The Venable Report. Cooperating with the Government s Investigation: The New Dilemma ENVIRONMENTAL CRIMES BULLETIN

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1 The Venable Report FA L L ENVIRONMENTAL CRIMES BULLETIN Cooperating with the Government s Investigation: The New Dilemma C IN THIS ISSUE Cooperating with the Government s 1 Investigation: the New Dilemma Increases for Leadership or Supervisory Roles for Sentencing - the Courts Speak 2 Guidelines for the Prosecution 4 of Corporations DOJ Names New Chief of 5 Environmental Crimes Section Criminal Environmental Law Enforcement 5 in the International Maritime Setting U.S. Considers Expansion of 6 Ocean Dumping Act Venable Produces Environmental 8 Crimes Handbook onsider the following scenario: A company is alerted to the possibility of a government investigation of reported illegal conduct by its employees and company counsel immediately initiates an internal investigation to determine the facts. Once the facts are gathered, the company must decide either to make a disclosure to the government, informing the affected agencies of its intent to cooperate and begin settlement negotiations, or prepare for trial, expecting to engage in plea negotiations as part of the litigation process. Whether the company decides to disclose or await later plea negotiations, one of the government s demands as the price of settlement will likely be full cooperation by the company with the government investigation. Full cooperation probably means handing over to government prosecutors materials developed during the company s internal investigation, with the company completely waiving attorney-client privilege and the work product protections for these documents. (See The Deputy Attorney General Issues Guidelines for the Prosecution of Corporations. ) The company then becomes caught in a Catch-22 situation. If the company cooperates, it risks damaging the delicate relationship between the company and its employees, and negatively affecting future self-policing efforts. On the other hand, if it rejects the government s terms, it may be labeled as noncooperative, increasing the likelihood that enforcement officials will push for indictment or broaden an existing indictment. The waiver of attorney-client privilege and work product protection is becoming a standard feature of corporate plea agreements and settlement negotiations. Recently, both BP Exploration (Alaska) and Royal Caribbean Cruises (RCCL) agreed to extensive waivers of attorney-client privilege and work product protection, and disclosed much of the information from their internal investigations as part of plea agreements. Corporate and outside defense counsel view the government s insistence on this type of cooperation as more than the traditional recruiting of informants that has always been part of criminal enforcement. In essence, defense counsel are forced to become informants themselves because they are expected to interview employees and other witnesses and turn this information over to the government. In fact, in the BP Exploration case, the plea agreement states that the government has the right to seek testimony directly from defense counsel or any participant in any interview, such as company counsel. continued on page 2

2 2 Cooperating with... continued from page 1 Prosecutors, on the other hand, argue that the demand is not coercive, and that companies are voluntarily waiving their privileges and protections as the price of a deal. They also argue that the government does not require waiver of the privilege to reach traditionally protected attorney advice or mental impressions of counsel. Do such demands for waiver by the government ultimately benefit the cause of justice or, for that matter, compliance? One obvious problem is that these waivers allow the government to make an end run around the Fifth Amendment rights of employees, who are more likely to make self-incriminating statements to attorneys representing the company than to government investigators or prosecutors. This is so despite warnings by company attorneys to the employees at the time of the interview that they are representing the interests of the company and not those of the individual employees. As government demands for waiver of attorney-client privilege and work product protection become a matter of routine, this development will no doubt have a significantly adverse impact on the ability of companies to maintain effective self-policing compliance programs. Companies can be most effective in ensuring compliance with applicable laws if their internal corporate practices encourage and reward early and frank disclosure of problems. Moreover, internal investigations allow companies to determine the scope of compliance problems, and companies need employees to be truthful and forthcoming in order to do so. Employees who believe that their disclosures ultimately will be turned over to the government, resulting in their colleagues or they themselves becoming potential targets of government investigations, are far less likely to offer the important information needed