1. Auditing and Inspections
10th Annual Kentucky Environmental Conference
March 6, 2012
Griffin Gate Marriott Resort & Spa
Lexington, Kentucky
Jennifer J. Cave
Bingham Greenebaum Doll LLP
300 West Vine Street, Suite 1100
Lexington, Kentucky 40507
Telephone: 859-288-4611
E-mail: jcave@bgdlegal.com

2. Auditing and Inspections:
 Audits
 Kentucky’s
Environmental
Audit Privilege
 U.S. EPA’s Audit
Policy
 Best Practices for
Handling
Inspections
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3. Kentucky’s Environmental Audit
Privilege Statute
 What is a Privilege?
 During a trial, all relevant evidence is generally
presented to the trier of fact (jury or judge) for
consideration.
 But, sometimes the law has determined that there is
reason to protect some information from disclosure
even though it might be helpful to the trier of fact.
 This is called a “privilege.”
 Common examples include:
 Attorney-Client
 Doctor-Patient
 Husband-Wife
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4. Kentucky’s Environmental Audit
Privilege Statute
 KRS 224.01-040 is Kentucky’s
Environmental Audit Privilege Statute.
 Creates a limited privilege for certain
information discovered during an
“Environmental Audit.”
 Provides limited relief from civil penalties
for violations discovered during the audit
and voluntary disclosed.
 Audit can be multi-media or limited to a
particular program area.
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5. Kentucky’s Environmental Audit
Privilege Statute
• “Environmental Audit” - a voluntary, internal, and
comprehensive evaluation of one (1) or more
facilities or an activity at one (1) or more facilities
regulated under this chapter, or
federal, regional, or local counterparts or
extensions thereof, or of management systems
related to that facility or activity, that is designed
to identify and prevent noncompliance and to
improve compliance with statutory or regulatory
requirements.
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6. Kentucky’s Environmental Audit
Privilege Statute
 Who Conducts the Audit?
 Owner, operator, or employees
 Independent contractors
(i.e., consultants, attorneys).
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7. Kentucky’s Environmental Audit
Privilege Statute
 "Environmental audit report“ is:
– a set of documents, each labeled "environmental audit
report: privileged document" and
– prepared as a result of an environmental audit.
• May include field notes and records of observations, findings,
suggestions, conclusions, drafts, memoranda, drawings,
photographs, computer-generated or electronically recorded
information, maps, charts, graphs, and surveys, if collected or
developed for the primary purpose and in the course of an
environmental audit.
KRS 224.01-040(1)(b)
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8. Kentucky’s Environmental Audit
Privilege Statute
 A complete “environmental audit report” has three
components:
 An audit report prepared by an auditor;
 Should include the scope and date of the audit and the
information gained in the audit together with exhibits and
appendices, and may include conclusions and recommendations.
 Memoranda and documents; and
 Analyzes part or all of the audit report and discusses
implementation issues; and
 An audit implementation plan.
 Addresses correcting past noncompliance, improving current
compliance, and preventing future noncompliance.
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9. Kentucky’s Environmental Audit
Privilege Statute
 Scope of Environmental Audit Privilege
 Generally, “Environmental Audit Reports” are
privileged and not admissible as evidence in
civil or administrative proceedings.
 Party asserting the environmental audit
privilege has the burden of proving the
privilege applies and proving that
appropriate efforts to achieve compliance
were promptly initiated and pursued with
reasonable diligence.
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10. Kentucky’s Environmental Audit
Privilege Statute
 But, privilege does not apply to:
 Documents made available to the public or a
regulatory agency pursuant to a requirement
of law or a permit;
 Information obtained directly by a regulatory
agency;
 Information obtained by a regulatory agency
from a source independent of the
environmental audit; or
 Any criminal proceeding.
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11. Kentucky’s Environmental Audit
Privilege Statute
 Limitations on Environmental Audit Privilege
 May be waived by the owner or operator, either expressly or
impliedly.
 Environmental Audit Report should be closely protected and
distributed selectively within the company. Distribution of the
report outside of the company should be carefully evaluated with
legal counsel.
 May be lost if a court finds the privilege was:
 Asserted for a fraudulent purpose
 If the specific material at issue is
 not subject to the privilege or
 shows evidence of noncompliance with regulations and a
lack of diligence in attempting to achieve compliance.
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12. Kentucky’s Environmental Audit
Privilege Statute
 Provides limited amnesty from civil penalties for
violations of KRS Chapter 224 that are voluntarily
disclosed and corrected within 60 days of
discovery.
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13. Kentucky’s Environmental Audit
Privilege Statute
 Civil Penalty Amnesty Requirements:
 Voluntary disclosure of voluntary discovery of the violation;
 Violation corrected within 60 days of voluntary discovery (Cabinet may require
shorter/longer period as necessary);
 Agree in writing to take steps to prevent recurrence of the violation;
 Violation has not occurred within 3 years and is not part of a pattern of
violations occurring within 5 years;
 Facility has not received penalty mitigation for the act/omission;
 Did not result in significant economic benefit resulting in a clear advantage
over competitors;
 Did not result in serious actual harm or present imminent and substantial
endangerment to human health or the environment;
 Did not violate terms of a judicial or administrative order; and
 Owner/operator cooperates with Cabinet and provides necessary information.
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14. Kentucky’s Environmental Audit
Privilege Statute
 What is "Voluntary discovery“?
– The violation was discovered by an
environmental audit; and
– The violation was not identified through a
legally mandated monitoring or sampling
requirement prescribed by statute,
administrative regulation, permit, judicial
or administrative order, agreed order,
consent decree, or plea bargain.
