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Cut Inflation Act’s expanded biofuel incentives raise concerns over fraud

The Cut Inflation Act signed into law by President Joe Biden in August includes historic investments to fight climate change. It may also open up new avenues for fraud by expanding a program that has given federal authorities slack for years.

The Renewable Fuels Standard, adopted with broad bipartisan support in 2005, uses a system of incentives to increase the percentage of biofuels like ethanol in the nation’s fuel supply. A Biotechnology Industry Organization study credited the program with reducing US dependence on foreign oil by nearly 2 billion barrels in its first 10 years.

The new law keeps the system in place for now, extends some credits that were set to expire, and adds new benefits for things like ethanol-based jet fuel. However, it does not include any new provisions to prevent fraud, which an industry compliance expert says could be a problem.

“In a program where you have comparatively little oversight, and where there is a way to generate a huge sum of money fraudulently with almost little effort, it seems that those opportunities (for fraud) will always exist,” said said Peter Whitfield, a partner. at the Sidley Austin law firm in Washington, DC, in an interview with CNBC’s “American Greed.”

The polygamist and the lion

The Environmental Protection Agency, which regulates the program, says its enforcement division has filed 16 renewable fuels fraud cases in the past 10 years alone, issuing civil fines of up to $27 million. . Many other cases have been referred to the Department of Justice for criminal prosecution.

Some of these crimes were particularly brazen. In 2019, members of a Utah-based polygamous religious cult known as ‘The Order’ pleaded guilty to conspiring with a Los Angeles businessman who called himself ‘The Lion’. to extract some $1 billion from the federal government in a scheme involving renewable energy. Fuel Standard credits and related IRS tax credits.

Using a series of shell companies and fictitious transactions, the team made it look like they were producing huge amounts of biofuel at a plant in northern Utah and shipping it far away. This allowed them to reap millions of dollars in incentives, even though they produced very little fuel.

The scale of the scam only came to light after a cult member who worked in the accounting department split from the group – she said she was about to be forced to marry her cousin – and told the authorities what she knew.

“You look at this little plant in northern Utah claiming millions, then tens of millions, then hundreds of millions of dollars in IRS credits for producing biodiesel,” the former US attorney said. Department of Justice, Arthur Ewenczyk. “And it doesn’t fit.”

Cars line up at a Sunoco gas station offering premium ethanol-gasoline blends at a lower cost than regular gasoline, Wednesday, April 13, 2022, in Delray Beach, Florida.

Marta Lavandier | PA

The cult practices what it calls “voluntary consecration of wealth”, where all belongings and money are shared with the group.

Four members of the Order, including the admitted ringleader of the scam, Jacob Kingston, have pleaded guilty to federal conspiracy charges. In 2020, a federal jury in Salt Lake City convicted their partner in crime, businessman Lev “the Lion” Dermen, on multiple counts, including conspiracy, fraud, and money laundering. . No sentencing date has been set.

The College itself has not been accused of wrongdoing. The group said it was unaware of the fraud and was unfairly targeted because some of its members practice “plural marriage”.

The Justice Department said its investigation is continuing.

Control fraud

The EPA says it has continued to strengthen its enforcement as it learns more about the program’s implementation – and as incentives grow under the Inflation Reduction Act .

“The EPA intends to continue to regularly update its compliance and oversight regulations to help prevent RFS fraud,” spokesman Tim Carroll said in a statement emailed to “American Greed”.

The EPA’s Criminal Investigations Division tracks the program, analyzes suspicious patterns, and matches credits to the fuel actually produced.

And Carroll said the agency has begun working more closely with the Internal Revenue Service, as it did on the Utah case.

“This relationship allows the IRS to use EPA reporting data to identify potential fraudulent activity,” Carroll said.

But Whitfield is skeptical of investigators’ ability to catch every fraud as the programs expand.

Among the issues he noted is that the Cut Inflation Act is creating more incentives for biofuels at a time when the feedstock or “feedstock” for fuels – such as corn, wood pulp and even cooking fat – is expensive or in short the supply. This might tempt some to try to cheat in order to collect the lucrative credits for biofuels.

“Someone can decide to build a facility that is the equivalent of a bridge to nowhere, right? You build a facility that can produce biofuel, but you never intend to exploit it,” he said. “So you’re just spending money to take advantage of the Inflation Reduction Act.”

But at the same time, expanding incentive programs are encouraging big companies to get involved, he said. This could help reduce fraud, as big players have fewer reasons to cheat and more resources to devote to compliance.

Corn is loaded onto a truck as a silo is emptied on a farm in Illinois.

Daniel Acker | Reuters

“You’re seeing more refiners investing in technology. You’re probably going to see airlines investing in technology,” he said. “You’re less likely to see fraud when some of the bigger and more sophisticated companies are in the program.”

Additionally, many renewable fuels programs are popular, with support from environmental groups, agricultural interests, and lawmakers from all political walks of life. The trickiest part is keeping everything going, while keeping the scammers at bay.

Find out how a determined teen exposes a billion dollar biofuel fraud and helps cage “the Lion”. Watch the all-new season premiere “American Greed,” Tuesday, Sept. 27 at 10 p.m. ET only on CNBC.


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