EPA Sets Corporate Audit Policy

Companies that voluntarily uncover, correct and disclose their environmental violations cannot withhold related internal reports from federal officials, according to a new Environmental Protection Agency (EPA) policy.

Corporate environmental audits are not privileged business information, says EPA Administrator Carol Browner. Nevertheless, if a violator steps forward in a timely fashion, the agency may decide not to criminally prosecute the company or seek punitive fines, she says.

Still, EPA policy firmly opposes granting total immunity from penalties to those who find and fix violations and voluntarily notify officials. Where appropriate, the agency will continue to seek the full economic benefit of environmental noncompliance "to preserve a 'level playing field' in which violators do not gain a competitive advantage."

The policy is "balanced and carefully crafted to give the regulated community predictability and to reward environmentally responsive actions without unduly limiting vigorous enforcement of ... environmental laws or the public's right to know," said Browner.

Industry had put intense pressure on EPA to treat audits the same as other private, sensitive business information. Although unpersuaded by the argument, the agency agreed not to ask companies to turn over internal reports on a regular basis.

"This clarification ... should greatly reduce any perception that environmental audits may be used unfairly in environmental enforcement," the policy said. EPA denies that it demands audit reports from companies and then uses the reports to bring charges against the firms. Some companies disagree.

Regulated entities still retain the common law privilege that protects communications between lawyers and clients. Companies and outside legal counsel routinely create elaborate audit reporting procedures to take full advantage of the attorney-client privilege.

"EPA officials may decide to follow the guidance provided in this interim policy or to act at variance with the guidance based on analysis of case-specific facts and circumstances," the policy said. And such discretion "is not subject to review by any court."

The policy creates a seven-step program for regulated entities that seek reduced civil penalties. Business, industry and government are eligible for reduced penalties if they: * Discover a violation in the course of a voluntary environmental audit;

* Fully disclose the discovered violation promptly and in writing, but before any government inspection, citizen suit notice or court filing;

* Correct the violation within 60 days;

* Eliminate any "imminent and substantial endangerment to human health or the environment;"

* Clean up environmental damage stemming from the violation;

* Prove that, before discovering the violation, they had a program under way to prevent violations; and

* Cooperate with EPA officials, providing whatever information the agency thinks is "reasonably necessary" to determine if the penalty-reduction policy should be applied.

Successfully meeting all criteria may allow a company to avoid "gravity-based penalties," akin to punitive damages in civil cases.

If an audit turns up a criminal violation, then EPA will likely refer the case to the Justice Department for prosecution, unless the disclosed violation shows that there is no corporate policy to hide environmental misdeeds, no "willful blindness" to the violation, and no substantial harm to human health or the environment.

Critics of EPA's policy are particularly worried about lack of protection from citizen suits. If a business voluntarily reports a violation, EPA may decide not to issue a civil or criminal referral. However, the information disclosed to EPA may still be discoverable by a request under the Freedom of Information Act. Environmental and community groups may then use such disclosures in a citizen suit.

States with laws granting immunity to companies that uncover, disclose and correct environmental violations may find themselves outflanked by federal prosecutors. The agency says it will carefully monitor states where such laws make it more difficult for a state to gather information about a potential criminal violation, to recover a violator's full economic benefit from its misdeeds, or to remove or dilute penalties for serious and repeat offenders.

Audit privilege laws - on the books in at least 10 states and under consideration elsewhere - could result in states losing delegated environmental authority under, for example, the Clean Water Act and RCRA.

EPA considers its policy mere guidance. Hence, the business community is pressing hard for federal legislation that encourages responsible conduct without protecting or excusing criminal behavior.