Enhancing Environmental Outcomes From Audit Policy Disclosures
Through Tailored Incentives for New Owners; Notice
[Federal Register: May 14, 2007 (Volume 72, Number 92)]
[Notices]
[Page 27116-27122]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr14my07-36]
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ENVIRONMENTAL PROTECTION AGENCY
[EPA-HQ-OECA-2007-0291; FRL-8309-2]
Enhancing Environmental Outcomes From Audit Policy Disclosures
Through Tailored Incentives for New Owners; Notice
AGENCY: Environmental Protection Agency.
ACTION: Notice; request for comment.
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SUMMARY: The Environmental Protection Agency (``EPA'' or ``the
Agency'') requests 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. The Agency is considering
whether actively encouraging such disclosures has the potential to
yield significant environmental benefit, since new owners may be
particularly well-situated and highly motivated to focus on, and invest
in, making a clean start for their new facilities by addressing
environmental noncompliance.
Any tailored incentives for new owners would be beyond those
offered as EPA is currently implementing EPA's April 11, 2000 policy on
``Incentives for Self-Policing: Discovery, Disclosure, Correction and
Prevention of Violations,'' commonly referred to as the ``Audit
Policy'' (65 FR 19618). These incentives would be designed to enhance
implementation of the Audit Policy and encourage its use in the new
owner context, but would not constitute a change to the Policy overall.
After the comment period closes, the Agency plans to review all
comments and decide whether to develop a pilot program to test the
policy of offering tailored incentives to encourage new owners to self-
audit and disclose under the Audit Policy. Should the Agency decide to
proceed, EPA would then publish a second Federal Register notice to
seek comment on a proposed pilot program. After a second round of
public comment, the Agency would publish in the Federal Register: The
final description of the pilot program; an announcement of its start
date; and a description of how its success in achieving increased self-
auditing and disclosure and significant improvement to the environment
will be evaluated.
DATES: EPA urges interested parties to comment in writing on the issues
raised in this notice. Comments must be received by EPA at the address
below no later than July 13, 2007. Comments may also be communicated
orally at two public meetings EPA will hold during the comment period.
The first meeting is scheduled for Washington, DC at the J.W. Marriott
Hotel, 1331 Pennsylvania Ave., NW., on June 12, 2007. The second one is
scheduled for San Francisco at the Palace Hotel, 2 New Montgomery St.,
on June 20, 2007. Both meetings will begin at 10 a.m. and end at 4 p.m.
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
in 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 Civil Enforcement, Special
Litigation and Projects Division, at (202) 564-6012 or
makepeace.caroline@epa.gov.
SUPPLEMENTARY INFORMATION:
I. General Information
A. Introduction
On April 11, 2000, EPA issued its revised final policy on
``Incentives for Self-Policing: Discovery, Disclosure, Correction and
Prevention of Violations,'' commonly referred to as the ``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, disclose, correct and prevent
[[Page 27117]]
the recurrence of violations of Federal environmental law. Benefits
available to entities that make disclosures under the terms of the
Audit Policy include reductions in the amount of civil penalties and a
determination not to recommend criminal prosecution of disclosing entities.
The Audit Policy program has been a successful effort to date,
resolving disclosed violations with over 3,000 entities. However, more
than half of these 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's goal is to increase the number of self-disclosures that have
the potential to yield significant environmental benefits while
effecting compliance with Federal environmental requirements. EPA's
recent experience with corporate-wide auditing agreements following a
corporate merger or acquisition has heightened the Agency's interest in
exploring whether encouraging new owners of regulated facilities to
discover, disclose, correct, and prevent the recurrence of
environmental violations would help EPA meet this goal. New owners may
be particularly well-situated and highly motivated to invest in making
a ``clean start'' for their new facilities by: Doing thorough self-
audits of their new facilities; disclosing any violations found;
promptly correcting the violations; and making the substantial
improvements that will enhance their ability to remain in compliance
going forward. Nevertheless, certain disincentives may stand in the way
of new owners that may be interested in taking these steps, and there
may be equitable reasons for considering particular incentives to
encourage self-auditing and disclosure at the time a new owner takes
control. The Agency is interested in developing this idea because of
its potential to enhance EPA's efforts to effectively utilize scarce
government resources by securing significant environmental improvement
as quickly as possible. The Agency is also interested in whether
offering tailored incentives in the new owner context may have
unintended adverse consequences with respect to, for example,
discouraging appropriate due diligence, timely compliance and a level
playing field, or other negative effects. The Agency seeks comment on
the potential for any positive or negative results that might come from
providing such tailored incentives. The Agency also requests comment on
how EPA could most efficiently determine who is a bona-fide new owner,
and how the Agency should evaluate whether such incentives are
successful in securing the prompt correction of environmental
violations and significant improvement to the environment.
