Environmental Self-Audit and Voluntary Disclosure to What End?

Gregory F. Linsin

he advent of criminal enforcement of the envi- the policy conditions were met EPA would forego or seek reduced ronmental laws in the United States during the mid- gravity-based penalties and would not refer the matter to DOJ for 1980s spurred interest within the regulated commu- criminal prosecution. EPA issued a revision to its Audit Policy in nity in the development of technical programs and 2000 (65 Fed. Reg. 19,618), but the basic components of the policy Tmanagement tools to enable companies to monitor environ- remained largely unchanged. mental performance more reliably and to correct detected In 2007, in the wake of scores of criminal prosecutions of instances of noncompliance before they became the subject commercial vessel owners and operators for intentional viola- of enforcement activity. These environmental management tions of antipollution statutes, the Coast Guard issued its Vol- systems enable companies to manage their environmental ob- untary Disclosure Policy (www.uscg.mil/foia/docs/CH-4%20 ligations more efficiently while improving overall compliance Appendix%20V.pdf), modeled closely after EPA’s Audit Policy with complex regulatory programs. Understanding that these and targeted to promote disclosures of environmental criminal corporate practices could contribute to the improvement of violations. As with other policies mentioned, the key incen- environmental compliance rates while enabling the enforce- tive is that the Coast Guard will not refer the matter to DOJ ment programs to focus their limited resources on intransigent for criminal prosecution of the disclosing entity if a regulated offenders, the federal enforcement agencies promulgated company satisfies the policy’s conditions. policies designed to encourage self-auditing programs and to Are these audit and voluntary disclosure policies for envi- reward companies by offering reduced sanctions or a waiver of ronmental criminal violations working? Have they resulted in a enforcement response to those companies that elected to dis- reduction in polluting activities? Unfortunately, the public record close voluntarily violations identified through such programs. suggests that they are not being applied with sufficient predict- In 1991 the Environment and Natural Resources Division ability to persuade regulated businesses to make the investments (ENRD) of the U.S. Department of Justice (DOJ) published its and assume the risks required to satisfy the policies’ conditions. voluntary disclosure policy “Factors in Decisions on Criminal Available evidence also suggests that these programs do not Prosecutions for Environmental Violations in the Context of achieve their intended goal of fostering the voluntary disclosure Significant Voluntary Compliance or Disclosure Efforts by of serious violations in a way that improves environmental com- the Violator,” (July 1, 1991), www.usdoj.gov/enrd/Electronic_ pliance and a yields a significant reduction in pollution activity. Reading_Room/factors.htm) (hereinafter ENRD Voluntary There are, however, several concrete, practical mea- Disclosure Policy or ENRD Policy),“to encourage self-auditing, sures that enforcement agencies could readily implement to self-policing and voluntary disclosure of environmental violations improve the predictability of participation in these programs by the regulated community” by clarifying that these activities will while preserving the ultimate investigative and prosecutive be viewed as “mitigating factors,” and explaining that if a company discretion to prosecute the most serious environmental offens- fully met the identified criteria, “the result may be a decision not to es. These steps would provide clearer guidance to responsible prosecute the company criminally.” members of the regulated community and would help ensure The Environmental Protection Agency (EPA) issued its own that good-faith efforts by regulated entities to monitor envi- Audit Policy in 1995, “Incentives for Self-Policing: Discovery, ronmental performance and to report and remedy promptly Disclosure, Correction and Prevention of Violations,” (60 Fed. Reg. any violations detected will be appropriately recognized. 66,706), and a separate guidance regarding the application of that Audit Policy to criminal violations in 1997 (http://epa.gov/compliance/resources/policies/incentives/auditing/auditcrimvio-mem. Environmental Compliance PDF). The central elements of these policies echoed the principles Plans Costs/Risks expressed in the ENRD Voluntary Disclosure Policy, i.e., that Every regulated company has an obligation to comply with regulated entities were encouraged to voluntarily discover, disclose, the nation’s environmental laws and to satisfy certain docu- correct, and prevent violations of environmental laws and that if mentation or reporting requirements to verify compliance. To meet these obligations, many companies have developed Mr. Linsin is a partner with Blank Rome LLP in the firm’s Washington, an Environmental Compliance Plan (ECP). The decision to D.C., office. He may be reached at [email protected]. develop and implement a comprehensive ECP and/or Com-

