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

The Inflation Reduction Act, signed by President Joe Biden in August, includes historic investments to combat climate change. It could also open new avenues for fraud by expanding a program that has been tampering with federal authorities for years.

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

The new law will keep the system in place for the time being, extending some credits that were due to expire, and adding new benefits for things like ethanol-based jet fuel. However, it does not contain any new provisions to prevent fraud, which could be a problem according to an industry expert.

“In a program where you have relatively little oversight and there is a way to fraudulently generate a huge amount of money with almost little effort, it seems like those capabilities [for fraud] will still exist,” said Peter Whitfield, a partner at law firm Sidley Austin in Washington, DC, in an interview with CNBC’s “American Greed.”

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The Polygamist and ‘The Lion’

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

Some of those crimes were particularly brutal. In 2019, members of a polygamous Utah-based religious sect known as “The Order” pleaded guilty to conspiring with a Los Angeles businessman calling himself “The Lion” to extort some $1 billion from the federal government. in a plan involving renewable energy sources. Fuel Standard credits and related IRS tax credits.

Using a series of shell companies and sham transactions, the team made it seem like they were producing massive amounts of biofuel at a plant in northern Utah and shipping it to distant lands. This allowed them to bring in millions of dollars in bounties, even though they produced very little fuel.

The scope of the scam only came to light after a cult member who happened to work in the accounting department split from the group — she said she was about to marry her cousin — and told authorities what she knew. .

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“You’re looking at this little plant in northern Utah claiming millions, then tens of millions, then hundreds of millions of dollars in credit from the IRS to produce biodiesel,” said Arthur Ewenczyk, a former Justice Department attorney. “And it’s not right.”

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

Marta Lavandier | AP

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

Four members of The Order, including the scam’s known leader, 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, fraud and money laundering. No sentencing dates have been set.

The Order itself has not been accused of wrongdoing. The group said they were unaware of the fraud and that they had been unfairly targeted because some of its members practice “plural marriage.”

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The Ministry of Justice said the investigation is continuing.

Keeping Fraud in Check

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

“EPA plans to regularly update its compliance and oversight rules to help prevent RFS fraud,” spokesman Tim Carroll said in an emailed statement to American Greed.

The EPA’s Criminal Investigation Department monitors the program, analyzing suspicious patterns and comparing credits with actual fuel produced.

And Carroll said the agency has been working more closely with the IRS, as with the Utah case.

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

But Whitfield is skeptical of investigators’ ability to detect any fraud as the programs expand.

One of the issues he noted is that the Inflation Reduction Act is creating a larger pool of incentives for biofuels at a time when the feedstock or “raw material” for the fuels — such as corn, wood pulp and even cooking fat — is expensive or short supply. That could tempt some to try to cheat to collect the lucrative biofuel credits.

“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 have any intention of operating it,” he said. “So you’re just spending money to take advantage of the Inflation Reduction Act.”

But at the same time, expanding stimulus programs encourages larger companies to get involved, he said. That could help reduce fraud, as the big players have less incentive to cheat and spend more resources on compliance.

Corn is loaded onto a truck while a silo is emptied at an Illinois farm.

Daniel Acker | Reuters

“You’ll see 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 if some of the larger companies and advanced companies are in the program.”

In addition, 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 everything running while keeping the bad guys out.

Watch a determined teenage girl uncover a billion-dollar biofuel fraud and help cage ‘The Lion’. Watch the BRAND NEW season premiere of “American Greed,” Tuesday, September 27 at 10 p.m. ET, only on CNBC.

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