United States
Environmental Protection
Agency
&EPA Report of Audit
OFFICE OF MOBILE SOURCES'
ESTABLISHMENT, MITIGATION, AND
COLLECTION OF PENALTIES
E1G16-05-0058-61560
SEPTEMBER 30, 198 6
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OFFICE OF MOBILE SOURCES'
ESTABLISHMENT, MITIGATION, AND
COLLECTION OF PENALTIES
E1G16-05-0058-61560
SEPTEMBER 30, 1986
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TABLE OF CONTENTS
Page
SCOPE AND OBJECTIVES 1
SUMMARY OF FINDINGS 2
ACTION REQUIRED 6
BACKGROUND 7
FINDINGS AND RECOMMENDATIONS
1. PROPOSED PENALTY AMOUNTS NEED REVIEW 9
2. OMS' EFFORTS TO RESOLVE CASES NEED BETTER
SUPPORT AND TRACKING 16
3. SETTLEMENTS WOULD BENEFIT FROM ADDITIONAL
GUIDANCE ON ALTERNATIVES TO CASH PENALTY PAYMENTS 24
4. CONTROLS OVER PENALTIES HAVE IMPROVED BUT
FURTHER IMPROVEMENTS CAN BE MADE 31
5. OMS SHOULD ENSURE CLEAR PROCEDURES FOR. PURSUING
VIOLATIONS AGAINST SMALL REFINERIES 38
6. FEDERAL MANAGERS' FINANCIAL INTEGRITY
ACT NOT FULLY IMPLEMENTED 41
OTHER MATTERS 45
EXHIBITS
1. ACTIVITIES SUMMARY - TAMPERING AND FUEL
SWITCHING ENFORCEMENT 47
2. GUIDELINES FOR PENALTY ASSESSED 48
3. EXCERPTS FROM OMS FMFIA DOCUMENTATION 49
APPENDICES
1. ASSISTANT ADMNISTRATOR FOR AIR AND RADIATION
REPLY TO OIG DRAFT REPORT 51
2. DISTRIBUTION 61
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S UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON, D.C. 20460
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SEP 30 1986
OFFICE OF
INSPECTOR GENERAL
MEMORANDUM
SUBJECT:
FROM:
TO:
Audit Report No. E1G16-05-0058-61560
Report on Office of Mobile Sources'
!"¦ tab! ishment, Mitigation, ami
Collection of Penalties
Jh.
7 '
rnest E. Bradley I lb
Assistant Inspector General for Audit
J. Craig Potter
Assistant Administrator for Air and Radiation
SCOPE AND OBJECTIVES
This report is the first of three reports on the results of our audit of the
Office of Mobile Sources' (OMS) enforcement program. This report covers our
audit of OMS' establishment, mitigation and collection 6f penalties.
The objectives of this audit were to: (1) evaluate the appropriateness of
proposed penalties; (2) evaluate the reasons for the disparity between proposed
penalties and the final mitigated amounts; and (3) determine that the final
mitigated penalties are collected where cash is involved and that the violator
complied with other conditions in the settlement agreement. We performed the
audit in accordance with the Standards for Audit of Governmental Organizations,
Programs, Activities, and Functions issued by the Comptroller General of the
United States.
Our audit generally covered OMS enforcement activities for FYs 1983 - 1985.
In order to accomplish our objectives, we interviewed OMS officials, reviewed
and evaluated OMS' policies, procedures and practices, and evaluated 106
enforcement cases. We included open, settled and dropped cases that involved
fuel and tampering violations. We identified and reviewed OMS' internal
control systems. The weaknesses we found are included in this report.
Our field work was conducted from October 4, 1985 to May 13, 1986.
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SUMMARY OF FINDINGS
Over the last three years, OMS has initiated significant enforcement cases
against violators of the Clean Air Act. During this period, OMS has proposed
penalties of over $46 million and issued over 2,000 Notices of Violation.
To improve their fuels enforcement program, OMS officials have:
— Developed a short form procedure to expedite minor violations to reduce
case processing time. Currently, settlement agreements are reached in
an average of 104 days from the date of the Notice of Violation.
-- Negotiated public information programs into settlement agreements to
dissuade the public from violating the regulations.
Our review disclosed, however, that OMS can improve procedures for adminis-
tering its enforcement program. In response to our review, OMS has already
taken action to implement several of our recommendations and we cite its
actions in our report.
1. PROPOSED PENALTY AMOUNTS NEED REVIEW
The penalties proposed by OMS on violators of EPA's unleaded gasoline regu-
lations have not changed since 1975 and may need revision. Proposed penalties
are in some cases only 5 to 10 percent of the amount allowed by the Clean Air
Act. The effectiveness of EPA's unleaded gasoline regulations and future
enforcement efforts against fuel additive violations could be improved by a
formal periodic review of the proposed penalty tables to ensure penalties are
large enough to encourage compliance. The effects of noncompliance with EPA's
unleaded gasoline regulations are significant. For example, two to four
tankfuls of leaded gasoline can permanently disable a catalytic converter which
can increase emissions of harmful pollutants by as much as 800 percent.
OMS officials had also not made a decision regarding an increase in lead
phasedown penalties. Unless these penalties are sufficient to deter
violations, a refiner may violate the revised lead in gasoline standard because
a penalty is cheaper than complying with the standard. Subsequent to the
completion of our field work, OMS took action to raise the per gram proposed
penalties in phasedown cases by 666 percent.
In addition, OMS has not finalized its draft February 1985 Civil Penalty Policy
for fuel and tampering violations. Each EPA program office, in a joint effort
with the Office of Enforcement and Compliance Monitoring (OECM), is to revise
existing policies or write new policies to ensure conformance with the Agency's
February 1984 Policy On Civil Penalties. However, OMS has not submitted its
policy to OECM for review.
In reply to our draft report, the Assistant Administrator for Air and Radiation
disagreed that current FOSD proposed penalties are too low, but he agreed.to
review the current penalty schedule. He also will re-examine OMS' draft penalty
policy to determine whether it should be finalized.
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If a penalty is to achieve deterrence, both the violator and the general
public must be convinced that the penalty places the violator in a worse
position than those who have complied in a timely fashion. The penalties
used by OMS are over 10 years old, thus the regulated petroleum marketing
industry has had ample time to comply with EPA1s rules. OMS needs to coor-
dinate its draft penalty policy with OECM to assure its enforcement program
is consistent with the Agency's Policy On Civil Penalties.
We recommend that the Assistant Administrator for Air and Radiation work
closely with OECM to revise the "Guidelines for the Assessment of Civil
Penalties under Section 211(d) of the Clean Air Act" to raise the penalty
amounts for the different types of violations. Also, consideration should be
given to (1) raising the size of business criteria for assessing the penalty
amount in order to penalize large-size businesses by a larger monetary amount,
(2) placing more emphasis on whether the defendant willfully or purposely
violated EPA's unleaded gasoline regulations, and not on whether it was a
first time violation, and (3) consider a higher penalty if the violation
occurred in an area with significant pollution problems. We further recommend
that simultaneous with the above action and coordinated with OECM, OMS' Civil
Penalty Policy be issued in final form.
2. OMS' EFFORTS TO RESOLVE CASES NEED BETTER SUPPORT
AND TRACKING
Case files did not always contain sufficient documentation to assure that
reductions of proposed penalties were warranted. Consequently, EPA cannot be
assured that all settlements were the best the Federal government could obtain.
Summaries of negotiations with appropriate evidence for penalty reductions are
required by the Agency guidelines and would help support final settlement
agreements between OMS and the violator.
OMS1 draft Civil Penalty Policy states "... a maximum of 40 percent of the
proposed penalty may be deducted if the violator promptly corrects the viola-
tion and where appropriate established a program designed to effectively
prevent recurrence of the violations." However, case files did not always
contain sufficient documentation for the Agency to assure that the reductions
were warranted. In addition, settlement agreements contained clauses requiring
the violator to correct the deficiencies which the violator should have
corrected promptly after the Notice of Violation (NOV), i.e., before the
settlement agreement. This suggests the violator did not promptly correct the
violation, yet the violator was judged as qualifying for a reduction of the
proposed penalty.
Our draft report outlined several steps that would increase management's
assurance that reductions of proposed penalties were warranted and to improve
the tracking of cases. As a result of our review, officials have acted to
improve procedures to ensure all mitigations are supported and to improve
their tracking of case file development. The Assistant Administrator, while
he did not see a need for an independent review of case files, did not object
to such a review. Accordingly, we recommend he (1) ensure that OMS completes
its actions to correct the cited weaknesses and (2) coordinate with OECM to
implement an independent periodic review of a representative sample of case
files to ensure that case files contain sufficient documentation to support
settlement conditions made by OMS attorneys.
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3. SETTLEMENTS WOULD BENEFIT FROM ADDITIONAL GUIDANCE ON
ALTERNATIVES TO CASH PENALTY PAYMENTS
OMS policy allows a violator to undertake an OMS approved project as an
alternative to a cash penalty. However, the impact of some alternatives is
speculative because the environmental benefits are unclear. OMS attorneys do
not have specific criteria on acceptable projects and they do not have adequate
criteria for determining how much credit should be given to alternative pay-
ments. Consequently, the Agency's goal of acceptable environmentally benefi-
cial projects may not be achieved in all cases, and the deterrent value of the
final settlement may not be accomplished.
The types of alternative payments negotiated by OMS, for example, have included:
— Purchase of a $20,000 van for a rehabilitation center which would have
the slogan "Breathe Clean Air . . . Use Unleaded Gas" on the van.
— A $25,000 donation to two colleges for purposes of sponsoring environ-
mental internships, scholarships and research on topics of environmental
1 aw.
Our draft report recommended that OMS develop criteria and examples for
attorneys to follow when assigning credit to alternative payments and that
case files show how the attorney calculated the credit for alternative
payments. In response to our.draft report, officials provided us a 1980
memorandum that allowed attorneys to mitigate proposed penalties at a rate of
two dollars for each dollar spent by the violator on an alternative project.
Officials believed that to quantify the credit or environmental benefit for
alternative projects would be unending, arbitrary and unnecessary.
We believe there is a need for OMS to reasonably determine the value of alter-
native projects. The 1980 memorandum stated that a primary reason for the two
for one credit is that it will generally take more than a one dollar reduction
of the penalty for each dollar spent by the respondent in order to encourage
the respondent to undertake these activities. We believe this basis is inade-
quate for mitigating millions in proposed penalties, and additional criteria
are needed. In this regard, the Agency stated in its February 1984 Policy On
Civil Penalties that in some cases the Agency has accepted for credit certain
expenditures whose actual environmental benefit has been somewhat speculative.
0ECM reviewed the Agency Policy on Civil Penalties and likewise found a need
for additional clarification regarding alternative payments. Accordingly,
we recommend the Assistant Administrator coordinate with 0ECM and develop
clearer criteria for alternative projects.
4. CONTROLS OVER PENALTIES HAVE IMPROVED BUT FURTHER
IMPROVEMENTS CAN BE MADE
OMS' controls over cash penalties owed to the Federal government and controls
over other settlement conditions were not completely adequate. Consequently,
we found instances where Agency employees lost penalty payments. OMS also
needs formal procedures to ensure that collection of the entire civil penalty
occurs when violators (1) do not comply with all settlement agreement
conditions or (2) do not comply in a timely manner.
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OMS and Financial Management Division (FMD) officials have initiated some steps
and our draft report recommended additional actions to improve collection
procedures and controls over cash penalties. In addition, OMS officials are
improving their oversight function of other settlement conditions in order to
maximize their enforcement of the Clean Air Act. Further, FMD plans to forward
information on penalty payments to the Internal Revenue Service. We are
recommending that the Assistant Administrator ensure that OMS complete its
actions to correct the cited weaknesses.
5. OMS SHOULD ENSURE CLEAR PROCEDURES FOR PURSUING VIOLATIONS
AGAINST SMALL REFINERIES
OMS did not pursue several violations of the lead phasedown regulations. As
a result, cumulative proposed penalties of $1,765,000 were not negotiated for
collection. Our draft report recommended that the Assistant Administrator for
Air and Radiation (1) establish clear procedures for attorneys to follow in
lead phasedown violations and (2) initiate an independent periodic review of
a representative sample of enforcement cases to ensure all Agency requirements
are met.
OMS officials agreed with our recommendation concerning the necessity for
establishing clear procedures for attorneys to follow in lead phasedown viola-
tions and stated they would not object to an independent review of cases.
Accordingly, we recommend that the Assistant Administrator take appropriate
action to implement our draft report's recommendations.
6. FEDERAL MANAGERS' FINANCIAL INTEGRITY ACT NOT FULLY IMPLEMENTED
Field Operations and Support Division (FOSD) officials did not fully partici-
pate in the Federal Managers' Financial Integrity Act (FMFIA) process.
Consequently, officials did not document specific internal control procedures
and techniques to show that their programs and activities were carried out in
accordance with Agency directives. Unless officials document specific internal
control procedures and techniques, there is a risk that FOSD's activities, if
performed improperly, will not be detected. For example, Finding No. 4 of our
report describes instances where Agency employees lost penalty payments.
Agency officials have acted to strengthen this year's FMFIA process. We
believe their actions provide FOSD officials the opportunity to fully
participate in the FMFIA process and to adequately document and evaluate their
internal control procedures and techniques.
Our draft report recommended that the Assistant Administrator for Air and
Radiation take appropriate action to ensure that existing internal control
procedures and the evaluation of current controls pertaining to fuel and
tampering enforcement programs are documented. OMS officials responded that
the Agency has not fully implemented FMFIA, but that FOSD's current controls
are a major step towards assuring FMFIA objectives are being achieved. We
have recommended that the Assistant Administrator require FOSD officials to
clearly document their internal controls.
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OTHER MATTERS
CRIMINAL PENALTIES WOULD BENEFIT QMS
Criminal sanctions are not provided in the Clean Air Act for flagrant violations
of the tampering, fuel switching and fuel compositions. Consequently, current
authority providing for civil penalties may not always result in a substantive
penalty when considering the violator's damage to the environment. For example:
° An OMS investigation resulted in a $4 million proposed penalty against a
distributor for numerous violations including 540 instances of distrib-
uting leaded gasoline as unleaded. An involuntary bankruptcy petition
showed the distributor had no assets and no penalty could be imposed.
Consequently, OMS dropped its proposed penalty and no further action
against the violator was taken.
In response to our draft report, OMS officials agreed with our conclusions
concerning the usefulness of criminal sanctions for flagrant violations.
However, they believed that a judge who applies civil sanctions leniently
will likely do the same in a criminal context.
Agency officials have acted responsibly to demonstrate their intent for
criminal sanctions against violations of the environmental regulations. On
July 29, 1985, EPA sent to the Office of Management and Budget a proposed bill
"The Improved Environmental Enforcement Act of 1985." The bill would improve
EPA's ability to enforce compliance with environmental legislation across its
multi-media regulatory programs fairly and effectively. As further support
for the need for criminal penalties, we suggest that OMS officials submit to
the appropriate Agency officials examples of violations where criminal or
injunctive actions would be appropriate for their further consideration.
ACTION REQUIRED
In accordance with EPA Order 2750, the action official is required to provide
this office with a written response to the audit report within 90 days of the
audit report date.
