Think You Don't Need to Worry About the EPA? Think Again

You may not own a giant smokestack or conduct fracking to recover natural gas, but your company still needs to worry about the Environmental Protection Agency and it ever-broadening purview.

While the energy, mining, and agricultural sectors have an obvious and heightened risk of EPA enforcement, others could face either routine or unexpected environmental scrutiny from the agency. That poses a problem for companies more focused on, and familiar with, the compliance demands of the Department of Justice, Securities and Exchange Commission, and other financial regulators.

“Most companies do their best to comply with environmental regulations, but because of the number and nature of programs out there some are really blindsided,” says Justin Savage, a partner at the law firm Hogan Lovells and a former enforcement official at the Justice Department's Environment and Natural Resources Division. “It is common for companies to inadvertently fall into a regulatory investigation or compliance issue because they were simply not aware.”

Retailers, for example, can run afoul of the Resource Conservation Recovery Act—one of the EPA's many guiding statutes—because of chemicals in the broken or unsold products they discard. A manufacturer buying engines from China could discover they violated the Clean Air Act, in particular the requirement that importers obtain certificates of conformity from the EPA to certify those engines meet U.S. emissions standards. Large manufacturers that require permits for wastewater disposal and air emissions can be scrutinized for recordkeeping lapses.

Any company that imports goods or materials, including retailers, likely falls under the Toxic Controlled Substances Act. “You could be importing pencils from Brussels and be liable,” says Robert Hogfoss, a partner at the law firm Hunton & Williams who specializes in environmental law.

Recent EPA actions against retailers include:

Walmart pleaded guilty in May 2013 for  violating the Clean Water Act by illegally handling and disposing of hazardous materials at its retail stores and, separately, failing to properly handle pesticides that had been returned by customers.

In August 2013, Fry's Electronics was fined $50,000 by the EPA for importing and selling an unregistered gaming equipment wipe that falsely claimed to be anti-bacterial and anti-pathogenic. Products that claim to kill or repel bacteria or germs are considered pesticides, and must be registered with EPA before their sale or distribution.

Also in August 2013, discount retailer Family Dollar paid a $600,000 to resolve charges from mislabeled bleach products.

Banks, too, can face unexpected enforcement actions from the EPA, says Hogfoss, mostly through their real estate dealings. If a bank forecloses on a property, or even holds a mortgage on one, and the owner walks away and leaves it contaminated, the lender could be held responsible. “Banks have to be very careful in how they structure their holdings,” Hogfoss says.

When the EPA Knocks …

For companies facing an unexpected visit from the EPA, the strategy shouldn't be much different than dealings with the SEC or Justice Department, Hogfoss says. Cooperation, transparency, and self-reporting are valued; compliance programs rewarded.  “They will be reasonable with you, if you are reasonable with them,” he says. “The important thing is to ask them to sit down with you, explain why they are there, and ask how you can help. You should start a dialogue and try to defuse things.”

Companies may be able to secure lower penalties and fines with cooperation and self-reporting. “You are always better off coming in early and advising us of a problem as opposed to waiting for us to come and get you,” says Doug Parker, director of the EPA's Criminal Investigation Division. Almost all EPA statutes require the agency to consider the level of cooperation in civil and criminal actions.

Expect any admission to be scrutinized, however. “We have to do some digging on those,” Parker says. “If an entity comes to us with self-reporting that's great, we are just not going to take it at face value. Was it only because a whistleblower came forward? We will do our own due diligence in terms of assessing the value of that information.” In criminal cases, this information will be presented to the Justice Department, who then will make the call on how much cooperation credit is warranted.

“It is common for companies to inadvertently fall into a regulatory investigation or compliance issue because they were simply not aware.”

—Justin Savage,

Partner,

Hogan Lovells

The EPA's baseline fine is $37,500 per violation, Savage explains. “If you are a facility with multiple violations that can really add up over a year. Under the self-disclosure policy, those penalties can be significantly reduced or eliminated." In recent years, however, critics say requirements to satisfy that policy “are too onerous and do not create the proper incentive for self-policing” and there is a move afoot within the agency to cease the program, he says.