by companies to self-police and take actions necessary to gain compliance. Interestingly, this issue arises at a time when federal and state agencies, including the Department of Justice, are encouraging companies to institute compliance and self- policing programs. Ironically, these government efforts to institutionalize corporate compliance programs for the greater benefit of society can be severely undermined by routine demands of government prosecutors that companies waive privileges and protections that lie at the heart of our criminal justice system. Open and frank discussion between employees and company counsel improves compliance with the law. Such discussion can not occur in an environment in which the employees fear that the information they disclose may later be turned over to government prosecutors. How Leadership Positions or Supervisory Roles Increase the Sentence The Courts Speak T he Federal Sentencing Guidelines provide upward adjustments (an increase of points) to the basic offense level calculation on sentencing if the defendant was an organizer, leader, manager or supervisor of the criminal activity. This upward adjustment could make a significant difference in sentencing, and may result in time in jail as opposed to none at all. Several courts have recently examined this guideline in the context of environmental crimes. In United States v. Bragg, the defendants recruited homeless men from out of state to use as laborers on an asbestos removal project, fraudulently procuring identification cards for some of the workers. The project was conducted in violation of numerous Clean Air Act regulations. On conviction for criminal violations of the Clean Air Act, the defendants offense levels were increased due to their respective leadership or supervisory roles in the criminal offenses. The defendants appealed the sentencing calculation, arguing that the upward adjustment resulted in double counting because the same conduct was used to justify both the increase for their role and to attach criminal liability for violations of the Clean Air Act. Under the Clean Air Act regulations, criminal liability

3 Increases for Leadership... continued from page 2 attaches to an owner or operator of pollution, which is defined, among other things, as any person who controls or supervises a demolition renovation operation. The appellate court upheld the upward adjustment on sentencing. The court noted that the adjustment disregards mere titles and attaches to conduct far more culpable than merely being an owner or operator as that term is defined under the Clean Air Act. In other words, the court said, the upward sentencing adjustment addresses a defendant s actual level of management and responsibility over the property, assets or activities of a criminal organization. The court stated that the upward adjustment was justified by several factors over and above the defendants mere role as an owner or operator of pollution under the Clean Air Act. These included the fact that the defendants recruited accomplices, the degree of planning or organizing that went into the crime, the nature and scope of the crime, and the degree of control and authority exercised by the defendants. The degree of control and authority necessary for a defendant to qualify for the upward adjustment was the issue in two other recent cases, United States v. Cooper and United States v. Hanousek. In Cooper, the defendant hauled sewage sludge for the City of San Diego. Subsequently, the defendant changed sites for disposal of the sewage sludge and failed to report the change in site to the City as required under the applicable NPDES permit. The defendant had also falsified weighmaster certificates on which payment under the contract with the City was based. The defendant was found guilty of conspiracy to violate the Clean Water Act, of aiding and abetting violations of the Clean Water Act and of mail fraud. The district court applied an upward adjustment on sentencing because of the defendant s role in the offense as the leader, manager or supervisor. The trial court found that the defendant owned half of the hauling company, benefited the most from the offenses, knew about the hauling company s day-to-day activities, and located the alternate site for the sludge. On appeal, the appellate court upheld the upward adjustment, noting that a defendant only has to exercise authority over one other participant to merit the adjustment, and that the evidence showed the defendant supervised at least one other participant in the criminal activity. In Hanousek, the defendant was a roadmaster for a railroad. The railroad had hired a subcontractor to conduct a rockquarrying project. In the course of the project, a backhoe operator working for the subcontractor struck an oil pipeline, causing a rupture, and oil was discharged into a river. As roadmaster, the defendant was responsible for the rock-quarrying project. However, he was not at the scene when the backhoe operator caused the rupture, and had not approved the activity that led to the rupture. The defendant was convicted of negligently