66706 Federal Register / Vol. 60, No. 246 / Friday, December 22, 1995 / Notices

ENVIRONMENTAL PROTECTION

AGENCY

[FRL–5400–1]

Incentives for Self-Policing: Discovery,

Disclosure, Correction and Prevention

of Violations

AGENCY: Environmental Protection

Agency (EPA).

ACTION: Final Policy Statement.

SUMMARY: The Environmental Protection

Agency (EPA) today issues its final

policy to enhance protection of human

health and the environment by

encouraging regulated entities to

voluntarily discover, and disclose and

correct violations of environmental

requirements. Incentives include

eliminating or substantially reducing

the gravity component of civil penalties

and not recommending cases for

criminal prosecution where specified

conditions are met, to those who

voluntarily self-disclose and promptly

correct violations. The policy also

restates EPA’s long-standing practice of

not requesting voluntary audit reports to

trigger enforcement investigations. This

policy was developed in close

consultation with the U.S. Department

of Justice, states, public interest groups

and the regulated community, and will

be applied uniformly by the Agency’s

enforcement programs.

DATES: This policy is effective January

22, 1996.

FOR FURTHER INFORMATION CONTACT:

Additional documentation relating to

the development of this policy is

contained in the environmental auditing

public docket. Documents from the

docket may be obtained by calling (202)

260–7548, requesting an index to docket

#C–94–01, and faxing document

requests to (202) 260–4400. Hours of

operation are 8 a.m. to 5:30 p.m.,

Monday through Friday, except legal

holidays. Additional contacts are Robert

Fentress or Brian Riedel, at (202) 564–

4187.

SUPPLEMENTARY INFORMATION:

I. Explanation of Policy

A. Introduction

The Environmental Protection Agency

today issues its final policy to enhance

protection of human health and the

environment by encouraging regulated

entities to discover voluntarily, disclose,

correct and prevent violations of federal

environmental law. Effective 30 days

from today, where violations are found

through voluntary environmental audits

or efforts that reflect a regulated entity’s

due diligence, and are promptly

disclosed and expeditiously corrected,

EPA will not seek gravity-based (i.e.,

non-economic benefit) penalties and

will generally not recommend criminal

prosecution against the regulated entity.

EPA will reduce gravity-based penalties

by 75% for violations that are

voluntarily discovered, and are

promptly disclosed and corrected, even

if not found through a formal audit or

due diligence. Finally, the policy

restates EPA’s long-held policy and

practice to refrain from routine requests

for environmental audit reports.

The policy includes important

safeguards to deter irresponsible

behavior and protect the public and

environment. For example, in addition

to prompt disclosure and expeditious

correction, the policy requires

companies to act to prevent recurrence

of the violation and to remedy any

environmental harm which may have

occurred. Repeated violations or those

which result in actual harm or may

present imminent and substantial

endangerment are not eligible for relief

under this policy, and companies will

not be allowed to gain an economic

advantage over their competitors by

delaying their investment in

compliance. Corporations remain

criminally liable for violations that

result from conscious disregard of their

obligations under the law, and

individuals are liable for criminal

misconduct.

The issuance of this policy concludes

EPA’s eighteen-month public evaluation

of the optimum way to encourage

voluntary self-policing while preserving

fair and effective enforcement. The

incentives, conditions and exceptions

announced today reflect thoughtful

suggestions from the Department of

Justice, state attorneys general and local

prosecutors, state environmental

agencies, the regulated community, and

public interest organizations. EPA

believes that it has found a balanced

and responsible approach, and will

conduct a study within three years to

determine the effectiveness of this

policy.

B. Public Process

One of the Environmental Protection

Agency’s most important

responsibilities is ensuring compliance

with federal laws that protect public

health and safeguard the environment.

Effective deterrence requires inspecting,

bringing penalty actions and securing

compliance and remediation of harm.

