Environmental Auditing and Internal Compliance Investigations

Complying with environmental laws is hard.  The regulations and permits are complex, and very often the regulated entity is unsure of its compliance status until after an inspection.  What if there was a way to investigate and resolve potential compliance issues under the protection of evidentiary privilege and without paying significant administrative penalties? A privileged environmental audit may allow just that.

The US EPA and 28 states, including Texas, have policies or laws that provide incentives for regulated entities to conduct voluntary environmental audits.  The concept behind these initiatives is to encourage companies to voluntarily assess their compliance status without the fear that issues discovered will then be used as a hammer in enforcement. 

The US EPA Audit Policy incentives include significant penalty reductions and no recommendation for criminal prosecution for qualifying violations.  US EPA also will not request environmental audit reports during environmental compliance inspections.  To qualify, the violation must have been discovered through a voluntary environmental audit or a voluntary environmental compliance system, must be promptly disclosed after discovery, must be discovered independent of a regulatory investigation, must be corrected and prevented from recurring, and the disclosing company must cooperate with the agency.  Violations that result in serious actual harm, present an imminent endangerment, or that violate an administrative or judicial order or consent agreement are ineligible.  The US EPA also has a New Owner Audit Policy that incentivizes purchasers to disclose violations discovered in pre-closing due diligence.

There is significant variability in state environmental audit policies and laws.  Texas has one of the more robust statutes, the Texas Environmental, Health & Safety Audit Privilege Act.  This statute includes a limited evidentiary privilege for audit reports as well as immunity from administrative and civil penalties for qualifying self-disclosed violations.  Unlike the EPA Audit Policy, to be eligible for immunity from penalties, Texas requires the submission of a Notice of Audit before starting the investigation.  But many of the other requirements (i.e., voluntary disclosure, no independent discovery, prompt corrective action) are similar.  The Texas statute, like the EPA New Owner Audit Policy, also applies to certain violations discovered during pre-acquisition due diligence.  

So, when should an entity consider conducting an internal compliance investigation under an environmental audit policy or statute?

  • If the facility is in a state where voluntary environmental audits are privileged.  There is little downside to conducting an internal compliance investigation under the protection of an evidentiary privilege, if available.  While it may be possible to structure an investigation under the aegis of the attorney-client privilege, a clear audit privilege creates a second layer of protection.  In Texas, you need not file a Notice of Audit to claim the evidentiary privilege.
  • If the investigation has the potential to discover violations that will require corrective actions that involve a regulatory agency. Some violations can be quickly corrected through on-site actions (i.e., fixing broken equipment or a pollution control device).  Others, such as permitting violations, require agency involvement and provide a record of the non-compliance.  If a company will have to submit documentation substantiating a violation anyway, why not gain the benefit of penalty avoidance?
  • If the internal compliance investigation is going forward anyway. Sometimes corporate policies require regular internal compliance investigations.  These investigations, if conducted outside of an environmental audit policy or statute, have the potential to create discoverable documents and could lead to enforcement and substantial penalties. 
  • If a facility is unsure of its compliance status.  Identifying and correcting a violation under an audit policy or statute is almost always preferable to having the violation discovered by a regulatory agency and addressed through enforcement.  Particularly when a company suspects, but does not know, it may have a compliance issue, a proactive environmental audit is often the best way to avoid an enforcement action.
  • If you are buying a facility. US EPA and some states, including Texas, offer incentives for disclosing environmental violations discovered in the due diligence process.  Even where there is not a formal new owner audit policy, regulators have the enforcement discretion to encourage new owners to address known compliance issues.  This is the opportunity for a new owner to begin operations with a clean slate when it comes to environmental compliance.

In general, environmental auditing is an under-used tool by the regulated community.   But to effectively use this tool, companies need to understand the applicable audit policy or statute requirements before starting the investigation.  Only by properly structuring the audit to comply with the applicable audit policy can the company obtain the protections and incentives. 

Chris Smith