Environmental Audits: Navigating E-Disclosure, Privilege ...media.straffordpub.com/products/environmental... · 7/7/2015 · Environmental Audits: Navigating E-Disclosure, Privilege,

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Presenting a live 90-minute webinar with interactive Q&A

Environmental Audits: Navigating E-Disclosure, Privilege, Exceptions, Voluntary Disclosure and Other Issues Ensuring Compliance with Environmental Laws,

Responding When Violations Are Discovered

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

TUESDAY, JULY 7, 2015

Joseph P. Koncelik, Counsel, Tucker Ellis, Cleveland

Gregory F. Linsin, Partner, Blank Rome, Washington, D.C.

Thomas J. P. McHenry, Partner, Gibson Dunn & Crutcher, Los Angeles

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Environmental Audits: Navigating E-Disclosure, Privilege,

Voluntary Disclosure and Other Issues

July 7, 2015– Strafford Webinar

Thomas J.P. McHenry

333 South Grand Avenue

Los Angeles, California 90071

[email protected]

(213) 229-7135

<Presentation Title/Client Name> <Presentation Title/Client Name>

Program Overview

Key Issues in Environmental Auditing

EPA’s New E-Disclosure Program

State Audit Programs

Voluntary Disclosure

Privilege Issues

Responding to Enforcement Actions

Questions & Answers

6


Key Issues in Environmental Auditing (1 of 2)

What?

– Systematic, periodic and documented review of environmental practices and

operations

Why?

– Opportunity to proactively identify and address issues to ensure compliance

– Reduced risk and exposure to civil and criminal liability (EPA and state audit

policies)

– Requirement of corporate, industry or other standards and certifications

– SEC disclosure obligations

– “What you don’t know, will hurt you!”

7


Key Issues in Environmental Auditing (2 of 2)

When?

– Regular program

– Disclosure obligations may be triggered

Who?

– Senior management oversight and support

– Independent auditor (in-house or third party)

How?

– Structured program and procedures

– Reporting system

– Corrective action

– Follow-up

8


Pros and Cons of Environmental Audits

Pros

– Promotes a culture of compliance

– Encourages self-policing and attention

– Identification and correction prior to discovery by the regulators

– Opportunity to fix problems and make a fresh start when new

companies are purchased or acquired

– Reduce or eliminate gravity based penalties

– Limit likelihood of criminal prosecution

– Combine with OSHA, social responsibility and other audit components

– It’s the right thing to do! But only, if it’s done right.

9


Pros and Cons of Environmental Audits

Cons

– Significant investment of time and resources

– Triggers possible legal obligation to report

– Triggers costs of corrective or remedial action

– Audit documentation can serve as basis of subsequent enforcement

– Lack of understanding of privilege protections

– Does not function as a “shield” from prosecution

10


EPA’s New E-Disclosure Program -- Pilot

In August 2008, EPA launched a pilot program for an electronic self-

disclosure system called “E-Disclosure”

– Allowed online reporting of environmental violations

– 6 states (AR, LA, NM, OK, TX) reported all violations

– Remaining states limited to Emergency Planning Community Right to Know

Act (EPCRA) violations

EPA also floated idea of doing away with self-disclosure program entirely

11


EPA’s New E-Disclosure Program -- Webcasts

In June 2015, EPA hosted 2 webcasts describing the agency’s plan for

expanding the full program nationwide

Intended to streamline the implementation of disclosures under the EPA

Audit Policy and the Small Business Compliance Policy (issued in April

2000)

The webcasts were open to the public and allowed stakeholders to:

– Learn how the new system will be designed and implemented

– Share comments and ask questions about the approach

– Prepare for the expected Fall 2015 launch

12


E-Disclosure: Program Mechanics – Tier 1

Tier 1 Disclosures

– Includes EPCRA violations that meet all Audit Policy or Small Business

Compliance Policy conditions

– Excludes CERCLA 103/EPCRA 304 chemical release reporting violations or

EPCRA violations with significant economic benefit

– System automatically issues an electronic Notice of Determination (eNOD)

confirming that violations are resolved with no assessment of civil penalties,

conditioned on the accuracy and completeness of the submitter’s eDisclosure

13


E-Disclosure: Program Mechanics – Tier 2

Tier 2 Disclosures

– Includes all non-EPCRA violations and EPCRA violations meeting only

conditions 2-9 (i.e., discovery was not systematic)

