Document ID: EPA-HQ-OECA-2007-0291-0033
Agency: epa
Document Type: Notice
Title: Interim Approach to Applying the Audit Policy to New Owners
Posted Date: 2008-08-01T04:00Z

[Federal Register: August 1, 2008 (Volume 73, Number 149)]
[Notices]               
[Page 44991-45006]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr01au08-63]                         

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ENVIRONMENTAL PROTECTION AGENCY

[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.

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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

[[Page 44992]]

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: docket.oeca@epa.gov, 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 makepeace.caroline@epa.gov 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

[[Page 44993]]

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:
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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.
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     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.
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    \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).
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    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

[[Page 44994]]

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

[[Page 44995]]

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

[[Page 44996]]

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

[[Page 44997]]

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.

[[Page 44998]]

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\
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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.
---------------------------------------------------------------------------

    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.
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    \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.
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    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

[[Page 44999]]

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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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

[[Page 45000]]

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\
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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).
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    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.
---------------------------------------------------------------------------

    \7\ See supra note 2.
---------------------------------------------------------------------------

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

[[Page 45001]]

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,

[[Page 45002]]

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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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.

[[Page 45003]]

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

[[Page 45004]]

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,

[[Page 45005]]

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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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

    New Owners should contact either Philip Milton ((202) 564-5029, 
milton.philip@epa.gov) or Caroline Makepeace ((202) 564-6012 or 
makepeace.caroline@epa.gov) 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

[[Page 45006]]

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