Fraudulent transactions involving renewable fuel credits, known as "RINs"1 continue to be a concern and a focus of federal regulators. On October 4, 2016, the U.S. Environmental Protection Agency (EPA) and the U.S. Department of Justice (DOJ) announced a $6 million settlement with Western Dubuque Biodiesel, LLC, the owner and operator of a biodiesel plant, in a RIN fraud case. Pursuant to the terms of the settlement released by EPA and DOJ, Western Dubuque agreed to pay a civil penalty of $6 million dollars for alleged violations of Section 211(o) of the Clean Air Act and the regulations promulgated thereunder. The enforcement case stems from a series of transactions in 2011 that resulted in the generation of more than 36 million allegedly invalid RINs.
Participants in the RIN market can expect to see more RIN fraud investigations and prosecutions in the future. In March, 2016, EPA and the Commodity Futures Trading Commission (CFTC) entered into a Memorandum of Understanding whereby the CFTC will advise EPA on conducting investigations into RIN fraud and market abuse. Based on observations by Doug Parker, the former head of EPA's Criminal Investigation Division, the Western Dubuque settlement may be the tip of an iceberg. "Anyone in the law enforcement or prosecutorial world will tell you that what's public is not the full picture of what's going on," Parker told E&E TV's "OnPoint." "There will be more prosecutions to come."
Further, Parker suggested that coming changes in the market--specifically, increasing requirements for ethanol--may create a shortage of ethanol RINs, increasing the incentive for fraudulent production of the biodiesel RINs that can act as a substitute. The RIN market can be treacherous, Parker said, calling it "tremendously opaque." "It is unlike any other commodity market out there in terms of people being able to understand where and how these RINs are generated,” he said. Parker also observed that in the early days of the RIN market, RIN fraud perpetrators were committing "mom and pop fraud" but have grown more sophisticated in response to EPA's increased third-party verification and oversight of RIN generation and RIN transactions. He noted that "[y]ou'd see schemes where multiple entities across the country were organized to ship fuel that didn't have RINs but claimed it had RINs, massive bookkeeping scams all to the tune of making hundreds of millions of dollars illegally."
The complaint filed by EPA and DOJ concurrently with the proposed consent decree with Western Dubuque accused Western Dubuque of involvement in a similar scheme. EPA and DOJ alleged that, with the help of NGL Crude Logistics, LLC, formerly known as Gavilon LLC, Western Dubuque attempted to double--or even triple--dip, using the same biodiesel to generate several times its value in RINs. According to the complaint, NGL first purchased biodiesel that came with RINs on the open market. It then separated the RINs from the biodiesel, sold the RINs to third parties, and sold the biodiesel product to Western Dubuque. The two companies classified the biodiesel as a methyl ester "feedstock," a class of chemicals that includes biodiesel among many other chemicals. Western Dubuque then reprocessed this "feedstock" and designated it biodiesel, thereby generating a second set of RINs. Finally, Western Dubuque sold the now reprocessed biodiesel, along with its corresponding RINs, back to NGL, at which point the process could be repeated.
In addition to the charges stemming from the alleged fraud scheme, EPA and DOJ also alleged that Western Dubuque engaged in a number of other violations under the Renewable Fuel Standards program because the RINs were not generated using a qualifying feedstock or qualifying process. NGL was also named as a defendant in the EPA and DOJ complaint. In the suit against NGL, EPA and DOJ seek to require NGL to retire 36 million RINs to offset the alleged violations, and to pay a substantial penalty.
The Renewable Fuel Standard program was originally enacted under the Energy Policy Act of 2005 and expanded under the Energy Independence and Security Act of 2007. The program mandated that a set level of biofuels be blended into gasoline. Originally set at 7.5 billion gallons of renewable fuel, the number was modified when the program was expanded in order to meet specific greenhouse gas emissions goals. The program is a market-based system. Renewable fuel producers generate RINs when they produce biofuel. Refiners and importers are then required to retire a specific number of RINs each year based on the amount of petroleum they produce and import. Such "obligated parties" may purchase additional RINs from producers in order to meet their reduction quotas.
Parker estimated that as recently as 2011, fraud in the RINs market "probably contributed an additional two coal-fired power plants to emissions that weren't being reduced." EPA estimates that Western Dubuque and NGL's illegal generation of RINs resulted in about 151,319 metric tons of excess CO2-equivalent greenhouse gas emissions. EPA also contends that Western Dubuque and NGL distorted the market price of RINs, thereby harming market integrity and the program's overall reputation. EPA alleges that the market distortion was greater than the $6 million dollar civil penalty Western Dubuque has agreed to pay, but indicates that the penalty was reduced to account for the relatively small company's inability to pay more.
The continued threat of purchasing invalid RINs faced by participants in the RIN market coupled with the program's "buyer beware" approach to liability underscores the importance of RIN buyers taking measures to protect against the risk of acquiring invalid RINs. These mitigation measures include robust contractual protections and the use of audits, including EPA's quality assurance program (QAP). Under EPA's QAP rules, RIN buyers and owners have an affirmative defense to civil liability for the transfer and use of invalid RINs that were verified as properly generated and valid for compliance purposes by an independent auditor under a QAP that meets the minimum requirements set forth in EPA's regulations; provided the defense does not apply if the party knew or had reason to know the RIN was invalid at the time of such transfer or use.