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Presenting a live 90-minute webinar with interactive Q&A
Environmental Audits: Navigating E-Disclosure, Privilege, Exceptions, Voluntary Disclosure and Other Issues Ensuring Compliance with Environmental Laws,
Responding When Violations Are Discovered
Today’s faculty features:
1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific
TUESDAY, JULY 7, 2015
Joseph P. Koncelik, Counsel, Tucker Ellis, Cleveland
Gregory F. Linsin, Partner, Blank Rome, Washington, D.C.
Thomas J. P. McHenry, Partner, Gibson Dunn & Crutcher, Los Angeles
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Environmental Audits: Navigating E-Disclosure, Privilege,
Voluntary Disclosure and Other Issues
July 7, 2015– Strafford Webinar
Thomas J.P. McHenry
333 South Grand Avenue
Los Angeles, California 90071
(213) 229-7135
<Presentation Title/Client Name> <Presentation Title/Client Name>
Program Overview
Key Issues in Environmental Auditing
EPA’s New E-Disclosure Program
State Audit Programs
Voluntary Disclosure
Privilege Issues
Responding to Enforcement Actions
Questions & Answers
6
<Presentation Title/Client Name> <Presentation Title/Client Name>
Key Issues in Environmental Auditing (1 of 2)
What?
– Systematic, periodic and documented review of environmental practices and
operations
Why?
– Opportunity to proactively identify and address issues to ensure compliance
– Reduced risk and exposure to civil and criminal liability (EPA and state audit
policies)
– Requirement of corporate, industry or other standards and certifications
– SEC disclosure obligations
– “What you don’t know, will hurt you!”
7
<Presentation Title/Client Name> <Presentation Title/Client Name>
Key Issues in Environmental Auditing (2 of 2)
When?
– Regular program
– Disclosure obligations may be triggered
Who?
– Senior management oversight and support
– Independent auditor (in-house or third party)
How?
– Structured program and procedures
– Reporting system
– Corrective action
– Follow-up
8
<Presentation Title/Client Name> <Presentation Title/Client Name>
Pros and Cons of Environmental Audits
Pros
– Promotes a culture of compliance
– Encourages self-policing and attention
– Identification and correction prior to discovery by the regulators
– Opportunity to fix problems and make a fresh start when new
companies are purchased or acquired
– Reduce or eliminate gravity based penalties
– Limit likelihood of criminal prosecution
– Combine with OSHA, social responsibility and other audit components
– It’s the right thing to do! But only, if it’s done right.
9
<Presentation Title/Client Name> <Presentation Title/Client Name>
Pros and Cons of Environmental Audits
Cons
– Significant investment of time and resources
– Triggers possible legal obligation to report
– Triggers costs of corrective or remedial action
– Audit documentation can serve as basis of subsequent enforcement
– Lack of understanding of privilege protections
– Does not function as a “shield” from prosecution
10
<Presentation Title/Client Name> <Presentation Title/Client Name>
EPA’s New E-Disclosure Program -- Pilot
In August 2008, EPA launched a pilot program for an electronic self-
disclosure system called “E-Disclosure”
– Allowed online reporting of environmental violations
– 6 states (AR, LA, NM, OK, TX) reported all violations
– Remaining states limited to Emergency Planning Community Right to Know
Act (EPCRA) violations
EPA also floated idea of doing away with self-disclosure program entirely
11
<Presentation Title/Client Name> <Presentation Title/Client Name>
EPA’s New E-Disclosure Program -- Webcasts
In June 2015, EPA hosted 2 webcasts describing the agency’s plan for
expanding the full program nationwide
Intended to streamline the implementation of disclosures under the EPA
Audit Policy and the Small Business Compliance Policy (issued in April
2000)
The webcasts were open to the public and allowed stakeholders to:
– Learn how the new system will be designed and implemented
– Share comments and ask questions about the approach
– Prepare for the expected Fall 2015 launch
12
<Presentation Title/Client Name> <Presentation Title/Client Name>
E-Disclosure: Program Mechanics – Tier 1
Tier 1 Disclosures
