Summary of EPA’s Interim Approach to Applying the Audit Policy to New Owners
This page provides a summary of EPA’s Interim Approach to Applying
the Audit Policy to New Owners which became effective August 1, 2008.
- 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 (PDF)”(11
pp 262K, About pdf) (65
FR 19618), is one of the Agency’s key compliance incentive tools to encourage
companies to get it right on their own -- by voluntarily discovering,
promptly disclosing and correcting, and preventing the recurrence of
- Pursuant to the Audit Policy, through September 2007, EPA has resolved violations involving over 3,500 entities and at nearly 10,000 facilities. More than half of these disclosures have been of reporting and recordkeeping violations, and while it is important that such violations be corrected, EPA wants to increase the direct pollutant reductions that result from the correction of violations disclosed under the Audit Policy.
- To further the goal of increasing pollutant reductions resulting from the correction of self-disclosed violations, EPA has announced tailored incentives to encourage new owners to look closely at compliance issues at their recently acquired facilities, self-disclose and, most importantly, fix the environmental problems they find.
What Are the Tailored Incentives?
As described more fully below,
these incentives include penalty mitigation beyond what the Audit Policy
offers and an expanded range of violations that may be eligible for Audit
Why New Owners?
EPA believes new owners have a unique opportunity
to focus on, and invest in, making a “clean start” at recently
acquired facilities, by addressing environmental issues, and that the
Agency may be able to secure high quality environmental improvements
more quickly and effectively than might otherwise occur.
Why Might New Owners Want to Use the Audit Policy?
New owners may already be well-situated and motivated to use the Audit Policy, as they:
▪ Were not responsible for the facility when the noncompliance began.
▪ May already be assessing and auditing new facilities to manage and reduce risk.
▪ May have funding available to fix problems, or have budget commitments which are still relatively flexible.
- EPA has announced and is seeking public comment on its Interim
Approach to Applying the Audit Policy to New Owners (16
pp, 120K, About
PDF) (“Interim Approach”).
The Interim Approach is effective immediately on an interim basis, and
EPA will be accepting comment until October 30, 2008. EPA sought public
comment on this concept last year, and the comments were generally very
supportive, and offered many helpful ideas about ways to structure a
program and enhance flexibility for new owners.
- Definition of New Owner: So that only appropriate
new owners can benefit from the tailored incentives, an eligible new
owner must certify that:
- Prior to the transaction, it was not responsible for environmental compliance at the facility which is the subject of the disclosure, did not cause the violations being disclosed and could not have prevented their occurrence;
- The violation which is the subject of the disclosure originated with the prior owner; and
- Prior to the transaction, neither the buyer nor the seller had
the largest ownership share of the other entity, and they did
not have a common corporate parent.
- Penalty Mitigation: Applies to new
owners that, within 9 months of the transaction closing:
- Promptly disclose violations to EPA, or
- Enter into an audit agreement with EPA, and
- Meet all the Conditions of the Audit Policy, as modified for new owners:
- No penalties will be assessed against the new owner for the period before the date of acquisition;
- Penalties for economic benefit associated with avoided operation and maintenance costs will be assessed against the new owner, but only from the date of acquisition; and
- No penalties for economic benefit associated with delayed capital
expenditures or with unfair competitive advantage will be assessed
against the new owner if the violations are corrected in accordance
with the Audit Policy (i.e., within 60 days of discovery or another
reasonable timeframe to which EPA has agreed).
- Modifications to Audit Policy Conditions for New Owners: Modifications,
in the new owner context, to the following 5 of the 9 conditions of the
Audit Policy will make more violations eligible for Audit Policy penalty
mitigation, as applied to new owners:
- Systematic Discovery – Condition 1: Because
EPA recognizes that a new owner's pre-closing due diligence is by
its nature a one-time event, EPA will waive the "periodic" element
of this condition for violations discovered through pre-acquisition due diligence,
and allow such disclosures to be considered for full penalty
- Voluntary Discovery – Condition 2: EPA will expand
its interpretation of the Voluntary Discovery condition in the
new owner context, currently limited to compliance with Title
V of the Clean Air Act, to allow consideration of all violations
which would otherwise be ineligible for Audit policy consideration
because they are already required to be identified through a
legally mandated monitoring, sampling or auditing protocol, and
thus not “voluntarily
owners that enter into an audit agreement or disclose violations
before the first instance when the monitoring, sampling or auditing
is required, would not be disqualified based on this condition.
