on the Internet at http://www.epa.gov/compliance/resources/policies/ incentives/auditing/sahmemo.pdf.

and the scope of legal relief sought by the entity. Federal liability can only be resolved by EPA.

6. Confidentiality

Various commenters expressed concern about the confidentiality of both audit and transaction documents. The Agency does not believe these concerns are warranted. First, it is generally not EPA’s intention to request documents related to the transaction, since the Agency has no plans to review or analyze them. Second, since 1986, the Agency has had a policy to refrain from routine requests for audit reports in the context of disclosures of civil violations, except in the rare event that the information is necessary to determine whether the conditions of the Audit Policy have been met. This Policy was re-affirmed in the 2000 Audit Policy, and EPA will not alter this practice in the context of disclosures from new owners. Third, EPA has long- standing policies of not publicly disclosing any information that might interfere with settlement negotiations 9 and of withholding Audit Policy self- disclosures from release prior to resolution of the disclosures.10

F. How Should a New Owner Self- Disclose or Request an Audit Agreement?

New Owners should contact either Philip Milton ((202) 564–5029, [email protected]) or Caroline Makepeace ((202) 564–6012 or [email protected]) of EPA’s Office of Enforcement and Compliance Assurance, Office of Civil Enforcement, Special Litigation and Projects Division regarding disclosures or audit agreements.

G. Applicability

This Interim Approach applies to settlement of claims for civil penalties for any violations under all of the federal environmental statutes that EPA administers. EPA has issued documents addressing several applicability issues pertaining to the Audit Policy. New owners considering whether to take advantage of the Interim Approach should review those documents as well

as the 2000 Audit Policy to see whether they address any relevant questions. The 2000 Audit Policy and related documents are available on the Internet at http://www.epa.gov/compliance/ incentives/auditing/auditpolicy.html. Additional guidance for implementing the Policy in the context of criminal violations can be found at http:// www.epa.gov/compliance/resources/ policies/incentives/auditing/ auditcrimvio-mem.PDF.

To the extent that the Interim Approach’s conditions or criteria differ from the 2000 Audit Policy, the 2007 Frequently Asked Questions, or the 1997 Interpretive Guidance, the Interim Approach will, in the new owner context, supersede any inconsistent provisions. All other provisions of the 2000 Audit Policy and the two other documents will continue to apply to self-disclosing new owners.

The Interim Approach is intended to inform the public and regulated entities of the Agency’s current enforcement approach to new owners disclosing violations under the Audit Policy. As is the case with all Agency policies, application of the Audit Policy and this Interim Approach is subject to EPA’s enforcement discretion and is not binding on the public or EPA. See also Section II.G. of the 2000 Audit Policy for discussion of the Audit Policy’s applicability (65 FR 19626).

H. Approach to Assessment of Interim Approach

1. Measures to Assess Interim Approach

The Agency intends to assess the effectiveness of the Interim Approach on an ongoing basis and will measure the following indicators:

a. Number of new owner disclosures resolved.

b. Pounds of pollutants estimated to be reduced, treated or eliminated.

c. Dollars invested in improved environmental performance or improved environmental management practices.

In addition, to help the Agency assess the Interim Approach and identify where opportunities may exist to improve it, EPA intends to observe the number of recently acquired facilities whose new owners chose not to make ‘‘new owner’’ disclosures under the Audit Policy. Within a relevant universe of mergers and acquisitions transactions (i.e., facilities under new ownership which are subject to environmental regulations and requirements), EPA will identify facilities whose new owners did not audit and disclose to EPA, and cross-reference these newly acquired facilities with other already available

enforcement data (e.g., history of violations, unresolved violations, last inspections, type of permitted activity, priority area).

2. Discussion of Measures and Assessment

Commenters were supportive of testing and assessing the effectiveness of a tailored approach to new owners, but not of limiting the effort in scope or size, or to any particular industrial sector. Some commenters urged a focus on only compliance measures (e.g., number of violations corrected, number of violators in compliance, number and type of disclosures), while other commenters discussed pollution reductions as the best measure of success, albeit acknowledging that such reductions can be difficult to quantify. Some commenters recommended that the Agency define criteria for significant environmental improvement.

The measures described above focus on both increases in compliance and benefits to the environment, tracking not only the number of new owner disclosures resolved but also how much was expended to correct them, and how much of an effect on pollution those corrections had. In addition, since the Agency is interested in an accurate assessment of how much the Interim Approach may motivate new owners to come forward to EPA, the Agency intends to track new owners that did not take advantage of the Audit Policy. EPA will look at a relevant sub-set of ongoing mergers and acquisitions activity (i.e., facilities under new ownership which are subject to environmental regulations and requirements) and may narrow the scope of inquiry further, to focus on facilities that have significant environmental regulatory obligations, or on facilities in certain sectors. Such an effort may help give EPA a sense of the sorts of enforcement issues the Agency may be ‘‘missing’’ in the effort to promote disclosures and compliance.

EPA may also identify some of the non-disclosing facilities which changed ownership nine months or more before as potential ‘‘facilities of interest,’’ where the analysis of available enforcement data indicates there may be compliance issues, or significant gaps in EPA’s understanding of a facility’s compliance status. While such facilities may potentially be ripe or appropriate for an inspection or enforcement attention, EPA has not established any new enforcement priority focused on M&A transactions or recently acquired facilities. EPA does expect, however, that awareness that the Agency will be tracking disclosures after relevant transactions may favorably affect the


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tipping point of the new owner’s internal risk analysis in favor of auditing and disclosing. EPA’s tracking is intended to help inform the Agency’s assessment of the effectiveness of the Interim Approach and may at some point serve as a scoping element for enforcement planning.

III. Public Process EPA seeks public comment on the

Interim Approach described in this Notice, and asks that comments be specifically aimed at improving the overall design and specific elements of the Interim Approach, as well as at addressing any relevant issues or considerations which may not appear to be reflected. The public comment docket will be open for a period of 90 days. The Agency will concurrently begin applying the Interim Approach, as EPA believes the most efficient way to effectively test this strategy, and learn from practical experience, is to implement it on an interim basis.

EPA will be reviewing public comment as it is received and will continue its dialogue with stakeholders on whether refinements to the Interim Approach are needed. In addition, the Agency will place into the public docket copies of agreements resolving violations disclosed by new owners under the Interim Approach. EPA intends to assess the effectiveness of the Interim Approach on a continual basis. Based on public comment and after the Agency has gained sufficient experience in implementing the Interim Approach, EPA will decide to finalize, revise or discontinue these tailored incentives for new owners.

EPA encourages parties of all interests, including state, tribal and local government, industry, not-for- profit organizations, municipalities, public interest groups and private citizens to comment, so that the Agency can hear from as broad a spectrum of stakeholders as possible.

IV. What Should I Consider as I Prepare My Comments for EPA?

1. Submitting CBI. Do not submit CBI to EPA through http:// www.regulations.gov or e-mail. Clearly mark the part or all of the information that you claim to be CBI. For CBI information in a disk or CD–ROM that you mail to EPA, mark the outside of the disk or CD–ROM as CBI and then identify electronically within the disk or CD–ROM the specific information that is claimed as CBI. In addition to one complete version of the comment that includes information claimed as CBI, a copy of the comment that does not contain the information claimed as CBI

must be submitted for inclusion in the public docket. Information so marked will not be disclosed except in accordance with procedures set forth in 40 CFR part 2.

2. Tips for Preparing Your Comments. When submitting comments, remember to:

• Identify the Notice and Request for Comments by docket number and other identifying information (subject heading, Federal Register date and page number).

• Follow directions—The Agency may ask you to respond to specific questions.

• Explain why you agree or disagree; suggest alternatives and language.

• Describe any assumptions and provide any technical information and/ or data that you used.

• If possible, provide any pertinent information about the context for your comments (e.g., the size and type of acquisition transaction you have in mind).

• If you estimate potential costs or burdens, explain how you arrived at your estimate in sufficient detail to allow for it to be reproduced.

• Provide specific examples to illustrate your concerns, and suggest alternatives.

• Explain your views as clearly as possible.

• Submit your comments on time. Dated: July 25, 2008.

Granta Y. Nakayama, Assistant Administrator, Office of Enforcement and Compliance Assurance. [FR Doc. E8–17715 Filed 7–31–08; 8:45 am] BILLING CODE 6560–50–P

FEDERAL COMMUNICATIONS COMMISSION

[CG Docket No. 03–123; DA 08–1673]

Notice of Certification of State Telecommunications Relay Service (TRS) Programs

AGENCY: Federal Communications Commission. ACTION: Notice.

SUMMARY: In this document, the Consumer & Governmental Affairs Bureau (Bureau) grants certification of fifty states’, two territories’, and the District of Columbia’s TRS programs. The current certification for state TRS programs expires this year. This action certifies state TRS programs for the next five years, pursuant to the Commission’s rules. DATES: Certifications effective July 26, 2008, through July 25, 2013.

FOR FURTHER INFORMATION CONTACT: Diane Mason, (202) 418–7126 (voice), (202) 418–7828 (TTY), or e-mail: [email protected]. SUPPLEMENTARY INFORMATION: This is a summary of the Bureau’s public notice DA 08–1673, released July 16, 2008, in CG Docket No. 03–123. The full text of document DA 08–1673 is available for public inspection and copying during regular business hours at the FCC Reference Information Center, Portals II, 445 12th Street, SW., Room CY–A257, Washington, DC 20554. It also may be purchased from the Commission’s duplicating contractor at Portals II, 445 12th Street, SW., Room CY–B402, Washington, DC 20554; the contractor’s Web site, http://www.bcpiweb.com; or by calling (800) 378–3160.

