ENVIRONMENTAL LAWS COMPLEX, BUT COMPLIANCE IS CRUCIAL

John D. Fognani
Gibson, Dunn & Crutcher
Denver

Imposition of criminal penalties for violation of environmental requirements is no longer confined to the "midnight dumper" or to the blatant practices of illegal pollution of rivers and streams.

Criminalization of the environmental regulatory process presents serious consequences to independent oil and gas producers, who use a variety of substances in drilling and production and who generate a number of waste streams.

Oil and gas activities involving the use of substances that seem innocuous may pose a hazard to human health and the environment. They can subject an unwitting corporate employee or officer to criminal prosecution.

What may seem like normal operations, long conducted in a particular way, come under increasing scrutiny, and penalties assessed for criminal acts can be severe. In this new climate, oil and gas operators and their personnel must take special care to satisfy all environmental requirements. In addition to imposing criminal liability, many environmental statutes authorize various forms of "whistle blowing" and payment of potentially lucrative "bounties" for identification of violations.

Whether right or wrong, criminal enforcement is viewed as a more effective deterrent to environmental violations than is the traditional and somewhat controversial and inconsistent imposition of civil penalties.

Governmental efforts, particularly at the federal level, increasingly focus on opportunities to impose criminal liability for actions that until relatively recently would have been subject only to civil enforcement and penalties.

The widespread feeling in the Department of Justice and elsewhere in the federal government is that civil penalties for environmental violations have become costs of doing business, at least for some companies. In this view, companies find it more convenient and less expensive simply to pay the civil penalty than to obey the law.

This article will analyze potential problems and pitfalls independent producers face in the area of environmental compliance. It also will briefly evaluate potential statutory liability associated with industry activity and suggest ways to avoid some liability problems.

ENFORCEMENT INCREASES

Stepped-up criminal environmental enforcement is forcing independent oil and gas producers to change the ways they operate.

DOJ in 1981 employed four environmental prosecutors; in 1991 it had 34. Although the majority of environmental cases never become criminal cases, the department has a 98% conviction rate in the ones that do.

Public policy and support provide the foundation for aggressive criminal environmental enforcement. Prosecutors increasingly seek opportunities to punish managers and corporate officers, not just the person in the field directly involved in the offense.

Individuals or companies with reputations for disregard of environmental regulations are most likely to be singled out by criminal prosecutors. Imposition of criminal penalties, including imprisonment, cannot be taken lightly.

Civil environmental violations might also constitute criminal violations, and civil enforcement actions often trigger criminal proceedings.

Field practices, corporate policies on reporting and notification, and corporate statements and programs designed to achieve environmental compliance must be reevaluated and possibly revamped. Practices once deemed acceptable and even progressive, such as baseline environmental audits, are no longer enough.

CRIMINAL LIABILITY

Criminal liabilities have always been part of the environmental statutes but have been largely unenforced except in egregious cases. Instead, civil penalties have been used to achieve compliance and to penalize violators.

Nevertheless, two categories of statutory offenses exist for imposition of environmental criminal liability.

Crimes covered by the conventional criminal code, involving false statements, conspiracies, and mail and wire fraud, are often charged in circumstances of environmental noncompliance and coupled with the second category of more generally understood environmental violations identified in federal programs.

This second category of crimes involves specific acts punishable under the various environmental statutes, such as:

Disposal or treatment of hazardous waste without a permit.
Discharge of pollutants to surface waters in violation of water quality requirements or permits.
Placement of dredge or fill material into surface waters, such as "wetlands."

A single act may expose a person to several levels of prosecution. The act might result in civil penalties as well as criminal penalties and subject a person to criminal prosecution under the appropriate environmental statute, along with imposition of a charge under the federal criminal code.

The Exxon Valdez settlement, for example, involved imposition of civil and criminal penalties. Although the settlement arrangement with the government called for civil penalties in excess of $1 billion, criminal fines and restitution of $250 million were also included in the settlement. DOJ credited $125 million of that amount.

