[Federal Register Volume 60, Number 246 (Friday, December 22, 1995)]
[Notices]
[Pages 66706-66712]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-31146]




[[Page 66705]]

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Part III





Environmental Protection Agency





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Incentives for Self-Policing: Discovery, Disclosure, Correction and 
Prevention of Violations; Notice

  Federal Register / Vol. 60, No. 246 / Friday, December 22, 1995 / 
Notices  

[[Page 66706]]


ENVIRONMENTAL PROTECTION AGENCY

[FRL-5400-1]


Incentives for Self-Policing: Discovery, Disclosure, Correction 
and Prevention of Violations

AGENCY: Environmental Protection Agency (EPA).

ACTION: Final Policy Statement.

-----------------------------------------------------------------------

SUMMARY: The Environmental Protection Agency (EPA) today issues its 
final policy to enhance protection of human health and the environment 
by encouraging regulated entities to voluntarily discover, and disclose 
and correct violations of environmental requirements. Incentives 
include eliminating or substantially reducing the gravity component of 
civil penalties and not recommending cases for criminal prosecution 
where specified conditions are met, to those who voluntarily self-
disclose and promptly correct violations. The policy also restates 
EPA's long-standing practice of not requesting voluntary audit reports 
to trigger enforcement investigations. This policy was developed in 
close consultation with the U.S. Department of Justice, states, public 
interest groups and the regulated community, and will be applied 
uniformly by the Agency's enforcement programs.

DATES: This policy is effective January 22, 1996.

FOR FURTHER INFORMATION CONTACT: Additional documentation relating to 
the development of this policy is contained in the environmental 
auditing public docket. Documents from the docket may be obtained by 
calling (202) 260-7548, requesting an index to docket #C-94-01, and 
faxing document requests to (202) 260-4400. Hours of operation are 8 
a.m. to 5:30 p.m., Monday through Friday, except legal holidays. 
Additional contacts are Robert Fentress or Brian Riedel, at (202) 564-
4187.

SUPPLEMENTARY INFORMATION:

I. Explanation of Policy

A. Introduction

    The Environmental Protection Agency today issues its final policy 
to enhance protection of human health and the environment by 
encouraging regulated entities to discover voluntarily, disclose, 
correct and prevent violations of federal environmental law. Effective 
30 days from today, where violations are found through voluntary 
environmental audits or efforts that reflect a regulated entity's due 
diligence, and are promptly disclosed and expeditiously corrected, EPA 
will not seek gravity-based (i.e., non-economic benefit) penalties and 
will generally not recommend criminal prosecution against the regulated 
entity. EPA will reduce gravity-based penalties by 75% for violations 
that are voluntarily discovered, and are promptly disclosed and 
corrected, even if not found through a formal audit or due diligence. 
Finally, the policy restates EPA's long-held policy and practice to 
refrain from routine requests for environmental audit reports.
    The policy includes important safeguards to deter irresponsible 
behavior and protect the public and environment. For example, in 
addition to prompt disclosure and expeditious correction, the policy 
requires companies to act to prevent recurrence of the violation and to 
remedy any environmental harm which may have occurred. Repeated 
violations or those which result in actual harm or may present imminent 
and substantial endangerment are not eligible for relief under this 
policy, and companies will not be allowed to gain an economic advantage 
over their competitors by delaying their investment in compliance. 
Corporations remain criminally liable for violations that result from 
conscious disregard of their obligations under the law, and individuals 
are liable for criminal misconduct.
    The issuance of this policy concludes EPA's eighteen-month public 
evaluation of the optimum way to encourage voluntary self-policing 
while preserving fair and effective enforcement. The incentives, 
conditions and exceptions announced today reflect thoughtful 
suggestions from the Department of Justice, state attorneys general and 
local prosecutors, state environmental agencies, the regulated 
community, and public interest organizations. EPA believes that it has 
found a balanced and responsible approach, and will conduct a study 
within three years to determine the effectiveness of this policy.

B. Public Process

    One of the Environmental Protection Agency's most important 
responsibilities is ensuring compliance with federal laws that protect 
public health and safeguard the environment. Effective deterrence 
requires inspecting, bringing penalty actions and securing compliance 
and remediation of harm. But EPA realizes that achieving compliance 
also requires the cooperation of thousands of businesses and other 
regulated entities subject to these requirements. Accordingly, in May 
of 1994, the Administrator asked the Office of Enforcement and 
Compliance Assurance (OECA) to determine whether additional incentives 
were needed to encourage voluntary disclosure and correction of 
violations uncovered during environmental audits.
    EPA began its evaluation with a two-day public meeting in July of 
1994, in Washington, D.C., followed by a two-day meeting in San 
Francisco on January 19, 1995 with stakeholders from industry, trade 
groups, state environmental commissioners and attorneys general, 
district attorneys, public interest organizations and professional 
environmental auditors. The Agency also established and maintained a 
public docket of testimony presented at these meetings and all comment 
and correspondence submitted to EPA by outside parties on this issue.
    In addition to considering opinion and information from 
stakeholders, the Agency examined other federal and state policies 
related to self-policing, self-disclosure and correction. The Agency 
also considered relevant surveys on auditing practices in the private 
sector. EPA completed the first stage of this effort with the 
announcement of an interim policy on April 3 of this year, which 
defined conditions under which EPA would reduce civil penalties and not 
recommend criminal prosecution for companies that audited, disclosed, 
and corrected violations.
    Interested parties were asked to submit comment on the interim 
policy by June 30 of this year (60 FR 16875), and EPA received over 300 
responses from a wide variety of private and public organizations. 
(Comments on the interim audit policy are contained in the Auditing 
Policy Docket, hereinafter, ``Docket''.) Further, the American Bar 
Association SONREEL Subcommittee hosted five days of dialogue with 
representatives from the regulated industry, states and public interest 
organizations in June and September of this year, which identified 
options for strengthening the interim policy. The changes to the 
interim policy announced today reflect insight gained through comments 
submitted to EPA, the ABA dialogue, and the Agency's practical 
experience implementing the interim policy.