To request materials in accessible formats for people with disabilities (Braille, large print, electronic files, audio format), send an e-mail to [email protected] or call the Consumer & Governmental Affairs Bureau at (202) 418–0530 (voice) or (202) 418–0432 (TTY). Document DA 08–1673 can also be downloaded in Word or Portable Document Format (PDF) at: http:// www.fcc.gov/cgb/dro/trs.html. In addition, the applications for certification may be viewed on the Bureau’s Disability Rights Office Web site at http://www.fcc.gov/cgb/dro/ trs_by_state.html .

Synopsis The applications for certification of

TRS programs of the states, territories, and the District of Columbia listed below (hereinafter, ‘‘states’’) have been granted, pursuant to Title IV of the Americans with Disabilities Act (ADA), 47 U.S.C. 225(f)(2), and 47 CFR 64.606(b). On the basis of the state applications, the Bureau has determined that:

(1) The TRS program of the states meet or exceed all operational, technical, and functional minimum standards contained in 47 CFR 64.604;

(2) The TRS programs of the listed states make available adequate procedures and remedies for enforcing the requirements of the state program; and

(3) The TRS programs of the listed states in no way conflict with federal law.

The Bureau also has determined that, where applicable, the intrastate funding mechanisms of the listed states are labeled in a manner that promotes national understanding of TRS and does not offend the public, consistent with 47 CFR 64.606(d).

Because the Commission may adopt changes to the rules governing relay


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A Guide to the Texas Environmental, Health, and Safety Audit Privilege Act – Texas Commission on Environmental Quality (2013)

Reference Materials

RG-173 Revised November 2013

A Guide to the Texas Environmental, Health, and Safety Audit Privilege Act

printed on recycled paper

Litigation Division

T E X A S C O M M I S S I O N O N E N V I R O N M E N T A L Q U A L I T Y

A Guide to the Texas Environmental, Health, and Safety Audit Privilege Act

Prepared by Litigation Division

Office of Legal Services

RG-173 Revised November 2013

ii

Published and distributedby the

Texas Commission on Environmental QualityPO Box 13087

Austin TX 78711-3087

Bryan W. Shaw, Ph.D., P.E., ChairmanToby Baker, Commissioner

Zak Covar, Executive Director

We authorize you to use or reproduce any original material contained in this publication—that is, any material we did not obtain from other sources. Please acknowledge the TCEQ as your source.

Copies of this publication are available for public use through the Texas State Library, other state depository libraries, and the TCEQ Library, in compliance with state depository law. For more information on TCEQ publications call 512-239-0028 or visit our website at:

tceq.texas.gov/publications

The TCEQ is an equal opportunity employer. The agency does not allow discrimination on the basis of race, color, religion, national origin, sex, disability, age, sexual orientation or veteran status. In compliance with the Americans with Disabilities Act, this document may be requested in alternate formats by contacting the TCEQ at 512-239-0028, Fax 512-239-4488, or 1-800-RELAY-TX (TDD), or by writing PO Box 13087, Austin, TX 78711-3087.

How is our customer service? tceq.texas.gov/customersurvey

TCEQ publication RG-173 A Guide to the Texas Environmental, Health, and Safety Audit Privilege Act

Revised November 2013 iii

Contents Introduction ................................................................................. 1

Purpose ............................................................................................................... 1

Historical Background ........................................................................................ 1

Significant Changes Made by HB 3459, 75th Legislature (1997) ..................... 2

Significant Changes Made by SB 1300, 83rd Legislature (2013) ..................... 3

Rulemaking Authority ....................................................................................... 4

Guidance ...................................................................................... 5

Submissions Required under the Audit Act ...................................................... 5

Notice of Audit (NOA) ............................................................................... 5

Disclosure of Violation (DOV) ................................................................... 6

Request for Extension ................................................................................ 7

Privilege and the Audit Act ................................................................................ 8

Evidentiary Privilege.................................................................................. 8

Waiver of Privilege ..................................................................................... 9

Immunity and the Audit Act............................................................................. 11

Questions and Answers .................................................................................... 13

General ...................................................................................................... 13

Confidentiality under the Audit Act .........................................................14

The Texas Audit Act and the EPA ............................................................. 15

What Does the Audit Act Cover? .............................................................. 15

Audits and Enforcement .......................................................................... 16

Privileged Information and Inspections .................................................. 17

Appendix A: Environmental, Health, and Safety Audit Privilege Act ............................................................................... 19

§1. Short Title ................................................................................................... 19

§2. Purpose ...................................................................................................... 19

§3. Definitions ................................................................................................. 19

§4. Audit Report .............................................................................................. 20

§5. Privilege.......................................................................................................21

A Guide to the Texas Environmental, Health, and Safety Audit Privilege Act TCEQ publication RG-173

iv Revised November 2013

§6. Exception: Waiver ..................................................................................... 22

§7. Exception: Disclosure Required by Court or Administrative Hearings Official .............................................................................................. 24

§8. Nonprivileged Materials ............................................................................ 24

§9. Review of Privileged Documents by Governmental Authority ................. 25

§10. Voluntary Disclosure; Immunity ............................................................. 25

§11. Circumvention by Rule Prohibited........................................................... 28

§12. Applicability ............................................................................................. 28

§13. Relationship to Other Recognized Privileges .......................................... 28

Appendix B: Government Code Chapter 552. Open Records ........ 29

§552.021. Availability of Public Information .................................................. 29

§552.124. Exception: Certain Audits ............................................................... 29

§552.352. Distribution of Confidential Information ...................................... 29

Appendix C: Model Notice of Audit ............................................. 30

Appendix D: Model Disclosure of Violation ................................. 31

Appendix E: Model Notice of Audit for Continuing Audit and Disclosure of Violation for a Newly Acquired Company .............. 32

Appendix F: Model Notice of Audit for a Completed Audit and Disclosure of Violation for a Newly Acquired Company .............. 34

Appendix G: Model Addendum to Disclosure of Violation ........... 36


Revised November 2013 1

Introduction This is a guide for those who plan to use the provisions of the Texas Environmental, Health, and Safety Audit Privilege Act (Audit Act). Under the Audit Act, certain documents and information gathered as part of an environmental self-audit are privileged from disclosure. The Audit Act also provides certain immunities from administrative or civil penalties for violations voluntarily disclosed and corrected within a reasonable amount of time. Key processes covered in this document include the submission to the Texas Commission on Environmental Quality of a letter indicating intent to initiate a self-audit and a letter disclosing violations discovered.

Please note that this guidance is not regulation and should not be relied upon as such. (The text of the Audit Act appears in Appendix A.) Additionally, please note that, although the Audit Act is applicable to issues within the jurisdiction of other state agencies, or even litigation between private parties, this guide focuses exclusively on the Act as it relates to the TCEQ’s jurisdiction.

Purpose This November 2013 revision updates the previous versions of this document, which was published in September 1997 and revised in February 2009. The updates were necessitated by statutory changes made to the Audit Act with the passage of SB 1300, 83rd Legislature, 2013. Additionally, minor revisions and clarifications have been made.

Historical Background In 1995, the 74th Texas Legislature approved House Bill 2473, the Texas Environmental, Health, and Safety Audit Privilege Act, Tex. Rev. Civ. Stat. Ann. Art. 4447cc (Vernon’s). The Audit Act was subsequently amended by House Bill 3459 in 1997 by the 75th Legislature.

The Audit Act provides incentives for persons to conduct voluntary audits at regulated facilities or operations of their compliance with environmental, health, and safety regulations and to implement prompt corrective action. Note that this guide uses the term person as it is defined in the Audit Act to mean an “individual, corporation, partnership, or other legal entity.”

The two primary incentives are a limited evidentiary privilege (see Section 5, “Privilege,” page 21) for certain information gathered in a voluntary self-audit and an immunity from administrative and civil penalties for certain violations voluntarily disclosed as a result of such an audit. Neither the privilege nor the immunity applies if an audit was conducted in bad faith, or if the person fails to take timely, appropriate action to achieve compliance, among other conditions.


2 Revised November 2013

Many violations disclosed under the Audit Act would not have been discovered in an ordinary inspection, since they are discoverable only through expensive sampling and testing protocols, or time-consuming data reviews. Nonetheless, the U.S. Environmental Protection Agency (EPA) cited its opposition to the 1995 Audit Act as partial explanation for its reluctance to grant delegation of federal environmental programs to Texas.1 However, the EPA conceded before the 75th Legislative Session that an amended Audit Act would not be an obstacle to delegation of those federal programs if several changes were included. The Texas Legislature responded with House Bill 3459, which enacted the changes agreed upon after negotiation between the TCEQ and the EPA.

The amended Audit Act took effect September 1, 1997. Its provisions apply only to audits prepared on or after that date.

Significant Changes Made by HB 3459, 75th Legislature (1997)

Although a number of changes were made to the Audit Act by HB 3459, the changes did not significantly affect the way TCEQ had been implementing the Act since 1995. The scope of the audit privilege and immunity was modified with the removal of references to criminal proceedings and penalties, and the application of the Act was more explicitly limited to state law. Many of the changes were purely explanatory, explicitly stating the relationship between the Act and other state and federal laws. The definitions of relevant terms remained the same, as did the description of what information may be incorporated in an audit report.

