Elise Rindfleisch

October 5, 2007

EPA's Audit Policy, "Incentives for Self Policing: Discovery, Disclosure, Correction and Prevention of Violations," encourages entities that own facilities regulated by EPA to voluntarily discover, disclose to EPA, and rectify violations of environmental regulations through a series of incentives. EPA initially issued the Audit Policy in December 1995. In 1998, EPA's Office of Compliance and Enforcement Assurance (OECA) evaluated the Policy's implementation and revised the Policy in April 2000. Currently, if a company meets the nine conditions of the Audit Policy, EPA will waive the entities' gravity-based penalties, not recommend criminal prosecution, and not routinely request audit reports.

As of late, EPA has focused much attention on "new owners," entities that have recently acquired an EPA regulated facility. On May 14, 2007, EPA issued a Federal Register Notice, "Enhancing Environmental Outcomes from Audit Policy Disclosures through Tailored Incentives for New Owners," through which it sought comments on whether and to what extent they should offer incentives for these new owners. Such incentives would go beyond those already included in the Audit Policy, but would not constitute a change in the Audit Policy. EPA received many comments, and is deciding whether to develop a pilot program of tailored incentives for new owners. If EPA does so, they will publish details of the pilot program, and a notice seeking comment on it, in the Federal Register.

EPA's pilot program, as well as the possible incentives for new owners that EPA will implement, may significantly impact both new owners and sellers of regulated facilities. One aspect to pay attention to is how EPA will address economic benefit in this context. Currently, EPA retains discretion to collect any economic benefit that may have accrued to the entity as a result of noncompliance. Typically, EPA assesses economic benefit from the date the violation first occurred, which could potentially result in significant penalties for the new owner. However, there has been some speculation that EPA may reduce or forgive the economic benefit assessed to new owners. If the economic benefit is not forgiven, new owners may try to recover these penalties from sellers. EPA has hinted, and sellers fear that EPA will not absolve them of liability for the economic benefit they gained from noncompliance that a buyer discloses. If these concerns are realized in an EPA policy, sellers could limit the scope of their indemnity to sellers in the purchase agreement. An EPA policy limiting these sorts of indemnities could thereby make disclosure quite costly for buyers, and may discourage disclosure because buyers would not be able to recover these costs from the seller.

Sources:

Enhancing Environmental Outcomes from Audit Policy Disclosures through Tailored Incentives for New Owners, 72 Fed. Reg. 27,116 (May 14, 2007).

Incentives for Self Policing: Discovery, Disclosure, Correction and Prevention of Violations, 65 Fed. Reg. 19,618 (Apr. 11, 2000).

U.S. Environmental Protection Agency, Exploring Incentives for New Owners, available at http://www.epa.gov/compliance/incentives/auditing/newowners-incentives.html (last visited Sept. 27, 2007).

Morrison & Foerster, EPA Tailors Incentives to New Owners of Facilities and Businesses under its Audit Policy, Legal Updates & News, LUEL Briefing, (June 27, 2007), available at http://www.mofo.com/news/updates/bulletins/12499.html (last visited Sept. 27, 2007).

Vinson & Elkins, EPA Seeks Comments on Offering "Incentives" to Encourage New Owners to Self-Disclose Federal Environmental Violations, Environmental News, (June 2007), available at http://www.velaw.com/mcso/shared/pdf/resources/EN_2007_06_Art5.pdf (last visited Sept. 27, 2007).