C. Purpose

    This policy is designed to encourage greater compliance with laws 
and regulations that protect human health and the environment. It 
promotes a higher standard of self-policing by waiving gravity-based 
penalties for 

[[Page 66707]]
violations that are promptly disclosed and corrected, and which were 
discovered through voluntary audits or compliance management systems 
that demonstrate due diligence. To further promote compliance, the 
policy reduces gravity-based penalties by 75% for any violation 
voluntarily discovered and promptly disclosed and corrected, even if 
not found through an audit or compliance management system.
    EPA's enforcement program provides a strong incentive for 
responsible behavior by imposing stiff sanctions for noncompliance. 
Enforcement has contributed to the dramatic expansion of environmental 
auditing measured in numerous recent surveys. For example, more than 
90% of the corporate respondents to a 1995 Price-Waterhouse survey who 
conduct audits said that one of the reasons they did so was to find and 
correct violations before they were found by government inspectors. (A 
copy of the Price-Waterhouse survey is contained in the Docket as 
document VIII-A-76.)
    At the same time, because government resources are limited, maximum 
compliance cannot be achieved without active efforts by the regulated 
community to police themselves. More than half of the respondents to 
the same 1995 Price-Waterhouse survey said that they would expand 
environmental auditing in exchange for reduced penalties for violations 
discovered and corrected. While many companies already audit or have 
compliance management programs, EPA believes that the incentives 
offered in this policy will improve the frequency and quality of these 
self-monitoring efforts.

D. Incentives for Self-Policing

    Section C of EPA's policy identifies the major incentives that EPA 
will provide to encourage self-policing, self-disclosure, and prompt 
self-correction. These include not seeking gravity-based civil 
penalties or reducing them by 75%, declining to recommend criminal 
prosecution for regulated entities that self-police, and refraining 
from routine requests for audits. (As noted in Section C of the policy, 
EPA has refrained from making routine requests for audit reports since 
issuance of its 1986 policy on environmental auditing.)
1. Eliminating Gravity-Based Penalties
    Under Section C(1) of the policy, EPA will not seek gravity-based 
penalties for violations found through auditing that are promptly 
disclosed and corrected. Gravity-based penalties will also be waived 
for violations found through any documented procedure for self-
policing, where the company can show that it has a compliance 
management program that meets the criteria for due diligence in Section 
B of the policy.
    Gravity-based penalties (defined in Section B of the policy) 
generally reflect the seriousness of the violator's behavior. EPA has 
elected to waive such penalties for violations discovered through due 
diligence or environmental audits, recognizing that these voluntary 
efforts play a critical role in protecting human health and the 
environment by identifying, correcting and ultimately preventing 
violations. All of the conditions set forth in Section D, which include 
prompt disclosure and expeditious correction, must be satisfied for 
gravity-based penalties to be waived.
    As in the interim policy, EPA reserves the right to collect any 
economic benefit that may have been realized as a result of 
noncompliance, even where companies meet all other conditions of the 
policy. Economic benefit may be waived, however, where the Agency 
determines that it is insignificant.
    After considering public comment, EPA has decided to retain the 
discretion to recover economic benefit for two reasons. First, it 
provides an incentive to comply on time. Taxpayers expect to pay 
interest or a penalty fee if their tax payments are late; the same 
principle should apply to corporations that have delayed their 
investment in compliance. Second, it is fair because it protects 
responsible companies from being undercut by their noncomplying 
competitors, thereby preserving a level playing field. The concept of 
recovering economic benefit was supported in public comments by many 
stakeholders, including industry representatives (see, e.g., Docket, 
II-F-39, II-F-28, and II-F-18).
2. 75% Reduction of Gravity
    The policy appropriately limits the complete waiver of gravity-
based civil penalties to companies that meet the higher standard of 
environmental auditing or systematic compliance management. However, to 
provide additional encouragement for the kind of self-policing that 
benefits the public, gravity-based penalties will be reduced by 75% for 
a violation that is voluntarily discovered, promptly disclosed and 
expeditiously corrected, even if it was not found through an 
environmental audit and the company cannot document due diligence. EPA 
expects that this will encourage companies to come forward and work 
with the Agency to resolve environmental problems and begin to develop 
an effective compliance management program.
    Gravity-based penalties will be reduced 75% only where the company 
meets all conditions in Sections D(2) through D(9). EPA has eliminated 
language from the interim policy indicating that penalties may be 
reduced ``up to'' 75% where ``most'' conditions are met, because the 
Agency believes that all of the conditions in D(2) through D(9) are 
reasonable and essential to achieving compliance. This change also 
responds to requests for greater clarity and predictability.
3. No Recommendations for Criminal Prosecution
    EPA has never recommended criminal prosecution of a regulated 
entity based on voluntary disclosure of violations discovered through 
audits and disclosed to the government before an investigation was 
already under way. Thus, EPA will not recommend criminal prosecution 
for a regulated entity that uncovers violations through environmental 
audits or due diligence, promptly discloses and expeditiously corrects 
those violations, and meets all other conditions of Section D of the 
policy.
    This policy is limited to good actors, and therefore has important 
limitations. It will not apply, for example, where corporate officials 
are consciously involved in or willfully blind to violations, or 
conceal or condone noncompliance. Since the regulated entity must 
satisfy all of the conditions of Section D of the policy, violations 
that caused serious harm or which may pose imminent and substantial 
endangerment to human health or the environment are not covered by this 
policy. Finally, EPA reserves the right to recommend prosecution for 
the criminal conduct of any culpable individual.
    Even where all of the conditions of this policy are not met, 
however, it is important to remember that EPA may decline to recommend 
prosecution of a company or individual for many other reasons under 
other Agency enforcement policies. For example, the Agency may decline 
to recommend prosecution where there is no significant harm or 
culpability and the individual or corporate defendant has cooperated 
fully.
    Where a company has met the conditions for avoiding a 
recommendation for criminal prosecution under this policy, it will not 
face any civil liability for gravity-based penalties. That is because 
the same conditions for discovery, disclosure, and correction apply in 
both cases. This represents a clarification of the interim policy, not 
a substantive change. 