– System automatically issues an Acknowledgement Letter (AL) noting receipt

of the disclosure and promising that EPA will make a determination as to

eligibility for penalty mitigation if and when it considers taking enforcement

action for environmental violations

14


E-Disclosure: Program Mechanics – Flow Chart

15

eNOD

AL

Tier 1

Tier 2

Most EPCRA

violations

All other new

disclosures

E-Disclosure

Portal

EPA

screening

& spot

checks

Disclosure


E-Disclosure: Key Reporting Deadlines

Step 1: Register to file with the centralized web-based portal (CDX)

Step 2: Submit violation disclosure report

– Within 21 days of discovery

Step 3: Certify compliance

– Correct violations within 60 days of discovery for Audit Policy (within 90 days

for Small Business Compliance Policy)

• Tier 1 disclosures: No extensions

• Tier 2 Audit Policy: 30 day extension upon request, 90 additional days with

justification

• Tier 2 Small Business Policy: 90 day extension upon request, 180 additional days

with justification

– Submit compliance report within 60 days of disclosure for Audit Policy (within

90 days for Small Business Compliance Policy)

16

*Note the different deadlines for correcting violations (60 days after discovery) vs. reporting compliance (60 days after

disclosure). Disclosure can occur up to 21 days after discovery.


E-Disclosure: Additional Considerations (1 of 2)

Confidential Business Information (CBI)

– Portal accepts only sanitized (non-CBI) data

– Follow-up CBI must be submitted manually

New Owners

– May use the portal to disclose violations

– However, submissions and resolutions will continue to be processed manually

17


E-Disclosure: Additional Considerations (2 of 2)

Pre-Existing Disclosures

– Outstanding EPCRA violations can be resubmitted as Tier 1 within 90 days of

launch

– Disclosures subject to audit agreement or significant settlement negotiations

will be resolved with NOD, CAFO, or CD

– All others treated as Tier 2; Federal Register notice announcing E-Disclosure

launch will serve as Acknowledgement Letter (AL)

All other disclosures (to EPA HQ and Regions) must come through portal

18


E-Disclosure: Next Steps

Summer 2015

– Public comment and feedback

– System build-out and testing

Fall 2015

– E-Disclosure launch

– Federal Register notice

Within 90 days of launch: Resubmit outstanding EPCRA disclosures

19


E-Disclosure: Helpful Links and Contact

EPA presentation slides: http://www2.epa.gov/sites/production/files/2015-

06/documents/edisclosurewebinarpresentation_0.pdf

2 page information sheet: http://www2.epa.gov/sites/production/files/2015-

06/documents/edisclosureinformationsheet.pdf

EPA contact: Phillip Milton, [email protected], (202) 564-5029

20


21

Thomas McHenry

Contact:

333 South Grand Avenue

Los Angeles, CA 90071-3197

Tel: 213.229.7135

[email protected]

Tom is a partner in Gibson Dunn’s

Los Angeles office and a member of the

firm's Environment and Natural Resources

practice. He practices general

environmental law with an emphasis on air

quality, hazardous waste, environmental

diligence, land use and energy issues.

Tom has broad experience with air quality

compliance and permitting. He has advised

companies on new source review, emission

reduction credits and rulemaking issues

and has handled enforcement and

compliance issues before all the major air

districts in California and the California

Air Resources Board.