But EPA realizes that achieving

compliance also requires the

cooperation of thousands of businesses

and other regulated entities subject to

these requirements. Accordingly, in

May of 1994, the Administrator asked

the Office of Enforcement and

Compliance Assurance (OECA) to

determine whether additional

incentives were needed to encourage

voluntary disclosure and correction of

violations uncovered during

environmental audits.

EPA began its evaluation with a twoday public meeting in July of 1994, in

Washington, D.C., followed by a twoday meeting in San Francisco on

January 19, 1995 with stakeholders from

industry, trade groups, state

environmental commissioners and

attorneys general, district attorneys,

public interest organizations and

professional environmental auditors.

The Agency also established and

maintained a public docket of testimony

presented at these meetings and all

comment and correspondence

submitted to EPA by outside parties on

this issue.

In addition to considering opinion

and information from stakeholders, the

Agency examined other federal and

state policies related to self-policing,

self-disclosure and correction. The

Agency also considered relevant surveys

on auditing practices in the private

sector. EPA completed the first stage of

this effort with the announcement of an

interim policy on April 3 of this year,

which defined conditions under which

EPA would reduce civil penalties and

not recommend criminal prosecution for

companies that audited, disclosed, and

corrected violations.

Interested parties were asked to

submit comment on the interim policy

by June 30 of this year (60 FR 16875),

and EPA received over 300 responses

from a wide variety of private and

public organizations. (Comments on the

interim audit policy are contained in the

Auditing Policy Docket, hereinafter,

‘‘Docket’’.) Further, the American Bar

Association SONREEL Subcommittee

hosted five days of dialogue with

representatives from the regulated

industry, states and public interest

organizations in June and September of

this year, which identified options for

strengthening the interim policy. The

changes to the interim policy

announced today reflect insight gained

through comments submitted to EPA,

the ABA dialogue, and the Agency’s

practical experience implementing the

interim policy.

C. Purpose

This policy is designed to encourage

greater compliance with laws and

regulations that protect human health

and the environment. It promotes a

higher standard of self-policing by

waiving gravity-based penalties for
Federal Register / Vol. 60, No. 246 / Friday, December 22, 1995 / Notices 66707

violations that are promptly disclosed

and corrected, and which were

discovered through voluntary audits or

compliance management systems that

demonstrate due diligence. To further

promote compliance, the policy reduces

gravity-based penalties by 75% for any

violation voluntarily discovered and

promptly disclosed and corrected, even

if not found through an audit or

compliance management system.

EPA’s enforcement program provides

a strong incentive for responsible

behavior by imposing stiff sanctions for

noncompliance. Enforcement has

contributed to the dramatic expansion

of environmental auditing measured in

numerous recent surveys. For example,

more than 90% of the corporate

respondents to a 1995 Price-Waterhouse

survey who conduct audits said that one

of the reasons they did so was to find

and correct violations before they were

found by government inspectors. (A

copy of the Price-Waterhouse survey is

contained in the Docket as document

VIII–A–76.)

At the same time, because government

resources are limited, maximum

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, EPA believes

that the incentives offered in this policy

will improve the frequency and quality

of these self-monitoring efforts.

D. Incentives for Self-Policing

Section C of EPA’s policy identifies

the major incentives that EPA will

provide to encourage self-policing, selfdisclosure, and prompt self-correction.

These include not seeking gravity-based

civil penalties or reducing them by

75%, 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

Under Section C(1) of the policy, EPA

will not seek gravity-based penalties for

violations found through auditing that

are promptly disclosed and corrected.

Gravity-based penalties will also be

waived for violations found through any

documented procedure for self-policing,

where the company can show that it has

a compliance management program that

meets the criteria for due diligence in

Section B of the policy.

Gravity-based penalties (defined in

Section B of the policy) generally reflect

the seriousness of the violator’s

behavior. EPA has elected to waive such

penalties for violations discovered

through due diligence or environmental

audits, recognizing that these voluntary

efforts play a critical role in protecting

human health and the environment by

identifying, correcting and ultimately

preventing violations. All of the

conditions set forth in Section D, which

include prompt disclosure and

expeditious correction, must be satisfied

for gravity-based penalties to be waived.