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BACKGROUND
EPA's Office of Mobile Sources is responsible for enforcing the provisions of
the Federal Clean Air Act that are designed to reduce air pollution from motor
vehicles. Controlling motor vehicle emissions is important because in urban
areas, emissions account for nearly (1) 90 percent of the total carbon monoxide
and airborne lead, (2) over 30 percent of the hydrocarbons, and (3) nearly 40
percent of the oxides of nitrogen emitted into the atmosphere.
Motor vehicles are also a major source of lead emissions. However, this
situation is improving. In March 1985, the Administrator announced a time-
table to phasedown the lead content of U.S. gasoline by 90 percent. EPA's new
standard, effective January 1, 1986, is expected to spare 172,000 children
from adverse health effects resulting from excess blood lead levels. Overall,
EPA estimates a net benefit exceeding a billion dollars a year for several
years in terms of health, reduced pollution and maintenance savings.
Assuring compliance with the tampering, fuel switching and lead phasedown laws
is integral to the success of the Agency's programs to control motor vehicle
emissions. To encourage compliance, OMS efforts include encouraging (1) state
and local compliance activities, (2) public information and education activi-
ties and (3) Federal enforcement activities. Federal enforcement activities
are directed toward (1) deterring catalyst removals, fuel switching, and lead
phasedown violations; and (2) re-examining and revising enforcement and penalty
policies. State, local and contractor personnel have been trained as author-
ized EPA agents.
Since FY 1980, the Investigations and Enforcement Branch (previously the
"In-Use Branch") of OMS' Field Operations and Support Division has conducted
or coordinated both directed and random inspections of gasoline retailers,
fleet facilities, and commercial repair facilities to deter violations.
Inspections are conducted by field office or contractor inspectors. After
the inspection results are received by Headquarters, officials determine if
a violation has occurred and issue a Notice of Violation with a calculated
proposed penalty. Settlement negotiations are initiated when the respondent
receives the Notice of Violation.
In FY 1985^ OMS' enforcement/investigation office conducted or coordinated
•over 10,000 inspections and issued 645 Notices of Violation with cumulative
proposed penalties of $10.9 million. Exhibit 1 summarizes FY 1985 OMS'
tampering and fuel enforcement activities. Several violations were signi-
ficant. For example:
0 In September 1985 EPA proposed penalties totalling $1.5 million against
10 gasoline retailers and distributors for illegal retail and wholesale
gasoline activities in Houston, TX. EPA initiated the investigation
based upon a complaint.
0 In October 1984 EPA proposed penalties totalling $7.5 million against 10
southern Californian fuel manufacturers. These manufacturers introduced
unapproved blends of methanol in unleaded fuel. EPA also initiated this
investigation because of a complaint.
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In these and other cases, the proposed penalties may be reduced if the parties
undertake efforts to remedy each violation, prevent future violations, correct
environmental damage or perform other alternative projects with sound environ-
mental benefits. Should OMS efforts to achieve resolution prove unsuccessful,
OMS can refer the case to the Department of Justice for Federal court civil
prosecution with penalties sought at $10,000 per violation per day.
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FINDINGS AND RECOMMENDATIONS
FINDING NO. 1 - PROPOSED PENALTY AMOUNTS NEED REVIEW
The penalties proposed by OMS for violations of EPA's unleaded gasoline
regulations have not changed since 1975 and may need revision. Proposed
penalties are in some cases only 5 to 10 percent of the amount allowed by the
Clean Air Act. The effectiveness of EPA's unleaded gasoline regulations and
future enforcement efforts against fuel additive violations could be improved
by a formal periodic review of the proposed penalty tables to ensure penalties
are large enough to encourage compliance. The effects of noncompliance with
EPA's unleaded gasoline regulations are significant. For example, two to four
tankfuls of leaded gasoline can permanently disable a catalytic converter
which can increase emissions of harmful pollutants by as much as 800 percent.
OMS officials had also not made a timely decision regarding an increase in
lead phasedown penalties. Unless these penalties are sufficient to deter
violations, a refiner may violate the revised lead in gasoline standard because
a penalty is cheaper than complying with the standard. Subsequent to the
completion of our field work, OMS took action to raise the per gram proposed
penalties in phasedown cases by 666 percent.
In addition, OMS has not finalized its draft February 1985 Civil Penalty Policy
for fuel and tampering violations. Each EPA program office, in a joint effort
with the Office of Enforcement and Compliance Monitoring (QECM), is to revise
existing policies or write new policies to ensure conformance with the Agency's
February 1984 Policy On Civil Penalties. However, OMS has not submitted its
policy to OECM for review.
In reply to our draft report, the Assistant Administrator for Air and Radiation
disagreed that current FOSD proposed penalties are too low, but he agreed to
review the current penalty schedule. He also will re-examine OMS' draft penalty
policy to determine whether it should be finalized.
EPA Penalties Should Deter Violations
EPA's Policy on Civil Penalties, explains when a penalty acts as a deterrent
against those parties who might violate Agency regulations:
If a penalty is to achieve deterrence, both the violator and the
general public must be convinced that the penalty places the
violator in a worse position than those who have complied in a
timely fashion. Neither the violator nor the general public is
likely to believe this if the violator is able to retain an over-
all advantage from noncompliance. Moreover, allowing a violator
to benefit from noncompliance punishes those who have complied by
placing them at a competitive disadvantage. This creates a
disincentive for compliance.
The Clean Air Act authorizes penalties of $10,000 per day for each violation
of the unleaded gasoline regulations and rests with the Administrator the
authority to mitigate or remit such penalties. The objective of the penalty
is to provide adequate deterrence to all members of the petroleum marketing
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industry and, thereby, encourage compliance with the regulations. OMS
determined that adequate deterrence could be achieved by assessing penalties
of less than $10,000 per day for substantially all violations. Therefore, on
August 29, 1975, EPA published in the Federal Register the Agency's "Guidelines
for the Assessment of Civil Penalties under Section 211(d) of the Clean Air
Act" (Guidelines). The Guidelines (See Exhibit 2) listed possible violations
and appropriate penalties.
Proposed Penalty Amounts
The proposed penalties listed in the Guidelines for fuel violations are only
a fraction of the amount allowed by the Clean Air Act ($10,000 per day). For
example, the dispensing or offering for sale gasoline represented to be
unleaded which does not conform to the lead or phospherous standards carries
a $500-$l,000 penalty for a first time offender who has up to $250,000 in
sales volume. This represents only 5 to 10 percent of the penalty amount
allowed by the Clean Air Act. For a business with sales volume from $250,000
to $1,000,000, the penalty is only $1,000 to $2,000 for a first time offender.
In addition, the proposed penalties are even further reduced and are discussed
in Finding No. 2.
The penalties proposed in the Guidelines may need to be raised to give greater
consideration to the damage leaded fuel does to vehicles which require unleaded
fuel. Also, those who willfully violate EPA's unleaded gasoline rules should
be penalized with a large dollar penalty. In addition, the business size
criteria may be too small to effectively deter or dissuade large corporations
from violating EPA's unleaded gasoline regulations.
OMS documents state that .two to four tankfuls of leaded gasoline can perma-
nently disable a catalytic converter. This causes emissions of hydrocarbons,
carbon monoxide and nitrogen oxides to increase up to 800 percent and causes
problems with the operation of the internal combustion engines designed to
burn unleaded fuel. Also, a replacement catalytic converter can cost the
vehicle owner in excess of $300. Further, until the destroyed catalytic
converter is replaced, the environment is unnecessarily polluted.
A $500 - 1,000 penalty for a first time offender, often mitigated even lower,
is not a significant deterrent. In addition, these small cases do not generally
result in adverse publicity to the violator, thus, little deterrence is accom-
plished. A more severe monetary penalty would dissuade others from violating
the regulations and ultimately reduce the EPA resources necessary to administer
the regulations. The proposed penalty should be based primarily on whether
the defendant willfully or purposely violated EPA's unleaded gasoline regula-
tions, and not on whether it was a first time violation.
The Agency believes that assessing varying penalty amounts against different
violators based on the size of the violator's business is a reasonable manner
to achieve a significant deterrence, particularly when the violator may be a
very large refiner on the one hand or a very small retailer on the other hand.
We believe this rationale is sound. However, the maximum size of the business,
as stated in the Guidelines, may be too small. For example, if a business
sold or transferred leaded gasoline as unleaded to a distributor or a retailer,
the following penalty would apply according to the size of the business for a
first time offender:
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Size of Business
Amount of Penalty
$0 to less than $250,000
$250,000 to less than $1,000,000
$1,000,000 to less than $5,000,000
$5,000,000 and above
$ 400 - $ 800
800 - 1,500
4,000 - 5,000
5,000 - 6,000
Thus, a $500 million business could be assessed the same size penalty as a
business with a size of $5 million. The proposed penalty to a $500 million
business is too small and results in a minimal deterrent effect.
We note that the penalty structure for stationary source violators (another
program area) provides different penalties for firms with business between
$5 and $20 million and over $20 million. Also, a higher penalty is considered
if the violation occurred in an area with significant pollution problems.
0MS officials told us they agree that penalties for very large-sized violators
are insufficient to create a deterrence. But they believe the $10,000 per day
violation statutory penalty cap compels the type of approach currently used in
the Guidelines. The conclusion is based upon several assumptions. For very
large-sized violators, the payment of $10,000 is not a deterrent. For this
type of defendant, a far greater deterrent is the adverse publicity which
comes with being cited as a violator of environmental rules. They stated that
there are a number of cases where large-sized defendants said they would gladly
pay any penalty if 0MS did not issue a press release. We found that press
releases are issued by 0MS for large-sized- violators.
For small to medium-sized violators, 0MS officials believe penalties under
$10,000 do constitute a deterrence. As a result, the penalties in the Guide-
lines are structured to be most appropriate and proportioned for businesses
which gross under $1,000,000 per year. They believe the current penalties for
these smaller businesses are appropriate for the flagrancy of the violations,
and create an adequate deterrence against future violations.
We recognize that adverse publicity may be a better deterrent than penalties
for large-size violators and should be used. However, the adverse publicity
should also be coupled with a large penalty amount. A $5,000 - $6,000 penalty
for a business over $5 million or more in size, when the maximum penalty
allowed by the Clean Air Act is $10,000, in our opinion, is inadequate.
In July 1985, the Agency submitted a draft proposed bill, "The Improved
Environmental Enforcement Act of 1985" that would generally increase the
maximum civil penalties to at least $25,000 per violation. We believe this
is appropriate for the regulations enforced by 0MS.
We believe periodic reviews of the penalties would be also useful. EPA's
unleaded gasoline regulations have been in existence for over 10 years and
major accomplishments toward a cleaner environment have resulted. The
regulated petroleum marketing industry has had ample time to become aware of
EPA's rules and to implement internal controls to ensure compliance. Now is
the time for 0MS to review all penalty policies to ensure that the remaining
violators incur penalties severe enough to bring about compliance.
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QMS Needed To Decide The Value Of Lead For Penalty Calculations
Agency officials had not revised the lead phasedown penalty guidelines even
though the revised lead standard may have made the current penalty guidelines
inadequate. In August 1985, OMS officials submitted a draft penalty revision
to the appropriate Agency officials for review, however, they returned the
draft for revision. Consequently, potential violators may not be adequately
dissuaded from violating the new lead standard under current penalty guidelines.
OMS officials have recognized that a new valuation of lead under the lead
phasedown regulations may be appropriate. A new valuation is needed because
EPA has made several changes to the regulations to reduce the lead content in
gasoline. These revisions allowed refiners to reduce lead ahead of schedule
and "bank" those reductions made ahead of time for later use in meeting the 0.1
grams per leaded gallon (gplg) standard. Refineries can produce gasoline with
more than 0.1 gplg if they produce leaded gasoline lower than the previous
standard of 1.1 and .5 gplg during time periods before January 1, 1986. If a
refiner does not need to use its "banked" rights, another refiner may purchase
the rights. These changes in the regulations combined with other economic
factors could increase the value of lead to refiners and thereby create
incentives to violate the lead phasedown regulations.
Refineries can use lead rights through December 31, 1987. Until that date,
an incentive to violate, in part, would exist because the value of lead rights
to refiners would be greater than EPA's cur-rent penalty for violating the lead
phasedown regulations. Thus, incurring a violation and paying the penalty
would be cheaper to a refiner than to use the banked rights or to buy the
rights from others. This condition creates the incentive to violate rather
than to use banked lead rights, and could result in an increase in lead usage
until December 31, 1987, as well as a competitive advantage to those companies
who use such tactics.
A review of OMS records show that staff attorneys prepared initial draft
revisions to the Agency guidelines in June 1984. OMS submitted a draft to
the Agency's Office of General Counsel (OGC) in August 1985. Subsequently,
OGC attorneys advised OMS officials in September 1985 that they had questions
regarding the policy. However, by June 1986 OMS officials had not finalized
a revision because of other priorities.
We pointed out in our draft report that the Assistant Administrator for Air
and Radiation needed to make a final determination on revising the valuation
of lead for lead phasedown penalty calculations. If a revision is necessary,
the Assistant Administrator should give sufficient priority to issuing the
revised guidelines promptly.
In reply to our draft report, OMS informed us that on July 11, 1986, a notice
was published in the Federal Register (Vol. 51, at 25253-25256) which raised
the per gram proposed penalties in phasedown cases from $0.0075 to $0.05. The
effect of this change is a 666 percent increase in the non-compliance component
of phasedown penalties.
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QMS Penalty Policy Not Final
At the time of our review, OMS had not finalized its Civil Penalty Policy for
fuel and tampering violations. Consequently, Agency management officials
cannot assure themselves that the OMS Civil Penalty Policy completely adheres
to the Agency's Policy on Civil Penalties.
In February 1984, the Assistant Administrator for OECM issued the Agency's
Policy On Civil Penalties. This policy document established a single set of
goals for penalty assessment in EPA administrative and judicial enforcement
actions. The document presents in general terms EPA's goals of deterrence,
fair and equitable treatment of the regulated community, and swift resolution
of environmental problems. The policy stated that "Each EPA program office,
in a joint effort with OECM, will revise existing policies, or write new
policies as needed."
OMS acted responsibly by drafting a Civil Penalty Policy for fuel and tamper-
ing violations to be consistent with the Agency-wide penalty policy. The
latest version we have is dated February 7, 1985. However, the draft policy,
at the time we completed our review, had not been issued in final form nor
submitted to OECM for review. OMS officials said the draft policy had not been
issued in final form because they believed it implements the Agency's Policy
On Civi1 Penalties.
The OMS draft Civil Penalty Policy substantially increases the penalty amounts
for fuel and tampering violations. For example, the draft policy provides for
a contamination violation penalty of $l,000-$2,000 for a first time violation
as compared to $500-$l,000 currently imposed.
OMS officials told us they will re-examine their draft Civil Penalty Policy
and, if appropriate, finalize the document. Because the Agency's Policy on
Civil Penalties is over two years old, OMS needs to take appropriate action
to finalize its Civil Penalty Policy and submit it to OECM for review.