Published in Natural Resources & Environment, Volume 23, Number 3, Winter 2009. © 2009 American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. pliance Management System (CMS) involves a substantial environmental regulatory system requires a company to adopt commitment of resources and personnel, both to monitor the type of comprehensive audit program outlined above. A environmental compliance and to ensure appropriate follow- company that chooses to implement such a program is vol- up beyond that mandated by law. A review of some of the untarily adopting a degree of scrutiny concerning its environ- standard features of a typical ECP readily illustrates this point. mental obligations not mandated by any regulatory regime. Senior Management Oversight – Most ECPs call for the Budget – The development and implementation of a designation of a senior management official to serve as the comprehensive ECP/CMS requires a significant commitment overall coordinator for the ECP. This individual is typically of financial resources and the sustained involvement of the se- charged with confirming that all elements of the ECP are nior management team, key technical personnel, and, in most being implemented as designed and ensuring that deficiencies cases, outside consultants to provide objective technical guid- are identified and corrected in a timely manner. In addition, ance and legal advice. A credible ECP also requires a transpar- this individual is responsible for coordinating the management ent budgeting process directly overseen by a senior corporate components of the CMS and is usually charged with making official to ensure that adequate funds are consistently available periodic reports to the company’s president and the board of for required maintenance, equipment replacement, employee directors concerning performance under the ECP. training, and the proper analysis, management, and disposal of The adoption of a CMS and an ECP reflects a decision on all waste streams. Finally, most ECPs developed in recent years the part of the senior management of a company to (a) pro- incorporate a procedure for the periodic reevaluation of the vide a blueprint for the managerial chain of responsibility for ECP itself and of the management systems that are intended environmental compliance from the shop floor to the board to support the compliance plan. These reevaluations are room, (b) specify the senior managers who are responsible for designed to test the overall compliance-assurance process, so compliance oversight, and (c) ensure there is documentation that weaknesses can be identified and improvements made in of the information that is periodically provided to the company the system before the initiation of enforcement proceedings. president and to the board members regarding environmental While all regulated businesses, even if they have not imple- compliance. Collectively, these measures reflect a substantial mented an ECP/CMS, must expend resources to comply with commitment on the part of an organization to build account- environmental standards, the standard ECP elevates the prior- ability for environmental compliance into its management ity and visibility of this financial commitment and identifies structure. The objective in implementing these systems is to with specificity the individuals responsible for ensuring that enhance overall compliance with environmental standards, but the requisite financial resources are committed to compliance. there is also no doubt that these measures significantly escalate Documentation – Another significant feature of many ECPs/ the enforcement risks to the organization and its individual CMSs is the requirement that the internal records concerning managers in the event a violation is detected. environmental performance generated through the operation of Auditing Processes – The heart of any ECP is the company’s the ECP/CMS, including the audit reports, must be retained to commitment to undertake comprehensive, periodic environ- ensure their availability for future review and comparative analy- mental audits of its business operation to verify compliance with sis. Especially when coupled with the vertical reporting process, environmental requirements, identify areas of noncompliance, which is a hallmark of the CMS, the adoption of such a targeted and provide the mechanisms for correcting any deficiencies. Most document-retention policy has the potential to increase the audit regimes involve a broad, integrated review of the company’s enforcement exposure for the company and its senior managers. overall environmental performance. Thus, an environmental au- Investment in environmental management systems can dit typically includes (a) a systematic review of all regulated waste yield significant benefits by strengthening the corporation’s ca- streams to assess waste-minimization efforts and ensure proper ac- pacity to monitor environmental performance systematically, counting, handling, and disposal; (b) a review of the systems regu- detect problems early, and continuously reinforce a corporate lated under each of the permits held by the company’s facilities ethic of compliance. These benefits, though, can be achieved to ensure ongoing compliance with permit parameters; and (c) only if the corporation’s senior management is prepared to verification