The following points highlight the main changes to the Audit Act:

• The reference to the applicability of the audit privilege in criminal proceedings was removed. [Audit Act Section (§) 5(b)]

• The reference to immunity from criminal penalties was removed. [§10(a)] • Federal agencies were deleted from the list of persons to whom certain

audit disclosures can be made under a confidentiality agreement without waiving the audit privilege. [§6(b)(2)(D)]

• Federal and state protections for individuals who disclose information to law enforcement authorities (“whistleblower laws”) were explicitly preserved. [§6(e)]

• The administrative or civil evidentiary privilege is no longer waived when an audit report is obtained, reviewed, or used in a criminal proceeding. [§9(a)]

• A state regulatory agency may now review certain information included in an audit report without resulting in a waiver of the privilege if that

1 Texas has not been alone as a focus of EPA criticism regarding self-audit privilege and immunity legislation. Texas is one of many states that have enacted legislation offering some form of evidentiary privilege or immunity from penalty.



information is required to be available under a specific state or federal law. Although in some cases the information could become available to the public by operation of state or federal law, it cannot be used in civil or administrative proceedings, and evidence that derives from the use of such information will be suppressed. [§9]

• Immunity was further limited such that violations that result in imminent and substantial risk of injury—in addition to actual injury—are ineligible for immunity. [§10(b)(7)]

• A new provision denied immunity for violations that result in “substantial economic benefit that gives the violator a clear advantage over its business competitors.” [§10(d)(5)]

• The penalty for fraudulent assertion of the privilege for unprotected information was amended to allow for a maximum fine of $10,000 as an alternative to sanctions under Rule 215, Texas Rules of Civil Procedure. [§7(d)]

• The penalty for the disclosure of confidential information was amended to refer to the Open Records Act, Chapter 552, Government Code. [§6(d)]

Significant Changes Made by SB 1300, 83rd Legislature (2013)

Although SB 1300 made a number of changes to the Audit Act, they do not significantly affect the way the TCEQ has been implementing the Audit Act since 1995. SB 1300 added verbiage to the statute concerning audits that take place before the purchase of a facility.

The following are the main changes to the Audit Act under SB 1300:

• Defined [a]cquisition closing date. [§3(a)(1)] • Expanded the definition of [e]nvironmental or health and safety audit

to include an audit conducted by a person, including an employee or an independent contractor of the person, considering the acquisition of a facility. [§3(a)(4)]

• Applied the six-month time frame in which an audit must be completed to certain pre-acquisition audits. Pre-acquisition audits which have been continued must be completed within six months of the acquisition closing date. [§§4(d-1), (e), 10(g-1)]

• Exempted audits conducted before the acquisition closing date from the six-month limitation to complete the self-audit investigation. [§4(f)]

• Extended the provisions related to disclosure of audit reports and information acquired during an audit to a person considering the acquisition of a facility or operation and also extended the provisions to that person’s employees or representatives. Such disclosure does not waive the privilege provided by Section 5 of the Audit Act. [§6(b)(1)(E) and (F)]

• Revised the requirements of a voluntary disclosure to require the submission of the Disclosure of Violation discovered during a



pre-acquisition audit within 45 days after the acquisition closing date. [§10(b)(1)(A) and (B)]

• Added a requirement that a person disclosing violations discovered during a pre-acquisition audit must make certain certifications relating to the business relationship between the seller and the person relating to the control of the facility in the disclosure. The same certifications must be included with a notice to continue an audit beyond the acquisition closing date. [§10(b-1) and 10(g-1)]

• Added an additional mitigating factor to be considered if a penalty is assessed under Subsection 10(d) of the Audit Act. [§10(e)(5)]

• Exempted a person considering the acquisition of a facility or operation from having to give the agency notice of an audit that the person initiated prior the acquisition closing date. [§10(g)]

Rulemaking Authority The Audit Act does not expressly grant any additional rulemaking authority to a state officer, department, agency, or institution. No rulemaking is necessary or anticipated to implement the Audit Act.



Guidance Submissions Required under the Audit Act

Three types of notices are anticipated under the Audit Act: a Notice of Audit, a Disclosure of Violation, and a Request for Extension. In most circumstances, in order to take advantage of the immunity offered by the Act, a “person” (defined in the Audit Act as an individual, corporation, partnership, or any other legal entity) must give notice to the TCEQ before the beginning of an environmental audit. A person who is considering the acquisition of a facility is not required to give notice to the TCEQ before initiating an environmental audit before the acquisition closing date. To qualify for immunity, a person must disclose to the agency any violations for which immunity is being sought and correct the violations within a reasonable amount of time. A person must request the written approval of the TCEQ if it seeks to extend the audit more than six months beyond the date it was begun or beyond the acquisition closing date where the person chooses to continue an environmental audit initiated before the closing date.

Guidance. The Notice of Audit and Disclosure of Violation, including responses to requests for additional information, are not confidential or privileged documents and are available to the public.

Notice of Audit (NOA) A Notice of Audit is the letter a person submits to the TCEQ before beginning an environmental audit. Although the person is not required to give this notice to the TCEQ, the person cannot take advantage of the immunity provision of the Audit Act if it fails to give proper notice to the TCEQ that it is planning to commence an environmental audit [Audit Act §10(g)]. However, if an auditing person does not intend to take advantage of potential immunity, no notice of intent to initiate an environmental audit is necessary; in such cases the audit report will still be privileged, but no immunity can attach to any violations discovered during the environmental audit.

An NOA is not required from a person who initiates an environmental audit before the acquisition closing date. However, in order to take advantage of the immunity conferred by the Audit Act, a person who elects to continue an environmental audit beyond the closing date must notify the TCEQ that the audit is continuing [Audit Act §10(g-1)].

An NOA should be submitted in writing by certified mail. Though not required, certified mail is in the person’s best interest, in part because it positively identifies the time the NOA was mailed.

An NOA should include the following information to facilitate the TCEQ’s processing and to fulfill the requirements of the Audit Act:

• the legal name of the person to be audited, including its TCEQ customer reference number (CN)



• the physical location of the regulated facility or operation to be audited (address including city or town and county)

• a description of the facility or portion of the facility to be audited, including the applicable TCEQ permit number, registration number, regulated-entity reference number (RN), and any other identifier used by TCEQ for such a facility or portion of a facility

• specific date and time the audit will commence (time, day, month, and year)

• a general scope of the audit, with sufficient detail to enable a determination of whether subsequently discovered violations are included

When drafting an NOA for submission, review the TCEQ’s Central Registry database to ensure that you have identified the appropriate CN and RN for your audit. While a person is not required to obtain a RN for a site, the person cannot receive compliance history benefits for conducting an environmental audit without a CN and RN; however, the person may be eligible for immunity. If a CN or RN is not present for the location you are auditing or the information in Central Registry is incorrect, you should complete a Core Data Form and submit it with your NOA. You may view the Central Registry and download the Core Data Form online at <www.tceq.texas.gov/goto/coredata> .

(See Appendix C, Model Notice of Audit)

Guidance. Even though an NOA is not required for environmental audits conducted prior to the acquisition closing date, a new owner may include a letter to the agency that contains the information traditionally included in an NOA with a Disclosure of Violation to facilitate the agency’s processing of the disclosure. The NOA should include a site name and geographic location (physical address or description of the physical location or latitude and longitude). If an NOA is submitted for multiple sites, it should include the required information for each site where an environmental audit is being conducted in order to be eligible for immunity under the Audit Act.

Disclosure of Violation (DOV) A Disclosure of Violation is the notice or disclosure made by a person to the TCEQ promptly upon discovery of a violation as a result of an environmental audit. In the context of a pre-acquisition audit, a disclosure must be made within 45 days after the acquisition closing date. A person wishing to take advantage of the immunity from penalty must make a proper voluntary disclosure of the violation.

An adequate disclosure letter must be sent in writing by certified mail [Audit Act §10(b)(2)].

A DOV should include all of the following information to fulfill the requirements of the Audit Act and to facilitate the TCEQ’s processing of the DOV:

http://www.tceq.texas.gov/goto/coredata



• the legal name of the person audited • a reference to the date of the relevant NOA (if applicable) • the certified-mail reference number • the time of initiation and completion (if applicable) of the audit • an affirmative assertion that a violation has been discovered • a description of the violation discovered, including references to relevant

statutory, regulatory, and permit provisions, where appropriate • the date the violation was discovered • the duration of the violation (from the date the violation began to the date

corrective action was completed) • the status and schedule of corrective action It is important to include the duration of the violations in the DOV. The duration identifies the specific window of time for which the immunity will be effective.

If a violation of a permit is disclosed, then a person should identify the specific permit condition that was violated and include a copy of the condition of the permit that was effective during the time of the violation. .

(See Appendix D, Model Disclosure of Violations; Appendix E, Model Notice of Audit for Continuing Audit and Disclosure of Violations Letter for a Newly Acquired Entity; Appendix F, Model Notice of Audit for a Completed Audit and Disclosure of Violation for a Newly Acquired Entity; and Appendix G, Model Addendum to Disclosure of Violations)

Guidance. To qualify for immunity, a person must demonstrate, among other things, that the person:

• has initiated an appropriate effort to achieve compliance, • has pursued that effort with due diligence, and • has corrected or will correct the noncompliance within a reasonable time. [Audit Act §10(b)(5)].

To qualify for immunity, a person must correct the violation within a reasonable time. When submitting a voluntary disclosure of a violation, a person should describe the corrective action that will be taken to achieve compliance and the projected date of compliance. If the TCEQ determines that the corrective action will not be completed within a reasonable amount of time, it may request additional information before approving an alternative compliance schedule. Upon completion of the corrective actions, a person should inform the TCEQ that compliance was achieved and provide the date of compliance for each violation.