While EPA does not intend to amend the Audit Policy, the Agency is
considering ways to enhance its implementation and encourage its
greater use in new owner situations, particularly with regard to the
disclosure and correction of violations that may yield significant
pollutant reductions. Today, EPA issues this Notice signaling its
intent to consider offering tailored incentives to self-report under
the current Audit Policy for new owners of regulated facilities.
The purpose of this notice is to (1) solicit information to be used
in helping EPA better understand and formulate decisions about key
issues; and (2) provide notification of open meetings at which EPA
hopes to hear from the public on these issues. Copies of the Agency's
current Audit Policy may be found on the EPA's Web site at
http://www.epa.gov/compliance/incentives/auditing/auditpolicy.html.
B. Background and History of the Audit Policy
1. Overview of the Audit Policy
The Audit Policy provides incentives for regulated entities to
detect, promptly disclose, expeditiously correct, and prevent the
recurrence of violations of federal environmental requirements. The
Audit Policy contains nine conditions, and entities that meet all of
them are eligible for 100% mitigation of any gravity-based civil
penalties that otherwise could be assessed in settlement. (``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%
mitigation of any gravity-based penalties. For criminal matters, EPA
will generally elect not to recommend criminal prosecution by the
Department of Justice (``DOJ'') or any other prosecuting authority for
a disclosing entity that meets at least conditions two through nine
(i.e., regardless of whether it meets the systematic discovery
requirement) as long as its self-policing, discovery and disclosure
were conducted in good faith and the entity adopts a systematic
approach to preventing recurrence of the violation. 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 result in actual
harm to the environment, and those that may present 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.
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.
2. How EPA Implements its Voluntary Disclosure Programs
EPA's voluntary disclosure policies \1\ are designed to provide
major incentives for regulated entities that voluntarily discover,
promptly disclose, and expeditiously correct violations, rendering
formal EPA investigation and enforcement action unnecessary in most
instances. The policies safeguard human health and the environment by
providing incentives for regulated entities to come into compliance
with the federal environmental laws and regulations, and enable
efficient use of scarce government resources.
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\1\ Besides the Audit Policy, EPA also implements another
voluntary disclosure policy: The Small Business Compliance Policy
(65 FR 19630), published April 11, 2000.
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Most self-disclosures come into the Agency on a single facility
basis. However, the Agency sometimes enters into an audit agreement
under which the disclosing entity commits to undertake a comprehensive
multimedia audit that will be conducted at a number of its facilities
over an agreed-upon time frame. Corporate auditing agreements allow
companies to plan a corporate-wide audit with advance understanding
between the company and EPA regarding the scope of the audit, schedules
(audit, reporting, and correction of violations), whether resolution
will be judicial or administrative, and any other
[[Page 27118]]
expectations. Such agreements also offer the potential for significant
environmental benefit while providing greater certainty to companies
about their environmental liabilities. Thus, EPA encourages companies
with multiple facilities to take advantage of the Agency's Audit Policy
through use of such corporate auditing agreements.
Once a regulated entity notifies EPA, in writing, of potential
violations, EPA evaluates the discovery, disclosure, and correction of
the violations against the criteria set forth in the Audit Policy, or
if applicable, the Small Business Compliance Policy, and determines the
appropriate enforcement response. If the disclosure does not meet the
conditions of the applicable policy or the disclosing entity does not
provide sufficient information to EPA to allow the Agency to make this
determination, then the matter is handled under the appropriate medium-
specific penalty policies, which often accommodate penalty mitigation
for voluntary disclosures. The enforcement response for the vast
majority of voluntary disclosures is a Notice of Determination
(``NOD'') for cases involving no assessment of penalties. EPA retains
its discretion to assess any economic benefit that may have been
realized as a result of noncompliance. If the regulated entity has
gained significant economic benefit, or if it failed to meet all the
conditions of the applicable policy, then a civil penalty may be sought
in an administrative or judicial action.
