[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.
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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.
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\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.
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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.
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\7\ See supra note 2.
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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