Request for Extension A person may submit a letter requesting an extension of the time period allowed for the completion of the audit investigation. The Audit Act explicitly



limits the audit period to “a reasonable time not to exceed six months” unless an extension is approved “based on reasonable grounds” [Audit Act §4(e)].

A request for extension must be submitted before the end of the audit investigation along with sufficient information for the TCEQ to determine whether reasonable grounds exist to grant an extension. Failure to submit a sufficient request could delay or prevent the approval of the extension before the expiration of the audit investigation, jeopardizing the availability of any immunity.

The six-month limitation does not apply to an environmental audit conducted by a person that is considering the acquisition of a facility before the acquisition closing date [Audit Act §4(f)]. A person may continue an audit that began before the closing date only if the person notifies the agency that the person intends to continue the audit [Audit Act §§10(e)(2) and 10(g-1)]. This notice of a continued audit must contain specific certifications relating to the business relationship between the seller and the person and the control of the facility before the closing date [Audit Act §10(g-1)].

The evidentiary privilege and the immunity from penalties pertain only to information compiled, violations discovered, and voluntarily disclosed during an audit period. Persons are cautioned that the continuation of an audit after the initial six-month period without prior written approval from the TCEQ may limit the availability of privilege and immunity.

Mailing Address. All correspondence regarding the Audit Act should be sent to:

Deputy Director, MC 172 Office of Compliance and Enforcement TCEQ PO Box 13087 Austin TX 78711-3087

The Deputy Director’s Office will route these notices to all program areas.

Privilege and the Audit Act

Evidentiary Privilege Section 5 of the Audit Act grants a limited evidentiary privilege for audit reports developed according to the statute. The audit privilege applies to the admissibility and discovery of audit reports in civil and administrative proceedings. The privilege does not apply to documents, reports, and data required to be collected, developed, maintained, or reported under state or federal law or to information obtained independent of the audit process [Audit Act §8(a)]. The privilege also does not apply to criminal proceedings.

The effects of the audit privilege extend beyond admissibility and discovery in legal proceedings. The TCEQ will not routinely receive or review privileged audit report information, and such information should not be requested,



reviewed, or otherwise used during an inspection. If the review of privileged information is necessary to determine compliance status, that information and information derived from its use will remain privileged and inadmissible in administrative or civil proceedings. Such review will occur under the terms of a confidentiality agreement between the TCEQ and the auditing person, where appropriate.

Note that information required for a Disclosure of Violation (violation, citation, violation start and end dates, corrective-action plan, and corrective-action target completion date) is considered basic information required to be voluntarily disclosed in order for a person to claim immunity pursuant to Audit Act §10. The Disclosure of Violation is not considered to be a privileged audit report pursuant to Audit Act §4.

Guidance. All privileged information contained in an audit report should be clearly labeled: COMPLIANCE REPORT: PRIVILEGED DOCUMENT. The TCEQ will accept a Disclosure of Violation and will not consider it to be non-privileged; it does not accept audit reports submitted under claims of confidentiality unless there is also a confidentiality agreement already in place.

Waiver of Privilege The Audit Act privilege can be waived and will be lost if privileged information is communicated to others except in limited situations described in the legislation. This section discusses the potential consequences of disclosure in some foreseeable circumstances.

Disclosure to Government Officials

• No waiver for disclosure of an audit report to TCEQ personnel pursuant to a confidentiality agreement or under a claim of confidentiality. Disclosure of an audit report to applicable TCEQ personnel (“government official of a state”) does not waive the privilege if disclosure is made under the terms of a confidentiality agreement between the owner or operator of the audited facility or the person for whom the report was prepared and the TCEQ. [Audit Act §6(b)(2)(D)].

However, the TCEQ does not accept audit reports submitted to TCEQ under claims of confidentiality; instead, TCEQ will attempt to return any such audit to the sender. The TCEQ recognizes that, under Audit Act §6(b)(3), privilege is not automatically waived. However, because it is difficult to segregate confidential information in an environment subject to public information requests, and because there are penalties against public entities or officials for disclosure, the TCEQ maintains a policy of not accepting audit reports submitted under claims of confidentiality. A party that violates the terms of a confidentiality agreement will be liable for damages caused as a result of the disclosure. Information submitted under a claim of confidentiality is not subject to disclosure under the Texas Open Records Act. Any agency employee who knowingly discloses such



confidential information is subject to potential criminal prosecution, which can result in a fine of up to $1,000 and a term of up to six months in jail.

Guidance. TCEQ personnel will not accept any information offered under a claim of confidentiality. Any TCEQ employee who receives a document offered under such a claim should return it immediately, without review. Also, no employee should request, review, accept, or use an audit report during an inspection without first consulting the Litigation Division.

• No waiver for disclosure to a state regulatory agency of information required to be made available under state or federal law. The disclosure for agency review of information required “to be made available” [Audit Act §9(b)] as opposed to information required “to be collected, developed, maintained, or reported” under a federal or state environmental or health and safety law [Audit Act §8(a)(1)] does not result in waiver of any applicable privilege.

If the TCEQ requests the review of such material, it accepts the responsibility to maintain confidentiality. The use of any such information obtained is strictly limited. Evidence that arises or is derived from review, disclosure, or use of such information can be suppressed in a civil or administrative proceeding [Audit Act §9(d)]. If such a request for review could result in public disclosure as the result of specific state or federal laws requiring public access to information in the TCEQ’s possession, TCEQ personnel must affirmatively notify the person claiming the privilege before the agency obtains the material for review [Audit Act §9(c)].

• Waiver for disclosure of privileged information to EPA or other federal agencies. Information privileged under the Audit Act cannot be disclosed to the EPA or other federal agencies without resulting in waiver of the privilege. Federal agencies are not included among entities to which privileged information can be disclosed under Audit Act §6(b).

Likewise, disclosure to the EPA or other federal agencies of information “required to be made available” under state or federal law will result in waiver of any applicable Audit Act privilege even though the disclosure of such information exclusively for TCEQ review would not waive the privilege under Audit Act §9(b).

Disclosure to Private Parties

• No waiver for disclosure to certain nongovernmental parties for the purpose of addressing an issue identified through an audit. The Audit Act authorizes the disclosure of privileged information to the following nongovernmental parties for the purpose of addressing or correcting a matter raised by the audit:



a person employed by the owner or operator, including temporary and contract employees;

a legal representative of the owner or operator;

an officer or director of the regulated facility or a partner of the owner or operator;

an independent contractor of the owner or operator; or

a person considering the acquisition of the regulated facility or operation that is the subject of the audit or that person’s employee (including a temporary or contract employee), legal representative, officer, director, partner, or independent contractor.

[Audit Act §6(b)(1)]

• No waiver for disclosure to certain nongovernmental parties pursuant to the terms of a confidentiality agreement. If the disclosure is made under the terms of a confidentiality agreement, the Audit Act authorizes disclosure of privileged information to the following nongovernmental parties:

a partner or potential partner of the owner or operator;

a transferee or potential transferee of the facility or operation;

a lender or potential lender for the facility or operation; and

a person or entity engaged in the business of insuring, underwriting, or indemnifying the facility or operation.

[Audit Act §6(b)(2)]

Criminal Proceedings

• No waiver relative to civil or administrative proceedings where an audit report is obtained, reviewed, or used in a criminal proceeding. [Audit Act §9(a)]

Immunity and the Audit Act Immunity under Audit Act §10 is from administrative and civil penalties relating to certain self-disclosed violations. This limited immunity does not affect the TCEQ’s authority to seek injunctive relief, make technical recommendations, or otherwise enforce compliance. In order to receive immunity, the disclosure must be both voluntary and preceded by a proper Notice of Audit, where applicable, that notified the TCEQ of the intent to initiate the environmental audit (see “Notice of Audit,” page 5).

A disclosure will be deemed voluntary under Audit Act §10 only if the following conditions apply (mnemonic: PINNACLE).



P—the disclosure was made promptly after the violation was discovered;

I—the disclosure was made in writing by certified mail to the TCEQ;

N—the violation was not independently detected, or an investigation of the violation was not initiated, before the disclosure was made in writing by certified mail;

N—the violation was noted and disclosed as the result of a voluntary environmental audit;

A—appropriate efforts to correct the noncompliance are initiated, pursued, and completed within a reasonable amount of time;

C—the disclosing person cooperates in the investigation of the issues identified in the disclosure;

L—the violation lacks injury or imminent and substantial risk of injury; and

E—the disclosure is not required by an enforcement order or decree.

For a disclosure of violation discovered during an environmental audit conducted before an acquisition closing date, the person making the disclosure must certify that, before the closing date:

• the person was not responsible for compliance at the regulated entity; • the person did not have the largest ownership share of the seller; • the seller did not have the largest ownership share of the person; and • the person and the seller did not have a common corporate parent or a

common majority interest owner. [Audit Act §10(b-1)] Audit Act §10(d) further limits the availability of the immunity for certain violations. Immunity does not apply, and a civil or administrative penalty may be imposed, if the violation was intentionally or knowingly committed; was recklessly committed; or resulted in a “substantial economic benefit which gives the violator a clear advantage over its business competitors.” Furthermore, the immunity does not apply if a court or administrative law judge finds that the person claiming immunity has repeatedly or continuously committed significant violations and has not attempted to bring the facility into compliance, resulting in a pattern of disregard of environmental or health and safety laws. A three-year period will be reviewed to determine whether a pattern exists [Audit Act §10(h)].

Guidance. TCEQ enforcement programs should take appropriate steps in coordination with the environmental-audit coordinators when a violation is disclosed as a result of an environmental audit. The TCEQ’s enforcement authority remains unaltered by the Audit Act, except for the exclusion of penalties.



