Buying Facilities with Environmental Conditions? How EPA’s Interim Audit Policy for New Owners of

Denee A. Diluigi

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Buying Facilities with Environmental Conditions? How EPA’s Interim Audit Policy for New Owners of Businesses Can Help You Denee A. DiLuigi With business sector outlooks beginning to stabilize as economic conditions improve, there are countless opportunities for entities to acquire new assets. Some of the assets may very well be facilities regulated by state or federal environmental agencies. Chances are those very facilities may have environmental conditions that could be discovered during the pre-purchase or post-purchase due diligence process. At the same time, EPA is increasing its enforcement presence. As EPA Administrator Lisa Jackson has pointed out: EPA is back on the job. Fortunately, Ms. Jackson also pointed out that EPA’s purpose is not limited to enforcement, but also includes working with businesses and communities to prevent potential violations of environmental law. Faced with knowledge that EPA is increasing its enforcement presence and that a to-be-purchased or newly acquired facility may have an environmental condition that must be addressed, a potential purchaser or new owner faces the question: “How can we gain knowledge of the environmental conditions of the facility or facilities and correct those conditions while limiting our exposure to environmental enforcement for those conditions existing prior to our purchase?” One possible answer is: Rely on EPA’s August 2008 Interim Approach to Applying the Audit Policy to ...

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• Publié par: Sogoz
• Nombre de lectures: 37
• Langue: English

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956235.3

Buying Facilities with Environmental Conditions?

How EPA’s Interim Audit Policy for New Owners of Businesses Can Help You

Denee A. DiLuigi

With business sector outlooks beginning to stabilize as economic conditions improve, there are

countless opportunities for entities to acquire new assets.

Some of the assets may very well be

facilities regulated by state or federal environmental agencies.

Chances are those very facilities

may have environmental conditions that could be discovered during the pre-purchase or post-

purchase due diligence process.

At the same time, EPA is increasing its enforcement presence.

As EPA Administrator Lisa Jackson has pointed out:

EPA is back on the job.

Fortunately, Ms.

Jackson also pointed out that EPA’s purpose is not limited to enforcement, but also includes

working with businesses and communities to prevent potential violations of environmental law.

Faced with knowledge that EPA is increasing its enforcement presence and that a to-be-

purchased or newly acquired facility may have an environmental condition that must be

addressed, a potential purchaser or new owner faces the question:

“

How can we gain knowledge of the environmental conditions of the facility or

facilities and correct those conditions while limiting our exposure to

environmental enforcement for those conditions existing prior to our purchase?”

One possible answer is:

Rely on EPA’s August 2008 Interim Approach to Applying the Audit Policy to

New Owners (“Interim Audit Policy”).

1

The purpose of the Interim Audit Policy was to provide greater detail as to how EPA would

apply its existing April 2000 Audit Policy (“Audit Policy”) to new owners of regulated

facilities.

2

The purpose of the Audit Policy was to enhance the “protection of human health and the

environment by encouraging regulated entities to voluntarily discover, promptly disclose,

expeditiously correct, and prevent the recurrence of violations of federal environmental law.”

3

Depending on an entity’s compliance with the nine conditions of the Audit Policy at its facility,

the entity could receive a reduction or, in some cases, the elimination of civil penalties, as well as

an EPA determination to forego a DOJ criminal prosecution referral.

Historically, EPA took the position that, in some cases, entities acquiring new regulated facilities

deserved additional flexibility in the implementation of the Audit Policy.

The degree to which

EPA acknowledged the need to flexibly apply the Audit Policy to new owners was very much a

case-by-case analysis.

In issuing the Interim Audit Policy, EPA developed a more structured

approach to ensuring that new owners were encouraged to undertake a comprehensive

1

73 Fed. Reg. 44,991 (Aug. 1, 2008).

2

65 Fed. Reg. 19,618 (April 11, 2000).

See also

http://www.epa.gov/oecaerth/incentives/auditing/newowners-

incentives.html

(for EPA’s current materials on the Interim Audit Policy).

3

73 Fed. Reg. at 44,992.

-2-

examination of, and improvements to, a to-be-purchased or newly acquired facility’s

environmental compliance.

Specifically, through the Interim Audit Policy, EPA is offering

certain additional incentives for new owners to discover, disclose, correct and prevent the

recurrence of violations that began prior to their acquisition, including penalty mitigation beyond

what the Audit Policy typically allows.

