11/14/86

Final EPA Policy on the Inclusion of Environmental Auditing Provision in Enforcement Settlements

MEMORANDUM                             NOV 14, 1986

SUBJECT:  Final EPA Policy on the Inclusion of Environmental
      Auditing Provisions in Enforcement Settlements

FROM:     /s/  Thomas L. Adams, Jr.
      Assistant Administrator for Enforcement and Compliance Monitoring

TO:   Addressees

    On July 17, 1986, this Office circulated a draft EPA Policy on the
Inclusion of Environmental Auditing Provisions in Enforcement Settlements.
I am pleased to report that Agency comments were almost uniformly supportive
of the draft as written.  Attached please find a final version of the
policy, including summaries of the known auditing settlements that Agency
personnel have achieved to date and several model audit provisions that
Agency negotiators, may use as a starting point in fashioning settlements
that address the circumstances of each case.

    I believe that the inclusion of environmental auditing provisions in
selected settlements offers EPA the ability to accomplish more effectively
its primary mission, namely, to secure environmental compliance.
Accordingly, I would like to renew last July's call for EPA's Offices of
Regional Counsel and program enforcement offices to consider including audit
provisions in settlements where the underlying cases meet the criteria of
the attached policy statement.

    Inquiries containing this policy should be directed to Neil Stoloff,
Legal Enforcement Policy Branch, FTS 475-8777, E-Mail box 2261, LE-130A.
Thank you for your consideration of this important matter.

Attachments

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Addressees:

Assistant Administrators
Associate Administrator for Regional Operations
General Counsel
Associate Enforcement Counsels
Director, Office of Criminal Enforcement and Special Litigation
Director, Office of Compliance Analysis and Program Operations
Headquarters Compliance Program Division Directors
Director, NEIC
Regional Administrators, Regions I - X
Regional Counsels, Region I - X
Regional Compliance Program Division Directors, Regions I - X
Principal Regional Enforcement Contacts, Regions I - X
Enforcement Policy Workgroup

cc:  Administrator
     Deputy Administrator
     John Ulfelder
     David Buente, Department of Justice ( DOJ )
     Nancy Firestone, DOJ

THE POLICIES AND PROCEDURES ESTABLISHED IN THIS DOCUMENT ARE INTENDED SOLELY
AS GUIDANCE FOR GOVERNMENT PERSONNEL.  THEY ARE NOT INTENDED, AND CANNOT BE
RELIED UPON, TO CREATE ANY RIGHTS, SUBSTANTIVE OR PROCEDURAL, ENFORCEABLE BY
ANY PARTY IN LITIGATION WITH THE UNITED STATES.  THE AGENCY RESERVES THE
RIGHT TO ACT AT VARIANCE WITH THESE POLICIES AND PROCEDURES AND TO CHANGE
THEM AT ANY TIME WITHOUT PUBLIC NOTICE.

           EPA POLICY ON THE INCLUSION OF ENVIRONMENTAL AUDITING
                   PROVISIONS IN ENFORCEMENT SETTLEMENTS

I.  Purpose

    The purpose of this document is to provide Agency enforcement personnel
with general criteria for and guidance on selecting judicial and
administrative enforcement cases in which EPA will seek to include
environmental auditing provisions among the terms of any settlement.  This
document supplements the "Guidance for Drafting Judicial Consent
Decrees."  1/

  1/ EPA General Enforcement Policy No. GM-17, October 19, 1983.

II. Background

    On July 9, 1986, EPA announced its environmental auditing policy
statement ( Attachment A ) which encourages the regulated community's use of
environmental auditing to help achieve and maintain compliance with
environmental laws and regulations.  2/

  2/ 51 Fed. Reg. 25004 (1986).

That policy states that "EPA may propose environmental auditing provisions
in consent decrees and in other settlement negotiations where auditing could
provide a remedy for identified problems and reduce the likelihood of
similar problems recurring in the future."  3/

  3/ 51 Fed. Reg. 25007 (1986).

    In recent years, Agency negotiators have achieved numerous settlements
that require regulated entities to audit their operations.  ( Attachment B
is a representative sample of the auditing settlements that the Agency has
achieved to date.  ) These innovative settlements have been highly
successful in enabling the Agency to accomplish more effectively its primary
mission, namely, to secure environmental compliance.  Indeed, auditing
provisions in enforcement settlements have provided several important
benefits to the Agency by enhancing its ability to:

    *    Address compliance at an entire facility or at all facilities owned
         or operated by a party, rather than just the violations discovered
         during inspections; and identify and correct violations that may
         have gone undetected ( and uncorrected ) otherwise.