Further, a single action might be prosecuted at both the state and federal levels since most states also have criminal provisions. Prosecutions under state law may be brought independently of federal prosecutions under the dual sovereignty doctrine.

LIABILITY BROADENS

It has long been established that a corporation can be held criminally liable. The definition of "person" under most federal environmental statutes is extremely broad, encompassing corporations as well as partnerships and individuals.

For example, the Resource Conservation and Recovery Act of 1976, as amended (RCRA), defines "person" as "an individual, trust, firm, joint stock company, corporation..., partnership, association, state, municipality, commission, political subdivision of a state, or any interstate body."

Moreover, it is well established that individual corporate officers can be held criminally liable for direct participation in or aiding and abetting an unlawful act, even in circumstances where no knowledge of unlawful acts can be shown.

In one case, a court affirmed a federal jury's conviction of a company president for knowingly transporting hazardous waste to an unpermitted facility even though the individual claimed he did not know the facility lacked a hazardous waste permit. Another court interpreted liability even more broadly by imparting liability to a corporate officer simply by virtue of his position.

Generally, federal statutes establish a general intent standard of criminal liability. General intent, as opposed to specific intent, crimes do not require a person to intend the result of a particular act or to intend to do harm but simply to intend the act itself.

Thus, general intent crimes only require the act or omission to be done with sufficient awareness; that is, committed knowingly. Under general intent statutes, one must be conscious of his actions, but the lack of knowledge of the illegality of conscious acts is not a defense. Thus, although most federal environmental statutes use the word "knowingly" to define the requisite standard of intent in committing environmental violations-for example, knowingly disposing of hazardous waste -the element of knowledge need only be tied to the act itself and not to the unlawfulness of the act or the resulting harm.

Under the Clean Water Act and Clean Air Act certain actions that result from a lack of due care or from negligence, where actual knowledge of the violation or commission of the act is not necessary, may form the basis of a criminal violation. The Clean Water Act makes it a crime to negligently violate the act by releasing hazardous pollutants to waters of the U. S or to violate certain permit conditions. The Clean Air Act similarly punishes as a crime negligent releases of hazardous air pollutants.

Obviously, both statutes create an extremely low standard of liability for criminal prosecution. In addition, the standard for establishing a knowing violation under the environmental statutes can be shown with relative ease. Criminal liability under the environmental statutes thus is approaching strict liability.

LOWER THRESHOLD

Although DOJ claims that it will ordinarily require actual knowledge of criminal wrongdoing before attributing individual criminal liability for violating environmental statutes, a much lower threshold seems to be evidenced in recent court cases.

In one recent case the court concluded that knowledge (necessary for establishing a hazardous waste violation) may be inferred by the jury as to those individuals who hold the requisite responsible positions with the corporate defendant.

Even further, with regard to knowledge of whether a particular substance or material is "hazardous," it may be sufficient to demonstrate that a person knew that the chemical wastes or materials being handled had the potential to be harmful to others or that the chemical or material was not, as the court ruled, "as innocuous as water."

Thus, generally, the federal government need not prove that defendants knew that certain actions constituted environmental violations or that particular materials were problematic.

PENALTIES BURDENSOME

Once criminal liability is established, imposition of criminal penalties can be burdensome. For instance, knowingly transporting, treating, or disposing of a hazardous waste without authorization can result in penalties ranging from a fine of up to $50,000/day of violation or imprisonment of 2-5 years.

Even further, the crime of "knowing endangerment" under the federal waste statute-that is, where a person knows at the time of a violation that he is placing another person in imminent danger of death or serious injury-may result in a fine of up to $250,000 or imprisonment of up to 15 years. An organization involved in such a violation can be subjected to a fine of up to $1 million.

Under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (Cercla), as amended, failing to immediately notify the National Response Center of a release of a hazardous substance in excess of a reportable quantity or knowingly reporting false or misleading information can result in a penalty of up to 3 years imprisonment for the first conviction or 5 years for any subsequent conviction or a maximum fine of $250,000.