JOE KONCELIK TUCKER ELLIS LLP [email protected] (216) 696-2373

OHIOENVIRONMENTALLAWBLOG.COM

Voluntary Disclosures

• EPA versus State Audit Laws/Policies

• Do’s and Dont’s

• EPA’s New Owner Audit Policy

mailto:[email protected]

U.S. EPA Audit Policy Nine Conditions (All Nine 100% of gravity; Eight of Nine 75% )

1. Systematic Discovery- Through an audit or compliance management system (required for 100% forgiveness

2. Voluntary Disclosure- Violations not discovered by required monitoring, sampling or auditing

3. Prompt Disclosure- Within 21 days of discovery unless under EPA audit agreement

4. Independent Discovery- Facility not the subject of EPA investigation or Citizen’s Suit

5. Correction- Within 60 days or expeditiously as practicable. Should notify EPA if more than 60 days to fix.

6. Prevent Recurrence- Take steps to prevent recurrence (ex: improvement to compliance management system)

7. No Repeat Violations- Same or closely related violations didn’t occur w/in 3 year (five years for multi-facility)

8. Certain Violations Excluded- Serious harm or endangerment

9. Cooperation with U.S. EPA- Provide information requested by EPA and cooperate with the Agency

23

State Audit Program States with Audit Privilege Policies or Laws

Privilege Only Laws: AZ, AR, IN and OR

Immunity Laws: NJ, RI, MN

Privilege & Immunity Laws: AK, CO, IA, KS, KY, MI, MS, NE, OH, SC, SD, TX, UT, VA, WY

Policies: AZ, AK, CA, CT, DE, FL, HI, IN, ME, MD, MA, NM, NY, NC, OK, OR, PA, TN, VT, WA, WY

[Information from U.S. EPA Website]

24

EPA vs. State Audit Laws

Privilege – Varies by State

• (reporting deadline, period to correct, def. “audit”, etc.)

– Not admissible in evidence or produce in discovery in civil or administrative proceedings • Persons with information can’t be compelled to testify

– Generally all communications regarding an environmental audit and audit report or privileged • Includes environmental consultants • Pay close attention to document management requirements

– Exceptions • Criminal proceedings, legally required information, waiver, obtained in bad faith or for

fraudulent purposes, necessary to prevent imminent harm or endangerment, information is personal knowledge obtained outside context of audit, existed prior to the audit

More Flexibility

– Less stringent reporting requirements – Correction within a reasonable amount of time

25

Voluntary Disclosure Pro’s and Con’s of Disclosure

Pro’s – Return to compliance w/o fear

of future action

– Civil penalty forgiveness

– Potential avoidance of criminal actions, unless • “prevalent management

philosophy or practice concealed or condoned violations”

• “high level corporate officials involvement or willful blindness”

– EPA general commitment won’t use audit materials against company

Con’s – U.S. EPA Guidance not law

– Violations become public

– Third party suits

– Limited scope of “non-recommendation provision” for criminal actions • DOJ

• EPA Crimes Section

– State and federal independent enforcement authority

– “Cooperation” • Waiver of A-C privilege or

Work Product in criminal context

26

Voluntary Disclosure Some Do’s and Dont’s Regarding Disclosure

1. Only perform if prepared to fix- understand the cost of returning to compliance. Be aware of deadlines for correcting.

2. Pay attention to disclosure timeframes- when did you learn of the violation (e-mail, date of audit report, etc.)

3. Prepare for investigation following disclosure- EPA and/or State will likely visit your site. Document what you have done to correct violations. Prepare for site visit.

4. Disclose potential violations- Even if still investigating disclose because no protection for violations not disclosed

5. Multiple facilities- Be aware of potential for inspections of non-reporting facilities once a disclosure is made. Consider risk of not performing company-wide audit.

6. Nuances of State and even divisions w/i State Agencies- Each state has unique aspects of their policies. Even divisions of the same state agency can have different interpretations of the language. Discuss hypotheticals with in-house counsel at the State agency.

7. Be aware of missing reports or permits- Clients may submit permit applications, missing reports or amended reports which can trigger enforcement. Appropriate to consider disclosure prior to submission.

