A memo released late last month by the US EPA’s Office of Civil Enforcement (OCE) provides insight into the steps EPA officials follow when determining the amount of a civil penalty for environmental violations.
For individuals or businesses that violate US EPA regulations, civil penalties can be costly. Noncompliance with the Resource Conservation and Recovery Act (RCRA) rules for managing hazardous waste, for example, are as high as $37,500 per day, per violation.
EPA Compliance Penalty Mitigation Of course, not all violations of EPA rules are equal. Before EPA finalizes a civil penalty, officials must consider a number of factors that could mitigate the penalty amount. These factors include:
- The individual’s degree of willfulness and/or negligence;
- History of noncompliance at the site;
- Ability to pay;
- Degree of cooperation during the enforcement process; and
- Other unique factors.
Among these, “ability to pay,” or ATP, is the subject covered in EPA’s 2015 guidance on penalty mitigation. Namely, the memo clarifies that EPA is not required to demonstrate specific evidence of a violator’s ability to pay a fine. Instead, the Agency must only “produce some evidence regarding the respondent’s financial status from which it can be inferred that the respondent’s ability to pay should not affect the penalty amount.”
Proving Your Inability to Pay If a business argues that it is unable to pay the civil penalty levied by US EPA, the business must establish that paying the fine will cause undue financial hardship and prevent the business from paying ordinary business expenses. Tax returns alone are not sufficient evidence of ability to pay, but are one item EPA officials may ask for when determining a company’s ability to pay a fine.
According to an EPA financial expert quoted in the memo, other items a business may furnish to EPA include proof of cutbacks, loan extensions obtained, or statements of back taxes owed. Other financial documents EPA may request to substantiate an ability to pay claim include:
- Financial statements prepared by an outside accounting firm;
- Budgets and year-to-date results;
- Asset ledger;
- Loan and mortgage agreements;
- Federal tax returns of related financial entities; and/or
- SEC Filing DEF 14A Proxy Statements.
The full memo has more information about how EPA enforcement personnel evaluate ATP claims.
When a Business Can’t Pay EPA If it’s determined that the business cannot pay the full penalty amount, EPA may allow for a reduced penalty. When the business can show that it has no options for raising funds to pay the fine—by using available cash, selling assets, personal or commercial borrowing, selling stock, or delaying future investments or profit distribution—a supplemental environmental project (SEP) may be an acceptable form of restitution.
To complete an SEP in lieu of paying the full civil penalty, the business must show that the SEP has a “nexus” to the underlying violation. Also, EPA’s SEP Policy states that the violator must pay a minimum penalty in addition to implementing the SEP.
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