The American Smelting & Refining Co. (Asarco) has been the subject of contention ever since 1899, when it was established to consolidate William Rockefeller’s U.S. mining interests. In 1901, Meyer Guggenheim wrested control of the company from Rockefeller, merged Asarco with his established operations, and built one of America’s greatest industrial fortunes, mining silver, lead, diamonds, and especially copper in the United States, Latin America, and Africa.

A century later, amid steadily falling copper prices and a $54 million net loss for the six months ended June 30, 1999, Asarco was sold for $817 million to Grupo Mexico S.A. de C.V. The Mexico City-based company announced that to help pay down the acquisition debt, it would begin to divest Asarco of assets. The most valuable, a mining operation in Peru, would be sold to another Grupo Mexico subsidiary, American Mining Corp.

The sale was blocked, however, by the U.S. Department of Justice, which claimed the deal was a fraudulent transfer of lucrative assets at below-market prices. The DoJ’s main concern was that Asarco — stripped of its most productive revenue-generating assets — would be unable to fund the cleanup of at least 27 polluted mining sites in 13 states. According to recent estimates, that tab will run between $500 million and $1 billion.

Someone else may need to pick up that tab, though; on August 10, Asarco filed for Chapter 11 bankruptcy protection. There’s no evidence that the company was trying to sidestep its liabilities, but environmental groups as well as state and local politicians cite Asarco as one of an increasing number of companies that exploit the bankruptcy system to avoid cleanup responsibilities. (Asarco officials have not returned CFO.com phone calls seeking comment.)

“The bankruptcy was not unforeseen,” says Stan Cummings, the executive director of the Tacoma, Washington-based environmental group Citizens for a Healthy Bay. “The only way federal agencies could have stopped the bankruptcy was to tie up the [Peruvian] assets, and they did not do that adequately.”

The deal that the DoJ made with Grupo Mexico, in January 2003, approved the asset sale for $765 million, more than $100 million higher than the price the department had originally contested; $550 million was used to pay down short-term debt. Asarco also earmarked $100 million for a trust fund whose proceeds would pay for environmental remediation of the U.S. mining sites over the next seven years.

The DoJ and Grupo Mexico also agreed that Asarco would pay an additional $2 million per year, for three years, during which time the Environmental Protection Agency would not enforce any other cleanup mandates on the company. Since then, EPA officials have located other contaminated sites; in February 2006, the agency will be free to pursue Asarco and, possibly, raise the level of funding that the company must provide for remediation. That may be moot, however, after the bankruptcy filing.

Indeed, it’s unclear whether the assets in Asarco’s remediation trust fund are part of the bankruptcy proceedings. The EPA and the trust contend that the funds, which have been under agency control for two years, reside outside the bankruptcy.

It is clear that Asarco’s cleanup efforts have stalled since the filing. According to Kevin Rockland, the EPA project manager for the Asarco cases, the remediation work now falls into three categories. In the first category, which covers mining sites that Asarco still owns, cleanup work is continuing; bankruptcy law permits the company to use its own employees, as well as whatever trust-fund money is available for a given project. Each year since the DoJ-Grupo Mexico agreement, between $15 million and $18 million has been released from the trust to the EPA, which prioritized the sites with the most-serious contamination and allocated the funds accordingly.

In the second category, which covers sites where Asarco is liable for the cleanup but no longer owns the property, trust funds can be used when available, but no internal resources can be expended. The third category, says Rockland, covers sites that Asarco owns but where it has halted cleanup efforts because the trust-fund allocation has dried up, and because the bankruptcy filing has caused remediation contractors to pull out due to lack of payment. Rockland estimates that before Asarco filed for Chapter 11 protection, $500,000 remained of the $2 million the company was to have spent on cleanup efforts this year.

The EPA, at the urging of Sen. Maria Cantwell (D-Wash.), has already taken over cleanup of one Asarco site in the third category. Using emergency funds, the agency has resumed work again on 17 residential lots in Ruston, Washington, that have been contaminated by arsenic and lead. “Asarco may have abandoned its responsibilities, but we haven’t,” said Cantwell.

Earlier this year, Cantwell and two other U.S. senators asked the Government Accountability Office to examine the connection between bankruptcy and environmental liability. The GAO report (which happened to be released on August 17, a week after the Asarco bankruptcy filing) did not name company names. The agency did outline how some companies have transferred income-generating assets from ailing subsidiaries to healthy ones, leaving the former with little else but money-losing assets, environmental liabilities, and the prospect of bankruptcy.

Such transfers are generally legal, added the GAO report. However, it’s illegal to transfer assets with the intent to hinder or defraud creditors, notes Greg Rogers, an environmental attorney and the author of Financial Reporting of Environmental Liabilities and Risks after Sarbanes-Oxley.

A fraudulent conveyance, as these illegal transfers are called can cause several ripple effects, Rogers observes. For instance, a subsequent distribution of dividends could be considered illegal. What’s more, he says, executives of financially troubled companies could be personally at risk under bankruptcy law, as well as the certification provisions of Sarbanes-Oxley, if management hides, understates, or fails to disclose environmental liabilities.

To be sure, the GAO report is quite clear on assigning responsibility. In “Environmental Liabilities: EPA Should Do More to Ensure that Liable Parties Meet Their Cleanup Obligations,” the GAO chastised the agency for being too lax in tracking and fining corporate polluters that hide behind bankruptcy and too passive in efforts to help the prosecute rulebreakers.

The GAO report notes, for example, that of the 231,630 businesses that filed for bankruptcy between 1998 and 2003, information on unpaid environmental liabilities is available only for the 136 companies that the DoJ has pursued. The agency suspects that many more bankruptcy filers have similar liabilities; the EPA counters that even if that’s true, with its limited resources it cannot keep track of 30,000 to 40,000 bankruptcy filers each year.

The report also notes that the Comprehensive Environmental Response, Compensation and Liability Act gives the EPA authority to compel businesses that handle hazardous substances to demonstrate their ability to pay for potential environmental cleanups. So, says the GAO, the agency must be more aggressive in demanding financial assurances such as letters of credit or guarantees from a parent company. The EPA should also seek more tax offsets, adds the report, rather than allow tax refunds to flow, unhindered, to companies that have environmental claims outstanding.

The report acknowledges that it will be difficult for the EPA to pursue a parent company for a subsidiary’s environmental liabilities. Corporate law, notes the GAO, states that while a corporation is liable for debts and obligations of its business, shareholders are liable only for what they have invested. It’s a “common practice,” continues the report, for companies to “take advantage of this limited liability principle to protect their assets by using a parent and subsidiary corporate structure” in which the parent is the subsidiary’s shareholder. In most such cases, the parent would then not be responsible for the subsidiary’s environmental liabilities should the subsidiary file for bankruptcy.

Additional revelations of environmental liability are expected after December, when the Financial Accounting Standards Board’s Interpretation No. 47 goes into effect. Under FIN 47, managers are likely to disclose more information about environmental liabilities associated with underused or “mothballed” assets, says Jim Redwine, a senior vice president with Shaw Environmental Liabilities Solutions, in Baton Rouge, Louisiana.

Meanwhile, counsels Rogers, directors of companies that hide environmental liabilities can expect scrutiny from the Securities and Exchange Commission. He explains that while corporate and bankruptcy laws do not impose financial-reporting requirements on board members, securities law provides a “strong motivation” for understanding the new risks associated with reporting environmental liabilities.