[[Page 66708]]

4. No Routine Requests for Audits
    EPA is reaffirming its policy, in effect since 1986, to refrain 
from routine requests for audits. Eighteen months of public testimony 
and debate have produced no evidence that the Agency has deviated, or 
should deviate, from this policy.
    If the Agency has independent evidence of a violation, it may seek 
information needed to establish the extent and nature of the problem 
and the degree of culpability. In general, however, an audit which 
results in prompt correction clearly will reduce liability, not expand 
it. Furthermore, a review of the criminal docket did not reveal a 
single criminal prosecution for violations discovered as a result of an 
audit self-disclosed to the government.

E. Conditions

    Section D describes the nine conditions that a regulated entity 
must meet in order for the Agency not to seek (or to reduce) gravity-
based penalties under the policy. As explained in the Summary above, 
regulated entities that meet all nine conditions will not face gravity-
based civil penalties, and will generally not have to fear criminal 
prosecution. Where the regulated entity meets all of the conditions 
except the first (D(1)), EPA will reduce gravity-based penalties by 
75%.
1. Discovery of the Violation Through an Environmental Audit or Due 
Diligence
    Under Section D(1), the violation must have been discovered through 
either (a) an environmental audit that is systematic, objective, and 
periodic as defined in the 1986 audit policy, or (b) a documented, 
systematic procedure or practice which reflects the regulated entity's 
due diligence in preventing, detecting, and correcting violations. The 
interim policy provided full credit for any violation found through 
``voluntary self-evaluation,'' even if the evaluation did not 
constitute an audit. In order to receive full credit under the final 
policy, any self-evaluation that is not an audit must be part of a 
``due diligence'' program. Both ``environmental audit'' and ``due 
diligence'' are defined in Section B of the policy.
    Where the violation is discovered through a ``systematic procedure 
or practice'' which is not an audit, the regulated entity will be asked 
to document how its program reflects the criteria for due diligence as 
defined in Section B of the policy. These criteria, which are adapted 
from existing codes of practice such as the 1991 Criminal Sentencing 
Guidelines, were fully discussed during the ABA dialogue. The criteria 
are flexible enough to accommodate different types and sizes of 
businesses. The Agency recognizes that a variety of compliance 
management programs may develop under the due diligence criteria, and 
will use its review under this policy to determine whether basic 
criteria have been met.
    Compliance management programs which train and motivate production 
staff to prevent, detect and correct violations on a daily basis are a 
valuable complement to periodic auditing. The policy is responsive to 
recommendations received during public comment and from the ABA 
dialogue to give compliance management efforts which meet the criteria 
for due diligence the same penalty reduction offered for environmental 
audits. (See, e.g., II-F-39, II-E-18, and II-G-18 in the Docket.)
    EPA may require as a condition of penalty mitigation that a 
description of the regulated entity's due diligence efforts be made 
publicly available. The Agency added this provision in response to 
suggestions from environmental groups, and believes that the 
availability of such information will allow the public to judge the 
adequacy of compliance management systems, lead to enhanced compliance, 
and foster greater public trust in the integrity of compliance 
management systems.
2. Voluntary Discovery and Prompt Disclosure
    Under Section D(2) of the final policy, the violation must have 
been identified voluntarily, and not through a monitoring, sampling, or 
auditing procedure that is required by statute, regulation, permit, 
judicial or administrative order, or consent agreement. Section D(4) 
requires that disclosure of the violation be prompt and in writing. To 
avoid confusion and respond to state requests for greater clarity, 
disclosures under this policy should be made to EPA. The Agency will 
work closely with states in implementing the policy.
    The requirement that discovery of the violation be voluntary is 
consistent with proposed federal and state bills which would reward 
those discoveries that the regulated entity can legitimately attribute 
to its own voluntary efforts.
    The policy gives three specific examples of discovery that would 
not be voluntary, and therefore would not be eligible for penalty 
mitigation: emissions violations detected through a required continuous 
emissions monitor, violations of NPDES discharge limits found through 
prescribed monitoring, and violations discovered through a compliance 
audit required to be performed by the terms of a consent order or 
settlement agreement.
    The final policy generally applies to any violation that is 
voluntarily discovered, regardless of whether the violation is required 
to be reported. This definition responds to comments pointing out that 
reporting requirements are extensive, and that excluding them from the 
policy's scope would severely limit the incentive for self-policing 
(see, e.g., II-C-48 in the Docket).
    The Agency wishes to emphasize that the integrity of federal 
environmental law depends upon timely and accurate reporting. The 
public relies on timely and accurate reports from the regulated 
community, not only to measure compliance but to evaluate health or 
environmental risk and gauge progress in reducing pollutant loadings. 
EPA expects the policy to encourage the kind of vigorous self-policing 
that will serve these objectives, and not to provide an excuse for 
delayed reporting. Where violations of reporting requirements are 
voluntarily discovered, they must be promptly reported (as discussed 
below). Where a failure to report results in imminent and substantial 
endangerment or serious harm, that violation is not covered under this 
policy (see Condition D(8)). The policy also requires the regulated 
entity to prevent recurrence of the violation, to ensure that 
noncompliance with reporting requirements is not repeated. EPA will 
closely scrutinize the effect of the policy in furthering the public 
interest in timely and accurate reports from the regulated community.
    Under Section D(4), disclosure of the violation should be made 
within 10 days of its discovery, and in writing to EPA. Where a statute 
or regulation requires reporting be made in less than 10 days, 
disclosure should be made within the time limit established by law. 
Where reporting within ten days is not practical because the violation 
is complex and compliance cannot be determined within that period, the 
Agency may accept later disclosures if the circumstances do not present 
a serious threat and the regulated entity meets its burden of showing 
that the additional time was needed to determine compliance status.
    This condition recognizes that it is critical for EPA to get timely 
reporting of violations in order that it might have clear notice of the 
violations and the opportunity to respond if necessary, as well as an 
accurate picture of a given facility's compliance record. Prompt 
disclosure is also evidence of the regulated entity's good faith in 
wanting 