– Includes EPCRA violations that meet all Audit Policy or Small Business
Compliance Policy conditions
– Excludes CERCLA 103/EPCRA 304 chemical release reporting violations or
EPCRA violations with significant economic benefit
– System automatically issues an electronic Notice of Determination (eNOD)
confirming that violations are resolved with no assessment of civil penalties,
conditioned on the accuracy and completeness of the submitter’s eDisclosure
13
<Presentation Title/Client Name> <Presentation Title/Client Name>
E-Disclosure: Program Mechanics – Tier 2
Tier 2 Disclosures
– Includes all non-EPCRA violations and EPCRA violations meeting only
conditions 2-9 (i.e., discovery was not systematic)
– System automatically issues an Acknowledgement Letter (AL) noting receipt
of the disclosure and promising that EPA will make a determination as to
eligibility for penalty mitigation if and when it considers taking enforcement
action for environmental violations
14
<Presentation Title/Client Name> <Presentation Title/Client Name>
E-Disclosure: Program Mechanics – Flow Chart
15
eNOD
AL
Tier 1
Tier 2
Most EPCRA
violations
All other new
disclosures
E-Disclosure
Portal
EPA
screening
& spot
checks
Disclosure
<Presentation Title/Client Name> <Presentation Title/Client Name>
E-Disclosure: Key Reporting Deadlines
Step 1: Register to file with the centralized web-based portal (CDX)
Step 2: Submit violation disclosure report
– Within 21 days of discovery
Step 3: Certify compliance
– Correct violations within 60 days of discovery for Audit Policy (within 90 days
for Small Business Compliance Policy)
• Tier 1 disclosures: No extensions
• Tier 2 Audit Policy: 30 day extension upon request, 90 additional days with
justification
• Tier 2 Small Business Policy: 90 day extension upon request, 180 additional days
with justification
– Submit compliance report within 60 days of disclosure for Audit Policy (within
90 days for Small Business Compliance Policy)
16
*Note the different deadlines for correcting violations (60 days after discovery) vs. reporting compliance (60 days after
disclosure). Disclosure can occur up to 21 days after discovery.
<Presentation Title/Client Name> <Presentation Title/Client Name>
E-Disclosure: Additional Considerations (1 of 2)
Confidential Business Information (CBI)
– Portal accepts only sanitized (non-CBI) data
– Follow-up CBI must be submitted manually
New Owners
– May use the portal to disclose violations
– However, submissions and resolutions will continue to be processed manually
17
<Presentation Title/Client Name> <Presentation Title/Client Name>
E-Disclosure: Additional Considerations (2 of 2)
Pre-Existing Disclosures
– Outstanding EPCRA violations can be resubmitted as Tier 1 within 90 days of
launch
– Disclosures subject to audit agreement or significant settlement negotiations
will be resolved with NOD, CAFO, or CD
– All others treated as Tier 2; Federal Register notice announcing E-Disclosure
launch will serve as Acknowledgement Letter (AL)
All other disclosures (to EPA HQ and Regions) must come through portal
18
<Presentation Title/Client Name> <Presentation Title/Client Name>
E-Disclosure: Next Steps
Summer 2015
– Public comment and feedback
– System build-out and testing
Fall 2015
– E-Disclosure launch
– Federal Register notice
Within 90 days of launch: Resubmit outstanding EPCRA disclosures
19
<Presentation Title/Client Name> <Presentation Title/Client Name>
E-Disclosure: Helpful Links and Contact
EPA presentation slides: http://www2.epa.gov/sites/production/files/2015-
06/documents/edisclosurewebinarpresentation_0.pdf
2 page information sheet: http://www2.epa.gov/sites/production/files/2015-
06/documents/edisclosureinformationsheet.pdf
EPA contact: Phillip Milton, [email protected], (202) 564-5029
20
<Presentation Title/Client Name> <Presentation Title/Client Name>
21
Thomas McHenry
Contact:
333 South Grand Avenue
Los Angeles, CA 90071-3197
Tel: 213.229.7135
Tom is a partner in Gibson Dunn’s
Los Angeles office and a member of the
firm's Environment and Natural Resources
practice. He practices general
environmental law with an emphasis on air
quality, hazardous waste, environmental
diligence, land use and energy issues.