of the accuracy and completeness of the information assume the risks and dedicate the resources required to imple- contained in manifests, monitoring reports, or other documents ment and sustain these management systems. that have been submitted to regulatory agencies or are otherwise required to be maintained by the company. Noncompliance find- ings must be recorded and classified as minor or major. Corrective Elevated Risks and action must be promptly initiated and completed, typically within Internal Investigations sixty days. The audit process also typically incorporates a review The risks inherent in the implementation of an ECP/CMS are of the company’s compliance with its own CMS to ensure that further elevated when management receives information concern- management oversight mechanisms are functioning as intended. ing a significant noncompliance event through a whistleblower Certain regulatory programs, such as the hazardous air allegation, internal monitoring, or the internal audit process. pollutant regulations under the Clean Air Act, require the Often, the preliminary information regarding a potential viola- periodic submission of detailed reports concerning the man- tion is incomplete and raises more questions than it answers. Is the agement of specific environmental requirements. However, no information credible, and does it, in fact, constitute a violation of

Published in Natural Resources & Environment, Volume 23, Number 3, Winter 2009. © 2009 American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. the law? If so, how extensive is the violation? How long has it been self-policing and to encourage regulated entities to disclose occurring? Does the information suggest that reports previously violations voluntarily. The policies were premised on the belief filed with or provided to regulatory agencies were incomplete or that responsible corporate actors could be persuaded to moni- inaccurate? Who was responsible for the violation, and who knew tor their environmental performance and voluntarily disclose about it at the time? Does the same problem exist at other facilities? evidence of violations, thus reducing the need for regulatory The company must also determine how to most efficiently establish oversight while improving the rate of compliance. However, the factual record and who to task with that responsibility. in addition to the expense and risk a company incurs with Management must decide whether it will voluntarily the implementation of a comprehensive ECP/CMS and the disclose the new information to the appropriate regulatory additional dangers that can result from a decision to conduct a agency. If so, questions then arise as to the form and timing of thorough internal investigation of a potential violation detected the disclosure; who should make the disclosure; what follow- by the ECP/CMS, the voluntary disclosure policies as currently up investigation should be anticipated from the agency; and implemented tend to create disincentives that work to frustrate whether any current employees might be deemed subjects or the core objective of the policies. targets of such an investigation. One of the greatest challenges for any company evaluating Senior management or the board may decide to commission whether to voluntarily disclose information regarding an environ- an internal investigation, often conducted by outside counsel, mental violation to the government is the difficulty in rationally to collect factual information quickly, analyze the potential assessing if the company will receive sufficient enforcement credit legal exposure for the organization, and provide legal advice to avoid criminal prosecution. Unlike the Antitrust Division, regarding a possible voluntary disclosure to the government. which offers an assurance of nonprosecution to the first corpora- However, the initiation of an internal investigation generates tion in the door if it is willing to cooperate in the investigation of a cascading series of additional issues for senior management the other companies involved in an anticompetitive scheme, no to resolve. The first challenge is to define the scope of the other component of DOJ, including the ENRD, is in a position to investigation itself and to establish a set of reporting procedures promise immunity from prosecution before a voluntary disclosure and protocols for documenting the investigation. When the is made. Indeed, the several iterations of the Principles of Federal investigation commences, outside counsel will need to cause a Prosecution of Business Organizations have all required federal litigation hold to be implemented for the universe of documents prosecutors to consider a range of postdisclosure factors before that must be preserved, and a subset of those documents will exercising prosecutorial judgment. But the experience of the past then need to be produced and analyzed. Senior management or seventeen years demonstrates that there are a number of steps the the board will also be required to decide whether the company environmental enforcement agencies, especially the ENRD, can will indemnify company employees who decide to retain coun- take to reduce uncertainties and lower risks for the target audi- sel to represent them individually. More