As in the interim policy, EPA reserves

the right to collect any economic benefit

that may have been realized as a result

of noncompliance, even where

companies meet all other conditions of

the policy. Economic benefit may be

waived, however, where the Agency

determines that it is insignificant.

After considering public comment,

EPA has decided to retain the discretion

to recover economic benefit for two

reasons. First, it provides an incentive

to comply on time. Taxpayers expect to

pay interest or a penalty fee if their tax

payments are late; the same principle

should apply to corporations that have

delayed their investment in compliance.

Second, it is fair because it protects

responsible companies from being

undercut by their noncomplying

competitors, thereby preserving a level

playing field. The concept of recovering

economic benefit was supported in

public comments by many stakeholders,

including industry representatives (see,

e.g., Docket, II–F–39, II–F–28, and II–F–

18).

2. 75% Reduction of Gravity

The policy appropriately limits the

complete waiver of gravity-based civil

penalties to companies that meet the

higher standard of environmental

auditing or systematic compliance

management. However, to provide

additional encouragement for the kind

of self-policing that benefits the public,

gravity-based penalties will be reduced

by 75% for a violation that is

voluntarily discovered, promptly

disclosed and expeditiously corrected,

even if it was not found through an

environmental audit and the company

cannot document due diligence. EPA

expects that this will encourage

companies to come forward and work

with the Agency to resolve

environmental problems and begin to

develop an effective compliance

management program.

Gravity-based penalties will be

reduced 75% only where the company

meets all conditions in Sections D(2)

through D(9). EPA has eliminated

language from the interim policy

indicating that penalties may be

reduced ‘‘up to’’ 75% where ‘‘most’’

conditions are met, because the Agency

believes that all of the conditions in

D(2) through D(9) are reasonable and

essential to achieving compliance. This

change also responds to requests for

greater clarity and predictability.

3. No Recommendations for Criminal

Prosecution

EPA has never recommended criminal

prosecution of a regulated entity based

on voluntary disclosure of violations

discovered through audits and disclosed

to the government before an

investigation was already under way.

Thus, EPA will not recommend criminal

prosecution for a regulated entity that

uncovers violations through

environmental audits or due diligence,

promptly discloses and expeditiously

corrects those violations, and meets all

other conditions of Section D of the

policy.

This policy is limited to good actors,

and therefore has important limitations.

It will not apply, 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 all of the conditions

of Section D of the policy, violations

that caused serious harm or which may

pose imminent and substantial

endangerment to human health or the

environment are not covered by this

policy. Finally, EPA reserves the right to

recommend prosecution for the criminal

conduct of any culpable individual.

Even where all of the conditions of

this policy are not met, however, it is

important to remember that EPA may

decline to recommend prosecution of a

company or individual for many other

reasons under other Agency

enforcement policies. For example, the

Agency may decline to recommend

prosecution where there is no

significant harm or culpability and the

individual or corporate defendant has

cooperated fully.

Where a company has met the

conditions for avoiding a

recommendation for criminal

prosecution under this policy, it will

not face any civil liability for gravitybased penalties. That is because the

same conditions for discovery,

disclosure, and correction apply in both

cases. This represents a clarification of

the interim policy, not a substantive

change.
66708 Federal Register / Vol. 60, No. 246 / Friday, December 22, 1995 / Notices

4. No Routine Requests for Audits

EPA is reaffirming its policy, in effect

since 1986, to refrain from routine

requests for audits. Eighteen months of

public testimony and debate have

produced no evidence that the Agency

has deviated, or should deviate, from

this policy.

If the Agency has independent

evidence of a violation, it may seek

information needed to establish the

extent and nature of the problem and

the degree of culpability. In general,

however, an audit which results in

prompt correction clearly will reduce

liability, not expand it. Furthermore, a

review of the criminal docket did not

reveal a single criminal prosecution for

violations discovered as a result of an

audit self-disclosed to the government.