Overall, the Agency's voluntary disclosure programs continue to
have positive results. The Audit and Small Business Compliance Policies
have encouraged voluntary self-policing while preserving fair and
effective enforcement and their use has been widespread. As of October
1, 2006, regulated entities and organizations have resolved actual or
potential violations at 9,255 facilities.
Thus, the solicitation of comments on tailored incentives for new
owners does not signal any intention to shift course regarding the
Agency's position on self-policing and voluntary disclosures, but
instead represents an attempt to enhance implementation of the Audit
Policy, and encourage its increased use in the new owner context.
As mentioned in the Introduction, EPA's interest in exploring this
approach stems in part from recent experiences in the Agency's current
implementation of the Audit Policy. In the last few years, EPA has
entered into corporate auditing agreements with several companies
following a merger or acquisition valued at over $1 billion. These
corporate auditing agreements provided a unique opportunity for
companies to use self-disclosures to make a ``clean start'' with regard
to environmental compliance. The Agency recognizes that taking steps to
further encourage audit agreements in this context could offer the
potential to garner significant environmental benefit.
3. How the Audit Policy Currently Applies to New Owners
On April 30, 2007, EPA issued the ``Audit Policy: Frequently Asked
Questions (2007)'' which recognizes that owners of newly acquired
facilities are uniquely situated to examine and improve performance at
newly acquired facilities. Specifically, the 2007 Frequently Asked
Questions provides that:
• New owners may be eligible for penalty mitigation under
the Audit Policy for violations at newly acquired facilities which are
discovered as part of a compliance examination agreed to be undertaken
prior to the 1st annual certification under Title V of the Clean Air
Act, or which are disclosed before that time.
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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The 2007 Frequently Asked Questions 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.
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. The Audit Policy: Frequently Asked Questions (2007)
can be found on the Internet at
http://www.epa.gov/compliance/incentives/auditing/auditpolicy.html.
C. Role of Benefit Recapture in the Auditing Context
The imposition of civil penalties that recapture the economic
benefit of noncompliance is the cornerstone of the EPA's civil penalty
program. Benefit recapture was adopted in 1984, and it has served the
Agency and the public well. Benefit recapture has also 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 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 other
Audit Policy conditions. The Audit Policy further provides that the
Agency may also waive the economic benefit component of the penalty
where the Agency determines that the economic benefit is insignificant
(65 FR 19620).
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. Put simply, violators ``gain'' the interest
on the amount of money that should have been invested in pollution
control equipment. A
[[Page 27119]]
typical example is where a factory delays installation of a required
waste water treatment facility. If the waste water treatment facility
costs $1,000,000 to install, and the violator waits three years past
the required date to comply, the violator has saved about $236,000 by
delaying compliance.\3\
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\3\ This number was generated by the current version of the BEN
computer model using the following assumptions: (1) The violator was
in the average maximum tax bracket; (2) the violator's cost of money
(i.e., the discount/compound rate) was 7.9%; 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 not
only delays but avoids the costs it would have incurred if it had
complied in a timely manner. A typical example would be where a factory
avoids the operation and maintenance costs for the above-mentioned
waste water treatment plant for the three years the polluter was out of
compliance. If the facility's annual operation and maintenance costs
are $100,000, then the violator probably saved about $200,000 by
avoiding the operation and maintenance costs for three years (again
assuming the violator is in the top tax bracket).
The third type of economic benefit is derived from the violator
obtaining an unfair competitive advantage. For example, where a
violator is selling banned products (e.g., DDT), any money made from
the sale of this banned pesticide would be illegal.\4\
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\4\ For a more detailed discussion of how economic benefit is
created, see Federal Register Notice of August 25, 2005, entitled
``Calculation of the Economic Benefit of Noncompliance in EPA's
Civil Penalty Enforcement Cases'' (70 FR 50326).
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D. Why is EPA Currently Considering Tailoring Incentives for Audit
Policy Disclosures for New Owners of Regulated Entities?