generally, throughout ence of its disclosure policies without surrendering their preroga- the course of an internal investigation, there is often a dynamic tive to retain ultimate prosecutorial discretion. tension between the need for thorough, accurate fact finding A quick review of the overall track record for these disclosure pol- and the risks associated with potential, parallel civil litigation or icies illustrates some of the deficiencies. EPA’s Voluntary Disclosure enforcement actions. Program, which specifically targets civil environmental violations, This tension is nowhere more apparent than in the balanc- has been active for over thirteen years. During that time, the agency ing that is often required to develop the requisite factual infor- received just over 3,000 disclosed violations, but more that half of mation in a manner and form that can potentially be shared those disclosures involved reporting violations under the Emergency with regulators while reserving a final decision concerning a Planning and Community Right-to-Know Act (EPCRA), which waiver of the attorney-client privilege. Recognition that DOJ almost certainly did not produce significant reductions in pollutant may take a negative inference from a decision not to waive the releases once the violations were corrected. Enhancing Environmental attorney-client privilege has complicated this effort. While Outcomes From Audit Policy Disclosures Through Tailored Incentives for the latest revision of DOJ’s Principles of Federal Prosecution New Owners, 72 Fed. Reg. 27,116 (May 14, 2007). Although the of Business Organizations suggests that federal prosecutors will number of voluntary disclosures initiated per year has risen somewhat no longer expressly consider a company’s decision not to waive over the past five years, the data still do not demonstrate a robust the privilege when assessing the company’s quality of coopera- disclosure program that is achieving the policy goal of a significant tion, the revised policy makes clear that the prosecutors will reduction in pollutant releases through voluntary disclosure. The de- continue to consider whether a company has made a voluntary ficiency is even more apparent when one considers the performance and timely factual disclosure of wrongdoing and whether, after of the Voluntary Disclosure Board (VDB), which was established in such a disclosure, the company cooperates in the production 1997 to review voluntary disclosures of potential criminal violations of relevant evidence and the identification of individual per- of the environmental statutes. From 2000 through the end of 2007, petrators. U.S. Attorneys’ Manual, Title 9, Ch. 9-28.000. the VDB received a total of forty-six submissions, or an average of The voluntary disclosure policies promulgated by the key under six voluntary disclosures per year, according to J. T. Morgan, federal environmental enforcement agencies (ENRD of DOJ Staff Attorney, VDB, Office of Criminal Enforcement, Forensics & (1991), the Environmental Protection Agency (1995), and the Training. That number is particularly surprising when it is recognized United States Coast Guard (2007)) were intended to promote that during the same general period an average of over 270 defen-

Published in Natural Resources & Environment, Volume 23, Number 3, Winter 2009. © 2009 American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. dants were charged each year with environmental criminal offenses. have a significant mitigating effect on the exercise of prosecutori- www.epa.gov/compliance/resources/reports/endofyear/eoy2007/ al discretion by its prosecutors. If the only potential benefit under fy2007results.pdf#page=23. The Coast Guard’s Voluntary Disclosure the policy for engaging in the qualifying conduct of self-auditing, policy, modeled on EPA’s program, was issued in November 2007. self-policing, and voluntary disclosure is a reduced criminal fine in As of August 2008, the Coast Guard has not reported receipt of any an inevitable criminal prosecution for felony offenses, the policy voluntary disclosures of violations from the maritime industry. Part of as implemented provides very little incentive for the regulated the reason may be that the Coast Guard’s policy labors under several community to make the financial investments and assume the structural disadvantages. enforcements risks that are required by ENRD’s disclosure policy. First, although there have been scores of well-publicized criminal enforcement cases brought over the past decade for intentional vessel pollution violations, no parallel civil or administrative Practical Steps to Enhance Incentives enforcement program for vessel pollution offenses has developed in The effectiveness of the federal voluntary disclosure poli- the United States. For a number of reasons, there has been no real cies could be significantly improved by the implementation of gradation of enforcement response. As a consequence, in the mind certain practical measures that could reduce uncertainty for the of the maritime operator contemplating a potential disclosure, the regulated community without compromising the investigative risks may appear to be much higher than for a typical shore-based or prosecutive discretion of the federal enforcement