E. Conditions

Section D describes the nine

conditions that a regulated entity must

meet in order for the Agency not to seek

(or to reduce) gravity-based penalties

under the policy. As explained in the

Summary above, regulated entities that

meet all nine conditions will not face

gravity-based civil penalties, and will

generally not have to fear criminal

prosecution. Where the regulated entity

meets all of the conditions except the

first (D(1)), EPA will reduce gravitybased penalties by 75%.

1. Discovery of the Violation Through

an Environmental Audit or Due

Diligence

Under Section D(1), the violation

must have been discovered through

either (a) an environmental audit that is

systematic, objective, and periodic as

defined in the 1986 audit policy, or (b)

a documented, systematic procedure or

practice which reflects the regulated

entity’s due diligence in preventing,

detecting, and correcting violations. The

interim policy provided full credit for

any violation found through ‘‘voluntary

self-evaluation,’’ even if the evaluation

did not constitute an audit. In order to

receive full credit under the final policy,

any self-evaluation that is not an audit

must be part of a ‘‘due diligence’’

program. Both ‘‘environmental audit’’

and ‘‘due diligence’’ are defined in

Section B of the policy.

Where the violation is discovered

through a ‘‘systematic procedure or

practice’’ which is not an audit, the

regulated entity will be asked to

document how its program reflects the

criteria for due diligence as defined in

Section B of the policy. These criteria,

which are adapted from existing codes

of practice such as the 1991 Criminal

Sentencing Guidelines, were fully

discussed during the ABA dialogue. The

criteria are flexible enough to

accommodate different types and sizes

of businesses. The Agency recognizes

that a variety of compliance

management programs may develop

under the due diligence criteria, and

will use its review under this policy to

determine whether basic criteria have

been met.

Compliance management programs

which train and motivate production

staff to prevent, detect and correct

violations on a daily basis are a valuable

complement to periodic auditing. The

policy is responsive to

recommendations received during

public comment and from the ABA

dialogue to give compliance

management efforts which meet the

criteria for due diligence the same

penalty reduction offered for

environmental audits. (See, e.g., II–F–

39, II–E–18, and II–G–18 in the Docket.)

EPA may require as a condition of

penalty mitigation that a description of

the regulated entity’s due diligence

efforts be made publicly available. The

Agency added this provision in

response to suggestions from

environmental groups, and 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 and Prompt

Disclosure

Under Section D(2) of the final policy,

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. Section D(4) requires that

disclosure of the violation be prompt

and in writing. To avoid confusion and

respond to state requests for greater

clarity, disclosures under this policy

should be made to EPA. The Agency

will work closely with states in

implementing the policy.

The requirement that discovery of the

violation be voluntary is consistent with

proposed federal and state bills which

would reward those discoveries that the

regulated entity can legitimately

attribute to its own voluntary efforts.

The policy gives 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 final policy generally applies to

any violation that is voluntarily

discovered, regardless of whether the

violation is required to be reported. This

definition responds to comments

pointing out that reporting requirements

are extensive, and that excluding them

from the policy’s scope would severely

limit the incentive for self-policing (see,

e.g., II–C–48 in the Docket).

The Agency wishes to emphasize that

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 not to provide an

excuse for delayed reporting. Where

violations of reporting requirements are

voluntarily discovered, they must be

promptly reported (as discussed below).

Where a failure to report results in

imminent and substantial endangerment

or serious harm, that violation is not

covered under this policy (see

Condition D(8)). The policy also

requires the regulated entity to prevent

recurrence of the violation, to ensure

that noncompliance with reporting

requirements is not repeated. EPA will

closely scrutinize the effect of the policy

in furthering the public interest in

timely and accurate reports from the

regulated community.

Under Section D(4), disclosure of the

violation should be made within 10

days of its discovery, and in writing to

EPA. Where a statute or regulation

requires reporting be made in less than

10 days, disclosure should be made

within the time limit established by law.