    *    Focus the attention of a regulated party's top-level management on
         environmental compliance; produce corporate policies and procedures
         that enable a party to achieve and maintain compliance; and help a
         party to manage pollution control affirmatively over time instead
         of reacting to crises.

    *    Provide a quality assurance check by verifying that existing
         environmental management practices are in place, functioning and
         adequate.

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III.  Statement of Policy

    It is the policy of EPA to settle its judicial and administrative
enforcement cases only where violators can assure the Agency that their
noncompliance will be ( or has been ) corrected.  4/

  4/ See "Working Principles Underlying EPA's National Compliance /
    Enforcement Programs," at 7 ( EPA General Enforcement Policy No. GM 24,
    November 22, 1983 ).

In some cases, such assurances may, in part, take the form of a party's
commitment to conduct an environmental audit of its operations.  While this
would not replace the need for correction of the specific noncompliance that
prompted an enforcement action, EPA nonetheless considers auditing an
appropriate part of a settlement where heightened management attention could
lower the potential for noncompliance to recur.  For that reason, and as
stated in the Agency's published policy, "environmental auditing provisions
are most likely to be proposed in settlement negotiations when:

    *    A pattern of violations can be attributed, at least in part, to the
         absence or poor functioning of an environmental management system;
         or

    *    The type or nature of violations indicates a likelihood that
         similar noncompliance problems may exist or occur elsewhere in the
         facility or at other facilities operated by the regulated
         entity."  5/

  5/ 51 Fed. Reg. 25007 (1986).

    This policy is particularly applicable in cases involving the owner or
operator of extensive or multiple facilities, where inadequate environmental
management practices are likely to extend throughout those facilities.  6/

  6/ See, e.g., Owens-Corning Fiberglass Corp., Attachment B, p. 1; and
    Attachments D-F.

Nevertheless, even small, single-facility operations may face the types of
compliance problems that make an audit requirement an appropriate part of a
settlement.

    The environmental statutes provide EPA broad authority to compel
regulated entities to collect and analyze compliance-related
information.  7/

  7/ See, e.g., the Clean Air Act ( CAA ) Sections 113 and 114, the Clean
    Water Act ( CWA ) Sections 308 and 309, and the Resource Conservation
    and Recovery Act ( RCRA ) Sections 3007 and 3008.

Given this statutory authority, and the equitable grounds for imposing a
requirement to audit under the circumstances outlined in this policy
statement, such a requirement may be imposed as a condition of settlement
or, in the absence of a party's willingness to audit voluntarily, sought
from a court or administrative tribunal.

    EPA encourages state and local regulatory agencies that have independent
jurisdiction over regulated entities to consider applying this policy to
their own enforcement activities, in order to advance the consistent and
effective use of environmental auditing.  8/

  8/ See 51 Fed. Reg. 25008 (1986).

a.  Scope of the Audit Requirement

    In those cases where it may be appropriate to propose an environmental
audit as part of the remedy, negotiators must decide which type(s) of audit
to propose in negotiations.  This

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determination will turn on the nature and extent of the environmental
management problem, which could range from a specific management gap at a
single facility  9/  to systematic, widespread, multi-facility, multi-media
environmental violations.  10/

  9/ See, e.g., BASF Systems Corp., Attachment B, p. 3.

  10/ See Attachment F.

In most cases, either ( or both ) of the following two types of
environmental audits should be considered:

    1.  Compliance Audit:  An independent assessment of the current status
of a party's compliance with applicable statutory and regulatory
requirements.  This approach always entails a requirement that effective
measures be taken to remedy uncovered compliance problems and is most
effective when coupled with a requirement that the root causes of
noncompliance also be remedied.  11/

  11/ See Attachment C.

    2.  Management Audit:  An independent evaluation of a party's
environmental compliance policies, practices, and controls.  Such evaluation
may encompass the need for:  (1) a formal corporate environmental compliance
policy, and procedures for implementation of that policy; (2) educational
and training programs for employees; (3) equipment purchase, operation and
maintenance programs; (4) environmental compliance officer programs ( or
other organizational structures relevant to compliance ); (5) budgeting and
planning systems for environmental compliance; (6) monitoring, recorkeeping
and reporting systems; (7) in-plant and community emergency plans; (8)
internal communications and control systems; and (9) hazard identification
and risk assessment.  12/

  12/ See Attachment D.

