Environmental audit privilege and voluntary disclosure rule: the importance of federal enactment.

• Author: Shweiki, Opher

1. INTRODUCTION II. CURRENT POLICY

   1. The Department of Justice Factors

   2. The EPA Final Policy Statement III. OVERVIEW OF AUDIT PRIVILEGE AND VOLUNTARY DISCLOSURE

   1. The Environmental Audit Privilege

   2. The Voluntary Disclosure Rule IV. THE POSITIVE INCENTIVES APPROACH: THE IMPORTANCE OF A

      QUALIFIED AUDIT PRIVILEGE AND LIMITED VOLUNTARY

      DISCLOSURE RULE V. DIRECTLY ADDRESSING THE CONCERNS WITH THE QUALIFIED

      AUDIT PRIVILEGE AND VOLUNTARY DISCLOSURE RULE.

   1. The Government and Environmentalist Position

      1. Weakening the Deterrent Effect of Criminal Liability

      2. Further Burdening the Judicial System

      3. Handcuffing the Prosecutors

      4. Heeding the Supreme Court's Concern with Creating a

         Privilege

      5. Allowing Environmental Damage and Gross Negligence to

         go Unpunished

      6. Providing Violators with an Economic Advantage B. The Concerns of Government and Environmentalists Directly

         Addressed

      1. Pursuing Fair and Effective Enforcement Actions

      2. Avoiding Litigation through Narrow Definitions and

         Well-Delineated Provisions

      3. Improving Government's Access to Information

      4. Learning from the Recent Recognition the Self-Evaluation

         Privilege Has Received in Federal Court

      5. Establishing Safeguards to Prevent Abuse of the Voluntary

         Disclosure Rule

      6. Eliminating the Economic Benefit from which Violators

         Could Gain VI. MARKET ORIENTED REGULATORY PROGRAMS: USING AMERICA'S

         EXPERIENCE AS A GUIDE FOR SUCCESS

   1. Identifying the Regulatory Problem

   2. An Effective Solution for the Dilemma

   3. Accounting for the Difficulties in Implementation VII. CONCLUSION

1. INTRODUCTION

   Beginning in the 1980s, corporations increasingly utilized environment self-auditing as a means to reduce environmental liability. By identifying and promptly correcting noncompliance with environmental laws, corporations could prevent serious accidents, government enforcement, and private lawsuits. The recent increase in criminal prosecutions, however, has altered the way many corporations view self-auditing. Corporations are now reluctant to authorize audits that the government might use as a roadmap for establishing criminal liability.(1)

   As a result, the regulated community has called on the government to adopt measures that would provide greater security from criminal prosecution for those companies that voluntarily audit, disclose violations, and promptly remedy noncompliance. The regulated community maintains that this assurance is necessary to ease corporate fear, encourage auditing, and increase voluntary compliance. The environment would benefit, and enforcement resources would be conserved.(2) The government and environmentalists argue, however, that the degree of security desired by the industry would inappropriately limit agency discretion and thereby compromise the deterrent effect of the criminal justice system.(3)

   This Note argues that the audit privilege(4) and voluntary disclosure rule(5) are necessary tools to achieve full environmental compliance and that explicit qualifications and limitations to these legal protections will alleviate the government's and environmentalists' concerns.

   Part II of this Note explains current federal policy as articulated in the policy statements of the Department of Justice and Environmental Protection Agency. Part III provides an overview of the primary components of the audit privilege and voluntary disclosure rule. In Parts IV and V, this Note discusses the benefits of these legal protections and directly addresses the concerns of the government and environmentalists. Part VI concludes by describing how America's experience with market-oriented regulatory programs favors the enactment of these legal protections and provides important lessons which aid in effectively implementing them.

2. CURRENT POLICY

   Current federal policy is articulated in policy statements, issued by the Department of Justice (DOJ)(6) and Environmental Protection Agency (EPA),(7) concerning the exercise of discretion in the prosecution of regulated entities engaged in environmental compliance practices.