agencies. company. Second, because of the international character of the By clarifying the potential benefits of self-auditing programs and commercial shipping industry, the Coast Guard is not the only en- improving the predictability of results, the federal government forcement authority with the ability to proceed against a maritime could increase the likelihood that responsible members of the operator. A vessel’s flag state and numerous other port and coastal regulated communities would be prepared to make the required states may also have jurisdiction to consider enforcement actions investments and assume the risks associated with intensive based on a voluntary disclosure made to the Coast Guard under its environmental monitoring programs. disclosure policy. The Coast Guard’s policy does not and cannot Illustratively, over the years, EPA has taken several steps to address these broader enforcement risks. Finally, while the require- assist the regulated community in understanding the agency’s ments for participation in EPA’s program were derived from and voluntary disclosure program and to make adjustments in the blended well with the more progressive trends in environmental program to correct perceived inequities and to encourage greater management practices in the United States, the requirements industry participation. For example, EPA publishes annually the for qualification under the Coast Guard’s policy bear very little data concerning the number of voluntary disclosures initiated, relationship to what have been the standard industry practices for the number of facilities involved, and the number of disclosures insuring environmental compliance under MARPOL 73/78, the resolved. The agency also periodically publishes responses to fre- international convention that establishes discharge limitations for quently asked questions (FAQs) in the Federal Register to clarify ocean-going commercial vessels and the international regime for issues concerning interpretations of the policy and its implemen- vessel inspection and certification. tation. The agency also offers compliance assistance to compa- The most critical deficiency of the ENRD voluntary disclo- nies that are attempting in good faith to implement meaningful sure policy has been the nearly complete failure of the policy to ECPs and CMSs. Additionally, the agency modified its disclosure generate significant interest or participation by members of the policy five years after it was initially promulgated to provide the regulated community. The express purpose of the policy is “to potential for reduced penalties even when the violations were encourage self-auditing, self-policing and voluntary disclosure discovered by means other than a systematic audit process. of environmental violations by the regulated community by EPA has also recently published a new Interim Approach indicating that these activities are viewed as mitigating factors to Applying the Audit Policy to New Owners. (73 Fed. Reg. in the Department’s exercise of criminal environmental enforce- 44,991 (Aug. 1, 2008)). This targeted modification of the Audit ment discretion.” Unlike EPA and other components of the Policy is a creative effort to leverage the motivation that new Department that have similar programs, over the past seventeen owners of regulated facilities have to avoid inheriting the envi- years ENRD has not published any statistics regarding industry ronmental mistakes of the prior owners and to encourage new participation in the program, the number of voluntary disclosures owners to engage in comprehensive environmental compliance made pursuant to policy, or the results of any such disclosures. reviews, correct violations, and upgrade deficient equipment Likewise, ENRD has not issued any clarifications, modifications, and practices. To achieve these results, the Interim Approach or updates to the policy. Public references to ENRD’s voluntary offers a range of additional incentives to new owners, includ- disclosure policy have appeared only indirectly in the context of ing an expanded disclosure period, the elimination of penalties organizational plea agreements involving guilty pleas to felony based on economic benefit or delayed capital expenditures offenses where ENRD has stated that the defendant was provided for qualifying disclosures from new owners, and allowance of a concession in the form of a reduced criminal fine or a reduced consideration of all violations under the disclosure policy, even number of counts in recognition of the defendant’s voluntary those which would otherwise be ineligible because they are disclosure of wrongdoing or cooperation during the investigation. required by legally mandated monitoring or auditing proce- Unfortunately, this public record conveys the almost inescapable dures. While this Interim Approach does not provide all of the conclusion that ENRD’s voluntary disclosure policy does not concessions sought by the regulated community, at a minimum,