[[Page 66709]]
to achieve or return to compliance as soon as possible.
    In the final policy, the Agency has added the words, ``or may have 
occurred,'' to the sentence, ``The regulated entity fully discloses 
that a specific violation has occurred, or may have occurred * * *.'' 
This change, which was made in response to comments received, clarifies 
that where an entity has some doubt about the existence of a violation, 
the recommended course is for it to disclose and allow the regulatory 
authorities to make a definitive determination.
    In general, the Freedom of Information Act will govern the Agency's 
release of disclosures made pursuant to this policy. EPA will, 
independently of FOIA, make publicly available any compliance 
agreements reached under the policy (see Section H of the policy), as 
well as descriptions of due diligence programs submitted under Section 
D.1 of the Policy. Any material claimed to be Confidential Business 
Information will be treated in accordance with EPA regulations at 40 
C.F.R. Part 2.
3. Discovery and Disclosure Independent of Government or Third Party 
Plaintiff
    Under Section D(3), in order to be ``voluntary'', the violation 
must be identified and disclosed by the regulated entity prior to: the 
commencement of a federal state or local agency inspection, 
investigation, or information request; notice of a citizen suit; legal 
complaint by a third party; the reporting of the violation to EPA by a 
``whistleblower'' employee; and imminent discovery of the violation by 
a regulatory agency.
    This condition means that regulated entities must have taken the 
initiative to find violations and promptly report them, rather than 
reacting to knowledge of a pending enforcement action or third-party 
complaint. This concept was reflected in the interim policy and in 
federal and state penalty immunity laws and did not prove controversial 
in the public comment process.
4. Correction and Remediation
    Section D(5) ensures that, in order to receive the penalty 
mitigation benefits available under the policy, the regulated entity 
not only voluntarily discovers and promptly discloses a violation, but 
expeditiously corrects it, remedies any harm caused by that violation 
(including responding to any spill and carrying out any removal or 
remedial action required by law), and expeditiously certifies in 
writing to appropriate state, local and EPA authorities that violations 
have been corrected. It also enables EPA to ensure that the regulated 
entity will be publicly accountable for its commitments through binding 
written agreements, orders or consent decrees where necessary.
    The final policy requires the violation to be corrected within 60 
days, or that the regulated entity provide written notice where 
violations may take longer to correct. EPA recognizes that some 
violations can and should be corrected immediately, while others (e.g., 
where capital expenditures are involved), may take longer than 60 days 
to correct. In all cases, the regulated entity will be expected to do 
its utmost to achieve or return to compliance as expeditiously as 
possible.
    Where correction of the violation depends upon issuance of a permit 
which has been applied for but not issued by federal or state 
authorities, the Agency will, where appropriate, make reasonable 
efforts to secure timely review of the permit.
5. Prevent Recurrence
    Under Section D(6), the regulated entity must agree to take steps 
to prevent a recurrence of the violation, including but not limited to 
improvements to its environmental auditing or due diligence efforts. 
The final policy makes clear that the preventive steps may include 
improvements to a regulated entity's environmental auditing or due 
diligence efforts to prevent recurrence of the violation.
