That’s the number of counterfeit fuel credits that were sold in the United States last year. Although the fake credits made up only about 10 percent of total RINs that changed hands, they also represent 140 million gallons of biofuel that were never produced.
Those who sold RINs fraudulently without producing a drop of greener fuel are paying the price.
Last year Rodney R. Hailey, owner of Clean Green Fuels in Maryland, was found guilty of 42 counts of wire fraud, money laundering, and violations of the Clean Air Act. Hailey was sentenced last February to 12 years in prison and ordered to pay about $42 million in restitution to the oil companies he swindled. In addition, Hailey was ordered to forfeit $9 million in proceeds from the sale of fraudulent RINs.
Hailey had rented a garage in White Marsh, Md., where he claimed to be producing biofuel. When the garage’s owner glanced into Hailey’s workshop one day, he saw only disconnected pumps and piles of plastic pipes. Fuel was conspicuously missing.
But there was nothing inconspicuous about the Rolls-Royce, the two Bentleys, the Lamborghini, the three Ferraris, and more pricey automobiles that showed up in his quiet suburban Baltimore neighborhood. His neighbors were so alarmed by the profusion of luxury cars – 22 in all – that they called the county police, who found out that the Environmental Protection Agency (EPA) already had Hailey under investigation.
Jeffrey David Gunselman, owner of Absolute Fuels in Lubbock, Texas, was also sentenced to 15 years in prison for selling more than $40 million in bogus RIN credits, and Green Diesel in Houston is under investigation by the EPA, which alleges the company generated more than 60 million phony RINs.
Like Hailey, Gunselman used his proceeds from bogus RINS to indulge in real estate and luxury cars, including a Bentley, Mercedes-Benz, Lexus, Cadillac and Shelby Cobra. However, he went a few steps further, purchasing a Gulfstream airplane and even a (demilitarized) Patton Tank.
And in September 2013, the Justice Department indicted seven people and three companies, E-Biofuels, Caravan Trading Company, and COMA Green, in an alleged $100 million biodiesel RINs scam in Indiana. They were charged with 88 counts of illegal activities, including falsifying paperwork and shipping phantom or “ghost” loads of biodiesel with RINS. It was dubbed “the largest tax and securities fraud scheme in Indiana history” by U.S. Attorney Joseph Hogsett.
Partly because of these breaches, the petroleum industry is calling for an end to the renewable fuel credit system.
Bob Greco, group director for downstream and industry operations for the American Petroleum Institute (API), argues that RIN fraud not only causes damage to refiners but could also hurt consumers.
“Companies that purchase bad RINs may have to pay fines and replace the bad RINs with good ones,” Greco said at a press conference in 2012. “This harms refiners, but it harms others, too. When refiners have to purchase additional RINs, that adds costs to their operations and could hurt consumers. Moreover, the refiners who purchase RINs are now proceeding cautiously. Some may be wary of purchasing them from less well known biodiesel producers, which could penalize these firms and cost jobs.”
But not everyone agrees. “RIN fraud is overblown,” counters Timothy Slating, an attorney with the Energy Biosciences Institute Biofuel Law and Regulation Project.
“There have been millions of RIN transactions over the last six years. The only instances of fraud were perpetrated by three criminals who had nothing to do with the industry,” Slating said. “The API and the refining industry don’t want the Renewable Fuel Standard (RFS) to work so they make the argument that RINs won’t work.”
Slating charges that six years ago, when the fuel standards were enacted, instead of finding ways to make blends work, the API used its resources to lobby for the repeal of the RFS.
“They made a bet back in 2007 that they could get the law changed before they had to spend the money to comply,” Slating said. In his view, the oil industry is faced with a situation where both the RFS and Corporate Average Fuel Economy (CAFE) Standards will begin to shrink the market for its products. As trying to eradicate the CAFE Standards would be “a public relations nightmare” for the oil companies, they are choosing to attack the RFS and insisting that RINs aren’t working.
Patrick Kelly, API’s senior policy advisor, defends API’s stance. “Our position is that RIN fraud was hurting the refiners who are being held accountable for these fraudulent credits,” Kelly said. “I don’t think it was blown out of proportion.”
Kelly said that his organization advocated strongly for EPA to take action to ensure RIN validity. Now that EPA is crafting quality assurance plans there is much more liquidity in the RIN market, he said.
“What we were concerned about was EPA granting these credits to fraudulent actors. I think the claim that we were in some way attacking RINS is just too far of a stretch,” he said.
“We are in opposition to the RFS. But as long as it’s the law of the land, our companies will comply with the mandate.”
One thing is certain: the two convicted ersatz biofuel producers will each be spending more than a decade in prison.
“These guys thought they could fly under the radar,” Slating said. He added that by vigorously prosecuting RIN fraud, “the government has sent a clear signal that this kind of criminal activity will not be tolerated.”