    Whether to seek a compliance audit, a management audit, or both will
depend upon the unique circumstances of each case.  A compliance audit
usually will be appropriate where the violations uncovered by Agency
inspections raise the likelihood that environmental noncompliance exists
elsewhere within a party's operations.  A management audit should be sought
where it appears that a major contributing factor to noncompliance is
inadequate ( or nonexistent ) managerial attention to environmental
policies, procedures or staffing.  13/

  13/ See Chemical Waste Management, Inc., Vickery, Ohio and Kettleman
     Hills, California Facilities, Attachment B, pp. 1 and 2 respectively;
     and Attachment D.

Both types of audits should be sought where both current noncompliance and
shortcomings in a party's environmental management practices need to be
addressed.  14/

  14/ See Attachments E and F.

     In cases where EPA negotiators determine that an acceptable settlement
should include an audit provision, the attached model provisions  15/  may
be used as a starting point in fashioning a settlement tailored to the
specific circumstances of each case.

  15/ Attachments C-G.

The model provisions are based on settlements addressing a broad range of
circumstances that give rise to audits.

    3.  Elements of Effective Audit Programs.  Most environmental audits
conducted pursuant to enforcement settlements should, at a minimum, meet the
standards provided in "Elements of Effective Environmental Auditing
Programs," the Appendix to

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the Agency's published policy on auditing.  Those elements include:

    *    Explicit top management support for environmental auditing and
         commitment to follow-up on audit findings.

    *    An environmental audit team separate from and independent of the
         persons and activities to be audited.

    *    Adequate team staffing and auditor training.

    *    Explicit audit program objectives, scope, resources and frequency.

    *    A process which collects, analyzes, interprets and documents
         information sufficient to achieve audit objectives.

    *    A process which includes specific procedures to promptly prepare
         candid, clear and appropriate written reports on audit findings,
         corrective actions, and schedules for implementation.

    *    A process which includes quality assurance procedures to ensure the
         accuracy and thoroughness of environmental audits.  16/

  16/ See 51 Fed. Reg. 25009 (1986).

    Agency negotiators may consult EPA's program and enforcement offices and
the National Enforcement Investigations Center, which can provide technical
advice to negotiators in fashioning auditing provisions that meet the needs
of both the party and the regulatory program(s) to which it is subject.
Additional information on environmental auditing practices can be found in
various published materials.  17/

  17/ See, e.g., "Current Practices in Environmental Auditing," EPA Report
     No. EPA-230-09-83-006, February 1984; "Annotated Bibliography on
     Environmental Auditing," September 1985, both available from EPA's
     Office of Policy, Planning and Evaluation, Regulatory Reform Staff, PM-
     223, FTS 382-2685.

    A settlement's audit requirements may end after the party meets the
agreed-upon schedule for implementing them.  Nevertheless, the Agency
expects that most audit programs established through settlements will
continue beyond the life of the settlement.  After the settlement expires,
the success of those programs may be monitored indirectly through the
routine inspection process.

b.  Agency Oversight of the Audit Process

    In most cases, resource and policy constraints will preclude a high
level of Agency participation in the audit process.  Several successful
audit settlements indicate that the benefits of auditing may be realized
simply by obtaining a party's commitment to audit its operations for
environmental compliance or management problems ( or both ), remedy any
problems uncovered, and certify to the Agency that it has done so.  18/

  18/ See, e.g., Crompton and Knowles Corp., Attachment B, p. 1; and
     Attachments C-E ).

Other recent Agency settlements, also successful, have entailed full
disclosure of the auditor's report of findings regarding noncompliance,

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and even access to the company records which the auditors examined.  19/

  19/ See, e.g., Chemical Waste Management, Inc., Vickery, Ohio and
     Kettleman Hills, California facilities, Attachment B, pp. 1 and 2
     respectively; and Attachment E.

Audit settlements that require either self-certification or full disclosure
of audit results may require a party to submit to the Agency an
environmental management or compliance plan ( or both ) that addresses
identified problems, to be implemented on an enforceable schedule.  20/

  20/ See, e.g., United States v. Georgia Pacific Corp., Attachment B, p. 2;
     Attachment D, Section B.3; and Attachment F, Sections 6(1) and 9.

