An essay on environmental audit privileges: the right problem, the wrong solution.

• Author: Johnston, Craig N.

Industrial representatives long have argued that the Environmental Protection Agency (EPA) should do more to encourage regulated entities to evaluate their own compliance status and correct their own violations. While both EPA and the Department of Justice (DOJ) have policies in place that purport to encourage these practices, regulated entities have argued that some elements of these policies, particularly when taken together with other aspects of EPA's existing rules, actually tend to discourage efforts to develop comprehensive compliance-assurance programs. When EPA declined to take further steps, regulated entities turned to the legislative process hoping to find a more receptive ear.

And that is exactly what they found. In 1993, the Oregon legislature led the charge by enacting Senate Bill 912, a provision of which creates an evidentiary privilege for documents associated with environmental audits.(1) In 1994, Colorado,(2) Indiana,(3) and Kentucky(4) followed suit. This year, Illinois,(5) Arkansas,(6) and Wyoming(7) added their voices to the chorus. Additionally, in Virginia(8) and Utah(9) bills await the Governors' signatures.(10) The Colorado, Wyoming, and Virginia bills go beyond the typical idea of a privilege by providing regulated entities who promptly address discovered violations with immunity from state enforcement of the relevant violations under many circumstances.

At the federal level, Representative Hefley (R-Colo.) recently introduced an audit privilege bill in the House.(11) Perhaps not surprisingly, the Hefley bill also contains an immunity provision similar to that contained in the Colorado bill. On the Senate side, Senators Hatfield (R-Ore.) and Brown (R-Colo.) have also introduced similar legislation.(12)

EPA, having been caught off guard by the recent flurry of legislative activity, is rethinking its posture relating to environmental audits, and has proposed an interim policy on initiatives in this area.(13) It is the thesis of this Essay that privilege and immunity provisions such as those contained in the above-mentioned state and proposed federal bills are the wrong solution to the right problem. I hope that this Essay will play some role in convincing EPA to oppose federal environmental audit privilege/immunity legislation, to resist further efforts by states to develop privilege/immunity legislation in this area, and to urge those states that already have adopted legislation to reconsider their approaches.

At the same time, this Essay urges EPA to develop an alternative framework to provide the regulated community with greater incentives to implement comprehensive compliance-assurance programs (which, as discussed below, should include, but not be limited to, environmental audits). In order to encourage these programs, EPA should develop a framework that includes a firm commitment not to impose civil penalties in response to self-disclosed violations except in limited circumstances, and to reduce the severity of its enforcement response even where some enforcement is appropriate. Additionally, EPA should agree to take steps, upon request from participating regulated entities, to reduce those entities' exposure to citizen suits in appropriate circumstances.

Everyone agrees that compliance-assurance programs are a good thing. EPA and DOJ have recognized as much in their current auditing policies. Surveys indicate that large corporations apparently agree. One recent survey conducted by Investor Responsibility Research Center found that 85% of the 249 companies surveyed had established voluntary audit programs; the programs' average age was eight years.(14) A 1992 Arthur Andersen survey of 257 companies, which included 38 companies with revenues of less than $100 million, found that 59.2% had conducted compliance audits between 1989 and 1991.(15)

These surveys should not be taken as an indication that the incentives currently in place (the EPA and DOJ auditing policies, as well as the draft Corporate Sentencing Guidelines) strike the appropriate balance between the need to promote industry compliance-assurance activities and the need to reserve adequate enforcement discretion for responding to serious violations. Many small and mid-sized companies currently do not have any auditing programs in place. Further, there may be good reason to question the comprehensiveness and aggressiveness of many of the programs currently in existence. Any candid private sector lawyer would acknowledge as much.

The major problem with the existing policies is that they largely ignore two important issues. First, regulated entities (particularly permit holders) frequently are required to report any identified violations to EPA as a matter of law.(16) And, second, even where reporting is not legally mandatory, the current policies frequently demand voluntary" disclosure as a precondition to any favored treatment in the enforcement process.(17) In neither case is there assurance that even relatively minor violations will be subject to reduced enforcement responses. As a result, there is a realistic threat that companies performing audits will wind up facing enforcement actions for violations that EPA otherwise may never have discovered.(18)

EPA should do whatever it can to increase both the quantity and quality of industry's compliance-assurance activities, so long as in the process it does not seriously undermine either the need for deterrence or the public's right to important information regarding environmental matters. The privilege approach, however, is seriously flawed. In addition to increasing the cost of enforcement, as a practical matter a federal audit privilege would shield many "bad actors" from criminal enforcement. It would also shield some not-so-bad actors from civil enforcement in cases where an enforcement response clearly is justified. Additionally, a federal environmental audit privilege would impose a veil of secrecy over environmental compliance issues that would be inconsistent with both the government's and the public's rights to be informed. These points are elaborated below.

Immunity approaches pose even more serious issues. In this context, the shields referred to above would be absolute, not just a matter of practical difficulties. Criminal behavior would go unpunished and other serious violators would escape enforcement regardless of either the threats posed by their violations or the economic benefits they garnered through their noncompliance. Moreover, under the Colorado, Wyoming, and Virginia immunity provisions, all this would be achieved without any quid pro quo beyond the violators' having performed one audit, notified the regulators, and returned to compliance. None of these bills provide a mechanism for ensuring that regulated entities continue to implement reasonable compliance-assurance programs on an ongoing basis.

Fortunately, there is a better way. Both EPA and states can provide regulated entities with powerful incentives to implement compliance-assurance programs short of passing privilege/immunity provisions. Through changes in their enforcement response and penalty policies, EPA and the states can develop frameworks that provide for immunity-type protection in most circumstances, while still reserving the right to take action in circumstances where public policy compels some enforcement response. Significantly, this can be done in the open, with full disclosure rather than secrecy. Additionally, unlike the privilege or immunity approaches, the administrative approach could ensure that regulated entities maintain an ongoing commitment to their compliance-assurance programs.

1. WHY ENFORCEMENT IS IMPORTANT: THREE ENFORCEMENT IMPERATIVES EPA SHOULD NOT JEOPARDIZE IN THE NAME OF PROMOTING COMPLIANCE-ASSURANCE PROGRAMS

   I start with the self-evident proposition that enforcement is important. Everyone will agree that enforcement is necessary to deter truly egregious behavior--that is, behavior that either intentionally violates the law or reflects gross negligence regarding legal requirements. This, of course, is the focus of EPA's criminal enforcement program.

   But enforcement programs have significance that goes well beyond flagrant violators. Only a very small percentage of environmental violations result from either wanton disregard for the law or...