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15. Kentucky’s Environmental Audit
Privilege Statute
 “Voluntary” discovery must occur prior to:
 Agency inspection/investigation or issuance of an
information request;
 Filing of a notice of a citizens’ suit;
 Filing of a Complaint by a third-party;
 Reporting of violation to an agency by an
employee not authorized to speak on behalf of
the facility; or
 Imminent discovery of the violation by an agency.
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16. Kentucky’s Environmental Audit
Privilege Statute
 Not effective in matters involving federal law
 U.S. EPA seeks to obtain information contained in an
Environmental Audit Report
 Federal Citizens’ Suit Initiated
 Attorney-Client privilege should be used as a
secondary level of protection for audit documents
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17. U.S. EPA’s Audit Policy
 EPA’s Audit Policy offers reduced penalties to
companies that:
 Self-police environmental compliance at their
facilities,
 Promptly disclose and correct discovered
violations, and
 Take steps to prevent future violations.
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18. U.S. EPA’s Audit Policy
 EPA has developed Auditing
Protocols to assist with development
of self-audit programs.
 CERCLA, CWA, EPCRA, FIFRA, RCRA,
SDWA, and TSCA
 Guidance only
 Available at:
http://cfpub.epa.gov/compliance/resou
rces/policies/incentives/auditing/
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19. U.S. EPA’s Audit Policy
 Tailored Incentives for New Owners
– Designed for new owners that want to make a “clean
start” at their recently acquired facilities by addressing
noncompliance issues that began prior to acquisition
– Expanded penalty mitigation
– Expanded range of violations eligible for Audit Policy
consideration
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20. U.S. EPA’s Audit Policy
 eDisclosure – EPA’s Electronic Audit
Policy Self Disclosure System
– EPA piloting a web-based disclosure system to
I
allow companies to voluntarily self-disclose
violations under EPA’s audit policy.
– Available nationwide for EPCRA violations.
– Available to Region 6 states for other programs
– Speeds processing time/reduces transaction
costs.
– But, can not assert business confidentiality
claim.
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21. Best Practices for Handling
Inspections
 Legal Authority for Inspections and
Information Requests
– Clean Air Act, Section 114
– Federal Water Pollution Control Act, Section
I 308
– Comprehensive Environmental Response,
Compensation and Liability Act, Section
104(e)
– Toxic Substances Control Act, Section 11
– Federal Insecticide, Fungicide, and
Rodenticide Act, 7 U.S.C. § 136f(b)
– KRS 151.125
– KRS 224.10
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22. Best Practices for Handling
Inspections
 Handling the “Routine” Inspection
– Prepare
– Be Organized
I
– Review your permits
– Who is your back-up?
– Build relationships with the
inspector
– Take a windshield tour of the facility
– Know your corporate and plant
policies
– Conduct a pre-inspection audit
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23. Best Practices for Handling
Inspections
 Dealing with the Inspector
– Do not keep the inspector waiting for a long time.
– Do ask the inspector for his/her credentials and ask
about the scope of the inspection and purpose.
– Always split samples and always find out what
analyses the inspector will run.
– Escort the inspector at all times.
– If the inspector comments on something that is a
problem and it can be fixed immediately then do so.
– Defend your position, but do not be obnoxious.
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24. Best Practices for Handling
Inspections
 Dealing with the Inspector
– Do not complain.
– Do not volunteer information that is not
required to be provided.
– If the inspector takes photographs, request
copies and/or take your own duplicates.
– Take notes of what the inspector says.
– Before the inspector leaves, ask him to review
his preliminary conclusions with you and any
recommendations he has for corrective
action.
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25. Best Practices for Handling
Inspections
 Dealing with Company Personnel
– Advise management when the inspector arrives and, if possible, let
facility personnel know that an inspection will be in progress.
– If a major dispute arises during the inspection, be prepared to stop the
inspection to confer with management and legal counsel.
– If the inspector wishes to interview employees, who will sit in on the
interviews?
– Plan to brief management, and possibly legal counsel, on the
inspection and outstanding issues, if any.
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26. Best Practices for Handling
Inspections
 What to do after an inspection?
– Confer with legal counsel and management
regarding possible violations.
– Provide any additional documentation that
was requested.
– For noncompliance items, take corrective
measures as soon as possible and document.
– Decide whether to retain your portion of the
split sample for future analysis or whether to
proceed with analysis now.
– Follow-up on ay trade secrecy claims.
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27. Best Practices for Handling
Inspections
 Suggestions for Dealing with Multi-Media
Inspections
– The preceding suggestions for a “routine” inspection
all apply.
– Have a meeting of the inspection team, the plant
manager and the company’s environmental team at
the beginning in order to lay out the ground rules.
– Every member of the inspection team must be
escorted by a company representative.
– Give the inspection team a place where they
congregate to discuss issues and plan their activities.
– Establish your own “command center” to be used by
your personnel.
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28. Best Practices for Handling
Inspections
 Suggestions for Dealing with Multi-Media Inspections
– All requests for documents should be in writing with the inspector’s
name, the document requested and the date and time of the request.
– Keep a log of documents provided.
– At the end of every day of the inspection, request a closing
conference.
– Everyone in management will want to know what is going on
• decide on a select group for reporting at the end of every day and have a
regular conference call.
– At the closing conference, determine what issues are still on the table
if possible and whether you will see a draft of the report.
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29. JENNIFER J. CAVE
Bingham Greenebaum Doll LLP
300 West Vine Street, Suite 1100
Lexington, KY 40507
Telephone: 859-288-4611
Fax: 859-255-2742
jcave@bgdlegal.com
www.bgdlegal.com