As previously stated, one of EPA's main goals is to secure the
prompt correction of environmental violations and achieve significant
improvements to the environment as expeditiously as possible. A number
of factors, including the Agency's recent experience with corporate
auditing agreements following large mergers and acquisitions, have
highlighted the promising opportunity presented by encouraging new
owners of regulated facilities to discover, disclose, correct, and
prevent the recurrence of environmental violations.
It is reasonable to surmise that new owners may be particularly
well-situated and highly motivated to focus on and invest in making a
``clean start'' for their new facilities and thus may be willing to
conduct thorough self-audits of their new facilities, disclose any
violations found, promptly correct the violations, and make the
significant improvements that will enhance compliance going forward. If
former owners were not timely about a facility's compliance
obligations, the new owners may want to make a clean break with the
past and get their newly acquired facilities into compliance promptly.
It is possible that new owners may see the benefits of quickly
assessing and working to limit their company's liability, and a firm
with a widely-respected compliance record may want to ensure that any
new acquisition develops a similarly positive record. Although some
anecdotal accounts suggest that, in recent years, new owners have often
had to make purchasing decisions based upon more limited information
about environmental compliance issues than may have been available in
the past, there has likely been at least some opportunity for pre-
acquisition due diligence review. Even somewhat limited due diligence
findings could help trigger a new owner's interest in more
comprehensively assessing the facility's environmental status and
exposure. New facility managers may also have access to new infusions
of capital, which could enable the sort of improvements that yield
significant benefit to the environment.
The Agency recognizes, however, that certain disincentives may
stand in the way of new owners who are interested taking advantage of
the Audit Policy. New owners may still have to pay substantial civil
penalties under the Audit Policy, as only the gravity portion of the
penalty can currently be mitigated. It stands to reason that new owners
may be uncomfortable about calling 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 indeed 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. One of the Agency's
current goals is to provide greater overall certainty and consistency
in the Audit Policy's implementation, and the recently-issued Audit
Policy: Frequently Asked Questions (2007) should help to resolve such
concerns generally. Nevertheless, there is likely still some hesitation
on the part of new owners to self-disclose violations, because they
worry about exactly how such disclosures will be handled by the Agency.
Encouraging new owners with tailored incentives that help address
some of their concerns or alleviate some of their costs, in the context
of a well-defined program that provides greater certainty about the
handling of disclosures, may make the difference in their willingness
to come forward and to commit to improving their environmental
compliance and reducing their environmental footprint. There is a
strong equitable argument that a new owner should not be penalized for
economic benefit relating to violations that arose when a facility was
not under the new owner's control, if that new owner is willing to
promptly address violations and make changes to ensure the facility
stays in compliance in the future. The Agency is also interested in
exploring the idea of tailored incentives because it may present an
opportunity to enhance EPA's efforts to effectively utilize scarce
government resources, by securing high quality environmental
improvements and achieving the most significant environmental benefit
more quickly than might otherwise occur. Nevertheless, the Agency is
also aware that such incentives may have unintended adverse
consequences with respect to, for example, discouraging appropriate due
diligence, timely compliance and a level playing field, or other
negative effects, and EPA intends to consider the potential for such
negative results as well.
E. Objectives of Any Potential Pilot Program
If, after review and consideration of all comments on this concept
and on any draft incentive policy, the Agency decides it makes sense to
test the approach of tailoring incentives to encourage new owners to
utilize the Audit Policy, EPA would then develop a pilot program. Such
a pilot program would be evaluated after three years and would be
designed with four main objectives in mind:
1. The program should increase the number of self-audits and
disclosures that yield significant environmental benefits.
2. The program should be transparent and straightforward. There
should be clarity about the program's goals and how the Agency will
handle those firms that self-audit and disclose violations, and the
program should have sufficient
[[Page 27120]]
safeguards to ensure that only bona-fide new owners participate.
3. The program should be efficient to administer. EPA must develop
a program that can be effective with the limited resources available to
administer it. For instance, EPA does not envision analyzing the
various financial details of each merger or acquisition.
4. The program should also have minimal transaction costs for the
regulated entities participating in the program. While the compliance
costs for the firms participating may be substantial, the actual
participation in the program should be cost-effective.
II. Issues
The Agency is seeking comment limited to: (1) Whether EPA should
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 and disclosures from
new owners are achieving significant improvements to the environment.
