Self-Reporting Environmental Violations: When And How To Do It

Barry Needleman Headshot
Barry Needleman
Managing Director and Director, Administrative Law Department
October 1, 2004

Imagine you are the CEO of a mid-sized manufacturer with facilities in several New England states. You receive a report that a company-wide environmental audit has just revealed that your facility in Connecticut has been operating without a required air permit for its coating line and that your facility in Massachusetts has failed to file its Emergency Planning and Community Right To Know Act “Form R” reports regarding waste production for the last 3 years. You have read recent new stories from throughout New England about large fines for seemingly similar violations. You may also have seen that in several cases, where the violations were self-reported and the entity worked closely with the regulators, the penalties were reduced, sometimes substantially. So now what do you do?

Businesses of all sizes confront the issue of how to handle self-discovered environmental violations. In many cases, state and federal law impose reporting obligations. In other instances, there is less clarity. In either case, before reporting any environmental violation, state and federal self-reporting policies should be carefully evaluated. Significant benefits may be available for entities that voluntarily self-report violations consistent with the specific requirements of the policies.

On December 22, 1995 the United States Environmental Protection Agency issued a Policy titled “Incentives for Self-Policing: Discovery, Disclosure, Correction and Prevention of Violations.” A revised version became effective on May 11, 2000. Many states also have statutes and/or policies to encourage self-reporting.

The first step in any self-reporting assessment is to determine whether the violations at issue involve federal law or state law. If the issue pertains to state law, familiarity with a particular state’s self-reporting requirements is necessary. In addition, mastering the underlying facts associated with the environmental violations is also critical. All violations are not the same in terms of the risks they present and the ways in which they should be managed. Moreover, effective self-reports almost always identify the path to achieving compliance. Submitting a self-report without understanding the full scope of the issues and the potential solutions is a weak approach that will likely invite further problems.

Many state self-reporting policies are based on the EPA Policy. The purpose of the EPA Policy is to “enhance protection of human health and the environment by encouraging regulated entities to voluntarily discover, promptly disclose and expeditiously correct violations of federal environmental requirements.” The Policy provides several important incentives for self-disclosure:

  • If all of the requirements of the Policy are met an entity may be eligible for elimination of the “gravity” component of an environmental penalty (i.e. the part of the penalty that reflects “the egregiousness of the violator’s behavior and constitutes a punitive portion of the penalty”);
  • A recommendation from EPA against pursuit of criminal enforcement; and
  • To the extent the violations were discovered as the result of an environmental audit, EPA will refrain from requesting a copy of the audit report.

Receiving the benefits of the EPA Policy is contingent upon meeting its nine conditions. The first two conditions are related. To qualify for a full reduction in the gravity portion of the penalty, the violation(s) must have been discovered through an environmental audit or compliance management system. Even if the violation is discovered in some other way, a reduction in the gravity portion of the penalty of up to 75% may be available. In addition, discovery must be “voluntary.” Thus, any violations found as a result of required monitoring, sampling, or other testing procedures, whether imposed by regulation, permit condition, or some other mechanism will likely not be considered voluntary. The Policy lists several examples including “violations detected through a continuous emissions monitor, violations of NPDES discharge limits found through prescribed monitoring, and violations discovered through a compliance audit required to be performed by the terms of consent order or settlement agreement.” The “voluntary” requirement pertains to discovery and therefore, even if some other legal requirement compels reporting of the violation, it may still qualify for the benefits under the Policy.

The third condition involves prompt disclosure; entities must self-report within twenty-one days from “when the entity discovers that a violation has, or may have, occurred.” The standard is an “objectively reasonable basis” for believing that a violation has or may have occurred. This requirement should be the focal point of any initial assessment. It is important to identify the starting point for measuring the 21 day period while being mindful of any subtleties. For example, under a conservative application of this requirement the entity might start the measuring period based on the findings in a draft audit report suggesting the possibility of a violation. Although EPA encourages self-reporting when in doubt, that may not necessarily be the best long-term approach in a given situation.

The fourth condition requires that violations must be discovered and identified before a regulator, through its own investigation or based on third-party information, would have identified the issue.

Once a violation is discovered, it must be corrected expeditiously in order to comply with the fifth condition. In most cases, violations should be corrected within 60 calendar days from the date of discovery, if not sooner. In some circumstances, more time may be needed. In such situations, EPA must be notified in writing prior to expiration of the 60-day period. In addition, steps must be taken to prevent recurrence of the violation in order to comply with the sixth condition. Such steps “may include, but are not limited to, improvements to the entity’s environmental auditing efforts or compliance management system.”

The seventh condition – the matter at issue cannot be a repeat violation – merits special attention. If an entity has had prior violations, it is not necessarily precluded from claiming the benefits of the Policy. The prior violations however, may not be of the same character or closely related to the violation being reported and, in cases involving a single facility, must not have occurred at the same facility within 3 years of the date of the new violation. This requirement places a special premium on ensuring that settlement of enforcement actions occurs in such a way that the settlement may not be automatically invoked in the future to preclude an entity from gaining the benefits of the Policy.

Finally, condition eight precludes use of the Policy when violations either result in serious actual harm to the environment or present an imminent and substantial endangerment to public health or the environment. Condition nine demands full cooperation with government.

In sum, effective self-disclosures often involve important strategic and legal choices that may have implications beyond the pending situation. These considerations may include reserve and reporting implications for publicly traded companies, issues pertaining to prior violations, potential legal exposure if the violations result in injuries to third parties or company employees, and corporate reputation, just to name a few. Therefore, while such disclosures offer substantial potential benefits provided they comply with applicable requirements, disclosures must be handled properly to maximize benefits and minimize the myriad of potential risks.