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Published in Land Use & Environmental Law Update (Winter 1997)

Recently passed state legislation provides a limited protection for businesses and others seeking to engage environmental professionals to determine the extent of compliance with existing environmental laws. Without this legislation a business could conduct an environmental audit in a good faith effort to determine compliance with environmental laws, only to find that the government used the results of the audit to prosecute the business for violations it uncovered.

As environmental laws have become more complex, businesses have faced a recurring dilemma. In order to determine their compliance with environmental laws, it is necessary to engage an environmental engineer or other specialists to conduct an audit of their business operations. However, if the audit finds noncompliance, the government could use the business’ own audit as primary evidence to prosecute them for a violation of environmental laws. Many involved in environmental compliance have felt that this unfortunate possibility has deterred businesses from undertaking environmental audits, with the result that harmful environmental conditions can go undetected and therefore uncorrected. Recognizing this, approximately 11 states have passed different forms of an environmental audit privilege which protects businesses and others from having their own environmental audit used against them as evidence in a criminal prosecution. When Governor Almond signed “An Act Relating to State Affairs and Government – Environmental Compliance Act” R.I. Gen. Laws � 42-17.8-1 et seq. (1997) (the “Compliance Act”) into law on January 7th, Rhode Island became the latest state to adopt a limited environmental audit privilege.

The Compliance Act is based on the finding that voluntary environmental compliance audits are an important element of environmental protection and that a limited privilege fosters such environmental audits.

An environmental audit is a review by trained environmental professionals which may be hydrologists, geologists, wetlands biologists, engineers, chemists, or other scientists, designed to determine whether a business, facility, or property is in compliance with applicable federal, state and local environmental laws, rules and regulations. The Compliance Act defines an environmental audit as a “systematic, documented and objective review of a regulated entity’s facility operations and occupational practices which affect the regulated entity’s compliance with environmental laws.” Id. � 42-17.8-2(e). A regulated entity need not be a private business or individual, but may include a federal, state or municipal agency or facility subject to regulation under environmental laws. Id. � 42-17.8-2(j).

Compliance Incentives. The legislation, effective July 1, 1997, sets up numerous conditions which must be met if the environmental audit is to be protected from use as a basis for criminal prosecution, or certain civil penalties which may be assessed by the Department of Environmental Management.

When an entity meets the conditions for protection of the environmental audit set forth in the Compliance Act, the Department of Environmental Management (“DEM”) may not assess a “gravity based penalty” for any violation of environmental laws, may not refer the entity to the Attorney General or other governmental authority for civil or criminal prosecution based on the violations noted in the environmental audit, and may not request or use a regulated entity’s environmental audit as a regular means of investigation or a basis for initiating administrative, civil or criminal actions. Id. � 42-17.8-3.

Thus, the environmental audit may not be used as evidence to assess certain penalties, refer certain violations for criminal prosecution, or provide evidence of investigation for administrative, civil or criminal actions. Id. � 42-17.8-3(3).

The protection from being assessed “gravity based penalties” means that the entity may be assessed a penalty to recover any economic benefit derived from the violation of the environmental law, but may not be assessed a penalty based upon the seriousness or gravity of the violation itself.

Exceptions. However, there are numerous conditions which must be met in order to invoke the privilege, and for this reason it is very much a limited privilege. Id. � 42-17.8-4.

For example, no regulated entity may invoke the privilege if the conduct or violations at issue demonstrate a willful or intentional disregard for complying with environmental laws, a management pattern or practice of condoning or concealing violations of environmental laws, or gross negligence. Id. � 42-17.8-4(3). In other words, if you are a “bad actor,” you cannot invoke the protections of the Compliance Act.

Similarly, if a regulated entity has violated or failed to timely comply with the terms of any judicial or administrative order or consent agreement, the protections of the Compliance Act are not available. Id.  42-17.8-4(2). If the violation described in the environmental audit resulted in “serious, actual harm or created an imminent and substantial endangerment to human health, public safety or the environment,” the protections of the Compliance Act are not available nor are they available if the violations in question are repeat violations that have occurred within the past three years at the same facility, or part of a pattern of federal, state or local violations by the regulated entity. Id.  42-17.8-4(4)-(5).

Protection under the Compliance Act is also denied if a regulated entity does not cooperate fully with DEM in its investigation, including providing DEM with all relevant documents, access to the regulated entity’s facilities and assistance in investigating the violation and any environmental consequences resulting from the violation. Id.  42-17.8-4(6).