discharging a harmful quantity of oil into a navigable water of the United States in violation of the Clean Water Act. Neither the backhoe operator nor the subcontractor was charged. At sentencing, the trial court made an upward adjustment based on the defendant s role as supervisor in a criminal activity. On appeal, the appellate court noted that under the guidelines, an upward adjustment could be made if the defendant supervised one or more participants. A participant is a person who is criminally responsible for the commission of the offense, but need not have been convicted of a crime. The court held that the defendant was a supervisor under the guidelines because, although the backhoe operator was not prosecuted, he was a participant in the criminal activity and the defendant supervised the project. These cases are important because of the trend in environmental criminal cases to prosecute managers and others deemed responsible corporate officers for the actions of the employees they supervise. While Bragg indicates that more than just the title of supervisor is required for purposes of an upward adjustment under the guidelines, Hanousek indicates that it does not take very much more than a title for the adjustment to be applied. Also, both Cooper and Hanousek reinforce that an upward adjustment may be made even though there is only one other person who participated in the violation. 3

4 4 DOJ Guidelines for the Prosecution of Corporations - the Debate Begins T he Deputy Attorney General of the United States, Eric Holder, has issued a document to the heads of all components of the Department of Justice and to all United States Attorneys entitled Federal Prosecution of Corporations, also known as the Holder Memo. The document provides guidance as to what factors should generally be taken into consideration by federal prosecutors in determining whether to bring criminal charges against a corporation. The guidelines apply to all crimes that may be committed by businesses, including environmental crimes. The document states that the factors in the document should be taken into consideration in all cases involving corporate wrongdoing. However, it also states that the factors are not outcome determinative and that federal prosecutors are not required to reference the factors in a particular case, nor are they required to document the weight they accord the specific factors in exercising their discretion. The guidelines do, though, identify those factors, pro and con, that should weighed in the decision to prosecute a corporation. The eight factors are: 1. The nature and seriousness of the offense, including the risk of harm to the public, and applicable departmental or agency policies applicable to the particular crime involved. 2. The pervasiveness of wrongdoing within the corporation, including the complicity, or condonation of, the wrongdoing by corporate management. 3. The corporation s history of similar conduct, including prior criminal, civil and regulatory enforcement actions against it. 4. The corporation s timely and voluntary disclosure of wrongdoing and its willingness to cooperate in the investigation of its employees, officers, directors and agents, including the waiver of corporate attorney-client privileges and attorney work product protections. (See Cooperating with the Government s Investigation: The New Dilemma above.) 5. The existence of a corporate compliance program and its adequacy. 6. The corporation s remedial actions, including any efforts to implement an effective corporate compliance program or to improve its existing one, to replace managers responsible for the violations, to discipline or terminate wrongdoers, to pay restitution, and to cooperate with the relevant government agencies. 7. Collateral consequences, including disproportionate harm to shareholders and employees not proven personally culpable. 8. The adequacy of non-criminal remedies, such as civil or regulatory enforcement actions. These guidelines offer some important information not only to prosecutors, but also to corporate and defense attorneys representing corporations that have found violations or are involved in a criminal investigation. Companies should focus on identifying early those mitigating factors identified in the guidelines that militate against prosecution and point these out to government investigators and prosecutors whenever possible. For instance, one factor that corporations should work hard to identify is the effects that collateral consequences will have on the corporation and its innocent employees. Collateral consequences may include suspension and debarment from government contracts, loss of business, loss of financing and loan opportunities for future improvements and so on. Further, corporations should seriously discuss possible non-criminal remedies that may be available to address the violations, and explore such remedies with regulatory agencies as early as possible. Knowledge of the guidelines is also very helpful in establishing the types of remedial actions that should be considered when addressing violations.