Questions and Answers

General 1. Will a Notice of Audit be considered adequate if only the county is given

for the specific location of the facility that is being audited? No. A site name and geographic location (physical address or description of physical location or latitude and longitude) must be included in the Notice of Audit. Failure to give proper notice may result in denial of immunity for disclosed violations. For an NOA being conducted at multiple sites, the required information for each site must be submitted.

2. Will Disclosures of Violation be accepted by any means of delivery other than certified mail (for example, telephone, fax, personal communication)? No. According to the Audit Act, Disclosures of Violation must be sent by certified mail. They should be addressed to the deputy director of the Office of Compliance and Enforcement.

3. What is considered a “prompt” disclosure? Whether a disclosure is prompt depends upon the circumstances surrounding the audit and the particular violation; the determination will be made case by case. It is in a person’s best interests to disclose violations as soon as they are discovered. In the pre-acquisition audit context, disclosures must be made no later than the 45th day after the acquisition closing date.

4. How certain must a person be that a violation has occurred before giving notice in order to receive immunity? A person must notify the TCEQ of a violation promptly once it has a reasonable factual basis that a violation has occurred. A person runs the risk of forfeiting potential immunity either if the disclosure is not prompt or if the violation is independently detected before the person has submitted a sufficient disclosure. A vague disclosure is inadequate and does not qualify as a voluntary disclosure of violation. Specific violations should be disclosed with reference to specific operating units or equipment (or both) affected by relevant regulations or other applicable law. Furthermore, since a person should make an affirmative assertion that a violation has been discovered, a Disclosure of Violation should not be reported as an apparent or potential violation or potential area of noncompliance.

5. Can a person be in “continuous audit” such that it can receive immunity from all violations discovered and disclosed? That is unlikely. The Audit Act generally limits the audit period to six months. It is doubtful that a person could justify such consecutive audits without raising the suspicion that it is conducting its audits in bad faith.



However, it is clear that a person may conduct several audits of different facilities during the year and take advantage of the Audit Act’s incentives.

6. Can a person receive immunity for violations disclosed for facilities that were not identified in the NOA after an audit has begun? No. For traditional audits, disclosed violations will only be granted immunity if a proper notice of intent to conduct an environmental audit for the facility was submitted, and the violations were properly disclosed and corrected with a reasonable amount of time. A Notice of Audit is not required for an audit initiated before the closing date by a person who is considering the acquisition of a facility.

7. Will all voluntarily disclosed violations be required to be listed on a regulated entity’s compliance history? All voluntarily disclosed violations must be identified in a facility’s compliance-history report as being voluntarily disclosed [Audit Act §10(i)]. The TCEQ views a voluntary disclosure as a positive action that leads to the correction of violations that might otherwise not be detected through traditional enforcement approaches. As detailed in the compliance-history rules, found in Title 30, Texas Administrative Code, Chapter 60, compliance-history points are awarded for both NOAs and voluntarily disclosed violations.

A person that properly discloses a violation that was discovered during a pre-acquisition audit will receive compliance-history benefits for the disclosure. Although an NOA is not required for pre-acquisition audits, the benefits associated with an NOA will appear in the compliance history of a person disclosing a violation discovered during a pre-acquisition audit. To facilitate the TCEQ’s processing of the DOV, a person making a disclosure in this context is encouraged to submit the information traditionally included in an NOA prior to or with its DOV.

Confidentiality under the Audit Act 1. Will the TCEQ receive and review audit reports?

The TCEQ will not routinely receive or review privileged audit reports. Notices of Audit and Disclosures of Violation will be reviewed for sufficiency by the Office of Compliance and Enforcement and the Litigation Division. If the review of privileged audit report information is necessary to determine compliance status, that information and information derived from its use will remain privileged and inadmissible in administrative or civil proceedings. The review will occur under the terms of a confidentiality agreement between the TCEQ and the auditing person, where appropriate.

2. How will the confidentiality of audit-report information be maintained inside the TCEQ? If the TCEQ and a person have entered into a confidentiality agreement, any audit-report information submitted will be flagged or segregated to



assist TCEQ personnel in maintaining confidentiality. However, the TCEQ emphasizes that privileged audit-report information should not be submitted under a claim of confidentiality to the agency or accepted by TCEQ personnel when a confidentiality agreement is not already in place.

3. How will the TCEQ address a claim of confidentiality accompanying a Disclosure of Violation or Notice of Audit? A Disclosure of Violation or Notice of Audit will not be considered privileged or confidential under the Audit Act. Any such letters that are labeled confidential will nonetheless be treated as public documents. Information required for a Disclosure of Violations (violation, citation, violation start and end dates, corrective-action plan, and corrective-action target completion date, etc.) is considered basic information required to be voluntarily disclosed in order for a person to claim immunity pursuant to Audit Act §10. The Disclosure of Violations is not considered to be a privileged audit report pursuant to Audit Act §4.

The Texas Audit Act and the EPA 1. How does the Audit Act apply to EPA inspectors operating in Texas?

The Audit Act does not apply to federal agencies, including the EPA. The EPA has its own audit policy,2 and EPA inspectors operate within that policy.

2. If an EPA inspector requests a copy of an audit during a joint inspection, should the TCEQ inspector continue to participate? The EPA has explicitly stated that it “will not request an environmental audit report in routine inspections.”3 However, if an EPA inspector does request and obtain a copy of an audit report privileged under the Texas Audit Act, the TCEQ inspector should continue to participate, but should not receive, review, or otherwise use such information. The inspector should refer the issue to the Litigation Division as soon as possible.

What Does the Audit Act Cover? 1. Does the definition of “audit report” include such routine reports as stack

tests, continuous emissions monitoring data reviews, and so forth? In other words, could a person review the information in such reports, disclose all violations before submitting the reports to the agency, and gain immunity in this way? Stack tests, data reviews, and so forth may be privileged under the Audit Act, but only if they are included in the scope of the environmental audit and are not required to be collected, maintained, or reported under laws, regulations, permit conditions, or enforcement orders (that is, only if they

2 “Incentives for Self-Policing: Discovery, Disclosure, Correction, and Prevention of Violations—Final Policy Statement,” 60 Fed. Reg. 66706 (Dec. 22, 1995).

3 Ibid., p. 66711.



are “voluntary”). Violations discovered as the result of a voluntary audit may also be immune from penalties if voluntarily disclosed.

2. If a person chooses to conduct an environmental audit in order to collect information necessary for an operating-permit application and to complete the application’s compliance certification (or in preparing to submit an annual compliance certification), is this audit considered voluntary under the Audit Act? Reports, data, communications, and other records required to be reported under state or federal law must be reported notwithstanding the environmental audit and are therefore not privileged. An audit report will only be eligible for the Audit Act privilege if a voluntary audit is conducted according to the terms of the legislation. If an audit is conducted pursuant to a federal or state mandate, none of the information collected within the mandated scope of audit will qualify for the Audit Act privilege. With regard to the Clean Air Act Title V operating permit program, a case-by-case determination will be necessary to determine whether an environmental audit exceeded the “reasonable inquiry” required by EPA regulations [40 CFR Part 70.5(d)] such that privileged information could have been generated in accordance with the Audit Act.

3. Will a person be able to place all documents, correspondence, and records that are not specifically required by regulation under the protection of the audit privilege, limiting the field inspector to looking only at records that are mandated by rule? No. Only the documents, communications, and other data produced from an environmental audit are privileged. The audit contemplated under this legislation is a systematic event with a start date and a completion date.

4. If a nuisance violation results from an upset condition, can the responsible party disclose the violation as part of an environmental audit and thereby gain immunity from the associated penalty? No. Immunity is available only for voluntarily disclosed violations whose disclosure arises out of a voluntary environmental audit. The discovery and subsequent disclosure of a nuisance violation might coincidentally occur during an audit period, but the discovery and disclosure cannot be attributed solely to the audit.

Audits and Enforcement 1. Will the TCEQ continue to inspect facilities that have submitted NOAs?

Yes. However, the TCEQ will not target a facility for inspection based upon the submission of an NOA. Enforcement authority is unaffected by the submission of an NOA, and the TCEQ will continue to inspect independently at its discretion.

2. Is any violation reported by a person during the audit period automatically immune from enforcement?



No. Only violations that are discovered in a voluntary environmental audit and are voluntarily disclosed can be immune from penalties. Companies receive no immunity for violations unrelated to the scope of the audit and violations that are identified through information otherwise required to be collected. Furthermore, the Audit Act does not provide immunity from enforcement—only from certain penalties.

3. Does the Audit Act allow participating companies the authority to set their own compliance plans and schedules without approval from the agency, or will the TCEQ still enter “no penalty” orders with technical requirements and compliance schedules based on the violations disclosed? Audit Act immunity applies only to the penalty; the TCEQ will still bring enforcement actions and enter “no penalty” orders with technical recommendations where appropriate.

4. Will the TCEQ regional office be aware that an audit is ongoing or has been conducted at a facility under review? In most cases, the regional staff will be aware. Notices of Audit will be forwarded to the regions by the Office of Compliance and Enforcement. However, the TCEQ is not necessarily notified of all environmental audits to be conducted. Under a traditional audit, only when a person intends to qualify for the immunity provisions of the Audit Act is the person required to give notice of intent to commence an audit. A person who is considering the acquisition of a facility is not required to file a Notice of Audit prior to commencing an audit before the acquisition closing date in order to qualify for immunity. Even where no Notice of Audit has been filed, audit reports remain privileged.