Published in Natural Resources & Environment, Volume 23, Number 3, Winter 2009. © 2009 American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. it constitutes an effort on the part of EPA to adjust its disclosure opinions are issued as a public release by the Department and policy proactively to address practical business realities while inform the broader business community of the Department’s enhancing compliance rates and reducing pollution. positions on FCPA compliance. Because the questions arising As the Coast Guard evaluates the effectiveness of its new under ENRD’s disclosure policy will not typically concern voluntary disclosure policy, it should consider implementing issues of statutory construction, the same procedure could be some of the measures EPA developed to enhance and expand its adapted to provide guidance to the interested corporations on disclosure program, such as a mechanism to provide compliance the requirements and benefits under the ENRD’s disclosure assistance to vessel owners and operators attempting in good faith policy, mimicking the success of the FAQs published by EPA. to develop effective ECPs or CMSs. Such advice could be very The Criminal Division has also released statistics concerning constructive for the maritime industry even if provided on a non- the disposition of public corruption cases, including the percent- binding basis. Also, the Coast Guard’s policy statement commits age of FCPA dispositions that arose from voluntary disclosures the agency to making all compliance agreements reached under by American companies to the Department. While the Criminal the policy publicly available. It would be extremely useful if the Division views the FCPA as an important weapon in combating Coast Guard committed to publishing statistics, as does EPA, on foreign corruption, it has repeatedly demonstrated flexibility in the number of voluntary disclosures received and vessels impact- resolving such cases, including the use of deferred prosecution ed and the enforcement outcome, if any. These measures could agreements, pleas by foreign corporate subsidiaries, and dramati- help the Coast Guard engage the commercial maritime industry cally reduced fines. Additionally, in addresses before profes- on a positive basis concerning environmental compliance and sional and business organizations, the leadership of the Criminal assist responsible owners and operators in implementing effective Division and the Fraud Section have repeatedly emphasized that audit programs while gaining a better appreciation of how such FCPA’s voluntary disclosure program will always provide tangible programs can yield benefits under the Coast Guard’s disclosure benefits for companies that elect to voluntarily disclose informa- program. However, DOJ retains sole authority for the initiation of tion, ranging from declinations to reduced charges and/or fines, environmental criminal prosecutions. EPA and the Coast Guard and have provided concrete examples of these benefits. The can make recommendations concerning the disposition of certain ENRD should actively consider adopting similar procedures to cases, but prosecutive authority in environmental criminal cases provide much needed guidance to the regulated community and rests exclusively with the leadership of ENRD and the U.S. to energize its moribund voluntary disclosure policy. Attorney’s Office in the district where the conduct occurred. In Much more can and should be done by ENRD’s leadership the end it is ENRD’s approach to and application of its voluntary to spell out what tangible benefits are available under the disclosure program that ultimately determines the degree of risk a policy and how a company can determine if it has a reason- company will face if it elects to disclose significant environmental able chance to obtain those benefits. Such an initiative would misconduct. Regrettably, ENRD’s nearly complete “radio silence” be particularly helpful to maritime owners and operators who on the subject since the adoption of its voluntary disclosure policy are attempting to evaluate the risks and potential rewards of seventeen years ago has undermined the policy’s stated objectives the Coast Guard’s new disclosure policy, in the context of an and has thwarted its potential to promote active self-policing and enforcement environment that has to date focused almost ex- the voluntary disclosure of more significant potential violations. clusively on criminal prosecution for all violations, large and ENRD could breathe life into its voluntary disclosure policy and small, intentional or accidental. help to clarify the risks that do and do not exist for a company con- By clarifying how its voluntary disclosure policy will be ap- sidering disclosures under the policy by borrowing both from EPA plied and publicly committing to an ongoing process of engage- and from the experiences of the Criminal Division with respect ment and dialogue with the regulated community concerning to public corruption prosecutions, including voluntary disclosures the risks and rewards under the policy, the ENRD could dra- made under the Foreign Corrupt Practices Act (FCPA). matically reduce the uncertainty that currently surrounds its dis- For example, the Criminal Division has a formal opinion closure policy and increase the likelihood that the policy could procedure whereby a company can obtain guidance concern- begin to achieve its stated purpose of improving the compliance ing specific, nonhypothetical, prospective transactions. These rate and yielding significant pollutant reductions.