A. Should the Agency Offer Tailored Incentives to Encourage New Owners
of Regulated Entities to Self-Audit and Disclose Violations?
Are tailored incentives needed and/or appropriate to encourage
self-audits and disclosures by new owners of regulated entities? Do the
circumstances of new ownership warrant special consideration or
handling, if the new owner was not responsible for creating a violation
and there exists potentially significant environmental benefit that
could result from new owners' disclosures and correction of violations?
Or, does the Audit Policy as currently implemented already offer
sufficient incentives to induce new owners to undertake self-audits and
disclosures?
1. Due Diligence in Mergers and Acquisitions
Anecdotal accounts suggest that, in today's merger and acquisition
market, acquiring firms often have to make decisions about a target
acquisition under tight deadlines and with relatively minimal
information about an entity's environmental compliance status or
problems. These accounts indicate that the traditional paradigm of
assuming that due diligence review will yield full knowledge to the
purchaser about any potential acquisition may not be accurate in many
current mergers and acquisitions. EPA suspects that the amount of
environmental compliance due diligence varies greatly depending on the
industrial sector involved, or on whether a certain target facility's
or company's environmental compliance is likely to present an important
or material issue (e.g., environmental compliance would be more germane
to the purchase of a chemical company than of a financial services
firm). EPA seeks comment on the extent to which pre-acquisition due
diligence reviews reveal environmental noncompliance (as opposed to
environmental contamination and remedial liability).
Providing tailored incentives to self-audit and disclose could
potentially improve environmental compliance in these situations by
encouraging in-depth auditing after purchase. On the other hand,
providing such incentives could cause sellers to further delay or avoid
compliance (i.e., a firm might be tempted to sell off a unit to another
business in its noncompliant state rather than bring that unit into
compliance), or could have the unintended effect of encouraging buyers
to perform inadequate due diligence. EPA seeks comment on whether it
would be appropriate to require that new owners have performed a
certain level of pre-acquisition due diligence to qualify for tailored
incentives, and if so, what that level should be? The Agency also seeks
comment on the potential effects on environmental compliance and on due
diligence reviews that might result from offering tailored incentives
for new owners.
2. Purchase Price Calculation
If, as the anecdotal reports mentioned above would indicate, the
due diligence that potential buyers perform may have substantial gaps
with regard to information about environmental compliance issues, what
is the effect on acquisition negotiations? If an acquiring company had
perfect information, presumably it would adjust its offered purchase
price to account for any anticipated environmental liabilities
associated with the target firm. But, without good information, the
buyer's offer may not reflect adjustments for the cost of environmental
noncompliance. EPA seeks comment on the extent to which environmental
noncompliance liabilities (as distinguished from environmental
remediation liabilities) are reflected in purchase price, and whether
tailored incentives should take this into account.
3. Indemnification Agreements Between Purchaser and Seller
The Agency is aware that, in acquisition situations, sellers may
indemnify purchasers across a broad range of issues, including
environmental liability. If a selling firm has indemnified the
purchaser for violations which are ultimately disclosed by the new
owner, are tailored incentives to self-report needed at all? On the
other hand, the mere existence of an indemnification agreement does not
insulate the purchaser from liability. Given the Agency's interest in
encouraging appropriate accountability and buyer/seller agreements on
environmental compliance issues, how should EPA take indemnification
agreements into account in designing any tailored incentives? Should
the existence or terms of an indemnification agreement have any bearing
on a new owner's eligibility for tailored incentives and, if so, how?
The Agency seeks comment on all the questions above.
4. Other Requirements for Incentives
Should the Agency consider other eligibility criteria or participation
requirements if a program to offer tailored incentives is developed?
B. What Constitutes a ``New Owner'' for Purposes of Being Offered
Tailored Incentives under the Audit Policy?
If EPA develops a pilot program offering incentives to new owners,
the Agency's goal would be to ensure that only bona-fide new owners can
participate. There should be no possibility that a firm could evade
significant environmental liabilities by making superficial changes
designed to make it appear as if the regulated entity has a new owner.
The Agency believes that, in the context of eligibility for tailored
incentives, only ``arm's length'' transactions can produce ``new owners.''