    In the interim policy, the Agency required that the entity 
implement appropriate measures to prevent a recurrence of the 
violation, a requirement that operates prospectively. However, a 
separate condition in the interim policy also required that the 
violation not indicate ``a failure to take appropriate steps to avoid 
repeat or recurring violations''--a requirement that operates 
retrospectively. In the interest of both clarity and fairness, the 
Agency has decided for purposes of this condition to keep the focus 
prospective and thus to require only that steps be taken to prevent 
recurrence of the violation after it has been disclosed.
6. No Repeat Violations
    In response to requests from commenters (see, e.g., II-F-39 and II-
G-18 in the Docket), EPA has established ``bright lines'' to determine 
when previous violations will bar a regulated entity from obtaining 
relief under this policy. These will help protect the public and 
responsible companies by ensuring that penalties are not waived for 
repeat offenders. Under condition D(7), the same or closely-related 
violation must not have occurred previously within the past three years 
at the same facility, or be part of a pattern of violations on the 
regulated entity's part over the past five years. This provides 
companies with a continuing incentive to prevent violations, without 
being unfair to regulated entities responsible for managing hundreds of 
facilities. It would be unreasonable to provide unlimited amnesty for 
repeated violations of the same requirement.
    The term ``violation'' includes any violation subject to a federal 
or state civil judicial or administrative order, consent agreement, 
conviction or plea agreement. Recognizing that minor violations are 
sometimes settled without a formal action in court, the term also 
covers any act or omission for which the regulated entity has received 
a penalty reduction in the past. Together, these conditions identify 
situations in which the regulated community has had clear notice of its 
noncompliance and an opportunity to correct.
7. Other Violations Excluded
    Section D(8) makes clear that penalty reductions are not available 
under this policy for violations that resulted in serious actual harm 
or which may have presented an imminent and substantial endangerment to 
public health or the environment. Such events indicate a serious 
failure (or absence) of a self-policing program, which should be 
designed to prevent such risks, and it would seriously undermine 
deterrence to waive penalties for such violations. These exceptions are 
responsive to suggestions from public interest organizations, as well 
as other commenters. (See, e.g., II-F-39 and II-G-18 in the Docket.)
    The final policy also excludes penalty reductions for violations of 
the specific terms of any order, consent agreement, or plea agreement. 
(See, II-E-60 in the Docket.) Once a consent agreement has been 
negotiated, there is little incentive to comply if there are no 
sanctions for violating its specific requirements. The exclusion in 
this section applies to violations of the terms of any response, 
removal or remedial action covered by a written agreement.
8. Cooperation
    Under Section D(9), the regulated entity must cooperate as required 
by EPA and provide information necessary to determine the applicability 
of the policy. This condition is largely unchanged from the interim 
policy. In the final policy, however, the Agency has added that 
``cooperation'' includes 

[[Page 66710]]
assistance in determining the facts of any related violations suggested 
by the disclosure, as well as of the disclosed violation itself. This 
was added to allow the agency to obtain information about any 
violations indicated by the disclosure, even where the violation is not 
initially identified by the regulated entity.

