March/April 1995
It’s true. If your company violates an environmental statute, you could be find and go to jail for it. Here’s a look at the growing trend toward criminal enforcement and the potential for it to affect recyclers.
By Robin K. Wiener
Robin K. Wiener is Director of Environmental Compliance/Assistant counsel for the Institute of Scrap Recycling Industries (Washington, D.C.).
The president of XYZ Scrap Corp. knew there was a way to clean up the 50 gallons of hydraulic fluid spilled at his company’s facility last year, but once it seeped into the soil and adjoining stream, he figured, why bother?
After all, he recalled, the firm had long been puncturing the refrigeration units in the appliances it handled instead of turning the job over to the refrigerant itself, and nothing had ever come of that cost-saving measure. And no one in the environmental community had ever caught on the shredder fluff disposal deal he made with the operator of that hidden dump, even though he had bragged to his friends about how he was saving an arm and a leg compared with the community landfill’s tipping fees.
Then one day soon after the hydraulic fluid spill, the state department of environmental protection showed up and before he knew it, he was facing a $250,000 fine and three years in prison.
This is fiction, of course, and exaggerated at that, but the fact is that scrap recyclers could be subject to criminal penalties—including incarceration—for violating environmental laws under certain circumstances.
While this may have been extremely unlikely in the not-so-distant past, federal and state officials are increasingly using the criminal penalty provisions of environmental statutes against violators. In fact, criminal enforcement of federal environmental laws reached an all-time high in 1994 in terms of the number of cases initiated by the U.S. Environmental Protection Agency (EPA), the Department of Justice (DOJ), and other enforcement authorities; the collection of fines; and the imposition of prison sentences.
A closer look at this trend can be found in the EPA’s most-recent enforcement statistics report, which shows that more than 500 criminal cases were initiated in 1994 alone—about a fivefold increase since 1980, when only 112 criminal cases were initiated. The report further notes that defendants tried in 1994 were sentenced to a total of 99 years of imprisonment and fined a whopping 36.8 million for their environmental violations. And while these totals are big, they don’t even include criminal enforcement on the state level, where 70 percent or so of all enforcement actions are taken under the federal air, water, and hazardous waste programs, according to the EPA, and where criminal penalties are on the rise.
There are a couple of possible reasons for this increase in criminal prosecution. For one thing, many government officials believe that the threat of incarceration, conditional prohibition, and potential public relations problems leads to greater environmental compliance on the part of industry than does the threat of civil penalties. In addition, there is public pressure on government agencies and prosecutors to seek criminal, rather than civil, penalties. Indeed, 84 percent of the general public believe that environmental violations are serious crimes and 75 percent say that corporate executives should be held liable for the violation of these crimes, according to a recent survey conducted by Opinion Research Corp. (Princeton, N.J.) for Arthur D. Little Inc. (Cambridge, Mass).
While no one can say for certain whether the upsurge in criminal enforcement of environmental violations will continue, the future seems likely to bring more of such actions. One indication: The EPA has announced that it plans to target its environmental enforcement activities to risks presenting cross-media environmental problems—for example, problems involving both air and water regulations—in order to encourage multimedia compliance with the environmental laws. In addition, the agency is expected to strengthen existing agreements with the Internal Revenue Service, the Securities Exchange Commission, and the Occupational Safety and Health Administration to enhance operation during compliance investigations. The agency also plans to rely heavily on the enforcement efforts of regional and state offices.
Penalty Possibilities
Most environmental statutes contain provisions for criminal prosecution, including the Reserve Conservation and Recovery Act; the Clean Water Act; the Clean Air Act; the Comprehensive Environmental Response, Compensation, and Liability Act; the Toxic Substances Control Act; and the Emergency Planning and Community Right-to-Know Act. And in recent years some of these laws have been modified to increase the criminal classification for violations from misdemeanors to felonies, thereby increasing the maximum levels of incarceration and fines for convicted offenders.
So, what kinds of penalties are violations of these statutes subject to? That all depends upon a number of case-specific factors, including whether the defendant is an organization (for example, a corporation) or an individual, the degree of harm resulting from the violation, the defendant’s past compliance history, and the statute violated. In general, however, the criminal provisions of federal environmental laws provide for penalties of up to $50,000 per day of violation and imprisonment of up to 15 years.
There are additional penalties possible as well. Defendants convicted of violating water or air standards, for instance, may be added to the EPA’s list of violating facilities, which bars them from receiving federally funded loans, grants, or contracts. The agency also can use creative penalties such a requiring violators to run newspaper advertisements warning other companies not to commit environmental crimes, donate money to public education programs on the environment, perform community service, and have their corporate chief executive officer enter a plea personally.
State environmental statutes, meanwhile, are generally modeled on their federal counterparts, though many states are following a trend of constructing programs that are broader in scope and more stringent than the federal programs. This is especially true in the hazardous waste area, where states often impose longer terms of imprisonment and greater fines than are imposed through the federal system.
Criminal or Civil?
