Nothing to see here, biodiesel industry says of latest fraud case

Source: Amanda Peterka, E&E reporter • Posted: Saturday, September 21, 2013

In the fourth major biodiesel fraud case to come to light in the past two years, the federal government this week charged six individuals and three companies with carrying out a tax and securities scheme that cost investors and taxpayers $100 million.

A day later, the biodiesel industry played down the relevance of the alleged scheme, in which a producer in Indiana is accused of reselling millions of finished gallons of biodiesel at a marked-up price and collecting benefits through the renewable fuel standard and tax credits. The federal charges, said the biodiesel industry’s main trade group, do not signal that there is a lingering fraud issue in the sector because the fraud happened before recent attempts to stem it by the private sector and U.S. EPA.

“It would be inaccurate to characterize this case and this investigative action as evidence that fraud is still going on,” Joe Jobe, CEO of the National Biodiesel Board, said yesterday

Biodiesel is a renewable fuel made from soybean oil, animal fats or used cooking grease. Fraud has been a thorn in the industry’s side since the fall of 2011, when the federal government charged that a Maryland man had produced millions of fake renewable fuel credits for biodiesel that was never produced. Since that time, two other companies have been charged with similar crimes; in all, federal regulators charged individuals with defrauding the government of about $150 million.

Two of the cases so far have resulted in convictions. In the most recent, a Texas man received a 15-year prison sentence and was ordered to pay nearly $55 million in restitution for using the illegally obtained funds to purchase several goods and vehicles, including a military tank and a Gulfstream airplane (Greenwire, April 1).

In the latest charges announced Wednesday, the government said that an Indiana biodiesel company and its subsidiary generated 52 million fake renewable fuel credits, garnered $35 million in illegally obtained tax credits and cost investors $60 million when their scheme fell apart.

U.S. Attorney Joseph Hogsett called it “the largest tax and securities fraud scheme in Indiana history” (E&ENews PM, Sept. 18).

The issue of fraud centers on the credits associated with gallons of biodiesel that refiners are required to use to show compliance with the federal renewable fuel standard. Unlike in other biofuel sectors, the 38-digit credits, known as Renewable Identification Numbers (RINs), can be separated from physical gallons of biodiesel at the time they are created. They are bought and sold by refiners on an electronic trading system maintained by EPA.

In response to the initial fraud cases that came to light, the agency has proposed a “quality assurance program” in which it would certify third parties to audit biodiesel producers and affirm that credits are legitimate. If refiners purchase a certified credit, they would be able to mount an affirmative defense if those credits were later found to be invalid.

Jobe, who is a former health care fraud investigator for the Missouri Attorney General’s Office, said efforts by EPA and others in the private sector to ensure biodiesel is actually being produced at facilities have been successful. The National Biodiesel Board worked with a company called Genscape Inc., which monitors other types of fuel operations, to certify fuel.

The new fraud case, although it came out this week, has been under investigation for several years and happened in the 2010-2011 range, well before EPA and the private industry began to take steps to halt fraud, Jobe said.

“We took those aggressive measures, and it has worked,” he said. “We don’t suspect that there’s been any material fraud taken place since those cases came to trial and people went to prison. It really froze that kind of behavior.”

Over the past year, biodiesel RIN prices have stabilized as producers have begun to double-check the validity of credits. Liquidity has returned to the market, Jobe said.

Although the new case casts the biodiesel industry in an “unflattering light,” it sends a strong signal that violators will be caught, he added.

“It doesn’t represent the industry well, but it needed to happen to send the message to criminals that there can’t be fraud in the system,” Jobe said. “There’s been two cases where people have been convicted and sent to prison, and in those cases, it’s important to understand that those were not biodiesel producers — those were criminals.”

But petroleum refiners say the issue of fraud in the biodiesel RIN market, although dwarfed in recent months by the issue of spiking prices in the corn ethanol RIN market, is still a major concern.

Refiners were highly critical of EPA for its handling of the first fraud cases because it penalized not only the company involved but also the refiners that purchased the fraudulent credits, issuing notices of violation and requiring refiners to purchase new, legitimate credits to replace the fake ones.

“I think the fact that they’ve just announced these indictments is indicative of the fact that the problem persists and hasn’t been solved,” said Rich Moskowitz, general counsel of American Fuel & Petrochemical Manufacturers. “This problem is really a symptom of a much greater disease, and that disease is an unworkable renewable fuel standard that is calling for much more biofuels than the U.S. transportation fuel system can accommodate.”

He said he expected to see more fraud cases come to light. They will also likely be from the time period before any steps were taken to halt fraud, given the length of time it takes for the government to investigate such cases, he added.

Moskowitz acknowledged EPA’s proposed plan to address fraud but said it comes with so many bells and whistles that it would be more of a burden than a boon for refiners. The plan defines the minimum requirements for auditors to certify the production at biodiesel facilities.

“EPA went well beyond those things and is asking for dozens of other pieces of information,” Moskowitz said. “With each additional data point that they collect, there’s an expense associated with it. So they’ve created a proposed quality assurance program that people may not find particularly useful, and it may be easier to just buy RINs from people you’ve purchased from before.”

The agency has proposed two options for audits, which will verify volumes of biodiesel production, feedstocks and production processes, and whether RINs were properly generated. Under the first option, third parties would continuously conduct the audits. In the second, audits would be done quarterly.

If RINs verified under the first option are later found to have been faked, the third-party auditors will be responsible for replacing the invalid credits. Under the second, refiners would be responsible for replacing the RINs. EPA is expected to finalize the proposal this fall (Greenwire, Feb. 11).

More generally, refiners object to the increased due diligence that EPA is making refiners engage in to purchase biodiesel and trade credits.

“In one instance, the biodiesel producer didn’t even have a facility. Basically, their address was an empty parking lot. They didn’t even have machinery on-site,” Moskowitz said. “You tell me how a refiner in Kansas is supposed to know that a biodiesel producer in Maryland doesn’t actually have an operating plant? Were they supposed to go and get on a plane and look? The plant was registered with EPA, and their RINs were traded on EPA’s electronic monitoring transaction system.”