5. How will an inspector know whether a person has received immunity from penalties related to certain violations? The Office of Compliance and Enforcement will furnish copies of correspondence regarding Disclosures of Violations to the regional offices.

Privileged Information and Inspections 1. If there is a dispute during an inspection regarding which information is

privileged and which should be available to the inspector, where and when will it be resolved? If a dispute arises during an inspection, a person should not make audit reports available to the inspector, and the inspector should not insist upon access to the information. The inspector should note, as specifically as possible, the types of documents that have been withheld and promptly refer the issue to the Litigation Division for resolution.

2. If, in the course of an inspection, the inspector identifies an apparent violation and the person’s representative says, “Yes, we found that during our audit,” how should the inspector proceed?



The inspection should proceed as normal. The potential immunity would affect only the penalty, not the investigation. Whether immunity is applicable will be determined later, based on the sufficiency of the NOA, if required, the sufficiency of the DOV, and the voluntariness of the disclosure. The person should cooperate with the inspector’s investigation of all issues, including any which the person feels are covered by a self-audit.

3. Is it the responsibility of TCEQ inspectors to instruct companies to refrain from discussing information that is related to an environmental audit during inspections? Although it may not be the TCEQ inspectors’ responsibility, they should inform companies not to provide or discuss privileged audit report information during inspections.

4. How should an inspector document a verbal disclosure of audit information during the inspection? An inspector should be careful to avoid receiving privileged information from an audit. If such information is nonetheless communicated, the inspector should document the information and the circumstances under which it was received, including whether a claim of confidentiality accompanied the disclosure; label the notes “Privileged and Confidential Information”; and promptly refer the matter directly to the Litigation Division.

5. When an inspector independently discovers a violation, how will the TCEQ resolve disputes regarding the timing of the Disclosure of Violation relative to the inspector’s discovery? Disclosures of Violation must be sent by certified mail. The mailing date of a sufficient DOV will be used to determine the timing.



Appendix A Environmental, Health, and Safety Audit Privilege Act

as amended by SB 1300, 83rd Legislature

Article 4447cc. Environmental, Health, and Safety Audit Privilege Act.

§1. Short Title.

This Act may be cited as the Texas Environmental, Health, and Safety Audit Privilege Act.

§2. Purpose.

The purpose of this Act is to encourage voluntary compliance with environmental and occupational health and safety laws.

§3. Definitions.

(a) In this Act:

(1) “Acquisition closing date” means the date on which ownership of, or a direct or indirect majority interest in the ownership of, a regulated facility or operation is acquired in an asset purchase, equity purchase, merger, or similar transaction.

(2) “Audit report” means an audit report described by Section 4 of this Act.

(3) “Environmental or health and safety law” means:

(A) a federal or state environmental or occupational health and safety law; or

(B) a rule, regulation, or regional or local law adopted in conjunction with a law described by Paragraph (A) of this subdivision.

(4) “Environmental or health and safety audit” or “audit” means a systematic voluntary evaluation, review, or assessment of compliance with environmental or health and safety laws or with any permit issued under an environmental or health and safety law conducted by an owner or operator, an employee of an owner or operator, a person, including an employee or independent contractor of the person, that is considering the acquisition of a regulated facility or operation, or an independent contractor of:

(A) a regulated facility or operation; or

(B) an activity at a regulated facility or operation.

(5) “Owner or operator” means a person who owns or operates a regulated facility or operation.



(6) “Penalty” means an administrative, civil, or criminal sanction imposed by the state to punish a person for a violation of a statute or rule. The term does not include a technical or remedial provision ordered by a regulatory authority.

(7) “Person” means an individual, corporation, business trust, partnership, association, and any other legal entity.

(8) “Regulated facility or operation” means a facility or operation that is regulated under an environmental or health and safety law.

(b) A person acts intentionally for purposes of this Act if the person acts intentionally within the meaning of Section 6.03, Penal Code.

(c) For purposes of this Act, a person acts knowingly, or with knowledge, with respect to the nature of the person’s conduct when the person is aware of the person’s physical acts. A person acts knowingly, or with knowledge, with respect to the result of the person’s conduct when the person is aware that the conduct will cause the result.

(d) A person acts recklessly or is reckless for purposes of this Act if the person acts recklessly or is reckless within the meaning of Section 6.03, Penal Code.

(e) To fully implement the privilege established by this Act, the term “environmental or health and safety law” shall be construed broadly.

§4. Audit Report.

(a) An audit report is a report that includes each document and communication, other than those set forth in Section 8 of this Act, produced from an environmental or health and safety audit.

(b) General components that may be contained in a completed audit report include:

(1) a report prepared by an auditor, monitor, or similar person, which may include:

(A) a description of the scope of the audit;

(B) the information gained in the audit and findings, conclusions, and recommendations; and

(C) exhibits and appendices;

(2) memoranda and documents analyzing all or a portion of the materials described by Subdivision (1) of this subsection or discussing implementation issues; and

(3) an implementation plan or tracking system to correct past noncompliance, improve current compliance, or prevent future noncompliance.



(c) The types of exhibits and appendices that may be contained in an audit report include supporting information that is collected or developed for the primary purpose of and in the course of an environmental or health and safety audit, including:

(1) interviews with current or former employees;

(2) field notes and records of observations;

(3) findings, opinions, suggestions, conclusions, guidance, notes, drafts, and memoranda;

(4) legal analyses;

(5) drawings;

(6) photographs;

(7) laboratory analyses and other analytical data;

(8) computer-generated or electronically recorded information;

(9) maps, charts, graphs, and surveys; and

(10) other communications associated with an environmental or health and safety audit.

(d) To facilitate identification, each document in an audit report should be labeled “COMPLIANCE REPORT: PRIVILEGED DOCUMENT,” or labeled with words of similar import. Failure to label a document under this section does not constitute a waiver of the audit privilege or create a presumption that the privilege does or does not apply.

(d-1) A person that begins an audit before becoming the owner of a regulated facility or operation may continue the audit after the acquisition closing date if the person gives notice under Section 10(g-1).

(e) Unless an extension is approved by the governmental entity with regulatory authority over the regulated facility or operation based on reasonable grounds, an audit must be completed within a reasonable time not to exceed six months after:

(1) the date the audit is initiated; or

(2) the acquisition closing date, if the person continues the audit under Subsection (d-1).

(f) Subsection (e)(1) does not apply to an audit conducted before the acquisition closing date by a person that is considering the acquisition of the regulated facility or operation.

§5. Privilege.

(a) An audit report is privileged as provided in this section.



(b) Except as provided in Sections 6, 7, and 8 of this Act, any part of an audit report is privileged and is not admissible as evidence or subject to discovery in:

(1) a civil action, whether legal or equitable; or

(2) an administrative proceeding.

(c) A person, when called or subpoenaed as a witness, cannot be compelled to testify or produce a document related to an environmental or health and safety audit if:

(1) the testimony or document discloses any item listed in Section 4 of this Act that was made as part of the preparation of an environmental or health and safety audit report and that is addressed in a privileged part of an audit report; and

(2) for purposes of this subsection only, the person is:

(A) a person who conducted any portion of the audit but did not personally observe the physical events;

(B) a person to whom the audit results are disclosed under Section 6(b) of this Act; or

(C) a custodian of the audit results.

(d) A person who conducts or participates in the preparation of an environmental or health and safety audit and who has actually observed physical events of violation, may testify about those events but may not be compelled to testify about or produce documents related to the preparation of or any privileged part of an environmental or health and safety audit or any item listed in Section 4 of this Act.

(e) An employee of a state agency may not request, review, or otherwise use an audit report during an agency inspection of a regulated facility or operation, or an activity of a regulated facility or operation.

(f) A party asserting the privilege described in this section has the burden of establishing the applicability of the privilege.

§6. Exception: Waiver.

(a) The privilege described by Section 5 of this Act does not apply to the extent the privilege is expressly waived by the owner or operator who prepared the audit report or caused the report to be prepared.

(b) Disclosure of an audit report or any information generated by an environmental or health and safety audit does not waive the privilege established by Section 5 of this Act if the disclosure:

(1) is made to address or correct a matter raised by the environmental or health and safety audit and is made only to:



(A) a person employed by the owner or operator, including temporary and contract employees;

(B) a legal representative of the owner or operator;

(C) an officer or director of the regulated facility or operation or a partner of the owner or operator; or

(D) an independent contractor retained by the owner or operator;

(E) a person considering the acquisition of the regulated facility or operation that is the subject of the audit; or

(F) an employee, temporary employee, contract employee, legal representative, officer, director, partner, or independent contractor of a person described by Paragraph (E) of this subdivision.

(2) is made under the terms of a confidentiality agreement between the person for whom the audit report was prepared or the owner or operator of the audited facility or operation and:

(A) a partner or potential partner of the owner or operator of the facility or operation;

(B) a transferee or potential transferee of the facility or operation;

(C) a lender or potential lender for the facility or operation;

(D) a governmental official of a state; or

(E) a person or entity engaged in the business of insuring, underwriting, or indemnifying the facility or operation; or

(3) is made under a claim of confidentiality to a governmental official or agency by the person for whom the audit report was prepared or by the owner or operator.

(c) A party to a confidentiality agreement described in Subsection (b)(2) of this section who violates that agreement is liable for damages caused by the disclosure and for any other penalties stipulated in the confidentiality agreement.

(d) Information that is disclosed under Subsection (b)(3) of this section is confidential and is not subject to disclosure under Chapter 552, Government Code. A public entity, public employee, or public official who discloses information in violation of this subsection is subject to any penalty provided in Chapter 552, Government Code. It is an affirmative defense to the clerical dissemination of a privileged audit report that the report was not clearly labeled “COMPLIANCE REPORT: PRIVILEGED DOCUMENT” or words of similar import. The lack of labeling may not be raised as a defense if the entity, employee, or official knew or had reason to know that the document was a privileged audit report.