    These approaches require the Agency neither to devote significant
resources to oversight of the audit process nor to depart from its
traditional means of enforcing the terms of consent decrees and agreements.
Although it may--and will--evaluate audit proposals in terms of the elements
described in Section III.a.3. above, in all but the most extreme cases  21/
the Agency will not specify the details of a party's internal management
systems.

  21/ See, e.g., Attachment G.

Rather, an independent audit represents one step a violator can take toward
assuring the Agency that compliance will be achieved and maintained.  22/


  22/ See.e.g., Potlatch Corp., Attachment B, p. 1; and Attachment C.

    Considerations such as the seriousness of the compliance problems to be
addressed by an audit provision, a party's overall compliance history, and
resource availability will dictate the extent to which the Agency monitors
the audit process in particular cases.  Thus, it will usually be appropriate
to withhold approval of an audit plan for a party with an extensive history
of noncompliance unless the plan requires:

    *    Use of an independent third-party auditor not affiliated with the
         audited entity;
    *    Adherence to detailed audit protocols; and
    *    More extensive Agency role in identifying corrective action.  23/

  23/ See Attachment F.

c.  Agency Requests for Audit-Related Documents

    The various environmental statutes provide EPA with broad authority to
gain access to documents and information necessary to determine whether a
regulated party is complying with the requirements of a settlements.  24/

  24/ See, e.g., CAA Section 114, CWA Section 308, RCRA Section 3007, CERCLA
     Section 103, the Toxic Substances Control Act Section 8, and the
     Federal Insecticide, Fungicide and Rodenticide Act Section 8.

Notwithstanding such statutory authority, Agency negotiators should
expressly reserve EPA's right to review audit-related documents.  25/

  25/ See, e.g., Attachment F, Section IV, "Access to Documents."

d.  Stipulated Penalties for Audit-Discovered Violations

    Settlements which require a party to report to EPA audit-discovered
violations may include stipulations regarding the amount of penalties for
violations that are susceptible to prediction and are promptly remedied,
with the parties reserving their respective rights and liabilities for other
violations.  26/

  26/ See, e.g., Attachment F, Sections  22, 23, 24, 34, and Appendix 2.

This policy does not authorize reductions of penalty amounts below those
that would otherwise be dictated by applicable penalty policies, which take
into account the circumstances

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surrounding violations in guiding the calculation of appropriate penalty
amounts.  It is therefore important that stipulated penalties only apply to
those classes of violations whose surrounding circumstances may be
reasonably anticipated.  The application of stipulated penalties to
violations discovered during an audit is consistent with Agency policy.  27/


  27/ See "Guidance for Drafting Judicial Consent Decrees," at 22 ( EPA
     General Enforcement Policy No. GM-17, October 19, 1983 ).

e.  Effect of Auditing on Agency Inspection and Enforcement

    1.  Inspections

    The Agency's published policy on auditing states that "EPA will not
promise to forgo inspections, reduce enforcement responses, or offer such
incentives in exchange for implementation of environmental auditing or other

sound environmental practice.  Indeed, a credible enforcement program
provides a strong incentive for regulated entities to audit."  28/

  28/ 51 Fed. Reg. 25007 (1986).

    Consistent with stated Agency policy, the inclusion of audit provisions
in settlements will not affect Agency inspection and enforcement
prerogatives.  On the contrary, a party's incentive to accept auditing
requirements as part of a settlement stems from the Agency's policy to
inspect and enforce rigorously against known violators who fail to assure
the Agency that they are taking steps to remedy their noncompliance.
Auditing settlements should explicitly provide that Agency ( and State )
inspection and enforcement prerogatives, and a party's liability for
violations other than those cited in the underlying enforcement action ( or
subject to stipulated penalties ), are unaffected by the settlements.  29/

  29/ See Attachment C, Section A.3; Attachment D, Section B; Attachment E,
     Section C.3; and Attachment F, Section 34.

    2.  Civil Penalty Adjustments

    Several audit settlements achieved to date have mitigated penalties to
reflect a party's agreement to audit.  In view of EPA's position that
auditing fosters environmental compliance, EPA negotiators may treat a
commitment to audit as a demonstration of the violator's honest and genuine
efforts to remedy noncompliance.  This may be taken into account when
calculating the dollar amount of a civil penalty.  30/

  30/ See 51 Fed. Reg. 25007 (1986); EPA's Framework for Statute-Specific
     Approaches to Penalty Assessments, General Enforcement Policy No. GM-
     22, at p. 19; and applicable medium-specific penalty policies, e.g.,
     TSCA Settlement with Conditions, November 15, 1983.