- Prompt Disclosure – Condition 3: The Audit
Policy provides that violations must be promptly disclosed in
writing, within 21 days of discovery. For
violations discovered pre-closing, a new owner would have up
to 45 days after closing to disclose violations. For violations discovered
post-closing, a new owner would have to disclose violations within
21 days after discovery or within 45 days after the transaction
closing, whichever time period is longer. In the busy period just after
acquisition, this will give new owners a little more time to
decide and prepare to come forward with due diligence findings.
- Other Violations Excluded – Condition 8: The
Audit Policy excludes violations that resulted in serious actual
harm or may have presented an imminent and substantial endangerment. Where
violations that gave rise to serious actual harm or an imminent
and substantial endangerment began before the new owner
acquired the facility, EPA will allow such violations to be eligible
under the Interim Approach, absent a fatality, community evacuation
or other seriously injurious or catastrophic event. This
should encourage new owners to come forward and correct
significant violations, which is one of the goals of this approach.
- Cooperation Condition – Condition 9: EPA is modifying
the Cooperation condition of the Audit Policy only to make clear
that the disclosing entity must cooperate with EPA in determining
whether all Audit Policy conditions - as they have been modified by this
Interim Approach - have been met.
- Unmodified Audit Policy Conditions: EPA
will apply and interpret all other Conditions of the Audit Policy as
described in the 2000 Audit Policy, the 2007 Frequently
Asked Questions (13 pp, 235K, About
and/or the Audit Policy Interpretive Guidance (“1997
Interpretive Guidance”) (40 pp, 1MB, About
- Discovery and Disclosure Independent of
Government or Third Party Plaintiff – Condition 4: The Audit
Policy provides that violations must be discovered and disclosed before
EPA or another government agency likely would have identified
the problem either through its own investigative work or from
information received through a third party.
- Correction and Remediation – Condition 5: The Audit
Policy provides that a self-disclosing entity must correct the disclosed
violation within 60 calendar days from the date of discovery, certify in
writing that the violation has been corrected, and take appropriate measures
as required by law to remedy any environmental or human harm due to the violation. EPA
recognizes that not all violations can be corrected in the 60-day time frame,
and may allow for an extension of time for corrections that require significant
expenditures, involve technically complex issues, or involve decisions for
which an entity seeks or is required to obtain EPA, state or local input
- Prevent Recurrence – Condition 6: The Audit Policy
provides that the disclosing entity must agree in writing to take steps to
prevent a recurrence of the violation after it has been disclosed and corrected.
- No Repeat Violations – Condition 7: For a self-disclosure
to receive Audit Policy consideration, the same or closely-related violation
must have not occurred at the same facility within the past three years. When
the facility is part of a multi-facility organization, the Audit Policy is
not available if the same or closely-related violation occurred as part of
a pattern of violations at one or more of these facilities within the last
five years. If a facility has been newly acquired, the existence of
a violation prior to the acquisition does not trigger the repeat violations
exclusion as to the new owner. New owners generally will be eligible
under the No Repeat Violations condition of the Audit Policy irrespective
of the new owner’s history of violations at other facilities.
- Discovery and Disclosure Independent of Government or Third Party Plaintiff – Condition 4: The Audit Policy provides that violations must be discovered and disclosed before EPA or another government agency likely would have identified the problem either through its own investigative work or from information received through a third party.
For more information: Regarding the Interim Approach or Federal Register Notice: contact Caroline Makepeace (email@example.com or 202-564-6012). Regarding new owner disclosures or audit agreements: contact Philip Milton (firstname.lastname@example.org or 202-564-5029) or Caroline Makepeace.