Tom has broad experience with air quality
compliance and permitting. He has advised
companies on new source review, emission
reduction credits and rulemaking issues
and has handled enforcement and
compliance issues before all the major air
districts in California and the California
Air Resources Board.
JOE KONCELIK TUCKER ELLIS LLP [email protected] (216) 696-2373
OHIOENVIRONMENTALLAWBLOG.COM
Voluntary Disclosures
• EPA versus State Audit Laws/Policies
• Do’s and Dont’s
• EPA’s New Owner Audit Policy
U.S. EPA Audit Policy Nine Conditions (All Nine 100% of gravity; Eight of Nine 75% )
1. Systematic Discovery- Through an audit or compliance management system (required for 100% forgiveness
2. Voluntary Disclosure- Violations not discovered by required monitoring, sampling or auditing
3. Prompt Disclosure- Within 21 days of discovery unless under EPA audit agreement
4. Independent Discovery- Facility not the subject of EPA investigation or Citizen’s Suit
5. Correction- Within 60 days or expeditiously as practicable. Should notify EPA if more than 60 days to fix.
6. Prevent Recurrence- Take steps to prevent recurrence (ex: improvement to compliance management system)
7. No Repeat Violations- Same or closely related violations didn’t occur w/in 3 year (five years for multi-facility)
8. Certain Violations Excluded- Serious harm or endangerment
9. Cooperation with U.S. EPA- Provide information requested by EPA and cooperate with the Agency
23
State Audit Program States with Audit Privilege Policies or Laws
Privilege Only Laws: AZ, AR, IN and OR
Immunity Laws: NJ, RI, MN
Privilege & Immunity Laws: AK, CO, IA, KS, KY, MI, MS, NE, OH, SC, SD, TX, UT, VA, WY
Policies: AZ, AK, CA, CT, DE, FL, HI, IN, ME, MD, MA, NM, NY, NC, OK, OR, PA, TN, VT, WA, WY
[Information from U.S. EPA Website]
24
EPA vs. State Audit Laws
Privilege – Varies by State
• (reporting deadline, period to correct, def. “audit”, etc.)
– Not admissible in evidence or produce in discovery in civil or administrative proceedings • Persons with information can’t be compelled to testify
– Generally all communications regarding an environmental audit and audit report or privileged • Includes environmental consultants • Pay close attention to document management requirements
– Exceptions • Criminal proceedings, legally required information, waiver, obtained in bad faith or for
fraudulent purposes, necessary to prevent imminent harm or endangerment, information is personal knowledge obtained outside context of audit, existed prior to the audit
More Flexibility
– Less stringent reporting requirements – Correction within a reasonable amount of time
25
Voluntary Disclosure Pro’s and Con’s of Disclosure
Pro’s – Return to compliance w/o fear
of future action
– Civil penalty forgiveness
– Potential avoidance of criminal actions, unless • “prevalent management
philosophy or practice concealed or condoned violations”
• “high level corporate officials involvement or willful blindness”
– EPA general commitment won’t use audit materials against company
Con’s – U.S. EPA Guidance not law
– Violations become public
– Third party suits
– Limited scope of “non-recommendation provision” for criminal actions • DOJ
• EPA Crimes Section
– State and federal independent enforcement authority
– “Cooperation” • Waiver of A-C privilege or
Work Product in criminal context
26
Voluntary Disclosure Some Do’s and Dont’s Regarding Disclosure
1. Only perform if prepared to fix- understand the cost of returning to compliance. Be aware of deadlines for correcting.
2. Pay attention to disclosure timeframes- when did you learn of the violation (e-mail, date of audit report, etc.)
3. Prepare for investigation following disclosure- EPA and/or State will likely visit your site. Document what you have done to correct violations. Prepare for site visit.
4. Disclose potential violations- Even if still investigating disclose because no protection for violations not disclosed
5. Multiple facilities- Be aware of potential for inspections of non-reporting facilities once a disclosure is made. Consider risk of not performing company-wide audit.