If a corporation is involved in violating this provision, a fine of $500,000 may be imposed. However, by statute, any Cercla notification made to the National Response Center cannot be used against the reporting person in a criminal context, except in a prosecution for making a false statement.

NO BRIGHT LINE

Although no "bright line test" exists to determine when an environmental violation rises to the level of a criminal offense, certain critical factors have been identified by federal agencies and can be used for guidance.

In a statement released in September 1987, the Environmental Protection Agency (EPA) identified six major factors to be considered in determining whether an environmental matter should be referred for criminal investigation.

According to EPA, these factors are not exclusive and are not in any particular order of importance. Many may overlap. Balancing the importance of any particular factor may depend on the circumstances involved. These are the factors:

Knowing or willful behavior on the part of the violator.
Proof of all elements of a violation (for example, a person knowingly disposing of hazardous wastes without a permit).
The degree to which the violation damaged or threatened the government's regulatory function or system (for example, falsification, concealment, or destruction of information or documents).
The extent of harm or threatened harm to human health and the environment.
A violator's record or pattern of noncompliance.
The extent to which criminal environmental enforcement will deter others.

In addition to those factors, EPA stated that other reasons may ultimately warrant nonprosecution of a particular violation, Such reasons include, for example, lack of prosecutorial merit, inadequate proof, a preference for civil or administrative action, state prosecution of the matter, the nonpriority of the matter, and the lack of available resources.

GUIDELINES

In July 1991, DOJ issued guidelines for avoiding criminal prosecution for environmental violations.

DOJ intended for these guidelines "to encourage self-auditing, self-policing, and voluntary disclosure of environmental violations" since those activities are viewed as mitigating factors in the department's exercise of criminal environmental enforcement discretion.

DOJ identified six factors to be considered in determining whether the criminal prosecution of an environmental violation would be appropriate. In identifying these six factors, the department was careful to point out that other factors may be deemed appropriate for consideration in the exercise of prosecutorial discretion.

Moreover, although the department did not want to create disincentives to self-policing, it cautioned against relying upon these factors as creating a right to which the environmental criminal defendant may be entitled. Instead, it advised that these factors are simply "guidelines" lacking the force and effect of law.

In any event, the following factors were identified:

Whether the relevant entity made a voluntary, timely, and complete disclosure of the matter under investigation; i.e., not required by statute, regulation, or permit.
The degree and timeliness of the entity's cooperation with the government.
The existence and scope of any regularized, intensive, and comprehensive environmental compliance program, including compliance or management audits.
The entity's history of noncompliance and the nature of the unlawful activities; i.e., seriousness and duration.
Whether effective internal disciplinary action for employees is part of the entity's compliance program.
The entity's subsequent, good faith compliance efforts in remediating or addressing environmental problems or harm.

The most important factor affecting any decision to bring a criminal action in the event of an environmental violation is whether the violator knew of the consequences of his actions, regardless of his awareness of the existence of the regulation violated.

For example, in the loss of a wetlands area, if the damage cannot be reversed DOJ may more likely criminally prosecute than in the situation where there is a remedy for the loss. Additionally, other factors may be taken into consideration outside of the violator's knowledge and the nature of the harm, including any economic benefit derived by the violator during noncompliance and the appeal of the case to a judge or a jury.

INDEPENDENTS' COMMON PROBLEMS

Independent producers often find it difficult to realize that common field or company practices can amount to criminal environmental violations. They also may find it difficult to persuade field workers to change waste management practices to comply with environmental requirements.

For instance, leaks or spills from contaminated vessels may constitute environmental crimes. So might use or disposal of common solvents used at exploration and production sites.

Escape of such pollutants into surface waters can constitute violation of the Clean Water Act, while disposal of certain solvents without regard to quantity can constitute disposal of the hazardous waste without a permit or without appropriate authorization.