(e) Nothing in this section shall be construed to circumvent the protections provided by federal or state law for individuals that disclose information to law enforcement authorities.

§7. Exception: Disclosure Required by Court or Administrative Hearings Official.

(a) A court or administrative hearings official with competent jurisdiction may require disclosure of a portion of an audit report in a civil or administrative proceeding if the court or administrative hearings official determines, after an in camera review consistent with the appropriate rules of procedure, that:

(1) the privilege is asserted for a fraudulent purpose;

(2) the portion of the audit report is not subject to the privilege under Section 8 of this Act; or

(3) the portion of the audit report shows evidence of noncompliance with an environmental or health and safety law and appropriate efforts to achieve compliance with the law were not promptly initiated and pursued with reasonable diligence after discovery of noncompliance.

(b) A party seeking disclosure under this section has the burden of proving that Subsection (a)(1), (2), or (3) of this section applies.

(c) Notwithstanding Chapter 2001, Government Code, a decision of an administrative hearings official under Subsection (a)(1), (2), or (3) of this section is directly appealable to a court of competent jurisdiction without disclosure of the audit report to any person unless so ordered by the court.

(d) A person claiming the privilege is subject to sanctions as provided by Rule 215 of the Texas Rules of Civil Procedure or to a fine not to exceed $10,000 if the court finds, consistent with fundamental due process, that the person intentionally or knowingly claimed the privilege for unprotected information as provided in Section 8 of this Act.

(e)A determination of a court under this section is subject to interlocutory appeal to an appropriate appellate court.

§8. Nonprivileged Materials.

(a) The privilege described in this Act does not apply to:

(1) a document, communication, datum, or report or other information required by a regulatory agency to be collected, developed, maintained, or reported under a federal or state environmental or health and safety law;

(2) information obtained by observation, sampling, or monitoring by a regulatory agency; or



(3) information obtained from a source not involved in the preparation of the environmental or health and safety audit report.

(b) This section does not limit the right of a person to agree to conduct and disclose an audit report.

§9. Review of Privileged Documents by Governmental Authority.

(a) Where an audit report is obtained, reviewed, or used in a criminal proceeding, the administrative or civil evidentiary privilege created by this Act is not waived or eliminated for any other purpose.

(b) Notwithstanding the privilege established under this Act, a regulatory agency may review information that is required to be available under a specific state or federal law, but such review does not waive or eliminate the administrative or civil evidentiary privilege where applicable.

(c) If information is required to be available to the public by operation of a specific state or federal law, the governmental authority shall notify the person claiming the privilege of the potential for public disclosure prior to obtaining such information under Subsection (a) or (b).

(d) If privileged information is disclosed under Subsection (b) or (c), on the motion of a party, a court or the appropriate administrative official shall suppress evidence offered in any civil or administrative proceeding that arises or is derived from review, disclosure, or use of information obtained under this section if the review, disclosure, or use is not authorized under Section 8. A party having received information under Subsection (b) or (c) has the burden of proving that the evidence offered did not arise and was not derived from the review of privileged information.

§10. Voluntary Disclosure; Immunity.

(a) Except as provided by this section, a person who makes a voluntary disclosure of a violation of an environmental or health and safety law is immune from an administrative or civil penalty for the violation disclosed.

(b) A disclosure is voluntary only if:

(1) the disclosure was made:

(A) promptly after knowledge of the information disclosed is obtained by the person; or

(B) not more than the 45th day after the acquisition closing date, if the violation was discovered during an audit conducted before the acquisition closing date by a person considering the acquisition of the regulated facility or operation;

(2) the disclosure was made in writing by certified mail to an agency that has regulatory authority with regard to the violation disclosed;



(3) an investigation of the violation was not initiated or the violation was not independently detected by an agency with enforcement jurisdiction before the disclosure was made using certified mail;

(4) the disclosure arises out of a voluntary environmental or health and safety audit;

(5) the person who makes the disclosure initiates an appropriate effort to achieve compliance, pursues that effort with due diligence, and corrects the noncompliance within a reasonable time;

(6) the person making the disclosure cooperates with the appropriate agency in connection with an investigation of the issues identified in the disclosure; and

(7) the violation did not result in injury or imminent and substantial risk of serious injury to one or more persons at the site or off-site substantial actual harm or imminent and substantial risk of harm to persons, property, or the environment.

(b-1) For a disclosure described by Subsection (b)(1)(B), the person making the disclosure must certify in the disclosure that before the acquisition closing date:

(1) the person was not responsible for the environmental, health, or safety compliance at the regulated facility or operation that is subject to the disclosure;

(2) the person did not have the largest ownership share of the seller;

(3) the seller did not have the largest ownership share of the person; and

(4) the person and the seller did not have a common corporate parent or a common majority interest owner.

(c) A disclosure is not voluntary for purposes of this section if it is a report to a regulatory agency required solely by a specific condition of an enforcement order or decree.

(d) The immunity established by Subsection (a) of this section does not apply and an administrative or civil penalty may be imposed under applicable law if:

(1) the person who made the disclosure intentionally or knowingly committed or was responsible within the meaning of Section 7.02, Penal Code, for the commission of the disclosed violation;

(2) the person who made the disclosure recklessly committed or was responsible within the meaning of Section 7.02, Penal Code, for the commission of the disclosed violation and the violation resulted in substantial injury to one or more persons at the site or off-site harm to persons, property, or the environment;



(3) the offense was committed intentionally or knowingly by a member of the person’s management or an agent of the person and the person’s policies or lack of prevention systems contributed materially to the occurrence of the violation;

(4) the offense was committed recklessly by a member of the person’s management or an agent of the person, the person’s policies or lack of prevention systems contributed materially to the occurrence of the violation, and the violation resulted in substantial injury to one or more persons at the site or off-site harm to persons, property, or the environment; or

(5) the violation has resulted in a substantial economic benefit which gives the violator a clear advantage over its business competitors.

(e) A penalty that is imposed under Subsection (d) of this section should, to the extent appropriate, be mitigated by factors such as:

(1) the voluntariness of the disclosure;

(2) efforts by the disclosing party to conduct environmental or health and safety audits;

(3) remediation;

(4) cooperation with government officials investigating the disclosed violation;

(5) the period of ownership of the regulated facility or operation; or

(6) other relevant considerations.

(f) In a civil or administrative enforcement action brought against a person for a violation for which the person claims to have made a voluntary disclosure, the person claiming the immunity has the burden of establishing a prima facie case that the disclosure was voluntary. After the person claiming the immunity establishes a prima facie case of voluntary disclosure, other than a case in which under Subsection (d) of this section immunity does not apply, the enforcement authority has the burden of rebutting the presumption by a preponderance of the evidence or, in a criminal case, by proof beyond a reasonable doubt.

(g) In order to receive immunity under this section, a facility conducting an environmental or health and safety audit under this Act must provide notice to an appropriate regulatory agency of the fact that it is planning to commence the audit. The notice shall specify the facility or portion of the facility to be audited, the anticipated time the audit will begin, and the general scope of the audit. The notice may provide notification of more than one scheduled environmental or health and safety audit at a time. This subsection does not apply to an audit conducted before the acquisition closing date by a person considering the acquisition of the regulated facility or operation that is the subject of the audit.



(g-1) A person that begins an audit before becoming the owner of the regulated facility or operation may continue the audit after the acquisition closing date if, not more than the 45th day after the acquisition closing date, the person provides notice to an appropriate regulatory agency of the fact that the person intends to continue an ongoing audit. The notice shall specify the facility or portion of the facility being audited, the date the audit began, and the general scope of the audit. The person must certify in the notice that before the acquisition closing date:

(1) the person was not responsible for the scope of the environmental, health, or safety compliance being audited at the regulated facility or operation;

(2) the person did not have the largest ownership share of the seller;

(3) the seller did not have the largest ownership share of the person; and

(4) the person and the seller did not have a common corporate parent or a common majority interest owner.

(h) The immunity under this section does not apply if a court or administrative law judge finds that the person claiming the immunity has, after the effective date of this Act, (1) repeatedly or continuously committed significant violations, and (2) not attempted to bring the facility or operation into compliance, so as to constitute a pattern of disregard of environmental or health and safety laws. In order to be considered a “pattern,” the person must have committed a series of violations that were due to separate and distinct events within a three-year period at the same facility or operation.

(i) A violation that has been voluntarily disclosed and to which immunity applies must be identified in a compliance history report as being voluntarily disclosed.

§11. Circumvention by Rule Prohibited.

A regulatory agency may not adopt a rule or impose a condition that circumvents the purpose of this Act.

§12. Applicability.

The privilege created by this Act applies to environmental or health and safety audits that are conducted on or after the effective date of this Act.

§13. Relationship to Other Recognized Privileges.

This Act does not limit, waive, or abrogate the scope or nature of any statutory or common law privilege, including the work product doctrine and the attorney-client privilege.



Appendix B Government Code Chapter 552. Open Records

§552.021. Availability of Public Information.

Public information is available to the public at a minimum during the normal business hours of the governmental body.

§552.124. Exception: Certain Audits.

Any documents or information privileged under the Texas Environmental, Health, and Safety Audit Privilege Act are excepted from the requirements of Section 552.021.

§552.352. Distribution of Confidential Information.

(a) A person commits an offense if the person distributes information considered confidential under the terms of this chapter.