However, the Agency does not have the resources necessary to delve
into complex corporate structures and histories to make determinations
about the authenticity of new ownership in the context of such Audit
Policy self-disclosures. The Agency seeks comment on a clear,
straightforward and easily administered approach to determining ``new
ownership'' and eligibility for tailored incentives, and on the
specific questions posed below.
1. What should a company need to provide to demonstrate to the Agency
that it is a bona-fide ``new owner?''
What should the standard be, to demonstrate ``new ownership'' in this
[[Page 27121]]
context? Should the Agency require each company to self-certify to the
government that it is indeed a bona-fide new owner, and eligible for
tailored incentives? If a self-certification is appropriate in this
situation, what should it contain? Should other proof be offered along
with the self-certification?
2. How long after an acquisition is an owner still ``new'' for the
purpose of being offered tailored incentives?
The Agency is seeking a clear approach to use in making such
determinations. While EPA wants to encourage new owners to avail
themselves of this process, there must be a time limit for the new
owners to address environmental violations that began prior to their
assuming ownership. Otherwise, the Audit Policy's goal of encouraging
regulated entities to self-audit and promptly correct noncompliance
could be undermined.
3. How should the Agency treat different acquisition transactions?
Should the Agency make any distinctions between acquisitions and
mergers? How should EPA handle disclosures by reorganized companies
that emerge from Chapter 11 bankruptcy? Should companies in which the
controlling interest is purchased by a new firm with no plans to
participate in management or operations be eligible for incentives? How
should the Agency treat companies that are purchased by their
employees, who were employed by the company when noncompliance began?
C. What Incentives Should the Agency Consider to Encourage New Owners
to Self-Disclose?
EPA is also inviting comment on what tailored incentives might be
appropriate to encourage self-auditing and disclosures from new owners.
EPA has identified three major potential incentives: (1) Reducing civil
penalties beyond what the current Audit Policy provides, by reducing
any economic benefit portion of the penalty; (2) allowing Audit Policy
consideration of violations which would otherwise be ineligible,
because their discovery is legally mandated and thus not discovered
voluntarily; and (3) providing recognition from the Agency to new
owners who self-audit and disclose under the Audit Policy.
EPA is seeking comment on these three possible incentives as well
as on any alternative approaches that might be effective. Commenters
suggesting other incentives are requested to clearly describe those
incentives and how they would function in the Audit Policy context.
In addition, there are some specific questions associated with the
three potential incentives suggested above on which EPA is seeking comment:
1. How should economic benefit be calculated for disclosures by new owners?
a. When should the clock start running when calculating economic
benefit?
The current practice is to calculate economic benefit forward from
the date a violation first occurred. This method can result in benefit
calculations so large that they serve as a disincentive to self-report,
especially in the context of certain types of statutory violations,
which may be longstanding and require multi-million dollar capital and
operating cost expenditures to remedy. Additionally, most new owners
would be averse to paying significant economic benefit amounts when
they were not in control of the facility when the violations occurred
and had little or no knowledge of them at the time of purchase. An
alternative method of calculating benefit in the new owner context
would be to commence calculating economic benefit from the date the
facility was acquired; another possibility might be to use the date the
post-acquisition audit was completed. If the latter, how long should a
new owner be given to complete the audit? Another approach might be to
give the new owner a reasonable time after acquisition to put on
controls, particularly where those controls are complex, and to
calculate benefits for delays beyond the reasonable period.
b. Should the economic benefit calculation take into account
whether and the extent to which the seller has indemnified the buyer?
As discussed above, in Section II.A.3.of this Notice, the Agency is
aware that, in many acquisition situations, the seller has indemnified
the new owner from liability from a whole host of issues, often
including certain environmental liabilities. The Agency seeks comment
specifically on whether such indemnification arrangements should have
any bearing on the calculation of penalties for economic benefit, as a
potential incentive.
c. In calculating economic benefit, should the Agency allow the new
owner to offset the cost of the audit?
Some self-audits can be expensive, particularly for large, complex
facilities. One incentive might be to offset the cost of the audit from
the economic benefit calculation. A fair, objective and efficient way
of establishing the cost of the audit would be critical to this
approach, especially when an audit has been performed by the company
itself, rather than by an outside third-party auditor.
