The Latest Case of Ethanol Fraud

The Environmental Protection Agency (EPA) has accused another biofuel company of generating and selling fraudulent Renewable Identification Numbers (RINs), marking the fourth case of RIN fraud since the federal ethanol mandate was passed in 2005.

A RIN is a string of numbers used for identification when the ethanol industry produces a gallon of ethanol. Refiners acquire RINs as proof of purchase when they buy ethanol from producers, as required by federal law. These RINs—a creation of government regulation—have no intrinsic value other than to demonstrate compliance with the federal ethanol mandate, making them ripe for abuse.

Which is exactly what has happened. In a notice of violation issued on December 18, EPA claims that e-Biofuels, LLC, a subsidiary of Imperial Petroleum, Inc., generated and sold more than 33.5 million invalid biodiesel RINs between July 2010 and June 2011. EPA claims the company never produced the biodiesel.

The Renewable Fuel Standard (RFS) requires refiners to purchase and blend increasing amounts of biofuels into gasoline. Refiners who unknowingly purchase fraudulent RINs, which are required to demonstrate compliance with the biofuel mandate, can be held financially responsible for the illegal activity of biofuel producers. As Charles Drevna, president of the American Fuel & Petrochemical Manufacturers (AFPM), explains:

EPA unfortunately continues to hold obligated parties responsible for illegal activities perpetrated by biodiesel producers such as E-Biofuels. Following the EPA’s initial imposition of penalties against obligated parties who innocently relied upon buying government-mandated quantities of biodiesel from EPA-registered producers on an EPA-controlled trading system, the industry developed due diligence programs designed to reduce the risk of purchasing fraudulent RINs. In the absence of an EPA-approved affirmative defense tied to reasonable due diligence standards, the industry remains unfairly exposed to a system that actually penalizes the victim of fraud rather than focusing on the perpetrator of the crime. This most recent indictment increases the total number of invalid RINs to over 170 million.

EPA has entered settlement agreements with numerous refiners who were sold invalid RINs, many of which require refiners to pay significant civil penalties simply for trying to comply with federal law. Refiners have also been fined for failing to purchase and blend cellulosic biofuels, even though none existed at the time.

This latest violation comes after the U.S. Justice Department indicted in September six individuals, including four executives at e-Biofuels, on 88 counts including wire fraud, money laundering, and securities fraud for selling invalid biodiesel RINs. According to the indictment, e-Biofuels defrauded customers out of more than $55 million while the company collected as much as $35 million in federal tax credits. The Justice Department called it “the largest tax and securities fraud scheme in Indiana history.”

Other alleged violators include Green Diesel, LLC, Absolute Fuels, LLC, and Clean Green Fuels, LLC. These three companies are accused of generating and selling more than 140 million RINs for biodiesel that was never produced. Officials at Absolute Fuels and Clean Green Fuels were sentenced to prison and ordered to pay restitution for their crimes.

The latest RIN fraud case provides further evidence that the federal ethanol mandate is fundamentally flawed. Under the RFS, refiners can be fined either for purchasing RINs that they did not know were invalid or for failing to purchase fuels that do not exist. This creates a lose-lose scenario for refiners who are simply trying to comply with federal law. The only permanent solution is for Congress to repeal the RFS.

IER Policy Associate Alex Fitzsimmons authored this post.