Potential Changes to EPA Self-Policing Incentives

Environmental Update

Date: December 06, 2012

Overview

According to final guidance issued earlier this year by the United States Environmental Protection Agency (EPA), with the start of its 2013 fiscal year (FY) on October 1, 2012, EPA intends to reduce investment in its self-policing Audit Policy to "a limited national presence." Although EPA has yet to explain how it plans to handle voluntary disclosures from companies in FY 2013 in light of this limited investment, its decision has the potential to affect both the federal and corollary state voluntary disclosure and immunity programs.

Audit Policy Background

In 1995, EPA issued a policy called "Incentives for Self-Policing: Discovery, Disclosure, Correction and Prevention of Violations" ("Audit Policy" or "Policy"). Since its inception the Policy has provided the regulated community an opportunity to find and disclose certain environmental violations to EPA, and in turn receive immunity or mitigation of penalties for those violations. 60 Fed. Reg. 66706 (Dec. 22, 1995), revised 65 Fed. Reg. 19618 (April 11, 2000). EPA also expressed its policy to refrain from making routine requests for copies of audit reports for purposes of triggering enforcement investigations.

Under the Audit Policy, if an entity self-reports certain environmental violations and meets the policy conditions, it is eligible for incentives including immunity from gravity-based penalties and no recommendation for criminal prosecution. To be eligible for these incentives, reporting parties must meet enumerated Policy conditions, including:

  • Systematic and voluntary discovery of the violation through an audit or compliance management system.
  • Prompt disclosure to EPA (within 21 days of discovery).
  • Expeditious correction (within 60 days of discovery).
  • Prevention of recurrence of the violations.

The Policy does not offer immunity from economic benefit penalties (financial benefits obtained through noncompliance). If an entity meets all Policy conditions except detection of the violation through a systematic discovery procedure, it may still be eligible for a 75 percent reduction in gravity-based penalties. However, violations that cause serious actual harm or that present an imminent and substantial endangerment are not eligible for penalty mitigation or immunity.

For nearly two decades, the regulated community has found significant benefit in the Audit Policy program. Over the past five years, an average of 1,315 facilities per year have initiated voluntary disclosures, with an average of 475 facilities each year resolving disclosure matters with EPA. The Audit Policy has been a significant factor to encourage companies to implement audit programs and environmental management systems.

Reduced Investment in 2013

EPA announced its intent to reduce investment in the Audit Policy program through its Fiscal Year 2013 Office of Enforcement and Compliance Assurance (OECA) National Program Manager Guidance (April 30, 2012). In this guidance EPA lays out its enforcement plans and goals for FY 2013, frequently referring to the challenges it faces during "lean budget times." One area where EPA chose to decrease funding is the self-reporting/immunity provisions under the Audit Policy. EPA states that it "believes it can reduce investment in the program to a limited national presence without undermining the incentives for regulated entities to do internal compliance reviews to find and correct violations." Although this language is not as grave as OECA's draft guidance from February 2012 (in which EPA required its regional offices to "consult with Headquarters before initiating any new work in response to self-disclosures"), the final guidance nonetheless plainly announces a reduced investment in the Audit Policy program.

Since issuing its FY 2013 enforcement guidance, EPA has been silent as to how it plans to reduce investment in the Policy while still offering the regulated community the incentives to perform compliance audits and find and correct violations. EPA was particularly cryptic in concluding, without further explanation, that it is considering a "modified Audit Policy program that is self-implementing." Although not stated in EPA's guidance, many in the regulated community feel that senior EPA policymakers in the Obama administration have grown to dislike the Audit Policy. This reflects a general disdain of the audit incentives by some environmental groups that believe the Policy provides free passes for violators. In fact, some in the regulated community believe that EPA may ultimately move to end the incentives during the Obama administration's second term.

Potential Impacts of Limited Investment

If EPA decides to eliminate the Audit Policy or reduce the incentives for self-disclosure, likely impacts will include a serious drop in voluntary disclosures and a potential decrease in compliance auditing (although proactive companies recognize many other auditing program benefits as discussed below). A change or retraction of the Policy may also impact state disclosure programs. Currently many states, including Ohio, Indiana and Kentucky, have laws, regulations or policies that encourage self-disclosure by offering immunity from certain penalties and enforcement actions. Although a reduction or elimination of the federal Policy would discourage businesses from self-reporting violations to EPA, such a change may lead to increased reporting under state programs that provide favorable protection for self-reporting entities (although such state programs would not protect the disclosing company from federal enforcement).

Also, because state laws may be more but not less stringent than federal law, another potential impact is the loss of state audit immunity incentives if a state program is more lenient than federal law. As has happened in the past, EPA might also put pressure on states to follow the federal lead and eliminate or reduce the benefits of state audit program incentives.

Conclusion

While EPA has signaled an intent to reduce investment in the Audit Policy program, for now it remains in effect. Before making any significant changes to the program, EPA would propose the revisions in the Federal Register where they would be subject to public comment. Even if EPA were to eliminate the self-reporting incentives, important benefits remain for the regulated community to conduct environmental audits, such as early identification and correction of noncompliance; protection of the environment and employee health and safety; avoidance of adverse publicity from enforcement actions or spills, injuries or other incidents; and the opportunity to use the voluntary audit as a factor to convince the government to forego criminal prosecution against the company. Because a reduction or loss of the self-reporting incentives in the Audit Program would increase the risk of EPA enforcement for violations discovered in audits, the regulated community should follow careful practices to conduct audits under the protection of the attorney-client privilege.

For further details on the EPA self-disclosure policy and related guidance, see the Audit Policy page on the EPA website.