Oraft Report Recommendations
We recommended in our draft report that the Assistant Administrator for Air and
Radiation take appropriate action to:
1. Work closely with the Assistant Administrator for Enforcement and Compliance
Monitoring to revise the "Guidelines for the Assessment of Civil Penalties
under Section 211(d) of the Clean Air Act" and determine whether penalty
amounts for the different types of violations need to be raised. Also,
consideration should be given to raising the size of business criteria for
assessing the penalty amount in order to penalize large-size businesses by
a larger monetary amount.
2. Determine whether the lead valuation for penalty calculations used in lead
phasedown violations should be revised.
3. Issue the OMS Civil Penalty Policy in final form after review by appropriate
Agency officials.
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Agency Reply To PIG Draft Report
In reply to our draft report, the Assistant Administrator disagreed that
current FOSD proposed penalties are too low. He also stated that given the
range of business sizes in the regulated community, OMS will never be able to
create a penalty schedule that imposes both proportional penalties and has a
deterrent impact. He stated that taking into account egregiousness, prior
violations, and size of business, OMS ca-nnot impose $10,000 penalties for
first time violators. However, he agreed to review the current penalty
schedule.
With regard to our second recommendation, OMS published a notice in the Federal
Register to increase substantially the non-compliance component of lead phase-
down penalties. Concerning our third recommendation, he agreed to re-examine
the draft OMS penalty policy to determine whether it should be finalized
pursuant to the Agency Policy On Civil Penalties, or whether OMS1 present
policy is sufficient.
Auditor Comments
If a penalty is to achieve deterrence, both the violator and the general public
must be convinced that the penalty places the violator in a worse position than
those who have complied in a timely fashion. To do otherwise creates a disin-
centive for compliance and punishes those who have complied. OMS' current
penalties, in some cases representing only 5 to 10 percent of the penalty
amounts allowed by the Clean Air Act and often mitigated even lower, are not a
significant deterrent. This also holds true for large corporations which are
not penalized to the full extent of the law. The Agency is attempting to
increase-the maximum civil penalties to at least $25,000 per violation.
The penalties used by OMS are over 10 years old. OMS' draft Civil Penalty
Policy increases the penalty amounts in some cases by 100 percent for fuel
and tampering violations. We believe this is a step in the right direction.
However, OMS1 draft Civil Penalty Policy should also place more emphasis on
whether the defendant willfully or purposely violated EPA's unleaded gasoline
regulations, and not on whether it was a first time violation.
OMS also needs to coordinate its draft Civil Penalty Policy with 0ECM. This
is in accordance with OECM's function of reviewing the efforts of each
Assistant Administrator to assure that EPA develops and conducts a strong and
consistent enforcement and compliance program.
The Agency Operating Guidance for FYs 1986-1987 states that EPA will continue
to place high priority on attaining healthful air quality for 150 million
people who live in areas not meeting National Ambient Air Quality Standards,
particularly the standard for ozone. The Agency is concerned about ozone
because new health data on ozone suggest that concentrations of the pollutant,
typical during hot weather, are unhealthy not only for those with respiratory
conditions, but also for people in good health. Higher penalties would be a
step toward helping achieve the Office of Air and Radiation's number one goal
of attaining healthful air across the nation.
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Recommendation
We recommend that the Assistant Administrator for Air and Radiation work
closely with the Assistant Administrator for Enforcement and Compliance
Monitoring to revise the "Guidelines for the Assessment of Civil Penalties
under Section 211(d) of the Clean Air Act" to raise the penalty amounts for
the different types of violations. Also, consideration should be given to
(1) raising the size of business criteria for assessing the penalty amount
in order to penalize large-size businesses by a larger monetary amount;
(2) placing more emphasis on whether the defendant willfully or purposely
violated EPA's unleaded gasoline regulations, and not on whether it was a
first time violation; and (3) consider a higher penalty if the violation
occurred in an area with significant pollution problems. We further recommend
that simultaneously with the above action and coordinated with OECM, OMS1 Civil
Penalty Policy be issued in final form.
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FINDING NO. 2 - QMS' EFFORTS TO RESOLVE CASES NEED BETTER SUPPORT
AND TRACKING
Case files did not always contain sufficient documentation to assure that
reductions of proposed penalties were warranted. Consequently, EPA cannot
be assured that all settlements were the best the Federal government could
obtain. Summaries of negotiations with appropriate evidence for penalty
reductions are required by Agency guidelines and would help support final
settlement agreements between OMS and the violator.
OMS' draft Civil Penalty Policy states "... a maximum of 40 percent of the
proposed penalty may be deducted if the violator promptly corrects the viola-
tion and where appropriate establishes a program designed to effectively pre-
vent recurrence of the violations." However, case files did not always contain
sufficient documentation for the Agency to assure that the reductions were
warranted. In addition, settlement agreements contained clauses requiring the
violator to correct the deficiencies which the violator should have corrected
promptly after the Notice of Violation (NOV), i.e., before the settlement agree-
ment. This suggests the violator did not promptly correct the violation, yet
the violator was judged as qualifying for a reduction of the proposed penalty.
Our draft report- recommended several steps that would increase management's
assurance that reductions of proposed penalties were warranted and to improve
the tracking of cases. In response to our draft report, officials improved
procedures to ensure all mitigations are supported and to improve their
tracking of case file development. They also obtained supporting documentation
where necessary to show that violators had complied with other settlement
conditions or they initiated action with the violator to comply with the
terms of the other settlement conditions. We also believe the Assistant
Administrator for Air and Radiation should coordinate with OECM to implement
an independent periodic review of case files to ensure they contain sufficient
documentation to support settlement conditions made by OMS attorneys.
Tampering Violations
The Clean Air Act prohibits all types of repair facilities from disengaging
or removing any part of a car's pollution control system. OMS can assess
penalties up to $2,500 per violation against repair facilities that violate
the law. Case files should be clearly documented to show the basis to support
a mitigation of the proposed penalty. However, the following tampering
penalties we reviewed showed mitigations which were not fully supported:
0 OMS cited a transportation company for seven tampering violations and
proposed a $17,500 penalty. The case file shows no prompt action by the
violator to correct the violation. In addition, after EPA filed the case
in court, the company representatives did not always appear. The proposed
penalty, nonetheless, was reduced by 40 percent.
0 OMS cited a city for tampering with many city vehicles and proposed a
$327,500 penalty. The case file did not show corrective action on all
violations cited in the NOV. For example, the city did not send proof
of repair on all tampered vehicles. OMS mitigated the penalty to $20,000
plus other conditions valued at $176,500, which equals 60 percent of the
proposed penalty.
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One attorney advised us that corrections often take place and evidence will,
therefore, not appear in post settlement correspondence. Our review of case
files covered all available correspondence, including the above examples.
Another attorney said because of their active caseload, attorneys may not
always ensure that documentation supporting correcting actions is timely placed
in the case file.
Lead Phasedown Violations
Over the last decade EPA has phased down the amount of lead refiners can put
in gasoline. Refineries that violate the Agency's lead standard can be subject
to a maximum per day penalty of $10,000. Agency guidelines explain that the
specific penalty will be composed of two components, a deterrent factor and a
noncompliance factor.
Similar to other types of violations we reviewed, OMS' settlement agreements
substantially mitigated the initial proposed penalties involving lead phasedown
violations. Case files did not show how the attorney arrived at a final miti-
gation using specific factors provided in the Agency's guidelines. Summarized
below are the proposed and final penalties against five refiners that violated
the lead phasedown regulations.
Case
Proposed
Deterrent
Noncompliance
Final
Number
Penalty
Factor
Factor
Penalty
1
$101,638
$100^,000
$ 1,368
$ 5,000
2
110,633
100,000
10,633
18,000
3
104,849
100,000
4,849
9,500
4
558,437
150,000
408,437
458,437
5
172,408
50,000
122,408
142,000
The deterrent factor is a fixed penalty for each violation and is sized so
that multi-mi 11 ion dollar companies will be deterred from exceeding the lead
standard and induced to take immediate corrective action. The noncompliance
factor is a variable penalty based on an estimation of the economic benefit
the company received by exceeding the lead standard in the gasoline they
produced.
Agency guidelines state the deterrent factor can normally be mitigated to
60 percent of the initial proposed value based on action taken to remedy the
violation. Consideration is given to immediate efforts a refiner takes to
eliminate the circumstances which caused the violation. Only corrective
efforts implemented during the quarter in which the violation occurred or the
succeeding quarter may be considered.
In addition, mitigation of the total penalty by up to 100 percent of its value
may be obtained due to financial hardship. In the first three cases cited
above, the violators appeared to be granted extraordinary relief. A violator
may receive extraordinary relief if it files an application that shows (1) the
facts of the case, (2) why the penalty would be inequitable, (3) why the
criteria for adjusting the initial penalty are insufficient, and (4) how the
public interest would be protected by an extraordinary adjustment. In these
three cases, we found no evidence that the violators filed a formal application
for extraordinary relief.
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Although the violators filed no formal application for extraordinary relief,
discussions between OMS and the violator occurred. Our review of the case
files, however, did not show how the attorney weighed and assessed the
violator's statements to decide that the violators were entitled to extraordi-
nary relief. Also, the case files did not show how the attorney considered
the deterrent factor in arriving at a final penalty. We were advised that
attorneys were primarily concerned with obtaining a penalty at least equal
to the noncompliance factor. Consequently, in these cases management cannot
assure that all final penalties served as an adequate deterrent to refineries
inclined to violate the lead standard.
Lead Contamination Violations
We also evaluated 20 of the 29 lead contamination referrals reported in FY 1985
to EPA by its inspection contractor (Bionetics Corporation). OMS officials
told us that retailers are required to stop the sale of, and immediately
replace, contaminated gasoline in order to receive any penalty reductions.
However, OMS case files had insufficient evidence to show that in all cases
retailers stopped the sale of, and immediately replaced, the contaminated fuel.
Yet, the proposed penalty was reduced. For example:
0 An inspection found that on March 19, 1985, contaminated gasoline repre-
sented to be unleaded was sold or offered for sale by the Respondent.
Bionetics inspectors informed the service station representative of their
inspection results and referred the results to OMS on March 20, 1985.
The file shows that an OMS official did not contact the service station
until April 30, 1985 and the Respondent stopped sale of the gasoline on
May 1, 1985. By this time a portion of the contaminated gasoline could
have been sold. At the time of our review, a tentative agreement between
OMS and the distributor mitigated the proposed $6,100 penalty to $1,220
in advertisements.
0 An inspection found that on March 11, 1985, contaminated gasoline repre-
sented to be unleaded was sold or offered for sale by the Respondent.
Although inspectors told the service station representative of their
inspection results, the file does not indicate that the service station
stopped the sale of the contaminated gasoline. An OMS official called
the Respondent on April 22, 1985. However, the case file does not show
that the Respondent took prompt action to replace the contaminated gaso-
line. OMS officials mitigated the initial $7,200 penalty to $1,440 cash
and a $2,880 donation to a university.
0 An inspection found that on March 5, 1985, contaminated gasoline repre-
sented to be unleaded was sold or offered for sale by the Respondent.
Bionetics inspectors informed the service station representative of their
inspection results and referred the case to OMS on March 20, 1985.
On April 22, 1985, an OMS employee called the Respondent regarding the
contamination. The respondent said he issued a memo to his drivers to
prevent further contamination. However, the case file does not show that
the Respondent immediately replaced the gasoline. OMS mitigated the
penalty from $7,000 to $1,400 cash and $1,400 in newspaper ads.
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The report used by the inspection contractor for referrals to OMS of lead
contamination cases does not contain a section dealing with immediate correc-
tive action. In addition, the contractor is to call an OMS employee immedi-
ately when a contamination is found. However, the employee receiving the call
uses a form that does not ask the inspector whether the retail outlet stopped
the sale of contaminated gasoline promptly. Such a section is needed to not
only provide evidence to support a reduction in the proposed penalty, but also
as an incentive to the violator to stop the sale of the contaminated fuel.
Summarizing Negotiations Better Would Also Help Support Settlements
EPA's "Guidelines for the Assessment of Civil Penalties Under Section 211(d)
of the Clean Air Act" describe a summary of the settlement conference in the
form of a memorandum. The memorandum is to describe in detail the evidence
and the conclusions upon which EPA relied in either granting or rejecting the
request for adjustment.
Case files did not contain a memorandum that summarized a final settlement
conference or that summarized all the negotiations. OMS officials told us
they believe a summary memorandum is not needed because attorneys are supposed
to document all relevant discussions. However, as stated in this report, our
review of case files showed that negotiations were not well documented.
A summary of all negotiations would be useful in supporting the final settle-
ment agreement. Otherwise, discrepancies may exist between the final settle-
ment agreement and prior correspondence describing corrective action that the
respondent would take as part of the settlement.
The summary should state the nature of the evidence presented in support of
the penalty reduction. Copies of all relevant documents should be attached to
the summary. In addition, the next responsible supervisory level should sign
off indicating review and agreement with the settlement decision. This would
serve as a excellent OMS1 administrative internal control over establishment
and mitigation of the proposed penalty.
OMS Needs A Better Tracking System For Open Cases
At January 28, 1986, OMS had approximately 750 active cases with cumulative
proposed penalties of $32 million. Our review of OMS tracking reports showed
197 of these cases with cumulative proposed penalties of $16.1 million have
remained open for more than 6 months. As processing time increases, (1) the
deterrent value of the penalty decreases, (2) compromises of the penalties
are more probable and (3) the total cost of U.S. Treasury short-term borrowing
is increased because collection of fines is untimely. Although the increased
cost to the U.S. Treasury borrowing is incidental to the delays in processing
violations and settling cases, timely processing of violations is critical to
an effective enforcement program.
In a November 1985 memorandum to EPA senior officials, the Administrator out-
lined a six-point environmental management plan for the Agency. One of the
points was to "ensure a strong enforcement presence." He also pointed out
that the Agency should follow through on enforcement actions with timely
tracking and increased emphasis on bringing cases to a successful conclusion.
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Also, in January 1985, a memorandum by the FOSD Director advised his staff
that the Agency's Office of Enforcement and Compliance Monitoring reemphasized
the need to refer nonstale cases to the DOJ. The FOSD Director considers
timely referral to the Department of Justice (DOJ) as essential to the inte-
grity of the Agency's enforcement strategy for fuel and tampering violations.
He required that a decision to proceed with a referral should normally be made
three months after OMS issues an NOV. In those cases where a referral decision
cannot be made, the attorney is required to prepare written justification to
support the decision.
Through the first 9 months of FY 1985, OMS issued 229 NOVs in its Eastern
Field Offices, excluding NOVs subsequently dropped. As of January 28, 1986,
OMS' status report of open cases showed no settlement or referral to
DOJ for 89 of the 229 NOVs with cumulative proposed penalties of $1.9 million.
In addition, the January 28, 1986 status report also shows no settlement or
referral to DOJ on an additional 67 NOVs issued during FYs 1983 and 1984 with
cumulative proposed penalties of $972,000.
Similarly, the October 17, 1985 status report of Western Field Office cases
showed 36 FY 1984 and 1985 cases over 6 months old as unresolved with cumulative
proposed penalties of at least $13.2 million. The status report showed no
information regarding success in negotiations or referrals to DOJ.
Our review of 10 cases show some discussions occurring between responsible OMS
attorneys and the violators. However, in three cases, negotiations were either
not documented or else negotiations between OMS and the violator were infre-
quent. In five other cases the respondents were not cooperating with OMS
attorneys to resolve violations. These delays were not reported on the OMS
tracking report which would help alert management early to problem cases.