   1. The Department of Justice Factors

      The DOJ policy is intended to "encourage self-auditing, self-policing and voluntary disclosure of environmental violations by the regulated community" by describing certain activities that would be viewed as mitigating factors in the Department's exercise of discretion regarding criminal environmental enforcement.(8)

      These factors include: (1) whether the violator made a voluntary, timely, and complete disclosure of the matter under consideration; (2) the degree and timeliness of cooperation by the violator; (3) the existence and scope of any "regularized, intensive, and comprehensive environmental compliance program;" and (4) additional factors such as the pervasiveness of noncompliance by the violator, the existence of an effective internal disciplinary program for employees, and the extent of any efforts to remedy ongoing noncompliance.(9)

      The Policy Statement explicitly declares that these mitigating factors are only guidelines and that full prosecutorial discretion remains with the prosecutor. These factors in no way limit the lawful litigative prerogatives of the Department of Justice.(10)

      Lois J. Schiffer, Assistant Attorney General of the Environment and Natural Resources Division, recently stated that this "policy continues to work well, and there are no present plans to change it.(11) She went on to explain that the Department has taken measures beyond these guidelines to encourage voluntary compliance and disclosure. More specifically, Schiffer stated that "[t]he Department generally will not seek an environmental audit from a regulated entity prior to receipt of other information suggesting that the entity has committed violations of environmental law."(12)

   2. The EPA Final Policy Statement

      The EPA policy is intended to "enhance protection of human health and the environment by encouraging regulated entities to discover voluntarily, disclose, correct and prevent violations of federal environmental law."(13)

      Under the Final Policy, EPA will not seek gravity-based (i.e., non-economic benefit) penalties(14) and generally will not recommend criminal prosecutions against the regulated entity where violations are discovered though voluntary environmental audits (or efforts reflecting a regulated entity's due diligence), promptly disclosed, and expeditiously corrected.(15)

      In addition, the Policy Statement reaffirms the EPA's long-held policy to refrain from routine requests for environmental audit reports. The Policy Statement clarifies, however, that the Agency remains firmly opposed to the establishment of a statutory evidentiary privilege.(16)

      The EPA explicitly states that "[t]he policy is not final agency action, and is intended as guidance," and the Agency retains its ability to exercise its full prosecutorial discretion.(17)

      The DOJ, which worked closely with the EPA in developing the policy,(18) fully endorsed the Policy as containing "the right mix of strong enforcement for wrongdoers and leniency for good actors."(19)

      This Policy will be discussed in greater detail in Part IV.

3. OVERVIEW OF AUDIT PRIVILEGE AND VOLUNTARY DISCLOSURE RULE

   Currently, fourteen states have enacted environmental audit privilege laws(20) and eight have enacted voluntary disclosure rules.(21) The various provisions of these laws illustrate the type of provisions that should be incorporated into federal legislation and enacted. These provisions also are effective at illustrating the dichotomy between a law that provides an audit privilege and penalty immunity, and an agency statement, such as the Final Policy Statement recently announced by EPA(22) and endorsed by DoJ,(23) that provides discretionary guidelines on auditing and prosecution policy.

   1. The Environmental Audit Privilege

      The state laws typically define an environmental audit as a self-initiated study or assessment to determine compliance with environmental laws and regulations. The Final Policy Statement refers to an audit more narrowly as "a systematic, documented, periodic and objective review by regulated entities of facility operations and practices related to meeting environmental requirements."(24) An environmental audit report refers to the information relating to an environmental audit, and states generally require that this report be explicitly labeled "environmental audit report." The Final Policy Statement and the state laws both permit an audit to be conducted by employees of the entity who are assigned this responsibility or by outside consultants who are hired expressly and specifically for this purpose.(25)

      Under the state laws, a self-initiated environmental audit report receives an evidentiary privilege for administrative, civil, and criminal proceedings. This privilege extends to the factual information underlying the report's conclusions. In addition, individuals involved with the preparation of the report are protected from testifying with regard to the report.(26)

      In contrast, the Final Policy Statement adopts a more limited approach to audit reports. The Policy Statement explains that a voluntary environmental audit report will not be routinely requested to trigger a civil or criminal investigation. If the Agency has reason to believe, however, that a violation has been committed, an investigation may be conducted to obtain any information relevant to identifying the violation. In addition, the Final Policy Statement's definition of environmental audit report explicitly excludes the factual information underlying the report and testimonial evidence relating to it.(27)

      Although the states provide significantly more protection to environmental audit reports than the Final Policy Statement, it is important to recognize the exceptions to the states' evidentiary privilege and the areas outside its scope.

      The first exception to the evidentiary privilege is waiver. Waiver can occur either expressly or by implication. For example, disclosure to a...