6. Nuances of State and even divisions w/i State Agencies- Each state has unique aspects of their policies. Even divisions of the same state agency can have different interpretations of the language. Discuss hypotheticals with in-house counsel at the State agency.
7. Be aware of missing reports or permits- Clients may submit permit applications, missing reports or amended reports which can trigger enforcement. Appropriate to consider disclosure prior to submission.
27
EPA’s New Owner Policy Incentives to Purchasers with Preexisting Compliance Issues
• Waiver of Economic Benefit portion of the Penalty? • Potentially ECO BEN limited to period post acquisition to compliance
• Policy modifies EPA’s Nine Conditions 1. Systematic Discovery (Condition 1)- Pre-acquisition due diligence
recognized as one time event
2. Voluntary Disclosure (Condition 2)- Monitoring, sampling and auditing considered “voluntary”
3. Prompt Disclosure (Condition 3)- Up to 45 days following closing or 21 days after discovery (whichever is longer)
4. Excluded Violations (Condition 8)- Imminent and substantial endangerment violations could be eligible if occurred prior to ownership
5. Cooperation (Condition 9)- Must cooperate with EPA in determining if conditions as modified were met
28
EPA’s New Owner Policy “New Owner” Status
New Owner for Nine (9) Months Post-Closing
Certify as to the following: • Prior to purchase, new owner not responsible for compliance at
the facility;
• Did not cause the violations;
• Could not prevent their occurrence;
• Violation originated with the prior owner;
• Buyer did not have the largest ownership interest share of the seller; and
• No common corporate parent
29
EPA’s New Owner Policy Impact on Merger’s and Acquisitions
Buyers • Traditional Phase I won’t capture most noncompliance issues; • Due diligence- Include compliance audits? • Cleanup seen as the bigger risk versus compliance; • Limited Time to Report- 45 days post closing or 21 days (whichever is
longer) – Audit Agreement- Extends time periods for new owner status and reporting – Individually Upon Discovery- More confidentiality, but less flexibility on timing;
• Impact on indemnification clauses (voluntary reporting exclusion)
Sellers • No protection from EPA enforcement if Buyer discloses violations; • “No tell clauses” - EPA comments such clauses are potentially void
as against public policy
30
Privilege and Environmental Audits & Pre-Disclosure Evaluation of the
Enforcement Risks
July 7, 2015
Gregory F. Linsin | Blank Rome LLP
Phone: 202.772.5813
Mobile: 202.340.7806
Email: [email protected]
Privilege and Environmental Audits
Recognizing scope and limits of privilege in context of environmental audits is essential
– Attorney client privilege
– Work product doctrine
– Self-critical analysis privilege
– State environmental assessment privilege
Need to plan from outset to ensure availability of privilege and protect against waiver
32
Why Protect Available Privileges?
Fosters open communication among counsel, auditor, and client
Ensures that privileged communications are not disclosed in audit context or subject to discovery in subsequent litigation
Enables client that uncovers noncompliance to manage disclosure effectively
Attorney-client privilege will NOT shield FACTS developed during audit from disclosure
33
Attorney Client Privilege and Work Product Doctrine Protection
Attorney Client Privilege
– Communications between attorney and client
– For the purpose of seeking legal advice
– Virtually complete protection
If privilege not waived
Work Product Doctrine Protection
– Prepared in anticipation of litigation
– Work produced by lawyers and non-lawyers
– Qualified protection against disclosure
“substantial need” and “undue hardship” exception
34
Attorney Client & Work Product Cases
Andritz Sprout-Bauer, Inc. v. Beazer East, Inc., 174 F.R.D. 609 (M.D. Pa. 1997)
– Documents related to environmental consulting work that were prepared for purpose of obtaining or giving legal advice were protected by attorney client privilege
AVX Corp. v. Horry-Land Co., 2010 WL 4884903 (D.S.C. 2010)
– Environmental report prepared by consulting firm was not covered by attorney client privilege
– Consultant was providing environmental services directly to the client
35
Self-Critical Analysis and State Environmental Assessment Privileges
In theory, the self-critical analysis privilege was intended to apply to nearly all audit report information, including underlying facts developed during audit
Scope of state environmental assessment privileges vary by state
Neither is widely recognized by federal courts or agencies
Number of states with environmental audits privilege and/or immunity laws: – environmental audit privilege laws: 5
– environmental audit immunity laws: 2
– environmental audit privilege and immunity laws: 19 http://www.epa.gov/region05/enforcement/audit/stateaudit.html
36
Self-Critical Analysis and State Environmental Assessment Privilege Cases
Lara v. Tri-State Drilling, 504 F. Supp. 2d 1323 (N.D. Ga. 2007) – Notes unclear history and application of self-critical analysis privilege
– Refuses to apply the privilege absent express recognition by Georgia courts or legislature
AVX Corp. v. Horry-Land Co.