(b) An offense under this section is a misdemeanor punishable by:

(1) a fine of not more than $1,000;

(2) confinement in the county jail for not more than six months; or

(3) both the fine and confinement.

(c) A violation under this section constitutes official misconduct.



Appendix C Model Notice of Audit [month day, year] Via certified Mail, return receipt requested, no. P12 345 6789 Deputy Director, MC 172 Office of Compliance and Enforcement TCEQ P.O. Box 13087 Austin, Texas 78711-3087 Re: ABC Corporation; CN123456789; ABC Plant—Unit No. 123; RN123456789 Facility ID No. 12345; Permit Nos. 123 and 456 Scheduled environmental, health, and safety audit Dear OCE Deputy Director: Please be advised that in accordance with the Environmental, Health and Safety Audit Privilege Act (Audit Act), the ABC Corporation’s Corporate Audit Group intends to conduct an environmental, health, and Safety compliance audit at its ABC Plant located at [plant’s physical address]. Pursuant to Section 10(g) of the Audit Act, which provides immunity for violations voluntarily disclosed as a result of a compliance audit, ABC Corporation is hereby notifying you that the planned audit will commence on [month day, year], at approximately [start time] and will cover Unit No. 123. The scope of the audit will be to evaluate compliance with all applicable environmental, health, and safety regulations, as well as Permit Nos. 123 and 456. Pursuant to Section 4(e) of the Audit Act, the audit will be completed no later than six months after the date of its commencement, unless, pursuant to a written request, we receive your written approval of an extension before the end of the six-month period. Please do not hesitate to contact me at 512-123-4567, [e-mail address], if you have any questions or require further information regarding this matter. Sincerely, [printed name] [title] cc: Regional Director, [TCEQ regional-office address] Audit Act Coordinator, TCEQ Litigation Division



Appendix D Model Disclosure of Violation [month day, year] Via certified mail, return receipt requested, no. P12 345 6789 Deputy Director, MC 172 Office of Compliance and Enforcement TCEQ P.O. Box 13087 Austin, TX 78711-3087 Re: ABC Corporation; CN123456789; ABC Plant—Unit No. 123; RN123456789 Facility ID No. 12345; Permit Nos. 123 and 456 Voluntary disclosure of violations discovered pursuant to a scheduled environmental, health, and safety audit; NOA dated [month day, year] Dear OCE Deputy Director: ABC Corporation has conducted an environmental audit of its ABC Plant, located at [plant’s physical address]. Advance notice of the audit was given to you by letter dated [month day, year]. The audit covered Unit No. 123; it began on [month day, year], and was completed on [month day, year]. This letter is to notify you of several violations discovered in the environmental audit. Accordingly, ABC Corporation hereby invokes the immunity from civil and administrative penalties provided by Section 10 of the Audit Act. The enclosed addendum summarizes the violations discovered, the time periods during which the violations occurred, the specific rule or permit provision violated, and the status and schedule of corrective actions. Please do not hesitate to contact me at 512- 123-4567, [e-mail address], if you have any questions or require further information regarding this matter. Sincerely, [printed name] [title] Enclosure cc: Regional Director, [TCEQ regional-office address] Audit Act Coordinator, TCEQ Litigation Division



Appendix E Model Notice of Audit for Continuing Audit and Disclosure of Violation for a Newly Acquired Company [month day, year] Via certified mail, return receipt requested, no. P12 345 6789 Deputy Director, MC 172 Office of Compliance and Enforcement TCEQ P.O. Box 13087 Austin, TX 78711-3087 Re: XYZ Corporation; CN123456789; ABC Plant; RN123456789; Facility ID No. 12345; Permit Nos. 123 and 456 Notice of audit and voluntary disclosure of violations discovered before

acquisition and pursuant to a scheduled environmental, health, and safety audit

Dear OCE Deputy Director: XYZ Corporation acquired the ABC Plant from the ABC Corporation on [month day, year]. In accordance with Section 10(g-1) of the Environmental, Health, and Safety Audit Privilege Act (Audit Act), the XYZ Corporation’s Corporate Audit Group began an environmental, health, and safety compliance audit prior to the acquisition of the ABC Plant located at [plant’s physical address] on [month day, year]. The scope of the audit was to evaluate compliance with all applicable environmental, health, and safety regulations, as well as Permit Nos. 123 and 456. Pursuant to Section 4(d-1) of the Audit Act, XYZ Corporation intends to continue the ongoing audit after the acquisition closing date and the audit will be completed no later than six months after the acquisition closing date, unless, pursuant to a written request for extension, we receive written approval of an extension before the end of the six-month period. This letter is also to notify you of several violations discovered during the environmental audit conducted before the acquisition closing date. Accordingly, XYZ Corporation hereby invokes the immunity from civil and administrative penalties provided by Section 10 of the Audit Act. The enclosed addendum summarizes the violations discovered, the time periods during which the violations occurred, the specific rule or permit provision violated, and the status and schedule of corrective actions.



In accordance with Sections 10(g-1) and 10(b-1) of the Audit Act, XYZ Corporation certifies that before the acquisition closing date:

- XYZ Corporation was not responsible for the scope of the environmental, health, or safety compliance being audited at the ABC Plant;

- XYZ Corporation was not responsible for the environmental, health, or safety compliance at the ABC Plant that is subject to the disclosure;

- XYZ Corporation did not have the largest ownership share of the ABC Corporation;

- ABC Corporation did not have the largest ownership share of the XYZ Corporation; and

- XYZ Corporation and ABC Corporation did not have a common corporate parent or a common majority-interest owner.

Please do not hesitate to contact me at 512-123-4567, [e-mail address], if you have any questions or require further information regarding this matter. Sincerely, [printed name] [title] Enclosure cc: Regional Director, [TCEQ regional-office address] Audit Act Coordinator, TCEQ Litigation Division



Appendix F Model Notice of Audit for a Completed Audit and Disclosure of Violation for a Newly Acquired Company [month day, year] Via certified mail, return receipt requested, no. P12 345 6789 Deputy Director, MC 172 Office of Compliance and Enforcement TCEQ P.O. Box 13087 Austin, TX 78711-3087 Re: XYZ Corporation; CN123456789; ABC Plant; RN123456789; Facility ID No. 12345; Permit Nos. 123 and 456 Notice of audit and voluntary disclosure of violations discovered before

acquisition and pursuant to a scheduled environmental, health, and safety audit

Dear OCE Deputy Director: XYZ Corporation acquired the ABC Plant from the ABC Corporation on [month day, year]. In accordance with Section 10(g-1) of the Environmental, Health, and Safety Audit Privilege Act (Audit Act), the XYZ Corporation’s Corporate Audit Group began an environmental, health, and safety compliance audit prior to the acquisition of the ABC Plant located at [plant’s physical address] on [month day, year]. The scope of the audit was to evaluate compliance with all applicable environmental, health, and safety regulations, as well as Permit Nos. 123 and 456. XYZ Corporation completed the audit before the acquisition closing date on [month day, year]. This letter is also to notify you of several violations discovered during the environmental audit conducted before the acquisition closing date. Accordingly, XYZ Corporation hereby invokes the immunity from civil and administrative penalties provided by Section 10 of the Audit Act. The enclosed addendum summarizes the violations discovered, the time periods during which the violations occurred, the specific rule or permit provision violated, and the status and schedule of corrective actions. In accordance with Sections 10(g-1) and 10(b-1) of the Audit Act, XYZ Corporation certifies that before the acquisition closing date:



- XYZ Corporation was not responsible for the scope of the environmental, health, or safety compliance being audited at the ABC Plant;

- XYZ Corporation was not responsible for the environmental, health, or safety compliance at the ABC Plant that is subject to the disclosure;

- XYZ Corporation did not have the largest ownership share of the ABC Corporation;

- ABC Corporation did not have the largest ownership share of the XYZ Corporation; and

- XYZ Corporation and ABC Corporation did not have a common corporate parent or a common majority-interest owner.

Please do not hesitate to contact me at 512-123-4567, [e-mail address], if you have any questions or require further information regarding this matter. Sincerely, [printed name] [title] Enclosure cc: Regional Director, [TCEQ regional-office address] Audit Act Coordinator, TCEQ Litigation Division



Appendix G Model Addendum to Disclosure of Violation Disclosure of Violation: Addendum ABC Company ABC Plant RN123456789

Violation

Citation and Permit

Provisions

Violation Discovery

Date Violation Start Date

Corrective Action Plan

Schedule or Target

Completion Date

Violation Status

Completion or Actual

Completion Date

1. Failure to register for

permit by rule to authorize

surface-coating

operations.

30 TAC § 106.433(9)

9/15/2013 4/23/2006 Submit Form PI-7 and obtain

confirmation from the

TCEQ that surface-coating

operations are registered under permit

by rule.

12/1/2013 Early completion: confirmation

received 9/30/2013

2. Failure to properly label

used-oil containers. Employees

were not trained in labeling

procedures.

30 TAC § 328.26(d)

9/15/2013 6/15/2007 All used-oil containers are now properly

labeled and employee training

regarding labeling

procedures was

conducted.

Complete Used-oil containers

labeled as of 9/20/2013

3. Failure to update

Stormwater Pollution

Protection Plan

(SWPPP). The SWPPP needs to be updated

to reflect current owner.

Stormwater General Permit

TXR05000, Part III,

Section A

9/15/2013 7/5/2007 Update SWPPP to accurately

reflect current owner.

12/1/2013 Status update: SWPPP

submission has been delayed;

plan expected to be submitted by

11/1/2013

This is an example addendum to a Disclosure of Violation. Please add columns or rows as needed.

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