F. Opposition to Privilege

    The Agency remains firmly opposed to the establishment of a 
statutory evidentiary privilege for environmental audits for the 
following reasons:
    1. Privilege, by definition, invites secrecy, instead of the 
openness needed to build public trust in industry's ability to self-
police. American law reflects the high value that the public places on 
fair access to the facts. The Supreme Court, for example, has said of 
privileges that, ``[w]hatever their origins, these exceptions to the 
demand for every man's evidence are not lightly created nor expansively 
construed, for they are in derogation of the search for truth.'' United 
States v. Nixon, 418 U.S. 683 (1974). Federal courts have unanimously 
refused to recognize a privilege for environmental audits in the 
context of government investigations. See, e.g., United States v. 
Dexter, 132 F.R.D. 8, 9-10 (D.Conn. 1990) (application of a privilege 
``would effectively impede [EPA's] ability to enforce the Clean Water 
Act, and would be contrary to stated public policy.'')
    2. Eighteen months have failed to produce any evidence that a 
privilege is needed. Public testimony on the interim policy confirmed 
that EPA rarely uses audit reports as evidence. Furthermore, surveys 
demonstrate that environmental auditing has expanded rapidly over the 
past decade without the stimulus of a privilege. Most recently, the 
1995 Price Waterhouse survey found that those few large or mid-sized 
companies that do not audit generally do not perceive any need to; 
concern about confidentiality ranked as one of the least important 
factors in their decisions.
    3. A privilege would invite defendants to claim as ``audit'' 
material almost any evidence the government needed to establish a 
violation or determine who was responsible. For example, most audit 
privilege bills under consideration in federal and state legislatures 
would arguably protect factual information--such as health studies or 
contaminated sediment data--and not just the conclusions of the 
auditors. While the government might have access to required monitoring 
data under the law, as some industry commenters have suggested, a 
privilege of that nature would cloak underlying facts needed to 
determine whether such data were accurate.
    4. An audit privilege would breed litigation, as both parties 
struggled to determine what material fell within its scope. The problem 
is compounded by the lack of any clear national standard for audits. 
The ``in camera'' (i.e., non-public) proceedings used to resolve these 
disputes under some statutory schemes would result in a series of time-
consuming, expensive mini-trials.
    5. The Agency's policy eliminates the need for any privilege as 
against the government, by reducing civil penalties and criminal 
liability for those companies that audit, disclose and correct 
violations. The 1995 Price Waterhouse survey indicated that companies 
would expand their auditing programs in exchange for the kind of 
incentives that EPA provides in its policy.
    6. Finally, audit privileges are strongly opposed by the law 
enforcement community, including the National District Attorneys 
Association, as well as by public interest groups. (See, e.g., Docket, 
II-C-21, II-C-28, II-C-52, IV-G-10, II-C-25, II-C-33, II-C-52, II-C-48, 
and II-G-13 through II-G-24.)

G. Effect on States

    The final policy reflects EPA's desire to develop fair and 
effective incentives for self-policing that will have practical value 
to states that share responsibility for enforcing federal environmental 
laws. To that end, the Agency has consulted closely with state 
officials in developing this policy, through a series of special 
meetings and conference calls in addition to the extensive opportunity 
for public comment. As a result, EPA believes its final policy is 
grounded in common-sense principles that should prove useful in the 
development of state programs and policies.
    As always, states are encouraged to experiment with different 
approaches that do not jeopardize the fundamental national interest in 
assuring that violations of federal law do not threaten the public 
health or the environment, or make it profitable not to comply. The 
Agency remains opposed to state legislation that does not include these 
basic protections, and reserves its right to bring independent action 
against regulated entities for violations of federal law that threaten 
human health or the environment, reflect criminal conduct or repeated 
noncompliance, or allow one company to make a substantial profit at the 
expense of its law-abiding competitors. Where a state has obtained 
appropriate sanctions needed to deter such misconduct, there is no need 
for EPA action.

H. Scope of Policy

    EPA has developed this document as a policy to guide settlement 
actions. EPA employees will be expected to follow this policy, and the 
Agency will take steps to assure national consistency in application. 
For example, the Agency will make public any compliance agreements 
reached under this policy, in order to provide the regulated community 
with fair notice of decisions and greater accountability to affected 
communities. Many in the regulated community recommended that the 
Agency convert the policy into a regulation because they felt it might 
ensure greater consistency and predictability. While EPA is taking 
steps to ensure consistency and predictability and believes that it 
will be successful, the Agency will consider this issue and will 
provide notice if it determines that a rulemaking is appropriate.

II. Statement of Policy: Incentives for Self-Policing

Discovery, Disclosure, Correction and Prevention

A. Purpose
    This policy is designed to enhance protection of human health and 
the environment by encouraging regulated entities to voluntarily 
discover, disclose, correct and prevent violations of federal 
environmental requirements.
B. Definitions
    For purposes of this policy, the following definitions apply:
    ``Environmental Audit'' has the definition given to it in EPA's 
1986 audit policy on environmental auditing, i.e., ``a systematic, 
documented, periodic and objective review by regulated entities of 
facility operations and practices related to meeting environmental 
requirements.''
    ``Due Diligence'' encompasses the regulated entity's systematic 
efforts, appropriate to the size and nature of its business, to 
prevent, detect and correct violations through all of the following:
    (a) Compliance policies, standards and procedures that identify how 
employees and agents are to meet the requirements of laws, regulations, 
permits and other sources of authority for environmental requirements;
    (b) Assignment of overall responsibility for overseeing compliance 
with policies, standards, and procedures, and assignment of specific 
responsibility for assuring compliance at each facility or operation; 

[[Page 66711]]