– Strictly construes definition of “environmental audit” and “environmental audit report” under the South Carolina environmental privilege statute
– Report at issue did not meet statutory definition and thus was not shielded by the privilege
Andritz Sprout-Bauer, Inc. v. Beazer East, Inc.
– “There is no authority before us which suggests that Pennsylvania or Virginia has adopted the self-critical analysis test.”
37
EPA and DOJ Policy on Privilege
EPA Policy on Privilege
“Presumably no” waiver of attorney client privilege or work product for “cooperation” for civil self-disclosure
http://www.gpo.gov/fdsys/pkg/FR-2000-04-11/pdf/00-8954.pdf
Privileges raised during the course of the investigation must be made in good faith
EPA opposed to statutory and regulatory audit privileges and immunities
DOJ Policy
Recognizes “cooperation” through disclosure of relevant facts
Does not require waiver of privilege
Selective Waiver = Waiver
In re Qwest Communications, 450 F. 3d 1179 (10th Cir. 2006)
– Company’s voluntary production of documents to government agency constituted waiver of attorney-client privilege and work-product protection
– Tenth Circuit declined to acknowledge validity of “selective waiver doctrine”
38
Pre-Disclosure Evaluation of Civil v. Criminal Enforcement Risks
Based on complete factual record developed during environmental audit, counsel must critically evaluate:
– Whether environmental violations occurred
– Whether disclosure will meet audit policy requirements
– Whether EPA and DOJ will view the violations as civil or criminal offenses
39
Civil v. Criminal Risks – cont’d
Can be challenging to predict with confidence because: – Low intent standard for environmental criminal
offenses
– Preponderance v. beyond a reasonable doubt
– Must consider discretionary policy factors, e.g.: Pervasiveness of misconduct
Pre-existing compliance program
Extent of environmental harm
Potential exposure of individuals
40
EPA Incentives Under Audit Policy
For civil violations – Complete relief from gravity-based penalties if part of systematic compliance
effort, (D)1-(D)9 of the Audit Policy terms are met
– Reduction of 75% of gravity-based penalties if (D)2-(D)9 are met
No criminal referral by EPA if conditions D(2) through D(9) are met – No systematic discovery requirement as long as self-policing, discovery, and
disclosure were conducted in good faith and the entity adopts a systematic approach to preventing recurrence of the violation
EPA has not referred for criminal prosecution where regulated entity: – Uncovered violation through environmental audits or due diligence;
– Promptly disclosed and expeditiously corrected those violations; and
– Met all other conditions of Section D of the policy.
EPA’s policy statement does NOT shield entity from DOJ’s exercise of independent prosecutorial discretion
41
DOJ Guidance on Prosecutorial Discretion
Factors considered in exercising prosecutorial discretion – Voluntary disclosure – Cooperation, including disclosure of relevant facts – Preventative measures and pre-existing compliance
programs – Pervasiveness of noncompliance – Internal disciplinary action – Subsequent remedial measures http://www.justice.gov/sites/default/files/opa/legacy/2008/08/
28/corp-charging-guidelines.pdf http://www.justice.gov/enrd/selected-publications/factors-
decisions-criminal-prosecutions
42
Questions?
Gregory F. Linsin | Blank Rome LLP Phone: 202.772.5813
Mobile: 202.340.7806
Email: [email protected]