Where reporting within ten days is not

practical because the violation is

complex and compliance cannot be

determined within that period, the

Agency may accept later disclosures if

the circumstances do not present a

serious threat and the regulated entity

meets its burden of showing that the

additional time was needed to

determine compliance status.

This condition recognizes that it is

critical for EPA to get timely reporting

of violations in order that it might have

clear notice of the violations and the

opportunity to respond if necessary, as

well as an accurate picture of a given

facility’s compliance record. Prompt

disclosure is also evidence of the

regulated entity’s good faith in wanting
Federal Register / Vol. 60, No. 246 / Friday, December 22, 1995 / Notices 66709

to achieve or return to compliance as

soon as possible.

In the final policy, the Agency has

added the words, ‘‘or may have

occurred,’’ to the sentence, ‘‘The

regulated entity fully discloses that a

specific violation has occurred, or may

have occurred * * *.’’ This change,

which was made in response to

comments received, clarifies that where

an entity has some doubt about the

existence of a violation, the

recommended course is for it to disclose

and allow the regulatory authorities to

make a definitive determination.

In general, the Freedom of

Information Act will govern the

Agency’s release of disclosures made

pursuant to this policy. EPA will,

independently of FOIA, make publicly

available any compliance agreements

reached under the policy (see Section H

of the policy), as well as descriptions of

due diligence programs submitted under

Section D.1 of the Policy. Any material

claimed to be Confidential Business

Information will be treated in

accordance with EPA regulations at 40

C.F.R. Part 2.

3. Discovery and Disclosure

Independent of Government or Third

Party Plaintiff

Under Section D(3), in order to be

‘‘voluntary’’, the violation must be

identified and disclosed by the

regulated entity prior to: the

commencement of a federal state or

local agency inspection, investigation,

or information request; notice of a

citizen suit; legal complaint by a third

party; the reporting of the violation to

EPA by a ‘‘whistleblower’’ employee;

and imminent discovery of the violation

by a regulatory agency.

This condition means that regulated

entities must have taken the initiative to

find violations and promptly report

them, rather than reacting to knowledge

of a pending enforcement action or

third-party complaint. This concept was

reflected in the interim policy and in

federal and state penalty immunity laws

and did not prove controversial in the

public comment process.

4. Correction and Remediation

Section D(5) ensures that, in order to

receive the penalty mitigation benefits

available under the policy, the regulated

entity not only voluntarily discovers

and promptly discloses a violation, but

expeditiously corrects it, remedies any

harm caused by that violation

(including responding to any spill and

carrying out any removal or remedial

action required by law), and

expeditiously certifies in writing to

appropriate state, local and EPA

authorities that violations have been

corrected. It also 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.

The final policy requires the violation

to be corrected within 60 days, or that

the regulated entity provide written

notice where violations may take longer

to correct. EPA recognizes that some

violations can and should be corrected

immediately, while others (e.g., where

capital expenditures are involved), may

take longer than 60 days to correct. In

all cases, the regulated entity will be

expected to do its utmost to achieve or

return to compliance as expeditiously as

possible.

Where correction of the violation

depends upon issuance of a permit

which 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.

5. Prevent Recurrence

Under Section D(6), the regulated

entity must agree to take steps to

prevent a recurrence of the violation,

including but not limited to

improvements to its environmental

auditing or due diligence efforts. The

final policy makes clear that the

preventive steps may include

improvements to a regulated entity’s

environmental auditing or due diligence

efforts to prevent recurrence of the

violation.

In the interim policy, the Agency

required that the entity implement

appropriate measures to prevent a

recurrence of the violation, a

requirement that operates prospectively.

However, a separate condition in the

interim policy also required that the

violation not indicate ‘‘a failure to take

appropriate steps to avoid repeat or

recurring violations’’—a requirement

that operates retrospectively. In the

interest of both clarity and fairness, the

Agency has decided for purposes of this

condition to keep the focus prospective

and thus to require only that steps be

taken to prevent recurrence of the

violation after it has been disclosed.