27

EPA’s New Owner Policy Incentives to Purchasers with Preexisting Compliance Issues

• Waiver of Economic Benefit portion of the Penalty? • Potentially ECO BEN limited to period post acquisition to compliance

• Policy modifies EPA’s Nine Conditions 1. Systematic Discovery (Condition 1)- Pre-acquisition due diligence

recognized as one time event

2. Voluntary Disclosure (Condition 2)- Monitoring, sampling and auditing considered “voluntary”

3. Prompt Disclosure (Condition 3)- Up to 45 days following closing or 21 days after discovery (whichever is longer)

4. Excluded Violations (Condition 8)- Imminent and substantial endangerment violations could be eligible if occurred prior to ownership

5. Cooperation (Condition 9)- Must cooperate with EPA in determining if conditions as modified were met

28

EPA’s New Owner Policy “New Owner” Status

New Owner for Nine (9) Months Post-Closing

Certify as to the following: • Prior to purchase, new owner not responsible for compliance at

the facility;

• Did not cause the violations;

• Could not prevent their occurrence;

• Violation originated with the prior owner;

• Buyer did not have the largest ownership interest share of the seller; and

• No common corporate parent

29

EPA’s New Owner Policy Impact on Merger’s and Acquisitions

Buyers • Traditional Phase I won’t capture most noncompliance issues; • Due diligence- Include compliance audits? • Cleanup seen as the bigger risk versus compliance; • Limited Time to Report- 45 days post closing or 21 days (whichever is

longer) – Audit Agreement- Extends time periods for new owner status and reporting – Individually Upon Discovery- More confidentiality, but less flexibility on timing;

• Impact on indemnification clauses (voluntary reporting exclusion)

Sellers • No protection from EPA enforcement if Buyer discloses violations; • “No tell clauses” - EPA comments such clauses are potentially void

as against public policy

30

Privilege and Environmental Audits & Pre-Disclosure Evaluation of the

Enforcement Risks

July 7, 2015

Gregory F. Linsin | Blank Rome LLP

Phone: 202.772.5813

Mobile: 202.340.7806

Email: [email protected]


Privilege and Environmental Audits

Recognizing scope and limits of privilege in context of environmental audits is essential

– Attorney client privilege

– Work product doctrine

– Self-critical analysis privilege

– State environmental assessment privilege

Need to plan from outset to ensure availability of privilege and protect against waiver

32

Why Protect Available Privileges?

Fosters open communication among counsel, auditor, and client

Ensures that privileged communications are not disclosed in audit context or subject to discovery in subsequent litigation

Enables client that uncovers noncompliance to manage disclosure effectively

Attorney-client privilege will NOT shield FACTS developed during audit from disclosure

33

Attorney Client Privilege and Work Product Doctrine Protection

Attorney Client Privilege

– Communications between attorney and client

– For the purpose of seeking legal advice

– Virtually complete protection

If privilege not waived

Work Product Doctrine Protection

– Prepared in anticipation of litigation

– Work produced by lawyers and non-lawyers

– Qualified protection against disclosure

“substantial need” and “undue hardship” exception

34

Attorney Client & Work Product Cases

Andritz Sprout-Bauer, Inc. v. Beazer East, Inc., 174 F.R.D. 609 (M.D. Pa. 1997)

– Documents related to environmental consulting work that were prepared for purpose of obtaining or giving legal advice were protected by attorney client privilege

AVX Corp. v. Horry-Land Co., 2010 WL 4884903 (D.S.C. 2010)

– Environmental report prepared by consulting firm was not covered by attorney client privilege

– Consultant was providing environmental services directly to the client

35

Self-Critical Analysis and State Environmental Assessment Privileges

In theory, the self-critical analysis privilege was intended to apply to nearly all audit report information, including underlying facts developed during audit

Scope of state environmental assessment privileges vary by state

Neither is widely recognized by federal courts or agencies

Number of states with environmental audits privilege and/or immunity laws: – environmental audit privilege laws: 5

– environmental audit immunity laws: 2

– environmental audit privilege and immunity laws: 19 http://www.epa.gov/region05/enforcement/audit/stateaudit.html

36

Self-Critical Analysis and State Environmental Assessment Privilege Cases

Lara v. Tri-State Drilling, 504 F. Supp. 2d 1323 (N.D. Ga. 2007) – Notes unclear history and application of self-critical analysis privilege

– Refuses to apply the privilege absent express recognition by Georgia courts or legislature

AVX Corp. v. Horry-Land Co.