Understanding that the Interim Audit Policy is just that—interim, EPA expects to assess, on an

ongoing basis, the effectiveness of the Interim Audit Policy.

EPA will be evaluating whether the

Interim Audit Policy is useful, yielding worthwhile results, and/or producing unintended

consequences.

The Interim Audit Policy could be changed or discontinued by EPA at any time.

Prior to relying on the Interim Audit Policy, entities should confirm the status of the Interim

Audit Policy.

Are You a New Owner?

To qualify for the Interim Audit Policy, an entity must self-certify that:

(1) prior to the

transaction, the new owner was not responsible for environmental compliance at the facility

which is the subject of the disclosure, did not cause the violation being disclosed, and could not

have prevented its occurrence; (2) the violation which is the subject of the disclosure originated

with the prior owner; and (3) 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.

4

EPA chose to require a self-certification because it was a “simple and direct” way to identify

new owners that would not require EPA to research and analyze corporate transactions.

5

When considering whether the new owner was not responsible for environmental compliance at

the facility which is the subject of the disclosure, did not cause the violation being disclosed and

could not have prevented their occurrence, EPA will focus on ownership, managerial, or

operational control of the environmental operations at the facility and will assume that the

responsibility for environmental compliance for any violations may be shared by corporate

entities, controlling stockholders, and operators.

6

When considering whether the violation that is the subject of the disclosure originated with the

prior owner, EPA will only apply the Interim Audit Policy to violations that did not originate

with the new owner, as opposed to violations that are wholly new and began after the

transaction.

7

When considering whether 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, EPA will

not apply the Interim Audit Policy to corporate spin-offs or subsidiaries where one subsidiary

buys another.

8

4

73 Fed. Reg. at 44,995.

5

73 Fed. Reg. at 44,996.

6

73 Fed. Reg. at 44,995.

7

Id.

8

Id

.

-3-

For What Period of Time is the Interim Audit Policy Available to a New Owner?

A new owner has nine months after the transaction closing date to qualify for new owner

treatment under the Interim Audit Policy.

Within that timeframe, the new owner may choose to

enter into an audit agreement with EPA or may, in the alternative, choose to make disclosures

individually, as violations are discovered.

9

Under an audit agreement, the new owner and EPA

will set timeframes and expectations for disclosure, which are specific to the new owner’s

particular circumstances.

The benefit for a new owner to pursue an audit agreement is that it

“stops the clock” regarding notification deadlines, including the requirement that the violation be

discovered before any otherwise required sampling, monitoring, or auditing at the new facility.

10

If a new owner chooses to disclose violations individually, the disclosures must be made

promptly within 21 days of discovery or within 45 days of closing, whichever period is longer.

11

Additionally, there is no “stopping the clock” under the individual disclosure route.

How Will Penalties be Calculated and Assessed under the Interim Audit Policy?

Under the Interim Audit Policy, no penalties for economic benefit 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

from the date of the acquisition.

12

Penalties for economic benefit associated with delayed capital

expenditures or with unfair competitive advantage will not be assessed against the new owner if

violations are corrected within 60 days of the date of discovery or another reasonable timeframe

as agreed to by EPA.

13

EPA may, however, provide additional flexibility in assessing economic

benefit on a case-by-case basis, if EPA believes it is warranted and appropriate given the facts in

a particular situation.

14

Interim Audit Policy Conditions

Under the Audit Policy, there are nine conditions that EPA considers to determine whether, and

to what extent, to reduce or eliminate, in certain circumstances, civil penalties and forego a DOJ

criminal prosecution referral.

The Interim Audit Policy modifies the application of five of the nine Audit Policy conditions for

new owners.

The five conditions modified by the Interim Audit Policy are:

Condition 1:

Systematic Discovery

To qualify for a 100 percent reduction of gravity-based penalties, the new owner must

discover the violation through either an environmental audit, which is a systematic,

documented, periodic, and objective review by regulated entities of the facility operations

and practices related to meeting environmental requirements, or a compliance

9

73 Fed. Reg. at 44,996.

10

Id.

11

Id.

12

73 Fed. Reg. at 44,998.

13

Id

.

14

73 Fed. Reg. at 44,999.

-4-

management system.

15

Given that most new owners undertake pre-closing due diligence,

EPA recognizes that this pre-closing due diligence may meet all elements of an

environmental audit other than the periodic review element.