6. No Repeat Violations

In response to requests from

commenters (see, e.g., II–F–39 and II–G–

18 in the Docket), EPA has established

‘‘bright lines’’ to determine when

previous violations will bar a regulated

entity from obtaining relief under this

policy. These will help protect the

public and responsible companies by

ensuring that penalties are not waived

for repeat offenders. Under condition

D(7), the same or closely-related

violation must not have occurred

previously within the past three years at

the same facility, or be part of a pattern

of violations on the regulated entity’s

part over the past five years. This

provides companies with a continuing

incentive to prevent violations, without

being unfair to regulated entities

responsible for managing hundreds of

facilities. It would be unreasonable to

provide unlimited amnesty for repeated

violations of the same requirement.

The term ‘‘violation’’ includes any

violation subject to a federal or state

civil judicial or administrative order,

consent agreement, conviction or plea

agreement. Recognizing that minor

violations are sometimes 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. Together, these

conditions identify situations in which

the regulated community has had clear

notice of its noncompliance and an

opportunity to correct.

7. Other Violations Excluded

Section D(8) makes clear that penalty

reductions are not available under this

policy for violations that resulted in

serious actual harm or which may have

presented an imminent and substantial

endangerment to public health or the

environment. Such events indicate a

serious failure (or absence) of a selfpolicing program, which should be

designed to prevent such risks, and it

would seriously undermine deterrence

to waive penalties for such violations.

These exceptions are responsive to

suggestions from public interest

organizations, as well as other

commenters. (See, e.g., II–F–39 and II–

G–18 in the Docket.)

The final policy also excludes penalty

reductions for violations of the specific

terms of any order, consent agreement,

or plea agreement. (See, II–E–60 in the

Docket.) 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 applies to

violations of the terms of any response,

removal or remedial action covered by

a written agreement.

8. Cooperation

Under Section D(9), the regulated

entity must cooperate as required by

EPA and provide information necessary

to determine the applicability of the

policy. This condition is largely

unchanged from the interim policy. In

the final policy, however, the Agency

has added that ‘‘cooperation’’ includes
66710 Federal Register / Vol. 60, No. 246 / Friday, December 22, 1995 / Notices

assistance in determining the facts of

any related violations suggested by the

disclosure, as well as of the disclosed

violation itself. This was added to allow

the agency to obtain information about

any violations indicated by the

disclosure, even where the violation is

not initially identified by the regulated

entity.

F. Opposition to Privilege

The Agency remains firmly opposed

to the establishment of a statutory

evidentiary privilege for environmental

audits for the following reasons:

1. 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

(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, 132

F.R.D. 8, 9–10 (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.’’)

2. Eighteen months have failed to

produce any evidence that a privilege is

needed. Public testimony on the interim

policy confirmed that EPA rarely uses

audit reports as evidence. Furthermore,

surveys demonstrate that environmental

auditing has expanded rapidly over the

past decade without the stimulus of a

privilege. Most recently, the 1995 Price

Waterhouse survey found that those few

large or mid-sized companies that do

not audit generally do not perceive any

need to; concern about confidentiality

ranked as one of the least important

factors in their decisions.

3. A privilege would invite

defendants to claim as ‘‘audit’’ material

almost any evidence the government

needed to establish a violation or

determine who was responsible. For

example, most audit privilege bills

under consideration in federal and state

legislatures would arguably protect

factual information—such as health

studies or contaminated sediment

data—and not just the conclusions of

the auditors. While the government

might have access to required

monitoring data under the law, as some

industry commenters have suggested, a

privilege of that nature would cloak

underlying facts needed to determine

whether such data were accurate.

4. An audit privilege would breed

litigation, as both parties struggled to

determine what material fell within its

scope. The problem is compounded by

the lack of any clear national standard

for audits. The ‘‘in camera’’ (i.e., nonpublic) proceedings used to resolve

these disputes under some statutory

schemes would result in a series of

time-consuming, expensive mini-trials.