– Strictly construes definition of “environmental audit” and “environmental audit report” under the South Carolina environmental privilege statute

– Report at issue did not meet statutory definition and thus was not shielded by the privilege

Andritz Sprout-Bauer, Inc. v. Beazer East, Inc.

– “There is no authority before us which suggests that Pennsylvania or Virginia has adopted the self-critical analysis test.”

37

EPA and DOJ Policy on Privilege

EPA Policy on Privilege

“Presumably no” waiver of attorney client privilege or work product for “cooperation” for civil self-disclosure

http://www.gpo.gov/fdsys/pkg/FR-2000-04-11/pdf/00-8954.pdf

Privileges raised during the course of the investigation must be made in good faith

EPA opposed to statutory and regulatory audit privileges and immunities

DOJ Policy

Recognizes “cooperation” through disclosure of relevant facts

Does not require waiver of privilege

Selective Waiver = Waiver

In re Qwest Communications, 450 F. 3d 1179 (10th Cir. 2006)

– Company’s voluntary production of documents to government agency constituted waiver of attorney-client privilege and work-product protection

– Tenth Circuit declined to acknowledge validity of “selective waiver doctrine”

38

Pre-Disclosure Evaluation of Civil v. Criminal Enforcement Risks

Based on complete factual record developed during environmental audit, counsel must critically evaluate:

– Whether environmental violations occurred

– Whether disclosure will meet audit policy requirements

– Whether EPA and DOJ will view the violations as civil or criminal offenses

39

Civil v. Criminal Risks – cont’d

Can be challenging to predict with confidence because: – Low intent standard for environmental criminal

offenses

– Preponderance v. beyond a reasonable doubt

– Must consider discretionary policy factors, e.g.: Pervasiveness of misconduct

Pre-existing compliance program

Extent of environmental harm

Potential exposure of individuals

40

EPA Incentives Under Audit Policy

For civil violations – Complete relief from gravity-based penalties if part of systematic compliance

effort, (D)1-(D)9 of the Audit Policy terms are met

– Reduction of 75% of gravity-based penalties if (D)2-(D)9 are met

No criminal referral by EPA if conditions D(2) through D(9) are met – No systematic discovery requirement as long as self-policing, discovery, and

disclosure were conducted in good faith and the entity adopts a systematic approach to preventing recurrence of the violation

EPA has not referred for criminal prosecution where regulated entity: – Uncovered violation through environmental audits or due diligence;

– Promptly disclosed and expeditiously corrected those violations; and

– Met all other conditions of Section D of the policy.

EPA’s policy statement does NOT shield entity from DOJ’s exercise of independent prosecutorial discretion

41

DOJ Guidance on Prosecutorial Discretion

Factors considered in exercising prosecutorial discretion – Voluntary disclosure – Cooperation, including disclosure of relevant facts – Preventative measures and pre-existing compliance

programs – Pervasiveness of noncompliance – Internal disciplinary action – Subsequent remedial measures http://www.justice.gov/sites/default/files/opa/legacy/2008/08/

28/corp-charging-guidelines.pdf http://www.justice.gov/enrd/selected-publications/factors-

decisions-criminal-prosecutions

42

http://www.justice.gov/sites/default/files/opa/legacy/2008/08/28/corp-charging-guidelines.pdf








http://www.justice.gov/enrd/selected-publications/factors-decisions-criminal-prosecutions










Questions?

Gregory F. Linsin | Blank Rome LLP Phone: 202.772.5813

Mobile: 202.340.7806

Email: [email protected]