While some substances may be excluded from regulatory control, other solvents, degreasers, or pesticides and herbicides may not be excluded. They may compromise the opportunity for an operator to take advantage of broad regulatory exclusions that might otherwise be available.

In general, drilling and production wastes are exempt from RCRA, the law that mandates "cradle-to-grave" management of hazardous substances. This favorable "exploration and production" exclusion has existed by statute since 1980.

However, only waste streams that are intrinsic to the exploration for or development and production of crude oil and natural gas qualify for the exemption. Waste streams typically generated at oil and gas operations that are not uniquely associated with exploration, development, or production are not exempt. Nonexempt waste streams include spent solvents from equipment cleaning or pesticides and herbicides used at an exploration site. Air emissions from diesel engines used to operate drilling rigs would similarly not be excluded.

In contrast, substances extracted or injected into the ground to facilitate drilling, maintain the well, or enhance oil and gas recovery would likely be considered uniquely associated with primary field operations. Materials injected at the wellhead to maintain or improve flow of a pipeline also would be intrinsically associated with primary field operations.

Primary field operations encompass production related activities but not transportation or manufacturing activities. Operators must approach exemptions cautiously. It is common and expedient to commingle all solvents and substances at a drillsite. Yet doing so can make it difficult to claim the exploration and production exemption and can subject the operator to civil and criminal penalties.

EPA's "mixture rule" can compromise an opportunity to exclude some exploration and production wastes from RCRA's hazardous waste regulation if, for example, listed solvents are mixed with otherwise exempt wastes.

BASIS FOR PROSECUTION

Use of various types of chemicals or hazardous substances and placement, disposal, or release of those chemicals on federal land contrary to Department of Interior regulations can create a separate basis for criminal environmental prosecution.

Even further, use or release of these substances may separately trigger reporting requirements under Cercla or Title III of the Superfund Amendments and Reauthorization Act.

Placement of wastes, materials, or excavated soils in wetland areas can similarly amount to a separate criminal violation. And, of course, discharge of pollutants into surface waters, whether for intrinsic or nonintrinsic activities, would clearly violate the Clean Water Act and possibly any National Pollutant Discharge Elimination System (Npdes) permit obtained for the site.

Injection of chemicals or contaminants into underground injection control wells would be a separate basis for criminal prosecution as a violation of the Safe Drinking Water Act.

Drilling activities are fraught with potential environmental pitfalls and must be carefully evaluated and managed in order to avoid serious environmental liabilities. Familiarity with chemicals, substances, materials, and wastes at such sites, along with their regulatory controls, is essential.

A COMPLIANCE STRATEGY

Oil and gas operators thus face daunting trends. The federal approach toward imposing civil vs. criminal penalties is inconsistent. And environmental criminal liability is moving in the direction of strict liability.

The challenge is to address environmental problems without having to resort to the vagaries of the judicial criminal process.

To do this, companies should develop meaningful environmental policies and evaluate existing programs to determine whether the programs: 1. minimize or eliminate exposure to environmental criminal and civil liabilities, and 2. are well-managed.

The alternative to enlightened, self-directed management of possible site or substance related environmental risks can be a lengthy criminal proceeding, which at best wastes resources, time, and effort.

Following are suggestions for ensuring maximum compliance with environmental laws and regulations and minimum environmental liability:

DEVELOP COMPLIANCE PROGRAMS

As a first step, a company must establish broad environmental compliance programs consistent with requirements of major federal and state laws and regulations. It then must communicate these programs to employees and officers.

Development of effective compliance programs requires critical evaluation of all operations or field activities that might expose the company to environmental liability. Like the program itself, the intent of this effort must be made clear to employees.

The company must know what materials and substances are used in field operations or at plant sites. It also must be familiar with land features wherever operations take place.

For example, knowledge of whether an activity occurs in a wetland area or floodplain might be critical to avoiding civil and criminal liability.

USE COMPLIANCE AUDITS

An aggressive audit program and a commitment to clean up any problems represent two of the most critical aspects of environmental compliance.