5 DOJ Names New Chief of the Environmental Crimes Section L ois Schiffer, the Assistant Attorney General for the Environment and Natural Resources Division in the Department of Justice, recently announced that David M. Uhlmann will assume the position of Chief of the Environmental Crimes Section. Mr. Uhlmann takes over from Steven Solow, who took a position as a visiting professor at the University of Maryland Law School. Prior to his appointment, Mr. Uhlmann served ten years in the Environmental Crimes Section as a trial attorney, senior trial attorney, and most recently as an Assistant Chief within the Section. As Chief, Mr. Uhlmann will direct approximately 35 prosecutors who try cases involving criminal violations of the federal environmental laws. He is the sixth Chief to head this section. Previous Chiefs include Venable s Judd Starr and Jerry Block. Maritime News Criminal Environmental Law Enforcement in the International Maritime Law Setting R ecently, some very interesting developments occurred involving the criminal enforcement of United States environmental crimes at sea. The case involved the Liberian flag tank vessel (T/V) Command. In September 1998, a mystery oil spill was reported in San Francisco Bay. The oil slick was large enough that the oil began washing up on the beaches in the area, and created a large oil slick. The oil killed approximately 100 sea birds, some of which were protected under the Endangered Species Act, as well as some sea lions. Needless to say, the spill led to extensive media coverage and outrage in the San Francisco area. Several days after the incident, the Coast Guard determined that the most likely source of the mystery spill was the T/V Command. By this time, the vessel had departed U.S. waters. The Coast Guard initiated interagency consultation under Presidential Directive 27 (PD 27). This process has long been used to coordinate efforts among federal agencies to combat smuggling of illegal drugs and aliens. Agencies that have an interest in the case are consulted and are requested to give consent to the Coast Guard to stop and board vessels that have been determined to be in likely violation of U.S. laws. After receiving permission from the other U.S. enforcement agencies under the PD27 process, the Coast Guard received permission from the ship s flag state, Liberia, to board the vessel when it was found. A Coast Guard aircraft flying a drug interdiction mission off the coast of Central America spotted the T/V Command about 250 miles off the coast of Guatemala. A Coast Guard cutter doing drug patrols off the coast of Central America was diverted to the scene and a Coast Guard boarding team boarded the T/V Command. Ultimately, Liberia withdrew its consent and the boarding team left the ship. However, Liberia indicated that it would place a hold on the vessel at its next port of call, Panama, and agreed to do a joint investigation with the United States. Under the United Nations Convention on the Law of the Sea (UNCLOS) and the International Convention for the Prevention of Pollution from Ships (MARPOL), a vessel s flag state has a duty to ensure that its vessels comply with international environmental rules and standards. If one of its vessels commits a violation of applicable rules and standards, no matter where it occurs, the vessel s flag state is supposed to immediately investigate the violation and, if appropriate, institute proceedings and assess penalties. Recognizing the overlapping interests and jurisdiction of the flag state and affected states in investigating marine casualties and pollution incidents, the International Maritime Organization (IMO) has issued resolutions encouraging joint investigations by the flag state and other affected states of pollution incidents that threaten or cause serious environmental harm. The U.S. assembled a boarding team of agents from the Coast Guard, the EPA and continued on page 6 5

6 6 Criminal Environmental Law continued from page 5 the FBI, and a prosecutor from the Office of the U.S. Attorney in San Francisco. This team then proceeded to Panama. The U.S. boarding team joined a team of investigators from Liberia to investigate the pollution incident in San Fransisco. The joint investigation lasted six days, at which time Liberia indicated that it was releasing the vessel. However, the U.S. was still not satisfied with the results of the investigation and requested that Panama, the port state, conduct an investigation into the incident. Panama agreed to the request and a joint investigation began. In requesting the participation of Panama, the United States invoked the port state control regimes that are established in UNCLOS and MARPOL when Liberia ended its participation in the investigation. Under UNCLOS and MARPOL, when a vessel is voluntarily in a port, the port state may investigate for pollution incidents involving the vessel that occurred outside the internal waters, territorial sea or EEZ of the port state for violations of international rules and standards. Ultimately, the Federal Grand Jury in San Francisco returned indictments against the Master and Chief Engineer of the T/V Command, and against Anax Shipping, a Greek corporation that was the operator of the vessel. The defendants were indicted for