Regulation by Third-Party Verification

IntroductionRegulatory failure makes headlines. Outbreaks of food borne illness show that regulators have failed to act on information they have or should have had about poor food safety practices.1 Investigative reporting on water pollution enforcement reveals that, although more than half of polluters are significantly out of compliance, fewer than three percent of violations result in fines or other sanctions.2 From the nation's largest oil spill, we have learned that the agency responsible for regulating offshore drilling failed to inspect as frequently as legally required.3The explanation is often the same: regulatory agencies lack the capacity to adequately implement and enforce the law.4 Most basically, there are not enough inspectors or resources to perform the basic task of detecting violations. For example, of the 9.1 million food shipments imported into the United States in 2006, the Food and Drug Administration (FDA) inspected only 115,000 shipments and sent only 20,000 samples for laboratory analysis.5 Facilities regulated under the Clean Water Act might only be inspected once every few years, and evidence suggests that noncompliance is the norm rather than the exception.6 Continuing and growing shortfalls in federal and state budgets make change to this status quo unlikely.Third-party verification, the regulatory approach described and analyzed in this Article, seems appropriate for an era of growing regulatory demands and diminishing governmental resources. As used herein, the term "third party" refers to an external private auditor or consultant who is paid by the regulated entity.7 "Third-party verification," in turn, denotes a system in which governmental agencies rely on these third parties to verify regulatory compliance.8 With third-party verification, regulated entities are required to contract with a 'Verifier" or "verification body" to make a regulatory compliance determination.9 The verifiers are generally private entities that have been approved, or "accredited," to perform this task by the government or by a governmentapproved "accreditation body." Third-party verification may substitute for direct compliance monitoring by the governmental agency.Third-party verification has already been incorporated into climate change and food safety regulatory frameworks, and it has potentially broad application across many fields of social regulation.10 The marketbased regulatory approaches that have been used in climate change regulation, including emissions trading and taxation schemes, are highly dependent on reliable compliance data. Similarly, the global structure of production chains for food, drugs, and other consumer products makes compliance difficult to ascertain by traditional routes. In these situations, third-party verification has become a regulatory approach of choice. .And it is not just these new areas of regulation that would benefit from more reliable information and greater compliance.* 11 Third-party verification could be used more broadly in efforts to enhance regulatory compliance and avert regulatory failure.Nonetheless, cautionary tales abound. Requiring annual reports that must be certified by independent accountants, financial regulation has relied extensively on a system much like third-party verification.12 Hired by the companies they audit, auditors have sometimes lacked independence and contributed to such financial disasters as the savings and loan crisis of the 1990s and the collapse of Enron in the early 2000s.13 In addition, third-party verification closely resembles third-party certification, used in voluntary schemes to substantiate marketing claims about, for example, the sustainability of forest products or the legality of labor practices in foreign manufacturing plants.14 Some scholars have questioned the competence and accountability of the third-party certifiers in voluntary certification schemes.15Third-party verification represents a partial privatization of the public function of enforcing regulatory law. …