by Peter Maloney
Posted April 1, 2020

The U.S. Department of Justice has issued a memorandum that ends a practice that allowed parties to reduce payments for emissions violation penalties by undertaking Supplemental Environmental Projects (SEPs) in civil settlements.

The March 12 memo from Jeffrey Bossert Clark, assistant attorney general, to section chiefs in the DOJ’s Environment and Natural Resources Division took effect immediately, ending what has become a widespread practice for about 30 years.

In the 1980s, government agencies, such as the Commodity Futures Trading Commission and the Nuclear Regulatory Commission, sought to use monies from the settlement of violations to fund community service programs, but the Comptroller General said that would have been a violation of the Miscellaneous Receipts Act, which specifies that any such payments have to go directly to the Treasury. In the 1990s, however, the comptroller changed its view, allowing agencies to use their discretion in relation to concessions from violators.

Over the ensuing decades, the use of SEPs grew as an in-kind payment in exchange for a reduction of up to 80% of a penalty. Government bodies, such as the Environmental Protection Agency and the DOJ, came to rely on the rationale that SEPs do not trade penalties for projects because there is no penalty owed to the government until the settlement is finalized, according to Clark’s memo.

But those in-kind payments are “as problematic as direct cash payments to third parties” because the “mathematical relationship” between penalties and SEPs leads to the “inescapable” conclusion that SEPs violate the Miscellaneous Receipts Act and, thus, usurp Congress’ sole constitutionally authorized power of the purse, Clark wrote in the memo. “Moving forward,” he wrote, SEPs “will no longer be part of the suite of relief the Environment and Natural Resources Division seeks in its cases.”

SEPs have long been used to successfully resolve complicated and protracted litigation and have been supported by the government, nongovernmental organizations, and the business community alike. They have resulted in significant environmental benefits, and for some SEP supporters, they are viewed as a more beneficial use of funds than placing them in the Treasury because they are intended to address the environmental harm arising from underlying violations.

Despite the benefits of SEPs, they are “purely a creation of the Executive Branch,” Clark wrote. And no matter how well intentioned, SEPs “reduce the amount paid into the Treasury … while simultaneously giving the Executive Branch discretion over how the monies diverted from the Treasury will be spent. This diversion of funds effectively makes the Executive Branch the quasi-appropriator of funds, yet the Constitution clearly gives that power to Congress,” Clark wrote.

For its part, the EPA on its website, notes that it does not have a “SEP program,” and that SEPs are not a “funding mechanism” for projects, but “an enforcement settlement policy only.” The EPA also notes that SEPs are voluntary and cannot augment any existing federal funding or appropriations or be undertaken using federal loans or grants.

The EPA also notes that it does not impose its preference for particular projects on defendants, but the agency generally recommends that potential SEP projects proposed by defendants “must involve the same pollutant or same health effects as were involved in the violations being resolved, addressing the same adverse impacts or risks to which the violations contributed, or preventing future similar violations.”

The March 12 memo builds on previous DOJ memos that have restricted the DOJ’s leeway in negotiating settlements. In November 2018, the Attorney General issued a memo directing that consent decrees “must not be used to achieve general policy goals.” In August 2019, Clark issued a memo applying the November directive to SEPs.

And while Clark says that he recognizes “the disruption this new policy could have on existing cases, particularly those in the final stages of negotiation … I must emphasize that I do not have discretion to make exceptions to what is a sound construction of both statutory and constitutional law.”

It should also be notes that this internal DOJ memorandum does not apply to states, many of whom have developed their own independent SEP authorities. And, it does not address the previously common practice wherein federal consent decrees resolved state claims by including state SEPs, which the federal government need not approve.