the negligent discharge of oil in violation of the Clean Water Act and for failure to report the spill. The Master and Chief Engineer voluntarily surrendered to U.S. law enforcement agents. Ultimately, the defendants agreed to a total of $9.4 million in fines and penalties, along with reimbursement for the damages and response costs associated with the oil spill. The Master and Chief Engineer were barred from sailing in the United States for three years, and Anax agreed to submit a detailed environmental compliance plan and to fund other environmental projects. The success of the United States in using the international enforcement regime and the cooperation of the other U.S. enforcement agencies in the investigation and prosecution of this case means that there will likely be more of these types of international investigations leading to U.S. prosecutions of maritime environmental incidents in the future. U.S. Considers Expansion of the Ocean Dumping Act for Ship-Generated Wastes R ecently, a Coast Guard representative told the Maritime Law Association of the United States that the Environmental Protection Agency (EPA) and the Coast Guard were drafting a Notice of Policy to address the discharge of materials, such as garbage, generated by vessels in port. The policy will be published as a proposal, probably in November or December of 2000, and public comment requested. Historically, the discharge of materials generated by the normal operation of vessels has been regulated under MARPOL. According to the Coast Guard and EPA, there is an inherent conflict between MARPOL, particularly Annex V, and the Ocean Dumping Act. Under MARPOL, discharges at sea of garbage and other materials generated by ships are allowed if they meet certain operational discharge criteria. The new policy apparently will require that all garbage and other material generated by vessels while in U.S. ports, or that is brought into U.S. waters, be disposed of ashore prior to vessel departure. The Ocean Dumping Act prohibits any vessel from transporting from the United States, or U.S. flag vessels transporting from any location, any material for the purpose of dumping it into the ocean. It also prohibits the dumping of material transported from a location outside the United States into the waters of the territorial sea or contiguous zone. The Ocean Dumping Act was amended in 1974 to make it consonant with the requirements of the Convention on Pollution of the Seas by the Dumping of Wastes and Other Matter, better known as the London Dumping Convention, which the United States signed and ratified. The London Dumping Convention excludes from the definition of dumping the disposal continued on page 7

7 U.S. Considers Expansion continued from page 6 at sea of wastes or other matter incidental to, or derived from, the normal operations of vessels. (This is different than the Ocean Dumping Act, which only excludes the discharge of effluent from the operation of propulsion and other motor-driven equipment on vessels from the definition of dumping.) Wastes and other materials, such as garbage, that are generated by the normal operations of vessels are controlled under international pollution standards by MARPOL, and not by the London Dumping Convention. Thus, the policy to be proposed by the Coast Guard and EPA will apparently interpret the Ocean Dumping Act in a manner that is not consonant with the requirements of the London Dumping Convention. This policy raises some very troubling issues. Annex V of MARPOL authorizes and anticipates the discharge at sea of garbage and other materials that are generated by a vessel in port. For instance, Annex V authorizes the discharge of cargo residues, such as from grain and other dry bulk cargoes. Cargo residues are considered an operational waste, and are defined as remnants of any cargo on deck that result from loading excess and spillage, or that remain in cargo holds after unloading. Such materials can be discharged at sea outside of 12 nautical miles from the nearest land under Annex V. Also, Annex V has specific requirements for the discharge of dunnage, lining and packing materials used on vessels, materials that clearly result from loading activities in port. These types of discharges apparently would not be allowed under the new policy. Additionally, the Ocean Dumping Act applies to U.S. flag vessels if they transport materials for dumping at sea from any location. This means that even if discharges would comply with MARPOL, U.S. flag vessels may still be required to discharge ashore all garbage and other materials under the policy generated by these vessels while they are in a foreign port. In light of the significant lack of adequate waste disposal facilities in many foreign ports, U.S. vessels will be hard pressed to comply with the policy if these issues are not taken into consideration. Yet another potential problem is what discharges may be eventually covered by the new policy. All types of garbage as defined under Annex V of MARPOL will apparently be included. But the definition of material under the Ocean Dumping Act is very broad, and other types of ship-generated materials also could be included. In fact, the legislative history of the Ocean Dumping Act indicates that Congress wanted to