The Inflation Reduction Act’s expanded biofuel incentives raise concerns about fraud

The Polygamist & The Bio Fuel Baron season premiere extended sneak peek

The Inflation Reduction Act, which was signed into law by President Joe Biden in August, includes historic investments to fight climate change. It could also open new avenues for fraud by expanding a program that has given federal authorities eligibility for years.

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

The new law keeps the system in place for now, extending some credits that were set to expire and adding new benefits for things like ethanol-based jet fuel. However, it contains no new provisions to prevent fraud, which an industry expert said could be a problem.

“In a program where you have relatively little visibility and there’s a way to fraudulently generate a huge amount of money with almost little effort, it seems like those opportunities (for fraud) will still exist,” 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 fuel fraud cases in just the past 10 years, imposing civil penalties as high as $27 million. Many more cases have been referred to the Ministry of Justice for criminal prosecution.

Some of these crimes have been particularly brazen. In 2019, members of a polygamous, Utah-based religious sect known as “The Order” pleaded guilty to conspiring with a Los Angeles businessman who called himself “The Lion” to con the federal government out of about $1 billion in a scheme that involved Renewable Fuel Standard credits and related IRS tax credits.

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

The extent of the scam only came to light after a member of the cult who happened to work in the accounting department broke away from the group – she said she was being forced to marry her cousin – and told authorities what she knew .

“You’re looking at this little plant in northern Utah claiming millions, then tens of millions, then hundreds of millions of dollars in credits from the IRS to produce biodiesel,” said former litigation attorney Arthur Ewenczyk. “And it doesn’t add up.”

Cars line up at a Sunoco gas station that offers high-level ethanol-gasoline blends at a price below regular gasoline, Wednesday, April 13, 2022, in Delray Beach, Fla.

Martha Lavandier | AP

The sect practices what it calls “voluntary consecration of wealth,” where all business and money is shared with the group.

Four members of the order, including the fraud’s confessed mastermind, Jacob Kingston, 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, of multiple felonies, including conspiracy, wire fraud and money laundering. No date has been set for sentencing.

The order itself has not been charged with wrongdoing. The group said it was unaware of the fraud and that it has been unfairly targeted because some of its members practice “polygamy”.

The Justice Department said the investigation is continuing.

Timber scam

The EPA says it has continued to strengthen its enforcement as it learns more about implementation of the program — and as incentives expand under the Inflation Reduction Act.

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

EPA’s Criminal Investigation Division tracks the program, analyzes suspicious patterns and matches credits with actual fuel produced.

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

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

But Whitfield is skeptical about the ability of investigators to catch any kind of fraud as the programs expand.

Among the issues he noted is that the Inflation Reduction Act creates a larger pool of incentives for biofuels at a time when the feedstock or “feedstock” for the fuels — such as corn, wood pulp and even cooking oil — is expensive or in short supply. deliver. That could entice some to try to cheat in order to collect the lucrative biofuel credits.

“Somebody can decide to build a facility that’s like a bridge to nowhere, right? You build a facility that can produce biofuel, but you never have any intention of running it,” he said. “So you’re just spending money to take advantage of the Inflation Reduction Act.”

But at the same time, the expansion of the incentive programs is encouraging larger companies to get involved, he said. It can help reduce fraud, as the big players have less reason 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 the technology. You’re probably going to see airlines investing in the technology,” he said. “You’re less likely to see fraud when some of the larger companies and sophisticated companies are in the program.”

Also, many of the renewable fuel programs are very popular, with support from environmental groups, agricultural interests, and lawmakers from across the political spectrum. The tricky part is keeping it all going while keeping the bad guys out.

Watch as a determined teenage girl uncovers a billion-dollar biofuel scam and helps cage “the lion.” Watch the BRAND NEW season premiere of “American Greed,” Tuesday, September 27 at 10pm ET only on CNBC.

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