Confession is Good for the Soul

August 6, 2015.  Back to an issue mentioned briefly in earlier posts on regulatory reform legislation — efforts to  make environmental audits confidential and to extend immunity from penalties to environmental violators who self-report violations. In an environmental audit, a business or industry reviews its own operations for compliance with environmental standards.  The N.C. Senate has made several attempts to enact legislation  protecting the confidentiality of  audit reports  and provide immunity for violations identified in an audit and voluntarily reported to state regulators.

The most recent version of an  environmental audit privilege/immunity  provision appears in the Senate version of House Bill 765.  That bill is now in a conference committee to work out differences between the House and the Senate.  The Senate provision has two parts:

1. The bill  creates an audit “privilege”  to prevent  state regulators from obtaining  or using an audit report in  environmental enforcement. The privilege does not apply in a criminal investigation, but In practice only  the most egregious, intentional violations would be referred for criminal prosecution. Agencies rely almost entirely  on civil penalty assessments to enforce environmental standards and the bill would prevent use of a company’s environmental audit report in a penalty  case. The  audit privilege does not cover Information the company has a legal obligation to report to the state or  information independently discovered by state regulators. The bill also excludes other kinds of information  from the privilege (such as records gathered  before or after the certified dates of the audit and information deliberately withheld from an audit report.)

2.  The bill offers immunity from civil penalties to a violator who voluntarily discloses an environmental violation to state regulators. (The bill does limit how often a company can claim immunity based on a self-reported violation.) Immunity would not extend to a criminal prosecution.  To be considered  “voluntary”, the  disclosure must meet specific criteria.  If there is a legal obligation to report the violation, disclosure would not be considered voluntary and the violator could not receive immunity.  Other criteria in the bill condition immunity on  prompt disclosure of the violation and timely action to correct the violation. See the text of the bill for a complete list of the  factors  used to distinguish voluntary disclosures from disclosures that would not qualify for immunity.

One way to understand  the scope of the Senate proposal may be to compare it  to an existing Department of Environment and Natural Resources (DENR) self-disclosure policy that has been in place since 2000 and to the  U.S. Environmental Protection Agency’s enforcement policy on self-disclosed violations.

For DENR’s  existing policy on enforcement discretion for self-reported environmental violations,  see the DENR environmental self-audit policy (1995, updated in 2000).  The longstanding DENR policy differs from the Senate proposal in several ways:

♦ The DENR policy provides guidance to DENR staff on the exercise of enforcement discretion for self-reported violations, but does not  grant  new legal rights to environmental violators. The Senate provision creates a both a new legal privilege (limiting the use of audit information in state enforcement cases) and  statutory  immunity from civil penalties.

♦  In allowing reduction or waiver of  penalties for a self-disclosed violation, the DENR policy assumes full disclosure. Although the policy indicates DENR will not necessarily request the  audit report, the policy  encourages complete disclosure  — including providing the audit report to document  the existence of an internal management system to identify and correct violations. The Senate proposal tilts toward limiting both agency and public access to audit reports rather than encouraging full disclosure.  Nothing in the bill assures DENR access to a full audit report, so  a company could self-report a violation and provide DENR only as much information about the violation as it chooses.  The  one reference in the bill to the public’s right to information concerns information the company voluntarily provides DENR in self-reporting a violation.

♦ Unlike H 765, the DENR policy does not prevent the department from obtaining and  using information in an environmental audit to enforce environmental standards.

♦  The DENR policy does not apply to  investigative costs,   natural resource damages, or to recovery (through penalties) of any economic benefit the company may have realized as a result of the violation.  The Senate provision does not  distinguish between different types of civil penalties and fines, so it isn’t clear whether the immunity provided under  H 765 could also apply to investigative costs and natural resource damage assessments.  Instead of clearly excluding recovery of economic benefit from the grant of immunity, the Senate provision makes “substantial economic benefit” a reason to consider the self-report of a violation involuntary — but puts the burden on the agency to show the company had a substantial economic benefit.

The U.S. Environmental Protection Agency also has a self disclosure policy.  If a violator meets all nine conditions in the policy (including documenting use of an environmental audit or other internal environmental management system to improve compliance), EPA can completely waive penalties above recovery of any economic benefit realized as a result of the violation. If a violator  meets all of the conditions in the policy other than documenting use of  an environmental audit or environmental management system,  EPA can reduce the part of the penalty that exceeds economic benefit recovery by 75%. EPA will not generally  make a  criminal referral of a violation meeting the conditions of the self-disclosure policy;  the conditions  tend to exclude violations likely to result in a criminal referral in any case. The federal policy does not provide legal immunity from penalties;    does not apply to  recovery of any economic benefit realized by the violator; and does not limit EPA’s ability to obtain and  use environmental audit information in either a civil or criminal enforcement action. In fact, EPA’s self-disclosure policy makes a strong statement opposing both legal privilege for environmental audit materials and statutory immunity from penalties as inconsistent with effective enforcement of environmental standards.

So the  H 765 provisions would  go significantly beyond  existing DENR and EPA  self-disclosure policies in  both creating a legal privilege shielding environmental audit reports from use in enforcement cases and  in granting statutory immunity from civil penalties for many self-reported violations. The  immunity provided under  H 765  may also extend to investigative costs; natural resource damages; and  recovery of some economic benefit realized by the violator as a result of the violation.

The Senate proposal recognizes the need for EPA approval of the privilege/immunity provisions as they apply to enforcement of federally delegated environmental programs. As a result, the provision would only go into effect following EPA review.