This article originally appeared in Business Lawyer, the newsletter published by the North Carolina Bar Association's Corporate Counsel Section. Reprinted with permission.
When a company discovers environmental non-compliance at its facility, whether to self-report the non-compliance to a governmental agency is all too often the quandary. Consider the following situation: you have just hired a new employee. The diligent new employee comes to your office to ask for your assistance in locating your company's air permit. You are not aware the company needs an air permit. The employee assures you, however, that you need a permit right away to come into compliance with the air quality regulations and you confirm that this is true. What should you do? Now consider a second situation: you retain the services of a third party consultant to conduct an environmental audit of your facility. The consultant's report turns up several environmental problems of which you were not previously aware. What should you do?
Such internally discovered environmental non-compliance issues are common, but companies are often hesitant to self-report these deficiencies to governmental agencies for fear of hefty civil penalties or even criminal liability. Fortunately, both North and South Carolina and the federal Environmental Protection Agency (EPA) have measures in place to encourage self-disclosure of environmental non-compliance issues such as the ones described above. The basic incentive of these measures is the waiver or reduction of civil (and, at times, criminal) penalties that typically would result if the environmental deficiencies had been discovered through government investigation. In addition, in limited situations, these measures allow companies to protect the environmental audit reports from disclosure to governmental agencies.
The public policy behind self-reporting incentives is simple and can best be described by quoting the North Carolina Department of Environment and Natural Resources (NCDENR) Policy Regarding Enforcement Penalty for Self-Reported Violations: "Environmental protection is enhanced if deficiencies are identified and corrected as soon as possible. The regulated community is often in the best position to rapidly identify deficiencies, promptly correct them, and with suitable advice and approval, to develop and implement a corrective action plan to ensure that the 'root cause' has been addressed and the public health and the environment are protected." The framework of these self-reporting incentives varies with each agency. The EPA's framework is regulatory, North Carolina's is policy-based, and South Carolina's is statutory.
EPA
EPA's regulation, Incentives for Self- Policing, 65 FR 19618 (April 11, 2000), often called the "Audit Policy," encourages the voluntary discovery, disclosure, correction, and prevention of environmental violations by waiving or significantly reducing the penalties associated with certain violations. In addition, EPA will not recommend criminal prosecution for qualifying self-disclosed violations, and will not request or use an audit report to initiate investigation of the disclosing company. In order for these provisions to apply, certain conditions must be met: (1) the violation must be revealed during voluntary audits or through environmental management systems that reflect due diligence; (2) the violation must be promptly disclosed to the agency and corrected by the company; (3) the violation must be corrected within 60 days of discovery of the violation, (4) the reporting must be voluntary; and (5) the violator must not be a repeat violator and must agree to prevent recurrence of the violation.
North Carolina
NCDENR has also established incentives for self-reporting. Although North Carolina's framework is policy-based and is therefore not binding on the agency, the policy provides that the Department will not initiate criminal investigations, nor seek penalties (beyond the economic benefit derived by the company as a result of its violation) for deficiencies voluntarily revealed through audits or compliance procedures. For this policy to apply, a company must satisfy all five of the following conditions: (1) the deficiency does not reflect a lack of good faith effort to comply with law; (2) the deficiency is not willful or knowing; (3) the deficiency is not harmful to the environment or public health; (4) the disclosure is truly voluntary, and the Department is promptly notified in writing of the deficiency; (5) the company takes immediate and effective action to rectify the violation in a manner acceptable to the Department.
South Carolina
South Carolina's self-reporting incentive is statutory. The state's Environmental Audit Privilege and Voluntary Disclosure Law, S.C. Code Ann. Section 48-57-10, encourages self-evaluation and voluntary disclosure through the complete waiver of civil and administrative penalties and the qualified guarantee that voluntary audit reports will not be used as evidence in agency enforcement actions. The statute requires that: (1) the violation be disclosed within fourteen (14) days after a reasonable investigation; and (2) that the company diligently pursue resolution of the issue through compliance.
Environmental Audit Privilege
The self-reporting frameworks of EPA and South Carolina both provide a qualified privilege for the audit reports of companies who self-report environmental non-compliance arising from those audits. This privilege insulates audit reports from use as evidence against a self-reporting company. North Carolina's policy does not expressly grant such a privilege, although it provides that NCDENR will not request copies of audit reports in connection with administration of the self-reporting policy.
EPA's policy provides that the agency will "neither request nor use an environmental audit report to initiate a civil or criminal investigation of an entity." 65 FR 19625. The regulation also notes that the agency will not request such reports during routine inspections. If the agency has reason to suspect a violation, however, it will seek "any relevant information," which presumably could include information contained in audit reports.
The South Carolina statutory framework expressly provides a qualified privilege to environmental audit reports, which excludes those reports from use in civil or administrative enforcement actions when the established conditions have been met.
When faced with an environmental issue, determining whether the problem warrants reporting to an agency - or what the repercussions of that disclosure could be - can be complicated. These state and federal incentives for self-reporting of environmental violations and discrepancies make self disclosure an attractive option. A company may be able to avoid significant civil and criminal penalties by simply taking the initiative to monitor its compliance and notify the appropriate agency of a violation before the agency discovers the violation on its own.
Two words of caution. First, self-reporting does not make the company bulletproof from enforcement. The agency to which non-compliance is reported makes the decision as to whether the self-reporting meets all required conditions for protection from enforcement. Therefore, self-reporting always carries with it the risk that the agency could conclude that the self-reporting is deficient in some manner and proceed with enforcement. Second, if a company becomes aware of an environmental violation, it may have a duty (independent of the self-reporting incentives) to report the environmental violation anyway.
On balance, the benefits of self-reporting typically outweigh the risks. When a company becomes aware of environmental noncompliance, it should seriously consider the pros and cons of self-reporting in light of the incentives described in this article.
This Client Alert is intended to inform readers of recent developments in the field of environmental law. It should not be considered as providing conclusive answers to specific legal problems.