    (c) Mechanisms for systematically assuring that compliance 
policies, standards and procedures are being carried out, including 
monitoring and auditing systems reasonably designed to detect and 
correct violations, periodic evaluation of the overall performance of 
the compliance management system, and a means for employees or agents 
to report violations of environmental requirements without fear of 
retaliation;
    (d) Efforts to communicate effectively the regulated entity's 
standards and procedures to all employees and other agents;
    (e) Appropriate incentives to managers and employees to perform in 
accordance with the compliance policies, standards and procedures, 
including consistent enforcement through appropriate disciplinary 
mechanisms; and
    (f) Procedures for the prompt and appropriate correction of any 
violations, and any necessary modifications to the regulated entity's 
program to prevent future violations.
    ``Environmental audit report'' means the analysis, conclusions, and 
recommendations resulting from an environmental audit, but does not 
include data obtained in, or testimonial evidence concerning, the 
environmental audit.
    ``Gravity-based penalties'' are that portion of a penalty over and 
above the economic benefit., i.e., the punitive portion of the penalty, 
rather than that portion representing a defendant's economic gain from 
non-compliance. (For further discussion of this concept, see ``A 
Framework for Statute-Specific Approaches to Penalty Assessments'', 
#GM-22, 1980, U.S. EPA General Enforcement Policy Compendium).
    ``Regulated entity'' means any entity, including a federal, state 
or municipal agency or facility, regulated under federal environmental 
laws.
C. Incentives for Self-Policing
1. No Gravity-Based Penalties
    Where the regulated entity establishes that it satisfies all of the 
conditions of Section D of the policy, EPA will not seek gravity-based 
penalties for violations of federal environmental requirements.
2. Reduction of Gravity-Based Penalties by 75%
    EPA will reduce gravity-based penalties for violations of federal 
environmental requirements by 75% so long as the regulated entity 
satisfies all of the conditions of Section D(2) through D(9) below.
3. No Criminal Recommendations
    (a) EPA will not recommend to the Department of Justice or other 
prosecuting authority that criminal charges be brought against a 
regulated entity where EPA determines that all of the conditions in 
Section D are satisfied, so long as the violation does not demonstrate 
or involve:
    (i) a prevalent management philosophy or practice that concealed or 
condoned environmental violations; or
    (ii) high-level corporate officials' or managers' conscious 
involvement in, or willful blindness to, the violations.
    (b) Whether or not EPA refers the regulated entity for criminal 
prosecution under this section, the Agency reserves the right to 
recommend prosecution for the criminal acts of individual managers or 
employees under existing policies guiding the exercise of enforcement 
discretion.
4. No Routine Request for Audits
    EPA will not request or use an environmental audit report to 
initiate a civil or criminal investigation of the entity. For example, 
EPA will not request an environmental audit report in routine 
inspections. If the Agency has independent reason to believe that a 
violation has occurred, however, EPA may seek any information relevant 
to identifying violations or determining liability or extent of harm.
D. Conditions
1. Systematic Discovery
    The violation was discovered through:
    (a) an environmental audit; or
    (b) an objective, documented, systematic procedure or practice 
reflecting the regulated entity's due diligence in preventing, 
detecting, and correcting violations. The regulated entity must provide 
accurate and complete documentation to the Agency as to how it 
exercises due diligence to prevent, detect and correct violations 
according to the criteria for due diligence outlined in Section B. EPA 
may require as a condition of penalty mitigation that a description of 
the regulated entity's due diligence efforts be made publicly 
available.
2. Voluntary Discovery
    The violation was identified voluntarily, and not through a legally 
mandated monitoring or sampling requirement prescribed by statute, 
regulation, permit, judicial or administrative order, or consent 
agreement. For example, the policy does not apply to:
    (a) emissions violations detected through a continuous emissions 
monitor (or alternative monitor established in a permit) where any such 
monitoring is required;
    (b) violations of National Pollutant Discharge Elimination System 
(NPDES) discharge limits detected through required sampling or 
monitoring;
    (c) violations discovered through a compliance audit required to be 
performed by the terms of a consent order or settlement agreement.
3. Prompt Disclosure
    The regulated entity fully discloses a specific violation within 10 
days (or such shorter period provided by law) after it has discovered 
that the violation has occurred, or may have occurred, in writing to 
EPA;
4. Discovery and Disclosure Independent of Government or Third Party 
Plaintiff
    The violation must also be identified and disclosed by the 
regulated entity prior to:
    (a) the commencement of a federal, state or local agency inspection 
or investigation, or the issuance by such agency of an information 
request to the regulated entity;
    (b) notice of a citizen suit;
    (c) the filing of a complaint by a third party;
    (d) the reporting of the violation to EPA (or other government 
agency) by a ``whistleblower'' employee, rather than by one authorized 
to speak on behalf of the regulated entity; or
    (e) imminent discovery of the violation by a regulatory agency;
5. Correction and Remediation
    The regulated entity corrects the violation within 60 days, 
certifies in writing that violations have been corrected, and takes 
appropriate measures as determined by EPA to remedy any environmental 
or human harm due to the violation. If more than 60 days will be needed 
to correct the violation(s), the regulated entity must so notify EPA in 
writing before the 60-day period has passed. Where appropriate, EPA may 
require that to satisfy conditions 5 and 6, a regulated entity enter 
into a publicly available written agreement, administrative consent 
order or judicial consent decree, particularly where compliance or 
remedial measures are complex or a lengthy schedule for attaining and 
maintaining compliance or remediating harm is required;
6. Prevent Recurrence
    The regulated entity agrees in writing to take steps to prevent a 
recurrence of the violation, which may include improvements to its 
environmental auditing or due diligence efforts;