For example:
0 In December 1983, OMS issued a $21,000 proposed penalty against a company
for allowing the introduction in March 1983 of leaded fuel into vehicles
requiring unleaded fuel. During 1984, the company did not cooperate with
OMS and, in January 1985, the OMS attorney told the violator that the case
would be referred to the DOJ. OMS, however, did not refer the case to DOJ
and further discussions in 1985 did not result in a settlement agreement.
The attorney told us she does not know what to do with the case because
the violation occurred in May 1983 and DOJ will probably not accept the
case because the violation is too old.
° In August 1984, OMS issued a $35,000 proposed penalty against a company
for five instances of introducing leaded fuel into vehicles requiring
unleaded fuel. In October 1984, the violator's attorney stated a
willingness to begin discussions. However, sporadic discussion in 1985
did not result in a settlement agreement and the case was unresolved as
of January 28, 1986.
° In December 1984, OMS issued a $56,650 penalty against a city for intro-
ducing leaded gasoline into seven vehicles requiring unleaded gasoline.
The NOV also cited one nozzle, one label and one sign violation. In
February 1985 the city contacted OMS regarding remedial action. The case
file showed an OMS attorney did not contact the city's representative
until November 1985 regarding a settlement and cited a backlog of cases
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as the reason for his delay in contacting the city. As of January 1986,
OMS and city officials were negotiating a settlement consisting of a cash
penalty and a public information program.
Supervisory officials said attorneys do not always enter relevant information
into the tracking system.
Recent case files still show that attorneys are not always providing written
justification of why they have not referred cases to the DOJ. During our
audit, the Chief, Investigations and Enforcement Branch, advised all attorneys
that he would meet with each attorney to expedite older unresolved cases. We
believe his action is appropriate and should be performed quarterly. Also, in
cases where an NOV has been outstanding for three months, attorneys should
comply with the FOSD Director's January 1985 memorandum. Further, personnel
should be reminded of the importance of entering sufficient and accurate
information into the tracking system.
Draft Report Recommendations
We recommended in our draft report that the Assistant Administrator for Air and
Radiation take appropriate action to:
1. Establish procedures that will ensure the proposed penalty is only
reduced in those cases where violators fully meet the reduction criteria.
When Agency contract inspectors call OMS about a contamination, OMS
records should show whether the retail outlet stopped sale of the gaso-
line when told of the contamination by the inspector. Also, develop an
independent review process to ensure that decisions to mitigate and
adjust proposed penalties are fully documented in case files.
2. Require attorneys to prepare a formal summary of negotiations to support
the final settlement agreement. The summary should be reviewed and
approved by supervisory personnel.
3. Establish a penalty tracking system with timeframe goals to ensure expedi-
tious processing of all civil penalties, and monitor staff progress in
meeting timeframe goals. Files should be documented with explanations
when cases exceed established timeframe goals. Also, personnel should
be reminded that entering sufficient and accurate information into the
tracking system is important, and that performance standards require
this activity.
Agency Reply To PIG Draft Report
In reply to our draft report the Assistant Administrator responded to our
recommendations as follows:
OMS attorneys make efforts in all cases to assure that appropriate
remedial measures are undertaken and documented in some manner within
the case file. Because of the variety of cases and situations OMS
encounters, the appropriate documentation may range from very elaborate
programs to simple statements regarding corrective action. FOSD is
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presently implementing procedures that will require a memorandum accom-
panying all settlement agreements describing both the violator's remedial
efforts and the supporting documentation in the case file.
With respect to several lead phasedown settlements, the Assistant Administrator
stated that this situation has been corrected and, in any event, the settlements
achieved in these cases were justified.
Regarding an independent review, the Assistant Administrator stated that an
Action Memorandum accompanying all settlement agreements is reviewed by
supervisory personnel, thus providing the independent review recommended in
our report. The Assistant Administrator, in response to Finding No, 5, further
added that he did not see a need for an independent review of case files but
did not object to such a review if it could be handled in a relatively nonin-
trusive manner.
With respect to a formal summary of negotiations, the Assistant Administrator
stated that an "Action Memorandum," when done properly, is a sufficient summary
of all the major factors that should be brought to management's attention.
FOSD officials will re-educate staff attorneys on the need to complete their
action memoranda properly and give them closer scrutiny in the review process.
The Assistant Administrator believed the present monitoring system provides
the necessary indicia to adequately monitor case analysis. OMS will investi-
gate the utility of tracking problem cases separately with written explanations
to management in order to improve their process.
Auditor Comments
FOSD is implementing procedures requiring a memorandum for all cases describ-
ing both the violator's remedial efforts and the supporting documentation
in the case file. This action is proper. We believe for lead contamination
cases the memorandum should show whether the retail outlet stopped sale of
the gasoline when told of the contamination by the inspector. Further, the
Assistant Administrator stated that corrective action has been taken on lead
phasedown settlements.
Regarding an independent review of case files, we believe such a review would
benefit both the Assistant Administrator and Agency management. These reviews
would work to assure the integrity of OMS' enforcement procedures and correct
inadequate performance. These types of reviews are the responsibility of the
Office of Enforcement and Compliance Monitoring.
The Assistant Administrator is seeking to improve the process for monitoring
case file development. In response to our draft report, FOSD employees' review
of case files showed that FOSD's tracking reports were not always accurate
(see page 27 Footnote 1). Appropriate action should be taken to ensure manage-
ment has an accurate report to help them monitor case file development. We
agree with the response that attorneys should be reminded of the need to main-
tain the data tracking system and that they should be evaluated accordingly
under their performance standards.
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OMS actions planned and taken to correct the weaknesses reported in this
finding are proper. The Assistant Administrator should ensure that OMS
implements these corrective procedures. In addition, there is a need for
the Assistant Administrator to implement an independent periodic review of
OMS' enforcement procedures.
Recommendation
We recommend that the Assistant Administrator for Air and Radiation take
appropriate action to (1) ensure that OMS complete its actions to correct
the cited weaknesses and (2) coordinate with OECM to implement an independent
periodic review of a representative sample of case files to ensure that
case files contain sufficient documentation to support settlement conditions
made by OMS attorneys.
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FINDING NO. 3 - SETTLEMENTS WOULD BENEFIT FROM ADDITIONAL GUIDANCE ON
ALTERNATIVES TO CASH PENALTY PAYMENTS
OMS policy allows a violator to undertake an OMS approved project as an
alternative to a cash penalty. However, the impact of some alternatives is
speculative because the environmental benefits are unclear. OMS attorneys do
not have specific criteria on acceptable projects and they do not have adequate
criteria for determining how much credit should be given to alternative pay-
ments. Consequently, the Agency's goal of acceptable environmentally benefi-
cial projects may not be achieved in all cases and the deterrent value of the
final settlement may not be accomplished.
Our draft report recommended that OMS develop criteria and examples for
attorneys to follow when assigning credit to alternative payments and that
case files show how the attorney calculated the credit for alternative
payments. In response to our draft report, officials provided us a 1980 FOSD
memorandum that allowed attorneys to mitigate proposed penalties at a rate of
two dollars for each dollar spent by the violator on an alternative project.
Officials believed that to quantify the credit or environmental benefit for
alternative projects would be unending, arbitrary and unnecessary.
We believe there is a need for OMS to reasonably determine the value of
alternative projects. The 1980 memorandum stated that a primary reason for
the two for one credit is that it will generally take more than a one dollar
reduction of the penalty for each dollar spent by the respondent in order to
encourage the respondent to undertake these activities. We believe this basis
is inadequate for mitigating millions in proposed penalties,, and additional
criteria are needed.
With respect to developing criteria for alternative projects, OECM reviewed
the Agency's Civil Penalty Policy and likewise found a need for additional
clarification regarding alternative payments.
Alternative Payments Are Part Of EPA's Policy
In August 1975, EPA issued "Guidelines for the Assessment of Civil Penalties
under Section 211(d) of the Clean Air Act" (Guidelines). The Guidelines
established a system for assessment and mitigation of penalties .for violations
of the Agency's unleaded gasoline regulations. With respect to mitigation,
the Guidelines explained that mitigation of a penalty may occur when:
0 The violator takes prompt action to prevent a violation and prevent
its recurrence;
0 The penalty may cause the violator severe economic hardship;-
0 Special circumstances exist and equity could not be served within the
above limitations.
Agency official subsequently recognized that in some cases environmentally
beneficial projects could be an effective alternative to a cash penalty. The
Agency's Policy On Civil Penalties (Policy) issued in February 1984 explained:
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The Agency has accepted various environmentally beneficial expendi-
tures in settlement of a fine and chosen not to pursue more severe
penalties. In general, the regulated community has been very
receptive to this practice. In many cases, violators have found
"alternative payments" to be more attractive than a traditional
penalty. Many useful projects have been accomplished with such
funds. But, in some instances, EPA has accepted for credit certain
expenditures whose actual environmental benefit has been somewhat
speculative.
Regarding how much credit EPA should give to alternative payments, the Policy
explains that EPA must not lower the amount it decides to accept in penalties
by more than the after-tax amount the violator spends on the project. The
Policy states:
This limitation does not apply to public awareness activities such
as those employed for fuel switching and tampering violations under
the Clean Air Act. The purpose of the limitation is to preserve
the deterrent value of the settlement. But these valuations are
often the result of public misconceptions about the economic value
of these violations. Consequently, the public awareness activities
can be effective in preventing others from violating the law. Thus
the high general deterrent value of public awareness activities in
these circumstances obviates the need for the one-to-one requirement
on penalty credits.
When considering alternative payments, officials must keep in mind the Agency's
goals of deterrence, fair and equitable treatment of the regulated community
and swift resolution of environmental problems. The Agency must be careful
in approving alternative payments because, as the Policy points out, the Agency
has accepted for credit certain expenditures whose actual environmental benefit
has been somewhat speculative. The Agency's Policy, however, does not provide
specific criteria and examples of acceptable environmentally beneficial
projects or the credit that should be given.
QMS Makes Extensive Use Of Alternative Payments
Our review shows that OMS has made innovative and extensive use of alternative
payments. For example:
0 A settlement agreement with one refiner in part required the refiner to
establish, conduct and maintain a program for unleaded gasoline quality
assurance among its branded marketers and retailers. In addition, the
refiner agreed to sample unleaded gasoline at its retail outlets in the
United States for contamination.
0 A settlement agreement with a county required in part that county
officials design a notice on the air pollution effects and federal laws
regarding automobile tampering and fuel switching and mail the notice
to 160,000 owners of motor vehicles registered in the county.
OMS has drafted a Civil Penalty Policy to implement the Agency's Policy. OMS'
draft Civil Penalty Policy explains that the use of alternative payments is
an integral and important part of its fuel and tampering enforcement program.
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Officials believe a substantial amount of the misfueling and tampering
occurring nationwide is caused by misperceptions held by the public and the
regulated community. Public information programs are by far the most common
type of project accepted by OMS as an alternative payment.
Although OMS' draft policy deems alternative payments as important, the draft
policy does not give attorneys specific criteria or examples to follow when
evaluating alternative payments and how much credit should be assigned for
each dollar the violator spends. In determining whether or not, or to what
degree, to permit alternative payments, the draft policy only states: ". . .
the negotiating team must consider all the equities of the case, especially
the degree of the respondents culpability in the violation."
With respect to how much credit can be given to alternative payments, OMS'
draft policy allows $2 of credit for each $1 spent by the respondent but states
the final cash penalty cannot be less than 20 percent of the proposed penalty.
However, the draft policy does not explain what type of alternative payments
may mitigate the cash penalty to 20 percent and what type of projects should
be extended $2 of credit for each $1 spent by the respondent. Instead the
draft policy provides general guidance for attorneys to follow:
The negotiating team has the discretion to determine how much credit
shall be given for alternative payments made in implementing a public
information program. An overall review of the respondent's culpa-
bility and the equities of the case will form the basis of such a
determination. The maximum credit that generally should be extended
is $2 worth of credit given for $1 spent by a respondent on a public
information program.
In our review of FY 1985 cases settled by the Eastern Field Offices, attorneys
did not perform an analysis of alternative payments and settlement conditions
for the purposes of assigning a credit. Instead, the case files imply that
attorneys assign a maximum $2 for every $1 actually expended by violators on
alternative payments. A maximum credit for alternative payments plus the cash
penalty often results in a settlement value equal to or less than 60 percent
of the proposed penalty. As discussed in Finding No. 2, OMS generally deducts
40 percent from the proposed penalty for prompt action to correct the violation
by the violator.
Generally, only by doubling the value of other settlement conditions can OMS
achieve 60 percent or above of the proposed penalty. For example, the FY 1985
settlements by the Eastern Field Offices, summarized below, show that when
other settlement conditions are doubled in value, the final calculated value
equals 60 percent in 45 percent of the cases In an additional 29 percent of
the cases, when other settlement conditions are doubled in value, the final
calculated value does not meet the minimum amount the Agency should obtain
(60 percent). Moreover, few violators (4 percent) pay a cash penalty exceeding
60 percent of the proposed penalty. Thus, OMS management has less assurance
that all projects' actual credit value is valid.
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SUMMARY - EASTERN OFFICES
FY 85 NOVs SETTLED
AS OF JANUARY 2/, 1986
Total Notices of Violation
1. When The Cash Penalty Alone Is Considered:
~ Settlements In Which The Cash Penalty Exceeds 60%
-- Settlements In Which The Cash Penalty Equals 60%
-- Settlements In Which The Cash Penalty Is Less Than 60%
2. When The Face Value Of Other Settlement Conditions Are
Doubled In Value:.!/
-- Settlements In Which The Cash Penalty Plus Double
The Face Value Of Other Settlement Conditions
Exceeds 60%
-- Settlements In Which The Cash Penalty Plus Double
The Face Value Of Other Settlement Conditions
Equals 60%
-- Settlements In Which The Cash Penalty Plus Double
The Face Value Of Other Settlement Conditions Is
Less Than 60% (Includes 23 cases slightly below
60%)
143
6 ( 4 percent)
21 (15 percent)
116 (81 percent)
37 (26 percent)
64 (45 percent)
42 (29 percent)
With respect to the table and how much credit should be assigned to alternative
payments, OMS officials said that attorneys are not provided more specific
guidance because attorneys need flexibility when negotiating other settlement
conditions.
We agree that attorneys need flexibility, however, specific criteria and
examples would help ensure that the actual environmental benefit from the
alternative payment is not speculative and has been assigned an accurate
valuation. An accurate valuation of the alternative payment plus the cash
penalty will help assure EPA that the final settlement is the best the
Agency can obtain.
Our draft report showed statistics based on an OMS tracking report dated
January 27, 1986. Subsequently, FOSD employees reviewed the individual
case files for these 143 cases and found additional conditions that were
not shown on their tracking report. We have adjusted the table to reflect
the results of FOSD's review.
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Without specific criteria and examples, OMS attorneys have not calculated
what credits they assign to alternative payments. Without this calculation,
attorneys have difficulty in assuring they have reached the best possible
settlement with a just penalty that accomplishes the deterrent value of the
settlement. Attorneys may be inclined to give maximum credit to alternative
payments even though different types of alternative payments have different
degrees of environmental impact. The types of alternative payments negotiated
by OMS, for example, have included:
0 Purchase of a $20,000 van for a rehabilitation center which would have
the slogan "Breathe Clean Air . . . Use Unleaded Gas" on the van.