Companies should create independent environmental audit or compliance review committees and follow their recommendations. Failure immediately to follow up on troublesome activities identified in an audit can in fact raise the company's liability level and chances for criminal prosecution.

In other words, it may be much worse to conduct environmental audits and ignore their findings than to conduct no audit at all. Follow-up is essential. Given prospective criminal liabilities, it is prudent to exceed recommendations of environmental compliance audits to ensure that a maximum effort is being made. Environmental audits are just the starting points in avoiding criminal liability.

An autonomous "environmental watchdog" should be appointed to evaluate company compliance with environmental requirements. The watchdog should be responsible for unilaterally addressing measures necessary to ensure compliance.

SEGREGATE FUNCTIONS

Environmental and operational functions must be separate.

Too often, the profit motive will win out if operations personnel have to weigh environmental compliance against the bottom line.

Identifying a separate group with responsibility for environmental compliance and with a separate reporting obligation to a high level corporate officer may be the only way to preclude natural tensions between operational and environmental issues.

MAINTAIN ACCURATE RECORDS

Information concerning potential environmental problems should flow freely. Corporations should establish formal procedures for access to managers or officers responsible for environmental matters.

Thorough training of employees and officers is critical, both in the field and in the home office. Employees, particularly those with responsibility for substance or material handling, must be trained in environmental compliance issues.

A well-defined reporting hierarchy should be established, pinpointing responsibility for reporting to government agencies and for updating employees about critical regulatory, technical, and legal developments.

It may be necessary to conduct internal investigations of record keeping and reporting procedures. "Paper trails" within the corporation should be evaluated with the same discriminating eye that a government investigator would use.

Companies also should consider a document destruction and retention program. Old files might form the basis for criminal prosecution and should be destroyed when they become unnecessary.

PROVIDE COMPLIANCE INCENTIVES

Employees should be rewarded for knowing and working in accordance with environmental laws and regulations. In addition to incentives for complying with environmental rules, companies should provide procedures to address the concerns of disgruntled employees. Unhappy or terminated workers are often the original source of information for environmental criminal prosecutions. Companies should have policies providing workers with grievances clear access to responsible, autonomous managers.

An appropriate part of such policies are measures to encourage and reward employees for identifying possible environmental violations. Exit interviews can ensure that workers don't leave their companies with information critical to compliance or with beliefs that compliance efforts were secondary to other concerns.

ADOPT REPORTING PROGRAMS

Companies should implement immediate reporting procedures and channels to ensure that government notifications and reports are prompt and accurate. Care in this aspect of reporting can avoid embarrassing or damaging inconsistencies in information provided the government.

In no event should any government inquiry go unattended. Efforts to respond promptly and completely to authorized government inquiries will reap dividends later.

STRESS CONFIDENTIALITY

Even though efforts should be made to ensure compliance and to provide for handling problems, environmental documents nevertheless should be kept as confidential as possible. Confidentiality can be as important as meeting reporting obligations.

Companies should use legal counsel to protect results of environmental audits. Such audits ordinarily should be conducted only at the request of and under the supervision of counsel.

Although it is unlikely that facts such as analytical data will be protected from disclosure, expert evaluations, opinions, and interpretations resulting from audits probably would be protected under the attorney-client privilege or as work product prepared in anticipation of litigation.

Companies should involve lawyers early and allow them to set reporting and information gathering procedures and priorities. In addition to creating the chance to invoke the attorney-client privilege and work product doctrine, counsel can determine the availability of any self evaluation privilege in the context of identifying measures to remediate environmental problems.

In that regard, it is always essential to evaluate the necessity of documents and to reduce paper generation to the extent possible. Verbal reports can be preferable to lengthy written and permanent analyses.

CONCLUSION

Any independent producer must make a commitment to comply with the growing number of environmental regulations and laws and to disclose and rectify violations when they are detected.

Companies should spend their time, resources, and efforts in operating within the environmental law, not in defending themselves against criminal or civil prosecutions.