Of course, just because a company violated an environmental statute doesn’t mean criminal enforcement is imminent. Indeed, the EPA is much more likely to pursue violations through civil enforcement actions than criminal. Still, there are several reasons why, in any specific case, the government might pursue a violation of an environmental statute as a criminal matter instead of as a civil one. Such considerations include:
- the likelihood of the government achieving a conviction,
- the potential deterrent effect of criminal prosecution on other illegal activities,
- whether any efforts were made to conceal criminal activities or falsify records,
- whether the defendant acted to promptly remedy known noncompliance,
- the defendant’s compliance history,
- whether the defendant received any economic benefit from the illegal activity,
- the duration and impact of the potential harm caused by the violation,
- whether there was any interference with the EPA’s regulator functions, and
- whether the defendant’s actions were intentional, willful, or knowing.
- this last factor deserves more explanation: Because most federal and state environmental statutes provide for the imposition of criminal liability when a person “knowingly” acts in manner inconsistent with the requirements set out in the applicable statute, “knowledge” of activities that led to an alleged violation is one of the most important issues that arises in any criminal enforcement action; the defendant’s “Motive” or “intent” is generally irrelevant for the purposes of criminal liability (though it may affect sentencing if criminal liability is found).
The problem is that the extent of what a person must “know” in order to be held criminally liable is usually unclear as a result of conflicting case law and ambiguous statutory language. Although the courts are in virtual agreement that ignorance of the law is no excuse for an environmental violation, they tend to disagree as to whether actual knowledge or direct involvement must be proven and whether knowledge can be imputed from the actions of others. Thus, it’s possible for knowledge to be demonstrated through circumstantial evidence.
Auditing the Knowledge Factor
The knowledge requirement can have some unintended effects. For example, a recent study found that owners and operators were twice as likely to serve time in jail for environmental offenses than their counterparts in larger companies. According to an unnamed EPA official quoted in an article in the American Bar Association Journal, “Big company executives are avoiding jail terms because the agency has too few investigators to follow the longer more complicated trail to the chief executive officer’s door. In a small company… it is much more likely that an executive will have ‘his hands on a drum dumped off a truck’”
Another possible effect of the knowledge requirement is that it could inhibit some companies from performing environmental audits of their facilities, a valuable tool for helping a company assess its compliance with environmental laws and determine how its environmental management system should be modified to ensure better compliance in the future.
At issue is the fact than an environmental audit, to be effective, should include a written record or problems uncovered and corrective actions taken, and such records, if found, would create a “paper trail” that could be used by government investigators and prosecutors as proof of a corporation’s or an employee’s knowledge of any environmental violations. Even if such violations were immediately corrected, the mere knowledge of the offense as demonstrated by the audit report is generally enough for prosecution. Thus, those firms that take steps on their own to improve their environmental compliance essentially could be punished for their actions.
Fear of criminal liability can affect not only the initial decision to audit, but also the level and extent to which information uncovered during an audit is shared with a company’s executives and other personnel. And a decision not to fully share information, or to provide distorted information, may be just as problematic as a decision not to audit. To be effective, an audit must be based on accurate information to ensure that all potential environmental concerns are identified and addressed.
Fortunately, a variety of legislative, regulatory, and judicial steps are beginning to be taken to reverse this deterrent to auditing. For instance, while auditing reports do not generally fall under the attorney-client privileges—which is a common way to protect internal legal documents from outside scrutiny—two recent federal district court rulings have provided environmental audits limited protection from disclosure. This does not mean that privilege now exists, but it does offer hope that the courts may start to recognize one.
A handful of states have even enacted voluntary disclosure policies designed to reduce the disincentive to auditing. A Minnesota law, for example, offers a defense from criminal liability to those who discover violations of state air or water quality laws, provided that as soon as the violation is discovered the state pollution control agency is notified of the violation and steps are taken to promptly remedy the violation. (The defense does not apply, however, to intentional violations.) In addition, the Oregon legislature recently passed a law creating a qualified “environmental audit privilege” that establishes environmental audit reports shall not be admissible as evidence in any civil, criminal, or administrative proceeding except in certain specified circumstances.
Similar laws also exist in Colorado, Indiana, and Kentucky, with Colorado ’s law providing immunity against penalties—with certain exceptions—to those firms that perform an audit, voluntarily disclose instances of noncompliance to the state regulatory agency, and correct the noncompliance within two years.
Comparable legislation may be on the way on the federal level too, as there are rumors that Sens. Mark Hatfield (R-Ore.) and Hank Brown (R-Colo.) are set to introduce a bill designed to encourage voluntary environmental audits by offering confidentiality protection. (Hatfield introduced the Environmental Audit Protection Act last year, but it did not pass before the session ended.)
Federal agencies—namely the EPA and DOJ—are also examining how their enforcement policies affect corporate decisions to perform environmental audits and whether audit reports should be privileged business information protected from disclosure. Furthermore, the DOJ has issued a guidance memorandum for prosecutors’ use in determining whether to bring a criminal prosecution for a violation of an environmental statute which specifies, among other things, that the existence and scope of any regular preventative measures and compliance programs such as environmental compliance audits should be considered in exercising prosecutorial discretion.