Others warn that the EPA isn't always so kind when companies admit their own infractions. “Increasingly, self-disclosure still results in fines that in previous years might not have been assessed,” says Karl Karg, a partner at law for Latham & Watkins and former associate regional counsel for the EPA. “The drive to collect more enforcement and penalty dollars has led them to be less generous with their self-disclosure policies.”

Changing Behaviors

Another wrinkle in the EPA's enforcement approach could mean added liability for individual executives. The SEC has garnered a lot of attention recently for a push by Chairman Mary Jo White to more aggressively go after individuals when fraud is committed, not just companies. The EPA has long taken this approach.

“Our focus is on the individual,” Parker says. “To change behavior, we really have to hold individuals accountable. They are the ones who make the decisions. Almost 80 percent of those charged are individuals, not corporations.”

NEXT-GENERATION COMPLIANCE

Below is a summary of the EPA's focus on next-generation compliance.

Big changes may be afoot for how the Environmental Protection Agency prioritizes enforcement activity in the years ahead. In response to budget and staffing issues, the agency plans to put added focus on the most serious cases, scaling back its activity in less egregious matters.

Among the projections is conducting 70,000 federal inspections annually by 2018, a steep decline from the yearly average of 105,000 since 2005. Enforcement cases initiated, averaging 19,500 a year, will drop to approximately 11,600 annually.

Bridging the gap is a technology-driven approach it calls “Next Generation Compliance,” a technology driven approach that “provides an opportunity to re-assess the usefulness of our current performance measures and to consider new ones.” It was detailed in the draft of a five-year strategic plan released in November.

Next-Generation Compliance is focused on the following five areas:

1. Designing regulations and permits that are easier to implement, with a goal of improved compliance and environmental outcomes.

2. Using and promoting advanced emissions/pollutant detection technology so that regulated entities, the government, and the public can more easily see quantified pollutant discharges, environmental conditions, and non-compliance.

3. Shifting toward electronic reporting by regulated entities so that we have more accurate, complete, and timely information on pollution sources, pollution, and compliance, saving time and money while improving effectiveness and public transparency.

4. Expanding transparency by making the information we have today more accessible, and making new information obtained from advanced emissions monitoring and electronic reporting more readily available to the public.

5. Developing and using innovative enforcement approaches (data analytics and targeting) to achieve more widespread compliance.

Source: EPA

Changing behavior also characterizes another strategy companies can rely upon, “supplemental environmental projects” they can negotiate with the EPA post-enforcement. Since 1991, the agency has allowed companies to devote a portion of their assessed penalty—more than half in some cases—to a related improvement project. “If you spilled something into the water, you could buy some advanced pollution control equipment that is not yet required by law,” Hogfoss says. “It is win-win. At the end of your case with the EPA, everyone is sitting around the table brainstorming really positive projects.”

The EPA also responds favorably to companies that have voluntarily implemented an environmental management system—compliance protocols, internal controls, and response plans to prevent, or at least minimize and respond to, environmental damage. These programs are also mandated by the EPA as part of a civil or criminal penalty, much as financial regulators often demand on-site, third-party monitors as a condition of settling an offense or striking a deferred-prosecution agreement.

“There is no question companies that have a more sophisticated, thorough, and diligent approach to managing their environmental affairs are better off in the context of a resolution with the EPA,” Karg says. “When it sees a company is diligent about environmental affairs, that they have an environmental management system and self-disclose issues, it all adds up in terms of reducing penalties.”

No ‘Paper Tiger' Compliance

The EPA also rewards effective compliance programs, with the key word being “effective,” says Brent Fewell, a partner at law firm Troutman Sanders and formerly the second highest ranking water official at the EPA. “It doesn't expect perfection; it expects a good faith effort to comply with the laws. It encourages companies to adopt environmental management systems as a critical part of the continuous improvement process they want to see from companies.”

“Like other regulators, they don't like window dressing,” Fewell adds. “They don't want companies to have an environmental compliance program that's a paper tiger.”

Companies will have less to worry about if they are serious about self-analysis, “look for problems, find them, fix them, and put in place measures to ensure that non-compliance doesn't happen in the future,” Fewell says. “Credibility matters and companies that have strong and effective compliance programs are much better off with the EPA when they get that knock on the door—and eventually nearly every company is going to draw attention.”