° A $30,000 donation to a University for the specific purpose of funding
a cooperative program of student internships and legal research under
the sponsorship of the State Department of Health.
° A $7,500 donation to the National Association of State Directors of
Law Enforcement Training to sponsor an environmental training and
enforcement certification seminar.
0 A $25,000 donation to two colleges for purposes of sponsoring environ-
mental internships, scholarships and research on topics of environ-
mental law.
We believe that alternative payments can be appropriate such as the two
examples cited on page 25 of this report. However, the environmental benefits
from other alternatives like the four examples above are not as effective in
deterring violations of the fuels regulations and the impact of these alterna-
tive projects may be questionable. Motor vehicle tampering and fuel switching
surveys over the last several years continue to show high rates of tampering
and misfueling.
OMS' draft Civil Penalty Policy needs additional criteria for, and examples of,
acceptable environmentally beneficial projects, along with guidance for deter-
mining the credit of the project. Otherwise OMS cannot provide assurance that
(1) the settlement is just, and provides a deterrence against future violations,
and (2) all alternative payments have had a significant impact.
In December 1985, FOSD's Chief, Investigations and Enforcement Branch, advised
the F0SD Director that he had established a task force to evaluate all factors
relating to FOSD's settlement practice with respondents who refused to settle
cases. His action is appropriate. We believe the Task Force should include
developing more specific guidance on quantifying the value of alternative
payments including specific examples.
Draft Report Recommendations
We recommended in our draft report that the Assistant Administrator for Air and
Radiation develop criteria and examples in OMS' draft Civil Penalty Policy for
attorneys to follow when assigning credit to alternative payments. Case files
should show how the attorney calculated credit for alternative payments.
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Agency Reply To PIG Draft Report
In reply to our draft report, the Assistant Administrator stated that FOSD case
attorneys have all been provided with a copy of a December 1980 FOSD memorandum
which states that "As a rule of thumb the attorney may assume that mitigation
at a rate of two dollars for each dollar spent is reasonable . . . The
response stated that to attempt to reasonably quantify the precise credit or
environmental benefit assigned to diverse alternative projects would be an
unending and arbitrary task and one which is unnecessary.
Auditor Comments
We believe there is a need by all enforcement officials to reasonably quantify
the credit to be given and the environmental benefit obtained from alternative
projects. EPA's Policy On Civil Penalties stated that in some instances EPA
accepted for credit certain expenditures whose actual environmental benefit was
speculative. Our audit showed OMS has negotiated both exceptional public infor-
mation programs and other alternative projects whose environmental benefits
appear speculative. These and other projects may not be deserving of a 2 for 1
credi t.
OMS1 December 22, 1980 memorandum, cited in the Assistant Administrator's
response, states that OMS prefers public information and education efforts
(mass mailings, radio, television and magazine ads, bumperstickers, and posters).
We agree that educating the public about the hazards of misfueling is worth-
while. However, the memo encourages flexibility and reminds the attorney that
the 2 for 1 credit encourages respondents to undertake the activity rather
than representing the value of the program. The memo states:
There is no hard and fast rule regarding the amount of mitigation
which is appropriate in these cases. However, the attorney should
keep two things in mind. First, it will generally take more than
$1 reduction of the penalty for each dollar spent by the respondent
in order to encourage the respondent to undertake these activities.
As a rule of thumb the attorney may assume that mitigation at a rate
of two dollars for each dollar spent is reasonable, but this is not
an inflexible guideline which must be applied.
OMS has issued proposed penalties of over $46 million over the last three years
and has made innovative and extensive use of alternative payments. We do not
believe the 1980 memorandum is an adequate basis for mitigating millions in
proposed penalties. Officials need to provide clearer criteria for mitigating
these proposed penalties when public information projects are undertaken by
the violators. The 2 for 1 credit may not always be justified, especially if
it is solely to encourage the violator to undertake the activity.
In October 1985, OECM's Legal Enforcement Policy Division (LEPD) reviewed
recommendations of the Agency's Task Force on Alternative Enforcement Remedies.
The Task Force believed the Agency's Policy On Civil Penalties needed
additional clarification regarding alternative payments. LEPD proposed to
revise the Agency's Policy discussion of alternative payments to provide clear
criteria for, and examples of, acceptable environmentally beneficial projects,
along with guidance on quantifying the value of alternative payments. Although
LEPD's work is not complete, we believe OMS should coordinate with LEPD and
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act promptly to provide clearer criteria and guidance on quantifying the value
of alternative payments. Otherwise, mitigations may be inappropriate.
Recommendations
We recommend the Assistant Administrator for Air and Radiation coordinate with
LEPD and develop criteria and examples in 0MS' draft Civil Penalty Policy for
attorneys to follow when assigning credit to alternative payments. Case files
should show how the attorney calculated the credit for alternative payments.
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FINDING NO. 4 - CONTROLS OVER PENALTIES HAVE IMPROVED BUT FURTHER IMPROVEMENTS
CAN BE MADE
OMS controls over cash penalties owed to the Federal government and controls
over other settlement conditions were inadequate. Consequently, we found
instances where Agency employees lost penalty payments and instances where
violators did not comply with other settlement conditions. OMS also needs
formal procedures to ensure that collection of the entire civil penalty occurs
when violators (1) do not comply with all settlement agreement conditions or
(2) do not comply in a timely manner.
OMS and Financial Management Division (FMD) officials have initiated some
steps and our draft report recommended additional actions to improve collection
procedures and controls over cash penalties. Further, FMD plans to forward
information on penalty payments to the Internal Revenue Service.
Actions That Will Improve Penalty Collections
By law (31 U.S.C. 66a), agency heads are required to provide effective controls
and accountability over all funds for which they are responsible. When con-
trols are not established over penalties owed to the Government, an. increased
risk exists that penalty payments may not be handled properly. Accordingly,
EPA's Financial Management Manual requires each program official to designate
one individual within the program to handle the collections of all cash, checks,
or money orders. FMD employees have overall responsibility for recording and
transmitting all receipts to a Federal Reserve Bank for,deposit.
Neither OMS nor Agency financial management officials had statistics to show
cumulative cash penalties paid by fiscal year. However, in FY 1985 OMS settled
285 cases with cumulative penalties of $1.4 million that violators agreed to
pay. In addition, at September 30, 1985, OMS had 775 active cases with cumula-
tive proposed penalties of $32.4 million.. Thus, millions in cash penalties
can be expected from OMS' eventual settlement of these cases.
When OMS attorneys reach an agreement with the violator, the settlement
agreement usually requires the violator to send a check to FMD with written
confirmation to the responsible OMS attorney. However, OMS did not notify FMD
of penalties due the Government. Consequently, FMD did not establish accounts
receivables over the penalties.
OMS employees also did not have an effective system to monitor penalty payments.
Contrary to EPA's Financial Management Manual, OMS did not designate one
individual to handle penalty collections. Instead, all OMS attorneys were
supposed to periodically review their case files to ensure they received a
copy of the violator's check from FMD. However, because of their limited time
and active caseload, one supervisory attorney said that attorneys did not
always review their closed files for evidence of payment. Because OMS and FMD
did not have effective monitoring procedures over penalties owned the Government,
we reviewed all cases for FYs 1983, 1984 and 1985 with a final cash penalty of
$5,000, or greater. We found instances where we could not find proof of payment
in either OMS or FMD files. Also penalty payments were not handled properly by
Agency employees. For example:
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° A county sent a $20,000 penalty check to OMS in May 1984. OMS forwarded
the check to EPA's Collection Office using the appropriate transmittal
form. Collection Office officials stated they had no record of the check
and OMS did not have a return copy of the transmittal form showing receipt
of the check by the Collection Office. In addition, there is no evidence
that the check cleared the county's bank. After we brought the matter to
the attention of OMS officials, they contacted the county and county
officials submitted another check for $20,000 on November 29, 1985.
0 An oil company sent a check for $24,000 to EPA's Collection Office in
November 1984. However, the Collection Office has no record of receiving
or depositing the check. Again, after we brought this matter to the atten-
tion of OMS officials, they contacted the company and company officials
submitted another check for $24,000 on November 20, 1985.
In both cases, OMS' management information report showed the cases as settled
and a date that the violator supposedly accomplished all terms in the settle-
ment agreement.
Our review also showed that OMS procedures did not clearly indicate OMS would
request FMD to demand payment and impose the full penalty if the violator did
not pay. An OMS official stated that imposition of the full proposed (nonmi-
tigated) penalty is appropriate after the debtor has received a dunning letter
from EPA, and still has not paid the penalty. Therefore, when cases are referred
for collection to EPA's Collection Office, i.e., when the debt is 90 days past
due, the nonmitigated penalty should be sought. The official intends to revise
the collection procedures to include this procedure and to have FMD process
penalty collections in this manner.
In September 1985 FMD and OMS officials met to discuss penalty collection
procedures. FMD officials suggested:
0 OMS insert new language into OMS settlement agreements involving the Debt
Collection Act;
0 OMS send a copy of the settlement agreement to FMD, marked "Billing Copy",
so that FMD can open an account over the debt;
° FMD would send dunning letters after a debt is 30 days past due and if
unpaid after 90 days the debt would go to EPA's Collection Officer;
0 For failure to pay the mitigated penalty, EPA could impose the proposed
penalty plus interest.
We recommended OMS include these suggestions in its procedures and a January
1986 OMS memorandum to all employees implemented the suggestions. FMD
officials advised us that a computerized accounts receivable system should be
operating by September 1986. OMS officials should periodically reconcile
their records to FMD's accounts receivable reports to ensure the accuracy of
accounts receivable.
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OMS officials have initiated action to improve collection procedures. OMS and
FMD should also ensure an adequate system exists to alert OMS officials when
payments are not made or not made timely. Where necessary, OMS officials can
then impose the proposed penalty depending on the circumstances in that case.
Case Files And QMS Tracking Report Do Not Always Show Violators
Compliance With Other Settlement Conditions
OMS1 current monitoring procedures and tracking system do not ensure that all
violators have complied with other settlement conditions. As with cash penal-
ties, attorneys said they follow up on other settlement conditions as time
permits. We also found that OMS' tracking report of cases does not always
provide complete information regarding the status of violators' efforts to
comply with other settlement terms. Consequently, a risk exists that OMS may
not always promptly detect those violators who neglect or decide not to comply
with other terms in the settlement agreement.
For the period covered by our review (FYs 1983 - 1985), OMS negotiated other
settlement conditions if the conditions had value to the Agency's community
health and environmental goals. For example, OMS believes a substantial amount
of inisfueling and tampering nationwide is caused by misperceptions held by the
public and the regulated community. Therefore, negotiations can result in the
violator undertaking a public information program or other environmentally
beneficial expenditures instead of paying a more severe cash penalty.' OMS'
monitoring of violators' compliance with other settlement conditions is
important because OMS allows $2 credit for every $1 the violator spends in
a public information type program.
We reviewed cases for evidence that violators complied with other settlement
conditions. We provided OMS officials a list of cases where we found insuffi-
cient evidence that the violator complied with other settlement conditions.
For example:
Case No
Other Conditions With
No Evidence
Of Performance
Value Of
Other
Conditions
1
Magazine article
$ 15,300
2
Adverti sements
$ 9,930
3
Newspaper ads
$ 4,000
4
Distribute 50 million
coffee cups with message
imprinted on each cup
$ 43,000
5
Numerous conditions
$200,000
6
Repair all damaged
vehicles
Cannot be
determined
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Our review of 76 cases showed 31 cases with at least one settlement condition
that we could not verify. OMS officials acted to determine whether the viola-
tor complied with all settlement conditions in these 31 cases. In most cases,
OMS officials said additional documentation has been obtained from violators
to support compliance but did not describe the type of documentation acceptable.
In four instances where the violator did not comply, OMS has contacted the
violator and requested that he comply with the other settlement'conditions.
As with cash penalties, control over "other" settlement conditions is difficult
because no one individual is responsible for monitoring violators' progress in
complying with these conditions. Supporting documentation received by OMS to
show compliance is routed to the responsible attorney for filing. Attorneys,
because of their active caseload, will review settled cases as time permits to
ensure violators submit adequate documentation. However, an attorney may
concentrate on his active caseload and not have time to ensure adequate
supporting documentation is received on all settled cases.
In order for OMS to monitor violators' compliance with all settlement condi-
tions, specific due dates should be established for all conditions in the
agreement. However, in 18 of 76 cases we reviewed the settlement agreement
did not give specific due dates for all settlement conditions. For example,
Case No. 2 did not have specific dates established for the three required
magazine articles. Consequently, violators may be less inclined to comply
with other settlement conditions in a timely manner, and OMS attorneys may
forget to check on the violators' compliance as time passes and as they become
involved with other cases.
Currently, OMS' tracking report is not an effective tool for monitoring
violator's compliance with other settlement conditions because the report
format does not include sufficient data to allow adequate monitoring. The
purpose of an enforcement tracking system is to assist the program office
in monitoring attorneys' progress in settling a violation and monitoring the
violators' progress in complying with the terms in the settlement agreement.
In accordance with EPA's policy of strict enforcement, OMS' settlement agree-
ments state that failure to timely pay or failure to comply with any of the
terms of the agreement will result in the violator owing the entire proposed
civil penalty. An inadequate tracking system increases the risk that a
violator's failure to comply with all terms of the agreement will not be
detected or detected timely by OMS.
The tracking report currently allows the attorney to show that other settlement
conditions exist and a date that all terms have been accomplished. Because
OMS settles hundreds of cases a year and makes extensive use of alternative
payments, a tracking system should list the specific settlement conditions,
the specific due date for each condition, and the violator's progress in
complying with these conditions.
Even if the tracking report allowed for additional data to monitor compliance,
OMS officials said that getting all attorneys to enter sufficient or accurate
data is difficult. Some attorneys do not view the entering of data into the
tracking system as especially important. For example, the tracking report
showed an August 23, 1985 terms accomplished date for Case No. 2 even though
our review showed the violator may have published only one of three required
articles.
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We discussed these issues with OMS officials and they are reviewing their
current tracking system to ensure inclusion of more information on violators'
status in completing other settlement conditions. They also said they would
remind supervisory attorneys to ensure all conditions have specific due dates.
These actions are appropriate. All personnel should be reminded that entering
sufficient and accurate information into the tracking system is important.
Penalty Information Should Be Forwarded To U.S Internal Revenue Service
The Agency does not forward information to the Internal Revenue Service (IRS)
on penalties paid or violators' alternative payments. Consequently, violators
could be deducting these expenditures for tax purposes. In FYs 1983 through
1985, OMS proposed cumulative penalties of $38 million and in several cases
companies paid large cash penalties. Two companies recently paid $600,000 and
$458,000 for lead phasedown violations.
In addition, penalty adjustments often include alternative payments such as
donations, newspaper ads, and other public information type expenditures.
For example:
0 One violator's settlement agreement required the violator to contribute
$24,300 to the American Cancer Society, and an additional $24,300 for news-
paper advertising, advertising on company vehicles, and a letter to members
of a state petroleum marketers association. The violator's representative
asked the OMS attorney for "A neutral position by the EPA concerning the
tax deductible status of the above-mentioned charitable contribution and ad
campaign expenditures."