Who’s at Risk?
Another aspect of environmental crime to keep in mind is that, although criminal liability applies only to “persons,” under most environmental statutes, the definition of a “person” can include corporations and any other legal business entities as well as individuals. Thus, a company may be held criminally liable for the violations of its employees. And, indeed, approximately 30 percent of all indictments for federal environmental crimes are against corporations.
Furthermore, many in the environmental community—as well as some environmental managers and possibly even some prosecutors—believe that corporate officers may be held criminally liable as individuals merely because of their position within the corporation. Under this interpretation of the so-called responsible corporate officer doctrine, a corporate officer may be liable when he or she is vested with the authority and responsibility to devise and control measures necessary to comply with a particular statute—actual knowledge is not required. This concept has apparently found its way to the DOJ. In an interview published in the Wall Street Journal several years ago, Judson Starr, a previous head of the DOJ’s Environmental Crimes Unit, stated that “it was his policy while in the government to prosecute the highest-ranking corporate officer with any responsibility for overseeing environmental responsibility.”
In fact, however, the responsible corporate office doctrine does not impose strict liability on corporate officers. Several recent cases indicate that although knowledge could be inferred from circumstantial evidence, a mere showing of official responsibility is not an adequate substitute for direct or circumstantial proof of knowledge.
Still, according to a recent study of environmental enforcement, the majority of individuals indicted for environmental crimes are either owners or presidents (who make up 35 percent of those individuals) or corporate officers, vice presidents, or directors (who account for another 17 percent of the pool). Management and supervisory personnel constitute another 29 percent according to the study, with the remaining 19 percent nonsupervisory personnel.
This enforcement breakdown could be even more top-heavy for Clean Air Act violations because of language Congress included in the 1990 amendments to the law that effectively limits prosecution of individuals to those in senior management. Under this legislation, for the purposes of criminal prosecution, the term “person” is defined to exclude any employee “who is carrying out his normal activities and who is acting under orders from the employer,” unless this person engages in a knowing and willful violation of the statute. In addition, the term “operator” is written to include “any person who is senior management personnel or corporate officer” and excludes persons who maintain and operate equipment, unless such persons engage in a knowing and willful violation.
If the Investigators Show Up…
While the potential for criminal prosecution for environmental violations may seem overwhelming, scrap recyclers can take steps to help ensure it doesn’t happen to them. The most obvious and important, of course, is to maintain compliance with all applicable federal, state, and local statutes.
Even the most diligent companies, however, could still be subject to environmental investigation. So if the EPA or other authority comes calling, keep in mind that before the agency can enter a facility it must have either the facility’s consent to enter or it must possess a warrant. Thus, if an inspector arrives at your facility unannounced requesting entrance, you have the right to refuse entry if the inspector does not have a warrant. Denying entry, however, may hurt your relationship with the inspecting agency, which might then inspect the facility with increased scrutiny when it returns with a warrant. On the other hand, by requiring a warrant, you gain extra time to prepare for the inspection. In addition, requiring a warrant for admission to the facility preserves your right to later object to the scope of the search under the Fourth Amendment of the Constitution, which protects persons against unreasonable searches and seizures. Note, however, that the Fourth Amendment claims have met with little success in the area of environmental protection.
Here are some guidelines to follow in the event of a search:
Accompany the Search. Follow the investigators on their search of the facility, recording where the investigators go and what they search. If possible, have your company’s attorneys—consider both environmental and criminal counsel—present.
Split Samples. If samples of water, soil, wastes, or other substances are taken, request a split sample of equal volume and weight, along with a description of the tests to be conducted and the eventual results of the tests.
Inventory. Request an inventory of all materials seized during the search as well as copies of all photos and videos taken. The government should also provide a receipt for any property removed; review it for accuracy.
Check the Warrant. A warrant must specify the place to be searched and the items to be seized in sufficient detail to prevent an arbitrary search. Do not volunteer any information beyond what is specified on the warrant. Limit the investigator’s search to those areas specified on the warrant and retain a copy of the warrant.
Limit Interviews With Employees. As a matter of policy, designate one employee as the contact person to whom all inquiries from the government inspectors are to be referred and ask the investigators to work with that person during their search. Limit the investigators’ contact with other employees.
Debrief. At the end of the search, request a debriefing from the investigators.
Investigate yourself. Immediately following the search, consider an internal investigation initiated in coordination with your attorneys in order to develop a response strategy to the government’s investigation. This step should include a complete factual and legal investigation to determine the nature and strength of the government’s case.
The chances may be slim, but the possibility of criminal liability is there, so be prepared.
It’s true. If your company violates an environmental statute, you could be find and go to jail for it. Here’s a look at the growing trend toward criminal enforcement and the potential for it to affect recyclers.