EPA Discovers Its 'Renewable Fuels' Program Is Vulnerable to Fraud

February 26, 2013 - 10:06 AM

biodiesel

The EPA requires all oil companies that market petroleum in the U.S. to either produce a certain amount of renewable fuel themselves or to purchase credits, called renewable identification numbers (RINs), from producers of renewable fuels. (AP Photo)

(CNSNews.com) - The Environmental Protection Agency is taking steps to protect the "integrity" of its Renewable Fuel Standard program, after a con man sold $9 million in fraudulent renewable fuel credits to various energy producers, including Shell and Exxon Mobil.

“When invalid renewable fuel credits are ‘produced’ and sold, it undermines the integrity of an important program designed by Congress to reduce the nation’s dependence on foreign oil and to grow the nation’s renewable energy industry,” said EPA's Cynthia Giles in a Feb. 22 news release.

Giles commented after a federal judge sentenced 34-year-old Rodney R. Hailey of Perry Hall, Md., to 12 years in prison for selling $9 million in renewable fuel credits, which he falsely claimed were produced by his company, Clean Green Fuel, LLC.

“Any government program that is based on trust is vulnerable to a fraudster like Rodney Hailey,” said U.S. Attorney Rod J. Rosenstein. “The only thing Rodney Hailey’s ‘Clean Green Fuel’ business produced was the dirty money he used to fund his lavish lifestyle.”

According to evidence presented at his trial, Hailey registered Clean Green Fuel with the EPA under the Renewable Fuel Standard (RFS) program. Hailey claimed his company was a producer of bio-diesel fuel, a motor vehicle fuel derived from renewable resources.

The EPA requires all oil companies that market petroleum in the U.S. to either produce a certain amount of renewable fuel themselves or to purchase credits, called renewable identification numbers (RINs), from producers of renewable fuels to satisfy their renewable fuel requirements. Validly generated RINs show that a certain volume of qualifying renewable fuel was produced or imported.

EPA says that between March 2009 and December 2010, Hailey engaged in a massive fraud scheme, selling over 35 million RINs (representing 23 million gallons of bio-diesel fuel) to brokers and oil companies, when in fact Clean Green Fuel had produced no fuel at all and Hailey did not even have a facility capable of producing bio-diesel fuel.

Federal law enforcement agents investigated the scheme after learning about a large number of luxury cars parked in front of Hailey’s house. Hailey used the money he made from selling false RINs to purchase luxury cars, including BMWs, Mercedes Benz, a Rolls Royce Phantom, a Lamborghini, Ferrari, Maserati and others, as well as real estate and more than $80,000 in diamond jewelry.

The loss to the traders and major energy companies who purchased Hailey’s false RINs is more than $40 million, EPA said. The loss also extends to small bio-diesel companies, many of which were unable to sell their RINs and were forced out of business.

(Fearing fraudsters such as Hailey, many energy producers have decided to purchase RINs only from companies they checked out and found to be valid, and those tended to be the larger companies. It therefore became more difficult for smaller companies to sell their RINs -- and EPA says that has led to "inefficiencies" and reduced liquidity in the RIN market.)

As a result of its probe into Hailey, the EPA issued "notices of violation" to 25 oil companies, including Shell and Exxon Mobil, which used invalid RINS generated by Clean Green Fuel to satisfy their renewable fuel obligations. The regulations say that "no person shall use invalid RINS to meet their RVO (renewable volume obligation) regardless of that person's good faith belief that the RINs were valid at the time they were acquired."

The EPA directed all 25 companies to resubmit corrected compliance reports.

EPA, which is charged with developing the renewable fuel standard program and enforcing its requirements, on Jan. 31 proposed a voluntary quality assurance program intended to provide energy companies with a way to verify that RINs have been validly generated. The program would enable smaller renewable fuel producers to demonstrate that their RINs are valid, reducing the risk associated with such RINs.

EPA says it expects the new regulations to make the renewable fuel standard program more "efficient and effective."