0 As part of a settlement agreement, a company agreed to pay a $65,000 cash
penalty. In addition, the company agreed to perform certain public aware-
ness programs with an estimated cost of $300,000.
These deductions, according to Chicago IRS officials, are not tax deductible
yet the company could easily deduct these expenditures. Even in the event of
an audit, the IRS auditor would not necessarily be aware that these payments
were made in lieu of a cash penalty. IRS officials also said they would
welcome information from EPA on cash penalties or alternative payments.
*****
OMS has acted to improve controls over cash collections but needs to ensure
that violators always submit sufficient documentation to show timely compliance
with other settlement conditions. Other settlement conditions, when practica-
ble, should include specific due dates for compliance and should require
submission of documentation to show that the violator complied with the other
settlement conditions. Also, OMS' management information system should be
improved to provide more information to attorneys which will assist them in
monitoring the status of violators' efforts to comply with other settlement
conditions. Finally, EPA needs to establish a system to forward to the IRS
information on cash penalty payments and violators' alternative payments.
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Draft Report Recommendations
We recommended in our draft report that the Assistant Administrator for Air
and Radiation:
1. Include in all settlement agreements that have other conditions, specific
due dates for compliance with those conditions and amend 0MS' management
information system to include data showing the status of the violators'
efforts to comply with all settlement conditions.
2. Periodically reconcile OMS penalty records to FMD's accounts receivable
reports.
3. Emphasize to all attorneys that a case should not be considered closed,
with a terms accomplished date entered in the management information
system, until the violator submits documentation showing compliance
with all conditions. Attorneys should be advised of the specific type
of documentation acceptable to show compliance. Also, personnel should
be reminded that entering sufficient and accurate information into the
tracking system is important.
4. Initiate action with FMD to forward information on cash penalty payments
and violators' alternative payments to the Internal Revenue Service.
Agency Reply To QIG Draft Report
In reply to our draft report, the Assistant Administrator responded to
recommendations 1 through 4:
1. FOSD attorneys will be reminded to draft settlements with specific due
dates, and managers will continue to monitor in this area. In addition,
officials are evaluating various systems to improve their tracking of
violators' efforts to comply with all settlement conditions including
(a) the addition of a new completion date field in OMS case tracking
computer system, (b) use of a new cover memorandum form for settlement
agreements on which public information terms and their due dates are
specified, (c) use of a new Accomplishment of Settlement Terms memorandum
to be submitted by attorneys when all settlement terms have been
accomplished (which also specifies the evidence that the terms were
accomplished), and (d) a review with each attorney to ensure that each
has an appropriate system to keep track of due dates in general.
2. FOSD and FMD officials will meet to develop a procedure to reconcile
accounts receivable.
3. FOSD will have attorneys prepare an Accomplishment of Settlement Terms
memorandum to management when they receive documentation from the violator
showing all settlement terms have been accomplished.
4. FOSD officials determined that FMD has a procedure in place to notify the
IRS of penalty payments, which they will implement for FOSD cases.
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Auditor Comments
We believe the actions taken and planned, if properly implemented, will correct
the cited deficiencies.
Recommendations
We recommend that the Assistant Administrator ensure that OMS Gomplete its
actions to correct the cited weaknesses.
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FINDING NO. 5 - OMS SHOULD ENSURE CLEAR PROCEDURES FOR PURSUING VIOLATIONS
AGAINST SMALL REFINERIES
OMS did not pursue several violators of the lead phasedown regulations. As
a result, cumulative proposed penalties of $1,765,000 were not negotiated for
collection. Our draft report recommended that the Assistant Administrator for
Air and Radiation (1) establish clear procedures for attorneys to follow in
lead phasedown violations and (2) initiate an independent periodic review of a
representative sample of enforcement procedures to ensure all Agency require-
ments are met.
OMS officials agreed with our recommendations concerning the necessity for
establishing clear procedures for attorneys to follow in lead phasedown viola-
tions and stated they would not object to an independent review of cases.
Accordingly, we recommend that the Assistant Administrator take appropriate
action to implement our draft report's recommendations.
Procedures For Pursuing Small Violations Were Unclear
In FY 1984, EPA's former Assistant Administrator for Air and Radiation
announced "... a national enforcement strategy to crack down on violators of
the tampering and fuel regulations." Recently, the Agency's current Assistant
Administrator also said that "EPA has a policy of strict enforcement of lead
phasedown violations." Lead phasedown refers to EPA's decision to reduce the
lead content of U.S. gasoline.
OMS has cited gasoline refiners and, importers for over 100 violations of the
lead phasedown regulations, with cumulative proposed civil penalties of over
$16 million. Recently, OMS proposed civil penalties of $2.6 million against
a refiner that prepared false reports of lead usage. The refiner used 300
million more grams of lead than allowed for the volume of leaded gasoline
produced from October 1, 1983 through December 31, 1984.
Although OMS has pursued significant violations, procedures were unclear for
pursuing penalties against small refiners that had apparent violations of the
lead phasedown regulations. Prior to July 1, 1983, EPA regulations provided
for less stringent standards for small refineries. Refineries that were
"large" were subject to a more stringent lead standard. Although some
penalties could not be pursued because of the small refiners financial hardship,
case file memoranda we reviewed also showed:
0 OMS officials were uncertain on how to classify refineries as large or
small when the refinery was a subsidiary of a large company.
0 Officials did not have a clear policy for liability of parties during
periods where the ownership of the refinery was split between two parties.
0 Officials considered the violation of the standard too small to
pursue a penalty. The economic benefit derived by the company was
insignificant in their opinion.
In November 1982, an OMS attorney recognized the need for a policy on small
refiners with one violation. However, OMS did not issue a formal policy with
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guidance on how to proceed with these types of cases and our review of.case
files showed that procedures for processing violations against small refineries
were not entirely clear. For example, the last document in one case file,
dated March 16, 1983, advised the OMS attorney to hold open the case file
pending a decision on small violations. OMS did not issue a policy and the
attorney performed no additional work on the case.
Subsequently, in November and December 1985, officials prepared memoranda to
not pursue 12 similar civil penalties with cumulative proposed penalties of
$1,765,000 against refineries that may have violated the lead phasedown
regulations. For example:
-- A refiner's quarterly gasoline production reports showed consistent small
excessive lead amounts in gasoline that-the refiner produced over several
months. An EPA attorney drafted a Notice of Violation (NOV) and calculated
a proposed penalty against the refiner for $750,000. OMS did not issue a
NOV even though the attorney targeted this case as a high priority. Other
OMS officials opposed a violation because the amounts of excess lead in
the refiner's production reports were extremely small.
-- A refiner reported three violations of the small refinery standards in
1981 and 1982. In December 1985, the attorney stated the case ". . . was
one of those that got stalled out because of uncertainty on the classi-
fication of the refineries."
In other cases, the memoranda specifically cited lack of policies for liability
of parties during periods where the ownership of the refinery was split between
two parties. OMS did not have a policy for liability of individuals who
purchased a refiner which had violated the lead phasedown regulations. In the
case of one refinery, an attorney noted that OMS pursued violations which were
not tied up in policy questions.
OMS officials stated the issue of small violations is one that plagues every
enforcement program and that their policy is perhaps not completely efficient.
However, officials emphasized that significant violations are pursued and that
the above type of small violations will not reoccur.
Our review shows that OMS has taken action on significant violations.
Violations differ in significance, but not sending an NOV or sending a NOV
containing no deterrent penalty would not distinguish a violator from a com-
plying refiner. By taking no action, OMS could have invited more violations
because refiners had little fear of penalty. OMS should develop procedures
for attorneys to follow in lead phasedown violations. Our review showed that
no review of OMS cases occurs by Agency officials independent of the OMS
enforcement program. This type of review is made by headquarters of regional
programs to assure that the programs are operating effectively and efficiently.
A similar independent review of OMS cases would benefit OMS management by
providing assurance that policy or procedural questions such as the type
described in this finding are promptly resolved.
Draft Report Recommendation
We recommended in our draft report that the Assistant Administrator for Air
and Radiation take appropriate action to:
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1. Establish clear procedures for attorneys to follow in lead phasedown
violations.
2. Initiate an independent periodic review of a representative sample of
case files to ensure all requirements are met.
Agency Comments
The Assistant Administrator agreed with our recommendation concerning the
necessity for establishing clear procedures for attorneys to follow in lead
phasedown violations. The Assistant Administrator did not see a need for an
independent review of cases. He stated that current procedures contain enough
safeguards to assure compliance with our procedures. He added, however, that
if a periodic review could be handled in a relatively non-intrusive manner,
he would not object to it being conducted.
Auditor Comments
The Assistant Administrator needs to develop clear procedures for attorneys to
follow in lead phasedown violations. Regarding our second recommendation, an
independent review of FOSD cases would benefit both OMS and Agency management.
A review would include evaluations of OMS' accomplishment reporting and enforce-
ment case development work to ensure integrity of the system and correct inade-
quate performance. These types of reviews are the responsibility of OECM.
The review would also help assure OECM that FOSD's enforcement program is
consistent with the Agency's enforcement policy and that issues, like those
described in this audit, are resolved promptly.
Recommendations
We recommend that the Assistant Administrator for Air and Radiation take
appropriate action to:
1. Establish clear procedures for attorneys to follow in lead phasedown
violations.
2. Coordinate with OECM for a periodic review of OMS case files to'
ensure that the Agency's enforcement policy and requirements are
met.
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FINDING NO. 6 - FEDERAL MANAGERS' FINANCIAL INTEGRITY ACT NOT FULLY IMPLEMENTED
Field Operations and Support Division officials did not fully participate in
the Federal Managers' Financial Integrity Act (FMFIA) process. Consequently,
officials did not document specific internal control procedures and techniques
to show that their programs and activities are carried out in accordance with
Agency directives. Unless officials document specific internal control
procedures and techniques, there is a risk that FOSD's activities, if performed
improperly, will not be detected. For example, Finding No. 4 of our report
describes instances where Agency employees lost penalty payments. Agency
officials have acted to strengthen this year's FMFIA process. We believe their
actions provide FOSD officials the opportunity to fully participate in the
FMFIA process and to adequately document and evaluate their internal control
procedures and techniques.
Our draft report recommended that the Assistant Administrator for Air and
Radiation take appropriate action to ensure that existing internal control
procedures and the evaluation of current controls pertaining to fuel and
tampering enforcement programs are documented. OMS officials responded that
the Agency has not fully implemented FMFIA, but that FOSD's current controls
are a major step towards assuming FMFIA objectives are being achieved. We have
recommended that the Assistant Administrator require FOSD officials to clearly
document their internal controls.
Responding to continuing disclosures of fraud, waste, and abuse across a wide
spectrum of Federal government operations, which were largely attributable to
serious weaknesses in agencies' internal controls, the Congress in 1982 enacted
FMFIA. It strengthens the existing requirements of the Accounting and Auditing
Act of 1950 that executive agencies establish and maintain systems of accounting
and internal controls in order to provide effective controls over, and account-
ability for, all funds, property, and other assets for which an Agency is
responsible. FMFIA is intended to help reduce fraud, waste, and abuse in
Federal government activities and operations.
Agency And OMS Actions To Implement FMFIA
In order to implement the FMFIA, the Agency issued EPA Order 1000.24 on
"Establishing, Evaluating, and Reporting on Internal Control Systems" in
February 1984. In accordance with this Order, the Agency developed a
specific process for implementing the FMFIA. The process required Assistant
Administrators, Associate Administrators, Staff Office Directors, and the
Inspector General to report on the status of- internal controls over their
programs or functions (assessable units).
In October 1985, the Director of OMS submitted his most recent annual report on
internal controls to the Acting Assistant Administrator for Air and Radiation
in order to comply with the Agency's process. The Director described OMS'
actions to implement FMFIA and listed the following weaknesses as identified
and corrected during FY 1985.
1. Procedures were improved to improve timely review of Confidential
Statements of Employment and Financial Interest.
-41-
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2. Additional resources were requested to perform audits of state and local
i nspection/mai ntenance programs.
In addition, the OMS Director initiated a series of internal control reviews
which would extend into FY 1986. We believe these internal control reviews
will help strengthen OMS' operations.
OMS' actions to implement FMFIA, however, did not include specific documenta-
tion of internal control procedures and techniques to show that all of FOSD's
enforcement programs and activities are carried out in accordance with Agency
directives. We reviewed OMS' internal control documentation to determine, for
example, specific internal control procedures that FOSD management uses to
ensure that penalty collections are made timely, other settlement conditions
are complied with, and that fuel and tampering cases are settled or dropped in
accordance with Agency directives. Specific internal control techniques for
these types of activities were not described in OMS' internal control documen-
tation. FOSD's specific internal control techniques were not described because
FOSD's officials were not required to fully participate in the FMFIA process.
Instead, OMS' Program Management Office was primarily responsible for develop-
ing OMS' internal control documentation.
Exhibit 3 shows excerpts from OMS' documentation pertaining to the event cycle,
objectives and techniques for the Mobile Sources Enforcement assessable unit.
The Exhibit shows that the asses-sable unit's event cycle is a restatement of
the assessable unit which conflicts with 0MB Guidelines for Internal Controls.
These guidelines state:
Event cycles "are the processes used to initiate and perform
related activities, create the necessary documentation, and
gather and report related data. In other words, an event
cycle is a series of steps taken to get something done.
Because the enforcement event cycle was broadly stated, control objectives and
techniques were also not stated specifically. 0MB guidelines define internal
control objectives and techniques as follows:
Control Objectives - are desired goals or conditions for a specific event
cycle that reflect the application of the overall objectives of internal
control to that specific cycle.
Control Techniques - are the processes or documents that enable the control
objectives to be achieved.
Exhibit 3 shows that OMS mobile source enforcement objectives and techniques
are described in broad terms. For example, the internal control documentation
states the following as an internal control technique to assure that vehicle
emission control systems are not removed or rendered inoperative:
Carry out investigations and enforcement actions against violators
of Federal anti-tampering/fuel switching regulations.
This statement of an FOSD activity should be supported by specific documented
internal control checks to ensure that the activity is carried out in
accordance with Agency directives. For example:
-42-
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0 A checklist could ensure proper processing of tips/complaints about fuel
switching or tampering by periodically requiring a review for (1) timely
resolution; (2) timely feedback from local agencies when FOSD makes a
referral; (3) timely feedback by FOSD to the regional, local agency offi-
cial or other outside party providing tips or complaints; and (4) effi-
cient and effective management of resources in resolving complaints.
° Periodic reviews of FOSD's management information system should include
steps to adequately control and monitor errors by:
1. Preventing erroneous data from entering the system that describes the
status of OMS cases.
2. Monitoring the status of those error corrections.
One OMS official stated the Agency has no one qualified to provide them
detailed guidance on the specific actions any one manager must take to comply
with FMFIA. The only training device the Agency has available, according to
the official, is a video tape about the FMFIA. Although FOSD managers viewed
the film, they believed the film did not meet their needs.
