The US Department of Justice announced it will no longer include environmental projects in settlements of environmental cases in which civil penalties are sought. This decision casts great doubt on the future of Supplemental Environmental Projects, or SEPs. Over the years, SEPs have been popular with EPA and industry, proven valuable in settling cases, and directed resources in a manner that benefits the environment.
In its 2015 Update of its SEP Policy, EPA defined a SEP as “an environmentally beneficial project or activity that is not required by law, but that a defendant agrees to undertake as part of the settlement of an enforcement action.” The project goes beyond what could legally be required in order for the defendant to return to compliance and secures environmental and/or public health benefits in addition to those achieved by compliance with applicable laws.
SEPs have been a useful tool for EPA and the DOJ to resolves civil penalty cases. SEPs lower the amount of the civil penalty paid in settlement as the cost of the SEP is factored into the final penalty amount. In the 2015 Update, EPA stated that the “amount of penalty mitigation given for a SEP should be equivalent to a percentage of the estimated cost to implement the SEP and should not exceed eighty percent (80%) of that estimated cost.” As a result, penalty money that would otherwise go to the US Treasury is instead diverted into the SEP.
The penalty mitigation and diversion of the civil penalty is at the heart of DOJ’s concern. DOJ found that SEPs run afoul of an obscure law known as the Miscellaneous Receipts Act, which states that government officials “receiving money for the Government from any source shall deposit that money with the Treasury.”
According to DOJ, the SEP Policy has been controversial since its inception in 1991. It cites a number of reports which criticize the SEP Policy generally based on the Miscellaneous Receipts Act. DOJ’s current reasoning is straightforward and echoes these past criticisms – SEPs allow alleged violators to expend funds on projects benefitting third parties that otherwise would go to the Treasury as miscellaneous receipts for Congress to appropriate as it sees fit.
Over the years, EPA attempted to address these long-standing concerns by, among other things, requiring that all SEPs have a sufficient nexus to the legal violations at issue and prohibiting EPA from playing any role in managing or controlling the SEP or the funds used to perform it. DOJ dismisses these attempts, stating that they do “not overcome the fact that EPA has established a mathematical relationship between the cost of a SEP and diminution of a penalty.”
DOJ concludes that the SEP Policy violates the Miscellaneous Receipts Act and “is inconsistent with the spirit and the letter of the law.” As a result, DOJ “will no longer compromise civil penalties that would otherwise be deposited in the Treasury in exchange for performance of projects,” even in cases where the SEP provides for direct monetary payments to a third party or indirect payments to a third-party through in-kind contributions of goods and services. However, DOJ’s decision is not retroactive and does not apply to past settlements.
For its part, EPA disagrees with the DOJ’s conclusions. On its web-site, EPA proclaims that SEPs are not a diversion of penalty funds and are an appropriate extension of its “prosecutorial discretion.” While, the DOJ’s decision does not apply directly to EPA’s administrative settlements, it seems only a matter of time before the DOJ’s reasoning is applied to an SEP in an EPA settlement. A decision in such a case may spell the end of the use of SEPs in administrative matters as well.