[[Page 66712]]

7. No Repeat Violations
    The specific violation (or closely related violation) has not 
occurred previously within the past three years at the same facility, 
or is not part of a pattern of federal, state or local violations by 
the facility's parent organization (if any), which have occurred within 
the past five years. For the purposes of this section, a violation is:
    (a) any violation of federal, state or local environmental law 
identified in a judicial or administrative order, consent agreement or 
order, complaint, or notice of violation, conviction or plea agreement; 
or
    (b) any act or omission for which the regulated entity has 
previously received penalty mitigation from EPA or a state or local 
agency.
8. Other Violations Excluded
    The violation is not one which (i) resulted in serious actual harm, 
or may have presented an imminent and substantial endangerment to, 
human health or the environment, or (ii) violates the specific terms of 
any judicial or administrative order, or consent agreement.
9. Cooperation
    The regulated entity cooperates as requested by EPA and provides 
such information as is necessary and requested by EPA to determine 
applicability of this policy. Cooperation includes, at a minimum, 
providing all requested documents and access to employees and 
assistance in investigating the violation, any noncompliance problems 
related to the disclosure, and any environmental consequences related 
to the violations.
E. Economic Benefit
    EPA will retain its full discretion to recover any economic benefit 
gained as a result of noncompliance to preserve a ``level playing 
field'' in which violators do not gain a competitive advantage over 
regulated entities that do comply. EPA may forgive the entire penalty 
for violations which meet conditions 1 through 9 in section D and, in 
the Agency's opinion, do not merit any penalty due to the insignificant 
amount of any economic benefit.
F. Effect on State Law, Regulation or Policy
    EPA will work closely with states to encourage their adoption of 
policies that reflect the incentives and conditions outlined in this 
policy. EPA remains firmly opposed to statutory environmental audit 
privileges that shield evidence of environmental violations and 
undermine the public's right to know, as well as to blanket immunities 
for violations that reflect criminal conduct, present serious threats 
or actual harm to health and the environment, allow noncomplying 
companies to gain an economic advantage over their competitors, or 
reflect a repeated failure to comply with federal law. EPA will work 
with states to address any provisions of state audit privilege or 
immunity laws that are inconsistent with this policy, and which may 
prevent a timely and appropriate response to significant environmental 
violations. The Agency reserves its right to take necessary actions to 
protect public health or the environment by enforcing against any 
violations of federal law.
G. Applicability
    (1) This policy applies to the assessment of penalties for any 
violations under all of the federal environmental statutes that EPA 
administers, and supersedes any inconsistent provisions in media-
specific penalty or enforcement policies and EPA's 1986 Environmental 
Auditing Policy Statement.
    (2) To the extent that existing EPA enforcement policies are not 
inconsistent, they will continue to apply in conjunction with this 
policy. However, a regulated entity that has received penalty 
mitigation for satisfying specific conditions under this policy may not 
receive additional penalty mitigation for satisfying the same or 
similar conditions under other policies for the same violation(s), nor 
will this policy apply to violations which have received penalty 
mitigation under other policies.
    (3) This policy sets forth factors for consideration that will 
guide the Agency in the exercise of its prosecutorial discretion. It 
states the Agency's views as to the proper allocation of its 
enforcement resources. The policy is not final agency action, and is 
intended as guidance. It does not create any rights, duties, 
obligations, or defenses, implied or otherwise, in any third parties.
    (4) This policy should be used whenever applicable in settlement 
negotiations for both administrative and civil judicial enforcement 
actions. It is not intended for use in pleading, at hearing or at 
trial. The policy may be applied at EPA's discretion to the settlement 
of administrative and judicial enforcement actions instituted prior to, 
but not yet resolved, as of the effective date of this policy.
H. Public Accountability
    (1) Within 3 years of the effective date of this policy, EPA will 
complete a study of the effectiveness of the policy in encouraging:
    (a) changes in compliance behavior within the regulated community, 
including improved compliance rates;
    (b) prompt disclosure and correction of violations, including 
timely and accurate compliance with reporting requirements;
    (c) corporate compliance programs that are successful in preventing 
violations, improving environmental performance, and promoting public 
disclosure;
    (d) consistency among state programs that provide incentives for 
voluntary compliance.
    EPA will make the study available to the public.
    (2) EPA will make publicly available the terms and conditions of 
any compliance agreement reached under this policy, including the 
nature of the violation, the remedy, and the schedule for returning to 
compliance.
I. Effective Date
    This policy is effective January 22, 1996.

    Dated: December 18, 1995.
Steven A. Herman,
Assistant Administrator for Enforcement and Compliance Assurance.
[FR Doc. 95-31146 Filed 12-21-95; 8:45 am]
BILLING CODE 6560-50-P