Audit Conditions. In addition to meeting these conditions for qualification under the Compliance Act, the environmental audit itself must meet certain conditions. Id.  42-17.8-5. First, the regulated entity conducting the environmental audit must give DEM three business days prior advance notice of the anticipated start of the audit and, to the extent violations at issue are discovered during due diligence review, the regulated entity must provide DEM accurate and complete documentation regarding how it exercises due diligence to prevent, detect and correct violations. Id. � 42-17.8-5(1). These due diligence activities must also meet statutory criteria. For example, the due diligence activities must be “regular, customary and systematic efforts to prevent, detect and correct violations” and must involve the development and implementation of compliance policies, standards and practices, the assignment of oversight responsibilities to monitor compliance with environmental laws and the creation of “systematic, objective mechanisms” for assuring the execution of due diligence policies including monitoring and auditing such policies. Id. � 42-17.8-2(d). Importantly, there must also be a means for employees or agents to report violations of environmental requirements without fear of retaliation. Accordingly, a necessary part of all due diligence programs is a policy which allows employees to be “whistle blowers” without suffering any adverse consequences. Id. � 42-17.8-2(3).

Furthermore, if a regulated entity is under an obligation, whether through a consent agreement, administrative order, or permit condition to monitor, test or sample environmental conditions, and the violations discovered are found during this normal process, these violations are not subject to the protection of the Compliance Act. Id. � 42-17.8-5.

Disclosure of Noncompliance. Importantly, in order to qualify for the protections under the Compliance Act, any violations discovered must be fully disclosed, in writing, within fifteen days, which disclosure shall identify each violation discovered, the manner of discovery of the violations (i.e., audit or due diligence), all supporting information pertaining to the violation, and all actions which it have or will be taken to bring the regulated entity into compliance, to mitigate any harm and to remediate any result in damage. Id. � 42-17.8-6(1)(a)-(d).

Protection under the Compliance Act also is not available if the violations are disclosed after certain enforcement actions have been commenced. Id. � 42-17.8-6(2). For example, the violations must be disclosed prior to commencement of a governmental inspection or investigation or an information production request, prior to notice of civil suit, or prior to filing of a civil or criminal complaint or administrative action by a governmental entity or third party, or prior to reporting of the violations to DEM or another governmental entity by a third party.

Compliance, Remediation and Mitigation. Those seeking protection under the Compliance Act must also take prompt action to correct the violation, generally within sixty days from the date the violation was reported to DEM, or if such violation cannot be cured in such period, pursuant to a remediation plan provided to DEM. Id. � 42-17.8-7(a). The regulated entity must also agree in writing to prevent recurrence of the violation. Id. � 42-17.8-7(b).

DEM has the discretion under the Compliance Act to forgive the entire penalty for violations which meet the conditions of the Compliance Act and do not merit any penalty in DEM’s judgment because of the insignificant amount of any economic benefit. Id. � 42-17.8-7(d).

Scope of Protection. By its terms, the Compliance Act covers violations of all federal and state environmental statutes which DEM administers. These include, without limitation, the Clean Air Act, the Clean Water Act, and various hazardous waste statutes.

It is evident that the protections under the Compliance Act are indeed limited, and are carefully designed to ensure that only those individuals who have discovered violations as part of a good faith effort to comply with environmental laws, and who actually do comply with such environmental laws, will not be subject to further criminal, civil or administrative prosecution based upon the environmental audit document which they commission.

Despite this limited protection, the Compliance Act generated a good deal of controversy. Some legislators were concerned that the legislation actually protected polluters, including those whose conduct may be harmful to the public but the health risks of which may not be readily apparent at the time the protection is sought and granted. Supporters argued that the Compliance Act was narrowly drawn to protect only those who had demonstrated good faith attempts to comply with environmental laws.

However, federal enforcement officials opposed the Compliance Act, perhaps in large part because there is no comparable federal protection administered by the Environmental Protection Agency (the “EPA”). The EPA has long opposed a similar environmental audit protection at the federal level, while urging companies to undertake voluntary compliance audits. Many companies have feared that this is a “Catch-22,” where their own environmental audit is the primary evidence in a criminal prosecution against them.

One may expect that the operation of this state legislation will be watched carefully not only by state officials but also by federal officials in Rhode Island responsible for enforcement of federal laws for evidence that unrepentant polluters might receive as protection. However, given how narrowly the statute is drawn, this appears unlikely.