The Internal Control Staff (ICS) of EPA's Resource Management Division has
established a new process for evaluating the Agency's internal controls in
FY 1986. As a result, Agency programs will resegment their functions and
operations in assessable units at the division level. Thus, officials in each
division will be required to complete an assessment of internal controls over
these functions and operations.
We believe the new assessment process will permit FOSD officials to fully
participate in the FMFIA process. Officials will need to document existing
internal control procedures and evaluate these controls in order to determine
where improvements can be made. Officials should begin these steps for the new
assessment process.
Draft Report Recommendation
We recommended in our draft report that the Assistant Administrator for Air
and Radiation take appropriate action to ensure that existing internal control
procedures and the evaluation of current controls pertaining to fuel and
tampering enforcement programs are documented.
Agency Reply To PIG Draft Report
The Assistant Administrator stated that EPA has not, as an Agency, fully imple-
mented all aspects of FMFIA. He also stated that as Agency rules and guide-
lines in this area become more firmly established, he will take appropriate
action to further establish proper controls for all areas within the Office of
Air and Radiation. In the meantime, he believed that the controls established
within FOSD for tracking and documenting the enforcement process are a major
step towards assuming that FMFIA objectives are being achieved.
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Auditor Comments
We recognize that management judgment is involved in reaching a conclusion
that OMS' established internal control system provides reasonable assurance
that FMFIA requirements are being achieved. However, our discussions with
FOSD officials, and a review of FOSD's records show that they did not fully
participate in the FMFIA process. Thus, specific internal control checks
were not sufficiently documented. In August 1986, 0MB revised Circular A-123
that prescribes policies and procedures that agencies should follow in their
internal control systems. The Circular included a statement- that all management
levels shall be involved in ensuring the adequacy of controls. FOSD officials
can begin this process by documenting its existing internal controls. This
will give management an adequate basis to conclude that the FMFIA objectives
are being achieved.
Recommendation
We recommend that the Assistant Administrator for Air and Radiation take
appropriate action to ensure that existing internal control procedures and the
evaluation of current controls pertaining to fuel and tampering enforcement
programs are documented. This action can be coordinated with the Internal
Control staff of EPA's Resource Management Division and the employee who
developed the OMS pilot internal control review process.
-44-
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OTHER MATTERS
CRIMINAL PENALTIES MOULD BENEFIT QMS
Criminal sanctions are not provided in the Clean Air Act for flagrant viola-
tions of the tampering, fuel switching and fuel compositions. Consequently
current authority providing for civil penalties may not always result in a
substantive penalty when considering the violator's damage to the environ-
ment. OMS is attempting to get statutory authority for criminal sanctions.
OMS issued several hundred NOVs in FYs 1983 through 1985 with cumulative pro-
posed civil penalties of $38 million. Our review of OMS' enforcement program
showed flagrant fuel and tampering violations where violators paid minimal or
no penalty. Criminal sanctions may have been more appropriate. OMS' current
authority of imposing civil penalties has not always resulted in penalties
appropriate when considering the damage to the environment. For example:
0 An OMS investigation resulted in a $4 million proposed penalty against a
distributor for numerous violations including 540 instances of distribut-
ing leaded gasoline as unleaded. An involuntary bankruptcy petition
showed the distributor had no assets and no penalty could be imposed.
Consequently, OMS dropped its proposed penalty and no further action
against the violator was taken.
° In FY 1984, OMS issued a $120,000 proposed penalty against a muffler shop
for 48 tampering violations. OMS had evidence the shop removed at least
1,400 catalytic coverters, had enlarged an excess of 700 gasoline filler
inlet restrictors and was currently installing single and dual exhaust
pipes in place of catalytic converters. A U.S. District Court imposed a
final cash penalty of $7,500 and enjoined the shop from performing such
actions in the future.
Agency officials have recognized that as environmental programs mature, the
enforcement authorities available to take enforcement action are not always
appropriate. OMS officials also stated that Section 211 of the Clean Air Act
does not provide them injunctive authority (requiring a party to refrain from
taking some specified action). On July 29, 1985, EPA sent to the Office of
Management and Budget a proposed bill "The Improved Environmental Enforcement
Act of 1985." The bill would improve EPA's ability to enforce compliance with
environmental legislation across its multi-media regulatory programs fairly
and effectively.
The purposes of developing and submitting to the Congress this multi-media
enforcement bill were two-fold: (1) to organize EPA's legislative recommenda-
tions for easy reference and cross-media comparison by congressional committees
during individual reauthorizations, and (2) to focus attention on the need for
change in EPA's enforcement authorities.
The provisions of the proposed bill fall into three primary categories:
judicial penalties, criminal enforcement, and administrative enforcement. The
basic principle of the criminal enforcement recommendations is that all environ-
mental statutes should include felony provisions within the range of available
-45-
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criminal penalties. Absent such statutory authority, it is difficult to obtain
criminal prosecutions for even serious environmental violations, and harder
still to obtain sentences commensurate with the health risks involved.
The Clean Air Act expired on September 30, 1981. As of June 13, 1986, no
hearings have been scheduled by either the House of Representatives or the
Senate. Further, Senate and House activity is uncertain at this time.
In response to our draft report, OMS officials agreed with our conclusions
concerning the usefulness of criminal sanctions for flagrant violations.
However, they believed that the judge who applies civil sanctions leniently
will likely do the same in a criminal context.
Agency officials have acted responsibily to demonstrate their intent to obtain
criminal sanctions against violations of the environmental regulations. Our
review of OMS enforcement programs showed instances where criminal penalties
would be appropriate. As further support for the need for criminal penalties,
we suggest that OMS officials submit to the appropriate Agency officials examples
of violations where criminal or injunctive actions would be appropriate.
-46-
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EXHIBIT 1
(See page 7)
Activities Summary
Tampering & Fuel Switching Enforcement
I. Active Cases
A. Post-NOV
1. Tampering
2. Fuels
09/01 thru 09/30/85
Proposed Penalties
& Amounts
B. Pre-NOV
1. Tampering
2. Fuels
C. Total:
II. NOV's Issued
A. Tampering
(Catalyst removals)
B. Fuels
1. Introductions
2. Small Nozzles
3. Excess Lead
4. Alcohol
III. Cases Settled
A. Tarrpering
B. Fuels
C. Cases Dropped
IV. Cases Referred to DOJ
A. Tampering
B. Fuels
V. Cases Filed in Fed. Dist. Ct.
A. Tanpering
B. Fuels
66 ($ 2,374,000)
579 ($30,001,550)
13 ($ N/A )
117 ($ N/A )
775 ($32,375,550)
4 ($ 259,300)
2 ($
11 ($
46 ($
0 ($
1 ($
27 ($
3 ($
0 ($
0 ($
0 ($
0 ($
116,900)
4,000)
266,800)
0 )
1,450)
114,640)
608,400)
0
0
0
0
Cumulative
Proposed Penalties
N/A
N/A
N/A
N/A
23 ($ 621,800)
43 ($ 1,883,050)
170 ($ 225,550)
399 ($ 3,186,280)
10 ($ 4,940,000)
5 ($ 29,750)
280 ($ 539,523)
104 ($ 1,128,000)
4 ($ 142,500)
29 ($12,726,200)
1 ($ 47,500)
23 ($12,408,200)
-47-
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fciiKtwr» m nuiri ctntre
EXHIBIT 2
(See Page 10)
fcMwU
iKtfee kfirmi
lewrlptle*
1 >0.22(4). lUbimjr—•—UtM»*t1po »f «mm miiMm trm a
1mm pw tote • eehUle rvqulrlpf
•nitMM fatollM.
i •O.l-
——*f»Ul of retailer pr *>oleillt purchaser.
(MiiMr »r UttrlMt' U ptnlt mtr/,
tMfKttM, uv)tl( tf trltlAf.
•0.221• ). W.2J (»).(~).U). •»< (tf) PUponslep Pf pffprleg for Ml*
liability repretented te b* vleaded Imi net
(•Mere U tht leed» or phosphorus
Ptandards (contamination).
•0.22(f)(1)--
BO.21(4)
——————fallort to P«u1p liMM pasolln* p«ps
with proper MUlei.
•Silt or transfer of ItMM ftiollnt
represented te bt •nlrtdtc to «
distributor pr retailer or Mholesale
p11 pentlt/ nuiwot table V
Schedule
lb. ftiaber of previous violations
Size of business 2/
I! Ill
I*
7.000
10.000
10.000
10.000
4.030
4,000
B.OOO
>.000
2.000
4,000
7.000
• .000
1.000
2,000
(.000
7.000
6,000-7,000
•.ooo-io.ooo
P.OOO-IO.OOO
t.000-10.000
3,000-4.000
4,000- (.000
7.000- B.OOO
1,000- 1.000
1,000.2.000
3,000- 4,000
(.000- 7.000
7,000- 1,000
400-1,000
1,000. 2,000
4.00b- (.000
(.000- 7,000
t,000-6,000
7,000- 1.000
9,ooo-io,ooa
*,000-10,000
2,000-3,000
4,000- 4,000
(.000- 7.000
7,000- 4,000
•00-1,500
2,000- 3,000
4.000- 4,000
C.OOO- 7,000
400- POO
•00- l.&OO
4.000- 4.000
4.000- (.000
4,000
7.000
1,000
1,000
2.000
3,000
(.000
7.000
1.000
2.000
4,000
5,000
soo
1.000
2.000
3.000
1.400
2.000
2.400
3.000
1.140
1.400
2.000
2.400
BOO
1.100
1.400
2.000
too
•00
1.000
1.400
1,400
1,400
1.100
2.000
1.040
1,240
1.440
1.640
700
•oo
1.100
1.300
440
(00
•00
•40
700
•00
*»
1.000
(00
700
•00
900
MO
too
700
•00
400
too
(00
700
If Ike dollar anunt tn pack cell phoeld be aultlpHod bj the PMfcer pf Ujn ever aklck the
violation continued. _
2/ I'tD tc less than 1740,000, 1I«K40,00C to less then ll.OOC.OOOi lll'Sl.OOO.OOO te leu than
S4.000.000, 1V>S4,000.000 end above.
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EPA ORGANIZATION:
ASSESSABLE UNIT:
PREPARED BY:
EXHIBIT 3
Page I of 2
(See Page 42)
Office of Mobile Sources
MOBLIE SOURCE ENFORCEMENT
Kevin Hull
DOLLARS: $6,030,600 FTE's: 94.4
Date: 3/20/84
EVENT CYCLE
OBJECTIVES
4-
TECHNIQUES
A. Mobile Source
Enforcement
1. Assure that new and in-use
vehicles are capable of meeting
emissions standards throughout
their useful lives.
2. Assure that vehicle emission
control systems are not
removed or rendered inoperative.
a. Operate recall program to mandate
repair of non-complying in-use
vehicles.
b. Carry out Selective Enforcement
Audits (SEA's) of assembly line
vehicles, and monitor manu-
facturer auditing.
c. Carry out program to assure that
non-standard imported vehicles
meet applicable requirements.
d. Grant waivers to emissions
standards as appropriate.
a. Carry out investigations and
enforcement actions against
violators of Federal anti -
tampering/fuel switching
regulations.
b. Support implementation of State
and local anti-tampering/fuel
switching programs.
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EXHIBIT 3
Page 2 of 2
EPA ORGANIZATION:
ASSESSABLE UNIT:
PREPARED BY:
Office of Mobile Sources
MOBILE SOURCE ENFORCEMENT
Kevin Hull
_ DOLLARS: $6,030,600 FTE's: 94.4
Date: . 3/20/84
EVENT CYCLE
OBJECTIVES
TECHNIQUES
3. Assure that harmful additives
are not present in motor
vehicle fuels.
a. Enforce lead phasedown program
limiting the presence of lead in
gasoline.
b. Grant waivers for fuel additives
as appropriate.
c. Carry out investigations and
enforcement actions against
violators of Federal regulations
governing fuels and fuel
additives.
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UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON, D.C. 20460
AE 22 086
OFFICE OF
air and radiation
MEMORANDUM
SUBJECT:
Comments on the Inspector General's
FROM:
lation
TO:
Ernest E. Bradley III
Assistant Inspector General for Audits
Thank you for the opportunity to comment on your draft
audit report on the Office of Mobile Sources' Establishment,
Mitigation and Collection of Penalties.
1 would like to make some general comments about the
enforcement program in the Office of Mobile Sources (OMS)
before addressing your six specific findings. The Field
Operations and Support Division (FOSD) has been enforcing the
anti-tampering provisions of the Clean Air Act and the Fuels
Regulations, including lead phasedown and Fuel Additive
Regulations, since it was created in 1979. Since fiscal 1983,
it has issued 2160 Notices of Violation, proposed penalties of
over $46 million, and has referred over 60 cases to the Department
of Justice. During this period approximately 1,200 cases have
been settled, and approximately §4 million in penalties have been
collected. Former Administrator Ruckelshaus singled out OMS
enforcement for its innovative approach to settlement, which
involves seeking, in addition to a civil penalty, appropriate
remedies designed to not only correct the violative conditions
but also to correct public misperceptions which often lead to
tampering and fuel switching, and to generally increase public
awareness of the need to preserve motor vehicle emission systems.
Most FOSD settlements involve such innovative activities.
FOSD has accomplished significant enforcement activities in
the face of resource reductions. The average caseload for an
FOSD attorney since FY83 is over 60 cases. Remarkably, case
processing time has been reduced over this period, both in terms
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- 2 -
of Che time needed to issue notices of violation, and the time
needed to settle cases. FOSD has developed innovative procedures
to shorten the processing of its more routine cases, and is
continuing to explore avenues to expedite the enforcement process.
In sum, I believe that OMS* enforcement program is an
excellent one.
Response to Finding No. 1—Proposed Penalty Amounts Need Review
Your finding number 1 made a number of observations and
recommendations concerning the size of the proposed penalties
in FOSD cases.
The size of proposed penalties in FOSD fuels cases (under
section 211(c) of the Clean Air Act and 40 C.F.R. Part 80) is
limited by the statutory penalty of $10,000 per day per violation
(Section 211(d)). FOSD policy is to calculate a proposed penalty
in each case by adjusting the statutory $10,000 penalty to take
into account the egregiousness of the particular violation,
prior violations by the defendant, and the size of the defendant's
business. These adjustments are formalized in the published
"Guidelines for the Assessment of Civil Penalties under Section
211(d) of the Clean Air Act (Guidelines)."
You made observations and recommendations in three general
areas: 1) the size of the penalties proposed by FOSD should be
reviewed and possibly increased; 2) proposed penalties for lead
phasedown cases should be raised; and 3) the FOSD penalty policy
document should be reviewed and issued.
Your first recommendation is that FOSD should review our
proposed penalty schedule in non-lead phasedown cases and determine
whether penalty amounts are too low. We agree to review this
schedule, although we strongly disagree with your conclusion that
penalties currently proposed by FOSD are too low. As we discussed
in detail in our April 18, 1986 response to your position paper
#5 (copy attached), our penalty schedule properly takes into
account business size, nature of the violation (both as to type
and degree) and violation history. Our penalty schedule does
account for inflation, since many companies that had low gross
revenues in 1975 would be in higher business size categories and
thus subject to higher penalties in 1986. A $500-$1 ,000 penalty
for a category I violator would thus have the same deterrent
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l^as.L in 1986 as In 1975. Similarly, given the range of business
sizes in the regulated community, we will never be able to create
a penalty schedule that imposes both proportional penalties and
has a deterrent impact. If we are to have a policy which results
in penalties that are proportioned to take into account egregious-
ness, prior violations and size of business, we simply cannot
impose $10,000 penalties for first time violators, even those
are very large.
