Kevin R. Doherty and Margaret Anne Hill
Earlier this month, the Department of Justice (“DOJ”) officially eliminated the use of “Supplemental Environmental Projects” in civil settlements. The once-popular settlement tool, commonly known as SEPs, allowed alleged violators of environmental laws to complete Environmental Protection Agency (“EPA”)-approved projects in exchange for reduced penalties. These projects were considered by EPA and DOJ as providing tangible environmental and/or public health benefits to the environment and/or the affected community, and through their completion, settling parties were permitted to offset a portion of their civil penalties through cost effective and proactive environmental measures.
The use of SEPs, however, has been somewhat controversial over the years. Used by the EPA since the 1980s, SEPs were often criticized as a method of trading projects for penalties, whereas proponents rationalized their use given the fact that civil penalties owed to the government for violations were not reduced on a dollar for dollar basis, and SEPs involved environmentally beneficial projects beyond what was required by federal or state environmental laws. In its March 12, 2020, Memorandum, DOJ recognized that the use of SEPs had been “controversial for decades” and determined that these “in-kind payments in exchange for a reduction of a penalty are as problematic as direct cash payments to third parties.” DOJ went on to acknowledge that through the use of SEPs, an alleged violator could reduce their civil penalty by as much as 80 percent and that this settlement arrangement violated the Miscellaneous Receipts Act, which prohibits funds received by federal officials in settlements from being diverted to third parties, and instead requires those funds to be submitted to the U.S. Treasury Department. Since SEPs permitted alleged violators to use funds on projects benefiting third parties (for example, communities), and the monies expended on such projects would have otherwise gone to the U.S. Treasury, DOJ concluded their use in civil penalty enforcement actions contravened the Act.
Ending the practice of allowing those found to be in violation of environmental laws to address civil penalties through the performance of environmentally beneficial projects is sure to disappoint the regulated community to some degree. Nevertheless, the use of SEPs had already been on a significant decline for several years given the extensive settlement process (involving counsel and the alleged violator), which was required to reach an agreement with EPA in order to incorporate a SEP into a consent order. Absent congressional action, which is highly unlikely, DOJ’s most recent announcement and enforcement decision simply puts the long-expected nail in the SEP coffin.