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Oct. 3 — Recent developments in multi-million dollar fraud cases involving biofuels tax credits and renewable fuels credits have raised new questions about the ability of enforcement officials at the Environmental Protection Agency, the Internal Revenue Service and the Department of Justice to keep control of the markets in renewable fuels incentives ( United States v Jalal,, S.D. Ohio,, No 2:16-cr-00180,, guilty plea 9/27/16 ; United States v. Chemoil Corp.,, N.D. Calif.,, No. 3:16-cv-05538,, settlement 9/29/16 ).
Malek Jalal, owner and manager of a New Jersey feedstock collector and processor, pleaded guilty Sept. 27 to conspiracy and obstruction of justice for his role in a $6 million scheme to fraudulently claim tax credits and renewable energy credits multiple times on the same load of fuel, according to a Justice Department statement.
Two days later, the department and the EPA announced that they had reached a settlement with Chemoil Corp. requiring the company to pay a $27 million fine and to retire more than 65 million renewable fuel credits—worth over $71 million at current market prices—over claims that the company exported nearly 50 million gallons in biodiesel between 2011 and 2013 without retiring the Renewable Identification Numbers that were generated for the exported fuel.
A spokeswoman for the biodiesel industry told Bloomberg BNA in the wake of the announcements that fraud in biofuels credits remains an isolated phenomenon in an industry that has succeeded in reining in its bad actors as it has matured. But a former EPA official says that it will remain very difficult for officials in resource-strapped agencies to stay on top of fraud in renewable energy credits without changes in the current structure of the program.
“To me, this is just more of the same,” said Doug Parker, former director of the EPA Criminal Investigation Division, who released a white paper in early September addressing fraud in the renewable fuels market. “The market that we have now in renewable energy credits puts too much distance between the creators of biofuels, where credits are generated, and the obligated parties who have responsibility for compliance. It’s extraordinarily difficult in this market for EPA and the obligated parties to do due diligence and ensure that credits are legitimate. There’s a lot of room for fraudulent conduct with such an extended chain of custody for credits.”
Jessica Robinson, a spokeswoman for the National Biodiesel Board, said in a statement, “EPA has taken significant steps recently to help ensure RIN integrity against actions seen early on in the program. It is encouraging that the EPA and industry continue to work together in support of a valuable program that is working to expand access to cleaner burning, renewable fuel.”
Chemoil admitted no liability in connection with the settlement. An attorney for Jalal declined to comment.
Erick Martinez, director of field operations in the Northern area of the IRS criminal investigation division, told Bloomberg BNA Sept. 30 that the large amount of money in the two cases provides the obvious reason why enforcement officials are concerned about fraud in biofuels tax credits and renewable energy credits, also called RINs, after the renewable identification numbers attached to a batch of biofuel for the purpose of tracking its production, use and trading.
“These can be very damaging cases, where the amounts claimed can be extraordinarily high,” he said. “Cases like these, it’s important that we get in there and stop them.”
Other recent cases have involved similarly eye-popping numbers. One example came to light in April 2015, when three brothers in Indiana pleaded guilty to a $145 million fraud scheme that involved the sale of biodiesel fuel with the false claim that the fuel was eligible for federal renewable energy incentives. The brothers, along with their New Jersey-based co-conspirators, managed to clear $56 million in profit on the scheme, according to a Justice Department statement.
Another case from June 2016 involved a Florida-based scheme to sell $42 million in fraudulent RINs, and the claiming of $4.4 million in false tax credits, according to a Justice Department statement.
Parker said in his white paper, written before the most recent cases, that completed prosecutions in biofuels fraud cases have involved $271 million in documented fraud loss and $71 million in seizures of illegal profits.
Investigations into suspected fraud in biofuels credits can be extremely complex, reflecting the complexity of the underlying criminal behavior in a typical case, Martinez said. “When you look at the facts of these cases that we have prosecuted, you typically see different groups conspiring together, working to keep things hidden and out of the limelight,” he said. “There can be several related entities, many of them false entities, located in different parts of the country. These kinds of investigations are very resource intensive and take a lot of man- and woman-hours to do in the right way.”
The investigations also can require the involvement of a welter of enforcement agencies, including EPA, with its expertise in the area of biofuels production and use, IRS, with its expertise in tax credits, the FBI and the Justice Department, which prosecutes the resulting criminal cases, he said. Even the Securities and Exchange Commission, with expertise in oversight of financial markets, can have a hand to play in cases which involve the trading of RINs once they have become “separated” from the underlying biofuel, he said.
EPA also recently announced an agreement with the Commodity Futures Trading Commission for help with oversight of the RINs market, said Rich Moskowitz, general counsel with the American Fuel and Petrochemical Manufacturers, a group that represents petroleum refiners, the obligated parties in the renewable fuels market. He termed the development “depressing.”
“This looks like an admission by EPA that they don’t have the tools in house to manage these markets,” he said.
Moskowitz told Bloomberg BNA Oct. 3 that one structural flaw in the program was allowing biodiesel makers to separate renewable fuel credits from the biodiesel without guaranteeing that it had been blended into motor fuel.
“If you look back at the cases of fraud in these markets, they involve biodiesel,” he said. “And that’s because biodiesel producers are the only ones that are allowed to separate the RINs before the renewable fuel is purchased by an obligated party or blended with gasoline or diesel at the terminal.”
EPA began its focus on biofuel credits enforcement in 2011, when Parker convened a team of agents, regulatory analysts and attorneys to examine the vulnerabilities of renewable energy incentives to fraud. By 2013, he had allocated around 10 percent of CID’s time and personnel to fraud in renewable credits, an area of investigation that “was essentially non-existent two years earlier,” he said in the white paper.
But internal budget decisions at the EPA have made these enforcement efforts more difficult, Parker told Bloomberg BNA Sept. 30. “There are career enforcement folks in the agency who are very attentive to this area, but they have endured significant resource cuts,” he said. “We now have fewer cops on the beat, both in the criminal and civil area.”
Parker left the EPA in March 2016, he said. In a statement, EPA said, "[T]he EPA, the U.S. Department of Justice, and other law enforcement partners are aggressively pursuing both civil and criminal enforcement of those individuals that have generated invalid RINs in this program, and are holding them accountable to the full extent of the law. The actions EPA has taken to date show that we are committed to an effective RFS program and a level playing field for all RIN producers, owners and users.”
A Justice Department spokesman declined to provide comment on the department’s enforcement priorities.
Martinez told Bloomberg BNA that cuts at the IRS have affected enforcement resources, but that the service has maintained its focus on what he termed an increasingly important area of criminal activity.
“We do the best we can with the resources we have,” he said. “This is a particularly sophisticated type of scheme, and it takes a lot of resources, of expertise, and of help to be effective.”
Moskowitz expressed skepticism that the program as designed can be effectively enforced.
“We think it’s hopeless to think that EPA will be able to enforce this program,” he said. “It’s fundamentally broken, and has been for years, and EPA has shown no willingness to make changes that will fix the program.”
Copyright © 2016 The Bureau of National Affairs, Inc. All Rights Reserved.
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