5. The Agency’s policy eliminates the

need for any privilege as against the

government, by reducing civil penalties

and criminal liability for those

companies that audit, disclose and

correct violations. The 1995 Price

Waterhouse survey indicated that

companies would expand their auditing

programs in exchange for the kind of

incentives that EPA provides in its

policy.

6. Finally, audit privileges are

strongly opposed by the law

enforcement community, including the

National District Attorneys Association,

as well as by public interest groups.

(See, e.g., Docket, II–C–21, II–C–28, II–

C–52, IV–G–10, II–C–25, II–C–33, II–C–

52, II–C–48, and II–G–13 through II–G–

24.)

G. Effect on States

The final policy reflects EPA’s desire

to develop fair and effective incentives

for self-policing that will have practical

value to states that share responsibility

for enforcing federal environmental

laws. To that end, the Agency has

consulted closely with state officials in

developing this policy, through a series

of special meetings and conference calls

in addition to the extensive opportunity

for public comment. As a result, EPA

believes its final policy is grounded in

common-sense principles that should

prove useful in the development of state

programs and policies.

As always, states are encouraged to

experiment with different approaches

that do not jeopardize the fundamental

national interest in assuring that

violations of federal law do not threaten

the public health or the environment, or

make it profitable not to comply. 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 make a

substantial profit at the expense of its

law-abiding competitors. Where a state

has obtained appropriate sanctions

needed to deter such misconduct, there

is no need for EPA action.

H. Scope of Policy

EPA has developed this document as

a policy to guide settlement actions.

EPA employees will be expected to

follow this policy, and the Agency will

take steps to assure national consistency

in application. For example, the Agency

will make public any compliance

agreements reached under this policy,

in order to provide the regulated

community with fair notice of decisions

and greater accountability to affected

communities. Many in the regulated

community recommended that the

Agency convert the policy into a

regulation because they felt it might

ensure greater consistency and

predictability. While EPA is taking steps

to ensure consistency and predictability

and believes that it will be successful,

the Agency will consider this issue and

will provide notice if it determines that

a rulemaking is appropriate.

II. Statement of Policy: Incentives for

Self-Policing

Discovery, Disclosure, Correction and

Prevention

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’’ has the

definition given to it in EPA’s 1986

audit policy on environmental auditing,

i.e., ‘‘a systematic, documented,

periodic and objective review by

regulated entities of facility operations

and practices related to meeting

environmental requirements.’’

‘‘Due Diligence’’ encompasses the

regulated entity’s 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 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;
Federal Register / Vol. 60, No. 246 / Friday, December 22, 1995 / Notices 66711

(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 program to prevent

future violations.

‘‘Environmental audit report’’ means

the 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 non-compliance.

(For further discussion of this concept,

see ‘‘A Framework for Statute-Specific

Approaches to Penalty Assessments’’,

#GM–22, 1980, U.S. EPA General

Enforcement Policy Compendium).

‘‘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

Where the regulated entity establishes

that it satisfies all of the conditions of

Section D of the policy, EPA will not

seek gravity-based penalties for

violations of federal environmental

requirements.

2. Reduction of Gravity-Based Penalties

by 75%

EPA will reduce gravity-based

penalties for violations of federal

environmental requirements by 75% so

long as the regulated entity satisfies all

of the conditions of Section D(2)

through D(9) below.

3. No Criminal Recommendations

(a) EPA will not recommend to the

Department of Justice or other

prosecuting authority that criminal

charges be brought against a regulated

entity where EPA determines that all of

the conditions in Section D are satisfied,

so long as the violation does not

demonstrate or involve:

(i) a prevalent management

philosophy or practice that concealed or

condoned environmental violations; or

(ii) high-level corporate officials’ or

managers’ conscious involvement in, or

willful blindness to, the violations.