In no case will a party's agreement to audit result in a penalty amount
lower than the economic benefit of noncompliance.

    For judicial settlements where penalties are proposed to be mitigated in
view of audit provisions, negotiators should coordinate with the Department
of Justice ( DOJ ) to ensure consistency with applicable DOJ settlement
policies.

    3.  Confidentiality

    EPA does not view as confidential per se audit-related documents
submitted to the Agency pursuant to enforcement settlements.  Such documents
may, however, contain confidential

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business information ( CBI ).  Auditing provisions should indicate that EPA
will treat such information in the same manner that all other CBI is
treated.  31/

  31/ See "Guidance for Drafting Judicial Consent Decrees," at 28 ( EPA
     General Enforcement Policy No. GM-17, October 19, 1983 ).

Where appropriate, negotiators may consider defining in advance which
categories of audit information will qualify for CBI treatment.  32/

  32/ See Attachment F, Sections 5(2), 14, and 15.

Such determinations shall be concurred in by the Office of General Counsel,
in accordance with 40 CFR Part 2.

    The Freedom of Information Act ( FOIA ) may provide additional bases for
protecting privileged information from disclosure.  33/

  33/ See, e.g., 5 USC Section 552(b)(4), which encompasses voluntarily
     submitted information the disclosure of which would impair a Government
     interest such as EPA's interests in the settlement of cases and in
     ensuring compliance with statutes under its authority.

However, determinations under FOIA are within the sole discretion of the
Agency and therefore are not an appropriate subject of negotiation.

IV.  Coordination of Multi-Facility Auditing Settlements

    When negotiating with a party over facilities located in more than one
EPA region, Agency personnel should consult with affected regions and states
to ensure that pending or planned enforcement actions in other regions will
not be affected by the terms of an audit settlement.  This may be done
directly ( e.g., pursuant to existing State / EPA Enforcement Agreements )
or with the assistance of OECM's Legal Enforcement Policy Branch ( LEPB ),
which will serve as a clearinghouse for information on auditing in an
enforcement context ( contact:  Neil Stoloff, LEPB, FTS 475-8777, LE-130A,
E-Mail Box EPA 2261 ).

    In most cases, however, auditing settlements that embrace facilities in
more than one region will affect neither the Agency's inspection and
enforcement prerogatives nor a party's liability for violations other than
those which gave rise to the underlying enforcement action.  34/

  34/ See Attachment F, Section 25.b.

Accordingly, inter-office consultation in most cases will be necessary only
for informational purposes.  Some multi-facility settlements will fall
within the scope of the guidance document, "Implementing Nationally Managed
or Coordinated Enforcement Actions."  35/

  35/ General Enforcement Policy No. GM-35, January 4, 1985.

Such settlements should be conducted in accordance with that document and
the memorandum, "Implementing the State / Federal Partnership in
Enforcement:  State / Federal Enforcement `Agreements.'"  36/

  36/ General Enforcement Policy No. GM-41, June 26, 1984.

Attachments

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OMITTED TEXT:  Attachment A - Environmental Auditing Policy Statement, 51
Fed. Reg. 25004, July 9, 1986; Attachment B - Representative Sample of
Environmental Auditing Settlements Achieved to Date, revised 10/9/86;
Attachment C - Model Environmental compliance audit provision, with
requirement for certification of compliance; Attachment D - Model
Environmental management audit provision, with requirement for submission of
plan for improvement of environmental management practices, to be completed
on an enforceable schedule; Attachment E - Model Environmental compliance
and management audit provision, with all audit results submitted to EPA, all
Agency enforcement prerogatives reserved; Attachment F - Model
Environmental compliance and management audit provision, with extensive
Agency oversight, audit results disclosed, stipulated penalties applied to
most prospective violations, and all Agency enforcement prerogatives
reserved for other violations.  ( Most appropriate for party with an
extensive history of noncompliance.  ); Attachment G - Model Emergency
environmental management reorganization provision.  ( Appropriate for cases
where a party's environmental management practices are wholly inadequate and
action is necessary without waiting for the results of an audit.  )