With regard to the second point regarding phasedown penalties,
this has been accomplished. On July 11, 1986, a notice was
published in the Federal Register (Vol. 51, at 25253-25256) which
raised the per-gram proposed penalties in phasedown cases from
$0.0075 to $0.05 (copy attached). The effect of this change is a
666% increase in the non-compliance component of phasedown case
penalties.
Concerning your third recommendation, we will agree to re-
examine the Penalty Policy we drafted two years ago, to determine
whether it should be finalized pursuant to the Agency Policy on
Civil Penalties, or whether our present policy is sufficient.
Response to Finding Number 2--QMS Efforts to Resolve Cases
Need Better Support and Tracking
Your Finding No. 2 addresses several separate and distinct
aspects of OMS1 process of resolving cases, each of which are
discussed below:
1. As you correctly state, it is OMS policy to provide
40% mitigation for respondent's efforts to correct the violations
and take steps to prevent future violations. OMS attorneys make
efforts in all cases to assure that appropriate remedial measures
are undertaken and documented in some manner within the case file.
Because of the variety of cases and. situations OMS encounters, the
appropriate documentation may range from very elaborate programs
to contact customers and inspect or repair vehicles, purchase
invoices for new fuels equipment or emission control devices,
instructions to employees, affidavits regarding corrective
measures to simple statements in the file regarding remedial
efforts. In some cases, violations have been corrected at the
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4
tine of inspection and enforcement action is based exclusively on
prior records or statements and no further documentation of
corrective action is even appropriate. W
You also commented on several lead phasedown settlements,
vhere the case files did not clearly document how ve arrived
at the final penalty. This situation has been corrected and,
in any event, the settlements achieved in these cases were
justified. The 1979 penalty guidelines were designed with
major refiners and large violations in mind, where $50,000
Deterrence Factors £/ (DF's) would be appropriate. We
1_/ You cite the following tampering case files for lack of
specific documentation:
- Cited for seven tampering violations with
a proposed penalty of $17,500. This case was resolved in
federal district court, where different factors are involved
in reaching settlement than in a routine NOV settlement.
The final settlement, strongly supported by the Department of
Justice, considered such factors as the probability of success,
the likely recovery in court, and the cost of going to trial.
The collected penalty represents an excellent resolution of
this litigation.
* - Cited for 131 tampering violations
with a proposed penalty of $327,500. A significant number
of the tampered vehicles cited were properly configured at
the time of inspection. Those violations were based entirely
on employee statements and old work Invoices and thus no
further documentation of repair was appropriate. Respondent
provided documents to evidence the purchase of new emission
control devices and statements from responsible city officials
regarding the repair of all other vehicles. In addition, a
team of OMS and regional personnel inspected a significant
sample of the cited vehicles still in service and relevant
maintenance invoices and identified no further nonconformities.
In addition, the city instituted increased vehicle maintenance
and emissions Inspections, well beyond the manufacturer's
recommendations, in order to prevent recurrence of the prior
problems.
2/ Lead Phasedown penalties have two components. The deterrence
~~ factor is designed to deter violations regardless of economic
benefit, while the noncompliance factor is essentially a
measure of the economic benefit to the violator from the
violation(s). The sum of the DF and NCF is the proposed
penalty.
-54-
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- 5 -
concluded that where Non-Compliance Factors (NCF's) were
small Imposition of a large
DF would be unfair. However, some DF was necessary and it
should be comparable to the NCF. For larger NCF's
we decided it was in the government's best
Interest to obtain the NCF plus a moderate DF as opposed to
prolonged negotiations and possible litigation to obtain a
larger DF, which would have still been small compared to the
NCF. We believe that these settlements are sufficient, all
factors considered.
You also recommended that OMS establish procedures for
independent review to assure that the criteria for reduction
of proposed penalties are met. including the stopping of
sale in contamination cases. £/ We are presently implementing
procedures that will require that the Action Memorandum
accompanying all settlement agreements describe both the violator's
remedial efforts and the supporting documentation in the case
file. This memorandum is reviewed by all supervisory personnel
involved in the final approval of settlement agreements, thus
providing the independent review as recommended in your report.
2. You discuss the need to summarize settlement
negotiations and/or conference(s) between the attorney and
respondents and recommend that a formal summary be prepared in
all cases for supervisory review. We believe the Action
Memorandum that accompanies all final agreements with the
addition described previously, should serve this purpose. When
it is done properly it is a sufficient summary of all the major
factors that need be brought to management's attention, particularly
considering the large number of cases handled by this office. We
will reeducate staff attorneys on the need to complete their
action memorandums properly and give them closer scrutiny in
the review process. Negotiations are documented by each attorney
in their own particular manner as they occur, and management
sees no need to dictate any particular format. Further,
problematic cases involving extended or complex negotiations are
usually brought to management's attention as they are being
resolved.
3/ You cite three cases where there was insufficient
~~ evidence in the file to justify mitigation. In
, the respondent was the distributor, and was
not notified until after the contaminated fuel was sold.
Since he had no opportunity to mitigate, we thought it
unfair to deny the 40% reduction. In , the
failure to mitigate was taken into consideration—hence
the 40% innovative settlement expenditure in addition to
the 20% cash penalty. In the 40% mitigation
should not have been granted.
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6
3. You dlacuas extensively OHS' need for a "Better
Tracking System for Open Case8M end recommend that OMS establiah
a better ayateo and document delaya with written explanatlona.
OMS presently haa an operational computerized caae tracking
ayitem which presently aerves a number of worthwhile functions
for staff attorneys, management and outside requests for OMS
data. This system presently provides management the necessary
indicia to adequately monitor case statua end, in fact.
Field Office Section Chiefs and the Branch Chief use this
system for periodic attorney case reviews. These formal
reviews and more frequent Informal meetings as needed provide
management and attorneys an opportunity to discuss the reasons
for unusual delays or problematic cases and determine the
appropriate course of action. Ue will Investigate the utility
of tracking problem cases separately with "written explanations
to management" in order to improve our process.
Deleted (See Footnote A/)
Response to Finding Number 3--Settlements Would Benefit From
Additional Guidance on Alternatives to Cash Penalty Payments.
You recommend that OMS attorneys be provided criteria
and examples for alternative payments and that cases show
the calculated credit for alternative paymenta. FOSD case
attorneys have all been provided with a copy of a December 22,
1980 In-Use Branch memo entitled "Conduct of Settlement
Negotiations." This memo builds on EPA'a 1975 "Guidelines
for the Assessment of Civil Penaltiea under Section 211(d)
of the Clean Air Act" and containa aubatantlal discussion on
A/ The data in the report, which this response pertains, has been deleted.
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general settlement policy, preparation for and conduct of
settlement negotiations, mitigation factors and the assessment
of special circumstances. This memo, in its discussion of
alternative settlement projects, very clearly states "As a
rule of thumb the attorney may assume that mitigation at a
rate of two dollars for each dollar spent is reasonable,
This has been and continues to be OMS general policy
and guidance for the settlement of cases in this manner.
OMS case attorneys have pioneered the use of this
alternative settlement concept within EPA resulting in numerous
innovative, creative and worthwhile programs and activities
towards meeting the goals of this program. Your audit has
examined only a small percentage of the creative efforts
that have resulted. These efforts have resulted from a
wealth of expertise and understanding of the causes, effects,
mechanisms and deterrence of tampering and fuel switching
accumulated over the last six years by lawyers, investigators
and management. These settlements have established mutually
beneficial relationships with many trade associations, public
interest organizations, educational institutions, environ-
mental groups, state and local agencies and a myriad of other
organizations that have productively enhanced EPA's ability to
meet the goals of this program in a comprehensive manner.
Many of these activities take advantage of a particular
respondent's available expertise, resources or contacts and
are often balanced by the attorney against the culpability
of the alleged violator and the strength of the case. Their
value simply cannot be meaningfully assessed by an out-of-pocket
cost or any other universal indicia but instead must be
evaluated by an informed staff in the full context from
which they were proposed. To attempt to reasonably quantify
the precise credit or environmental benefit assigned to the
myriad of diverse alternative projects developed by OMS
would likely be an unending and arbitrary task and one which
we believe unnecessary. Supervisory personnel interact
closely with case attorneys in the design and accreditation
of new projects and share examples of previous successful
efforts. We believe that case attorneys must retain the
flexibility to design these alternative projects within the
context of the general guidance that already exists and subject
to supervisory review prior to final agency commitment precisely
as they have done for the last six years.
In addition, your report lists 43 V cases for which you
claim that cash plus double the value o~£ other settlement
conditions is less than 60% ("guidelines"). These were
reviewed by OMS staff. In fact, the overwhelming percentage of
cases you reviewed were at or above guidelines. Of the 43 cases
reviewed, 24 were found to be within guidelines. Five (5) of
5/ Excluding those listed as slightly below 60%, and one not
~ identified by case number.
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these 24 cases were found to be above guideline settlements and
several very substantially above guidelines. These range roughly
from 65% to 114% of the proposed penalty (using $2 credit for $1
spent). Seven other cases involved very substantial public
information campaigns and very clearly meet the criteria for
"special circumstances" in the settlement guidelines. For example,
FOSD # 1995 involved a proposed penalty of $593,650. The
settlement consisted of a substantial cash penalty of $65,000,
very costly remedial action, 6 weeks of AAA automotive emission
testing for the general public with AAA's diagnostic mobile van
in three major cities, newspaper advertisements, posters, 18,000
billing inserts mailed to customers throughout the state containing
a clean air public information message and bumper stickers. At
least two of the cases were municipal cases, where we often
obtain particularly beneficial settlement activities taking
advantage of municipalities' unique position to educate their
citizens regarding tampering and fuel switching. All municipal
cases involved direct mailings to citizens and one case--F0SD #
2006--involved a direct mailing to all citizens. Of the remaining
12 settlements, six were only $100 to $200 below the 60% level.
The remaining six settlements all involved very small cases
where a penalty was collected along with some public education
activity. These were settled to avoid the cost of litigation—a
very good reason for settlement.
Response to Finding No. 4 -- Controls over Penalties Have
Improved, But Further Improvements Can be Made
Your finding number four involves FOSD procedures for
assuring that negotiated settlement terms—both money
penalties and public information activities—are carried out
by defendants in a timely manner. You make recommendations
and observations in the following areas: 1) ensuring that due
dates are specified for public information terms in settlement
agreements, and that management oversees completion of these
terms; 2) ensuring that defendants supply adequate proof of
accomplishing settlement terms, and that this is accurately
coded into the computer; 3) that FOSD reconcile penalty
accounts receivable with the Financial Management Division
(FMD); and 4) that FMD forward information on settlement terms
to the IRS.
With regard to your first point regarding specified due
dates in settlement agreements and management oversight of
their completion, we agree that these are important areas.
It has always been FOSD policy to make the terms of settle-
ment agreement as specific as possible. Because all settlement
agreements are reviewed before being executed on behalf of
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the Agency, such specificity can be and is monitored in
every settled case. FOSD attorneys will be reminded to
craft settlements with specific due dates, and managers
will continue to monitor in this area.
Regarding management oversight of the completion of
public information settlement terms, we are evaluating
various systems, including the addition of a new completion
date field in our case tracking computer system, use of a
new cover memorandum form for settlement agreements on which
public information terms and their due dates are specified,
use of a new Accomplishment of Settlement Terms memorandum
to be submitted by attorneys when all settlement terms have
been accomplished (which also specifies the evidence that
the terms were accomplished), and a review with each attorney
to ensure that each has an appropriate system to keep track
of due dates in general.
The second area about which you commented involves our
receipt of proper documentation that settlement terms were
accomplished. We agree that this is an important area, and
believe we have done a fairly good job in the past.6/
The Accomplishment of Settlement Terms memorandum, discussed
above, will allow consistent oversight in this area^ In
addition, during periodic case reviews, proper coding of
computer items will continue to be monitored.
Your last two points involve reconciling accounts
receivable with FMD, and forwarding settlement terms to
the IRS. We have been in contact with FMD, and learned that
FMD has a procedure in place to notify IRS of penalty payments,
which they will implement for FOSD cases. In addition, both
we and FMD would like to have a procedure to reconcile accounts
receivable, and have scheduled a meeting to develop such a
procedure.
Response to Finding Number 5--0MS Should Ensure Clear
Procedures for Pursuing Violations Against Small Refiners.
Your draft Finding No. 5 discusses OMS procedures for
pursuing lead phasedown violations against small refiners and
for pursuing relatively insignificant violations.
£/ Of the six cases you cite as examples of deficiencies in this
area, four either had good documentation in the file, or the
documentation had been received but not yet put into the file
because the 1G auditor had possession of the file.
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This matter is moot since the same standard now applies to
large and small refineries. We agree with your recommendation
concerning the necessity for establishing clear procedures for
attorneys to follow in lead phasedown violations. We believe
that our procedures are clear for lead usage violations, while we
are in the process of finalizing our procedures for lead banking
violations.
Concerning your recommendation that an independent periodic
review by non-OMS Agency officials of a representative sample of
case files be initiated, we simply do not see any need for
instituting such a procedure. We believe that our present system
contains enough safeguards to assure compliance with our procedures.
However, if a periodic review could be handled in a relatively
non-intrusive matter, we would not object to its being conducted.
Response to Finding Number 6—Federal Managers' Financial
Integrity Act Not Fully Implemented
You expressed your concern that the Office of Mobile
Sources is not fully implementing the provisions of the
Federal Managers' Financial Integrity Act. We feel that OMS
is actually one of the Agency's leaders in implementing FMFIA.
EPA has not, as an Agency, fully, implemented all aspects
of FMFIA. EPA is in the process of developing internal
control processes as part of FMFIA implementation. OMS,
however, started a pilot internal control review process
focusing on administrative support functions in the Ann
Arbor Motor Vehicles Emissions Laboratory. The developer of
the OMS pilot process has been asked to train internal control
coordinators for other programs. Thus, OMS is actually in a
leadership role at EPA in this area.
As Agency rules and guidelines in this area become more
firmly established, we will take appropriate action to further
establish proper controls for all areas within the Office of
Air and Radiation. In the meantime, the controls established
within FOSD for tracking and documenting the enforcement
process are a major step towards assuming that FMFIA objectives
are being achieved.
Other Matters
We generally agree with your conclusions concerning the
usefulness of criminal sanctions for flagrant and/or particularly
egregious violations. We have previously submitted such
recommendations to Congress. We note, however, that the judge
who applies civil sanctions leniently will likely do the same in
a criminal context.
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DISTRIBUTION
Assistant Administrator for Air and Radiation (ANR-443)
Assistant Administrator for Enforcement and
Compliance Monitoring (LE-133)
Comptroller (PM-225)
Agency Followup Office, Attention Resource
Management Staff (PM-208)
Associate Administrator for Regional Operations (A-101)
Director, Financial Management Division (PM-226)
Administrator (A-100)
Deputy Administrator (A-101)
Office of Congressional Liaison (A-103)
Office of Public Affairs (A-107)
Regional Administrators
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