2. Should EPA allow consideration under the Audit Policy of violations
which might otherwise be excluded, when the disclosures come from new
owners?
As described in Section I.B.3.of this Notice, EPA's recently issued
Audit Policy: Frequently Asked Questions (2007) makes new owners
eligible for Audit Policy penalty mitigation for violations at newly
acquired facilities, when the violations are discovered as part of a
compliance examination agreed to be undertaken prior to the first
annual certification under Title V of the Clean Air Act, or are
disclosed to EPA before that time. An additional suggested incentive is
to allow consideration under the Audit Policy of certain other
violations (e.g., Risk Management Program (RMP) under CAA 112(r)(7))
which may otherwise be ineligible for Audit Policy penalty mitigation.
As noted above, 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,
for example, examination pursuant to a RMP Triennial Audit would not
normally be considered voluntary. Since EPA wants to encourage new
owners to examine compliance and operations at their newly-acquired
facilities, correct violations and upgrade deficient equipment and
practices, should new owners that in good faith undertake a RMP
triennial Audit and inform the Agency of violations, which existed
prior to acquisition and are discovered through the audit, be eligible
for Audit Policy consideration? Are there other similar categories of
violations disclosed by new owners that should be eligible for Audit
Policy consideration?
3. Should the Agency provide recognition to new owners who self-audit
and disclose under the Audit Policy?
Would positive recognition by the Agency, commending a new owner's
willingness to voluntarily audit and disclose, encourage a company to
undertake such actions? One suggestion has been to create and publicize
a list that recognizes companies that have stepped forward to examine
compliance and operations at their newly acquired facilities, correct
violations and upgrade
[[Page 27122]]
deficient equipment and practices. What sort of recognition, if any,
would be most desirable?
D. Measures of Success
If the Agency decides to develop a policy for tailored incentives
for new owners, EPA intends to develop a three-year pilot program to
test the effectiveness of such incentives. In order to objectively,
effectively and promptly evaluate the pilot program and this approach,
EPA must have already identified clearly measurable outcomes and
efficient assessment methodologies. The main goal of this program, and
the most important measure of success, would be to show that compliance
with environmental laws and regulations has improved, and that
significant environmental benefit has been attained. However, there are
different approaches for determining how well these goals have been met.
What measures of success should the Agency adopt for the evaluation
of a pilot program? Important outcomes to consider could be the number
of disclosures made under the pilot program, the significance of the
violations involved, and the significance of the pollutant reductions
that can be attributed to or associated with these disclosures.
Transparency of the program, efficiency in administration, and low
transaction costs are also issues to be considered in evaluating the
tailored incentive approach. EPA is seeking comment on any potential
measures, and on the methodologies necessary to accurately measure them.
III. Public Process
As part of EPA's effort to obtain input on whether to offer
tailored incentives for new owners self-disclosing under the Audit
Policy, the Agency is planning to hold two public comment sessions. At
those two meetings, interested parties may attend and provide oral and
written comments on the issues. The first meeting is scheduled for
Washington, DC at the J.W. Marriott Hotel, 1331 Pennsylvania Ave., NW.,
on June 12, 2007. The second one is scheduled for San Francisco at the
Palace Hotel, 2 New Montgomery St., on June 20, 2007. Both meetings
will begin at 10 a.m. and end at 4 p.m.
The Agency is especially interested in comments relating to the
issues specified in this Notice. After the comment period closes, the
Agency plans to review and consider all comments. If EPA decides to
develop a pilot program offering tailored incentives to new owners
beyond those currently available under the Audit Policy, the Agency
would then publish a second Federal Register notice to seek comment on
such a proposed pilot program. After a second round of public comment,
the Agency would publish in the Federal Register: The final description
of the pilot program; an announcement of its start date; and a
description of how its success in achieving increased self-auditing and
disclosure and significant improvement to the environment will be
evaluated. EPA encourages parties of all interests, including State 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 as possible.
IV. What Should I Consider as I Prepare My Comments for EPA?
1. Submitting CBI. Do not submit this information 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; 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: April 30, 2007.
Granta Y. Nakayama,
Assistant Administrator, Office of Enforcement and Compliance Assurance.
[FR Doc. E7-9197 Filed 5-11-07; 8:45 am]
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