make material covered under the Ocean Dumping Act as close as possible to the definition of pollutant under the Clean Water Act. Recently, there has been a significant effort on the part of environmental groups to have the EPA regulate ballast water as a pollutant under the Clean Water Act. Will the Coast Guard and EPA policy lead to the assertion that the Ocean Dumping Act provisions cover discharges of ballast water taken on in port, or brought in from outside the United States into U.S. ports or waters? Finally, vessels may ultimately be most affected by the provision in the Ocean Dumping Act that addresses the dumping of materials generated beyond U.S. jurisdiction that are brought into the U.S. territorial sea and the contiguous zone. Under MARPOL Annex V, certain wastes that are comminuted or ground may be discharged at sea inside of 12 nautical miles from land. Because the Ocean Dumping Act defines material as matter of any kind or description, it appears that vessels in U.S. waters can not discharge any wastes that fit within the broad definition of material, such as food wastes, even if the discharge is done in accordance with MARPOL. Knowing violations of the Ocean Dumping Act are criminal misdemeanors. While there have been few criminal cases prosecuted under the Ocean Dumping Act, at least one case has involved ship-generated waste. In U.S. v. Apex Oil Co., the United States indicted the defendants under the Ocean Dumping Act for illegally dumping the 55-gallon drums and other materials used to muck out the cargo tanks in port, and the defendants pled guilty. This case was the first in which the Ocean Dumping Act was used to prosecute the discharge of purely ship-generated material. 7

8 8 Venable Produces Environmental Crimes Handbook for the Chamber of Shipping of America T he Chamber of Shipping of America recently announced the publication of Environmental Criminal Liability in the United States - A Handbook for the Marine Industry, which Venable wrote on behalf of the organization. Joseph J. Cox, President of the Chamber, states that the sponsorship of the project by the Chamber was undertaken with both reluctance and resolve. Mr. Cox states that the reluctance stemmed from the Chamber s belief that normal practice in the marine industry, much of it mandated by international standards and domestic regulations, should not lead to concerns about criminal liability. However, the resolve stemmed from actions by some federal, state and local enforcement agencies that dictate the need for guidance to the marine industry to address the increasing likelihood of criminal liability resulting from their operations. The handbook provides guidance to shoreside management of companies that own and operate vessels in U.S. waters, but also contains important information that may benefit others associated with the marine industry. The handbook contains chapters describing the current state of environmental criminal liability in the United States and how environmental laws are enforced by federal and state agencies. It makes recommendations regarding preparations that companies can make to deal with government investigations both of oil spills and other environmental incidents at sea and of a company s shoreside management and practices. Also included are quick response cards outlining steps that should be taken to deal with government searches and inspections of vessels and company offices, and guidance on rights and procedures to deal with requests by government investigators for interviews of employees and vessel crew. Finally, the handbook discusses the importance of effective environmental compliance programs, such as are required under the ISM Code, in addressing potential environmental criminal liability under United States law. This is the third major publication dealing with environmental crimes for which Venable was selected to team up with a prestigious organization, such as the Chamber of Shipping. The Environmental Law Institute recently selected Venable to author its Environmental Crimes Deskbook, while the Chemical Manufacturers Association selected Venable to write The Knock on the Door - Preparing for, and Responding to, a Criminal Investigation, which is now in its second edition. Information on purchasing the handbook is available from the Chamber of Shipping of America, 1730 M Street N.W., Suite 407, Washington, D.C , Phone: (202) , Fax: (202) The Venable Report, Environmental Crimes Bulletin is published by the Environmental Practice Group of the law firm of Venable, Baetjer and Howard, LLP, Two Hopkins Plaza, Suite 1800, Baltimore, MD 21201;1201 New York Avenue, N.W., Suite 1000, Washington, DC 20005; One Church Street, Suite 500, Rockville, MD 20850; 210 Allegheny Avenue, P.O. Box 5517, Towson, MD 21204; and 2010 Corporate Ridge, Suite 400, McLean, VA Internet address: It is not intended to provide legal advice or opinion. Such advice may only be given when related to specific fact situations. Questions and Comments concerning materials in the newsletter should be directed to David G. Dickman, Venable, 1201 New York Avenue, N.W., Washington, DC Telephone (202) or Address Changes should be directed to Ruth Kaufman, Venable, 1201 New York Avenue, N.W., Washington, DC Telephone (202) or