(b) Whether or not EPA refers the

regulated entity for criminal prosecution

under this section, the Agency reserves

the right to recommend prosecution for

the criminal acts of individual managers

or employees under existing policies

guiding the exercise of enforcement

discretion.

4. No Routine Request for Audits

EPA will not request or use an

environmental audit report to initiate a

civil or criminal investigation of the

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) an objective, documented,

systematic procedure or practice

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 it exercises due diligence to

prevent, detect and correct violations

according to the criteria for due

diligence outlined in Section B. EPA

may require as a condition of penalty

mitigation that a description of the

regulated entity’s due diligence efforts

be made publicly available.

2. Voluntary Discovery

The violation was identified

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;

(c) violations discovered through a

compliance audit required to be

performed by the terms of a consent

order or settlement agreement.

3. Prompt Disclosure

The regulated entity fully discloses a

specific violation within 10 days (or

such shorter period provided by law)

after it has discovered that the violation

has occurred, or may have occurred, in

writing to EPA;

4. Discovery and Disclosure

Independent of Government or Third

Party Plaintiff

The violation must also be identified

and disclosed by the regulated entity

prior to:

(a) 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;

(b) notice of a citizen suit;

(c) the filing of a complaint by a third

party;

(d) 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

(e) imminent discovery of the

violation by a regulatory agency;

5. Correction and Remediation

The regulated entity corrects the

violation within 60 days, certifies in

writing that violations have been

corrected, and takes appropriate

measures as determined by EPA to

remedy any environmental or human

harm due to the violation. If more than

60 days will be needed to correct the

violation(s), the regulated entity must so

notify EPA in writing before the 60-day

period has passed. Where appropriate,

EPA may require that to satisfy

conditions 5 and 6, a regulated entity

enter into a publicly available written

agreement, administrative consent order

or judicial consent decree, 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, which may include

improvements to its environmental

auditing or due diligence efforts;
66712 Federal Register / Vol. 60, No. 246 / Friday, December 22, 1995 / Notices

7. No Repeat Violations

The specific violation (or closely

related violation) has not occurred

previously within the past three years at

the same facility, or is not part of a

pattern of federal, state or local

violations by the facility’s parent

organization (if any), which have

occurred within the past five years. 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 (i)

resulted in serious actual harm, or may

have presented an imminent and

substantial endangerment to, human

health or the environment, or (ii)

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. Cooperation

includes, at a minimum, providing all

requested documents and access to

employees and assistance in

investigating the violation, any

noncompliance problems related to the

disclosure, and any environmental

consequences related to the violations.

E. Economic Benefit

EPA will retain 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 which meet conditions 1

through 9 in section D 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 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 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 which

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 the

assessment of penalties for any

violations under all of the federal

environmental statutes that EPA

administers, and supersedes any

inconsistent provisions in mediaspecific penalty or enforcement policies

and EPA’s 1986 Environmental

Auditing Policy Statement.

(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(s), nor

will this policy apply to violations

which have received penalty mitigation

under other policies.

(3) This policy sets forth factors for

consideration that will guide the

Agency in the exercise of its

prosecutorial 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. It does not

create any rights, duties, obligations, or

defenses, implied or otherwise, in any

third parties.

(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.

H. Public Accountability

(1) Within 3 years of the effective date

of this policy, EPA will complete a

study of the effectiveness of the policy

in encouraging:

(a) changes in compliance behavior

within the regulated community,

including improved compliance rates;

(b) prompt disclosure and correction

of violations, including timely and

accurate compliance with reporting

requirements;

(c) corporate compliance programs

that are successful in preventing

violations, improving environmental

performance, and promoting public

disclosure;

(d) consistency among state programs

that provide incentives for voluntary

compliance.

EPA will make the study available to

the public.

(2) 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 policy is effective January 22,

1996.

Dated: December 18, 1995.

Steven A. Herman,

Assistant Administrator for Enforcement and

Compliance Assurance.

[FR Doc. 95–31146 Filed 12–21–95; 8:45 am]

BILLING CODE 6560–50–P