EPA’s Interim Approach to Applying the Audit Policy to New Owners

This page provides a summary of EPA’s Interim Approach to Applying the Audit Policy to New Owners (New Owner Audit Policy) which became effective August 1, 2008.

• Background on the Audit Policy
• Tailored Incentives for New Owners
• Overview of Interim Approach

Background on the Audit Policy

• EPA’s April 11, 2000 policy on “Incentives for Self-Policing: Discovery, Disclosure, Correction and Prevention of Violations,” commonly referred to as the  Audit Policy (PDF)(11 pp 262K, About pdf) (65 FR 19618), is one of the Agency’s key compliance incentive tools to encourage companies to get it right on their own -- by voluntarily discovering, promptly disclosing and correcting, and preventing the recurrence of environmental violations.
• From 1995-2020, over 10,000 entities voluntarily self-disclosed violations at nearly 28,000 facilities under one of EPA’s self-disclosed violation policies.  More than half of these disclosures have been of reporting and recordkeeping violations, and while it is important that such violations be corrected, EPA wants to increase the direct pollutant reductions that result from the correction of violations disclosed under the Audit Policy.

Tailored Incentives for New Owners – How the Audit Policy Applies to New Owners

• To further the goal of increasing pollutant reductions resulting from the correction of self-disclosed violations, EPA has tailored incentives to encourage new owners to look closely at compliance issues at their recently acquired facilities, self-disclose and, most importantly, fix the environmental problems they find.

• What Are the Tailored Incentives? 

• As described more fully below, these incentives include penalty mitigation beyond what the Audit Policy offers and an expanded range of violations that may be eligible for Audit Policy consideration.

• Why New Owners? 

• EPA believes new owners have a unique opportunity to focus on, and invest in, making a “clean start” at recently acquired facilities, by addressing environmental issues, and that the Agency may be able to secure high quality environmental improvements more quickly and effectively than might otherwise occur.

• Why Might New Owners Want to Use the Audit Policy?

  New owners may already be well-situated and motivated to use the Audit Policy, as they:
  ▪   Were not responsible for the facility when the noncompliance began.
  ▪   May already be assessing and auditing new facilities to manage and reduce risk.
  ▪   May have funding available to fix problems, or have budget commitments which are still relatively flexible.

Overview of Interim Approach for New Owners

• EPA announced the Interim Approach to Applying the Audit Policy to New Owners (16 pp, 120K, About PDF) (“Interim Approach”) on August 1, 2008, after seeking public comment on this concept. The comments were generally very supportive, and offered many helpful ideas about ways to structure a program and enhance flexibility for new owners.
   
• Definition of New Owner: So that only appropriate new owners can benefit from the tailored incentives, an eligible new owner must certify that:
  1. Prior to the transaction, it was not responsible for environmental compliance at the facility which is the subject of the disclosure, did not cause the violations being disclosed and could not have prevented their 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.
      
• Penalty Mitigation:  Applies to new owners that, within 9 months of the transaction closing:
  • Promptly disclose violations to EPA, or
  • Enter into an audit agreement with EPA, and
  • Meet all the Conditions of the Audit Policy, as modified for new owners:
  1. No penalties will be assessed against the new owner for the period before the date of acquisition;
  2. Penalties for economic benefit associated with avoided operation and maintenance costs will be assessed against the new owner, but only from the date of acquisition; and
  3. No penalties for economic benefit associated with delayed capital expenditures or with unfair competitive advantage will be assessed against the new owner if the violations are corrected in accordance with the Audit Policy (i.e., within 60 days of discovery or another reasonable timeframe to which EPA has agreed).

• Modifications to Audit Policy Conditions for New Owners:  Modifications, in the new owner context, to the following 5 of the 9 conditions of the Audit Policy make more violations eligible for Audit Policy penalty mitigation, as applied to new owners:
  • Systematic Discovery – Condition 1:  Because EPA recognizes that a new owner's pre-closing due diligence is by its nature a one-time event, EPA will waive the "periodic" element of this condition for violations discovered through pre-acquisition due diligence, and allow such disclosures to be considered for full penalty mitigation.
     
  • Voluntary Discovery – Condition 2:  EPA  expanded its interpretation of the Voluntary Discovery condition in the new owner context, currently limited to compliance with Title V of the Clean Air Act, to allow consideration of all violations which would otherwise be ineligible for Audit policy consideration because they are already required to be identified through a legally mandated monitoring, sampling or auditing protocol, and thus not “voluntarily discovered.” New owners that enter into an audit agreement or disclose violations before the first instance when the monitoring, sampling or auditing is required, would not be disqualified based on this condition.
     
  • Prompt Disclosure – Condition 3:  The Audit Policy provides that violations must be promptly disclosed in writing, within 21 days of discovery.  For violations discovered pre-closing, a new owner has up to 45 days after closing to disclose violations.  For violations discovered post-closing, a new owner has to disclose violations within 21 days after discovery or within 45 days after the transaction closing, whichever time period is longer.  In the busy period just after acquisition, this gives new owners a little more time to decide and prepare to come forward with due diligence findings.
     
  • Other Violations Excluded – Condition 8:  The Audit Policy excludes violations that resulted in serious actual harm or may have presented an imminent and substantial endangerment.  Where violations that gave rise to serious actual harm or an imminent and substantial endangerment began before the new owner acquired the facility, EPA allows such violations to be eligible under the Interim Approach, absent a fatality, community evacuation or other seriously injurious or catastrophic event. This should encourage new owners to come forward and correct significant violations, which is one of the goals of this approach.
     
  • Cooperation Condition – Condition 9:  EPA modified the Cooperation condition of the Audit Policy only to make clear that the disclosing entity must cooperate with EPA in determining whether all Audit Policy conditions - as they have been modified by this Interim Approach - have been met.
     
• Unmodified Audit Policy Conditions:  EPA will apply and interpret all other Conditions of the Audit Policy as described in the 2000 Audit Policy and the EPA's Audit Policy Program:  Frequently Asked Questions document.
  • Discovery and Disclosure Independent of Government or Third Party Plaintiff – Condition 4:  The Audit Policy provides that violations must 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. 
     
  • Correction and Remediation – Condition 5:  The Audit Policy provides that a self-disclosing 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.  EPA recognizes that not all violations can be corrected in the 60-day time frame, and 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. 
     
  • Prevent Recurrence – Condition 6:  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. 
     
  • No Repeat Violations – Condition 7:  For 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.  When the 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.  If a facility has been newly acquired, the existence of a violation prior to the acquisition does not trigger the repeat violations exclusion as to the new owner.  New owners generally will be eligible under the No Repeat Violations condition of the Audit Policy irrespective of the new owner’s history of violations at other facilities.

For more information:

• See the New Owner Audit Policy Qs and As in the updated EPA’s Audit Policy Program: Frequently Asked Questions.
• Regarding the Interim Approach: contact Chad Harsh ([email protected] or 202-564-0211).