Therefore, EPA is not

requiring that an environmental audit be “periodic” if it is done by a new owner under the

Interim Audit Policy.

16

Condition 2:

Voluntary Discovery

Voluntary discovery requires that a new owner not identify the violation through a legally

mandated monitoring, sampling, or auditing procedure required by statute, regulation,

permit, judicial or administrative order, or consent agreement.

17

Under the Interim Audit

Policy, EPA expanded its interpretation to consider all violations which would otherwise

be ineligible because they are already required to be identified through a legally

mandated monitoring, sampling or auditing protocol, and thus not “voluntarily

discovered.”

18

Thus, a new owner that enters into an audit agreement or discloses

violations before the first instance when the monitoring, sampling or auditing is required

would not be disqualified from receiving the benefits of the Audit Policy.

19

Condition 3:

Prompt Disclosure

Under the Audit Policy, violations must be promptly disclosed in writing, within 21 days

of discovery.

For violations discovered pre-closing, the Interim Audit Policy now

provides a new owner with up to 45 days after closing to disclose violations.

20

For

violations discovered post-closing, a new owner is allowed to disclose violations within

21 days after discovery or within 45 days after the transaction closing, whichever time

period is longer.

21

In support of this extension, EPA recognized that the time period just

after acquisition is often busy, and it is therefore appropriate to allow new owners more

time to come forward with due diligence findings.

22

Condition 8:

Other Violations Excluded

Under the Audit Policy, violations that have resulted in serious actual harm or may have

presented an imminent and substantial endangerment are not eligible for the Audit

Policy’s incentives.

23

Under the Interim Audit Policy, EPA will allow violations that

gave rise to serious actual harm or an imminent and substantial endangerment to be

eligible for the Audit Policy’s incentives if the violations began before the new owner

15

Id

.

16

73 Fed. Reg. at 45,000.

17

Id.

18

Id.

19

Id

.

20

73 Fed. Reg. at 45,001.

21

Id.

22

Id.

23

73 Fed. Reg. at 45,003.

-5-

acquired the facility and did not result in a:

(1) fatality; (2) community evacuation; or (3)

other seriously injurious or catastrophic event.

24

Condition 9:

Cooperation

The Audit Policy requires that an entity cooperate with EPA and further provide EPA

with information that it needs to determine whether and to what extent the Audit Policy

applies.

25

Under the Interim Audit Policy, EPA is modifying the cooperation condition

only to make clear that the disclosing entity must cooperate with EPA in determining

whether all Audit Policy conditions have been met.

26

For instance, EPA may ask an

entity claiming new owner status to provide appropriate documentation that the entity

qualifies as a new owner under the Interim Audit Policy.

27

EPA will apply and interpret the four remaining Audit Policy conditions as described in its 2000

Audit Policy, 2007 FAQ, and/or Audit Policy Interpretive Guidance.

The four remaining Audit

Policy conditions include:

Condition 4:

Discovery & Disclosure Independent of Government or Third Party Plaintiff

The Audit Policy requires that violations 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.

28

Condition 5:

Correction and Remediation

Under the Audit Policy, a regulated 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.

29

EPA has repeatedly recognized that not all

violations can be corrected in the 60-day time frame.

30

Therefore, EPA 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 or approval.

31

Condition 6:

Prevent Recurrence

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.

32

These

24

Id.

25

Id.

26

Id

.

27

73 Fed. Reg. at 45,003-004.

28

73 Fed. Reg. at 45,001.

29

73 Fed. Reg. at 45,002.

30

Id.

31

Id.

32

Id.

-6-

preventative steps may include, but are not limited to, improvements to an entity’s

environmental auditing efforts or compliance management system.

33

Condition 7:

No Repeat Violations

For an entity providing 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.

34

More importantly, when a 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.

35

When a facility is newly acquired, the existence of a violation prior to the acquisition will

not trigger the “repeat violations” exclusion for the new owner.

36

EPA takes the position

that new owners will generally be eligible irrespective of the new owner’s history of

violations at other facilities.

37

Please feel free to contact us with any questions regarding how EPA’s Interim Audit Policy or

state equivalent policies could help limit your environmental enforcement exposure with to-be-

purchased or newly acquired facilities that may have environmental conditions.

33

Id.

34

73 Fed. Reg. at 45,003.

35

Id.

36

Id.

37

Id.