United States: Not Enough Cooks In The Kitchen: Fraud Alleged In The Renewable Fuels Market And "Flourless" Chocolate Cake

Last Updated: September 23 2016
Article by Melissa J. Lyon

An important white paper was released yesterday by E&W Strategies LLC that alleges that "[t]he establishment of the Renewable Fuel Standard ("RFS"), which was enacted for valid public policy reasons, provided the unintended framework for a new and persistent area of fraud."

Sounds like there were not enough cooks in RFS kitchen...

A full copy of the report entitled, "White Paper Addressing Fraud in the Renewable Fuels Market and Regulatory Approaches to Reducing this Risk in the Future," can be found here.  The report is further discussed in an Oil and Gas Journal ("OGJ") article entitled, "RINs program within RFS created opportunities for fraud, report says."

The author of the report, which was commissioned by Valero Energy Corp., is E&W Strategies President, Doug Parker, who was a special agent in the Environmental Protection Agency's ("EPA") nationwide Criminal Investigation Division for 24 years, according to the OGJ and as discussed detail in the report.

According to the report, which was the result of a review centered on compliance within the RFS and the analysis of vulnerabilities of the RFS to criminal conduct, "[s]tructural vulnerabilities in the regulations, limited agency oversight, and a lack of market transparency within the RFS made this program a ripe target for massive fraud and illicit gain."

The Renewable Identification Numbers ("RIN") market was intended to create and promote an efficient trading market that encourages the use of renewable fuels through a system of tradeable compliance credits in connection with RFS goals; but like any form of "currency" system, it requires strict oversight or it will be ripe for deception.

However, as discussed in the OGJ article, not only did the EPA lack the resources to properly oversee the RIN market, but the report mentions that "the RFS is not a traditional regulatory program in that it is market based, and the EPA, unlike agencies such as the Securities and Exchange Commission ("SEC") does not maintain significant staff expertise in the oversight of financial markets."

  • As a result, the report calls the RFS program "a program susceptible to large scale fraud."

Exactly how large is "large scale fraud?" The report provides that "[f]rom 2010 to the present, with moderate overall increases in renewable fuels integration, the RINs market has increased from less than $1 billion to in the range of $15 billion today – creating an exceptional new market opportunity for those seeking illegal profits."

The lack of oversight of the RFS and RIN market discussed in the report is surprising, but deception caused by lack of oversight is not.  Left unchecked, understaffed and up to our own devices, there is no telling what is really going on in the kitchen.

Much like when I am alone in my kitchen, the "flourless" chocolate cake recipe that I found a few years ago and am often asked to share, actually requires a few tablespoons of flour – without the oversight of someone with a gluten allergy or the supervision of someone who is on a very strict diet, I generally consider that my recipe is in fact not "flourless" as unimportant.

But "flourless" chocolate cake and the significant fraud going on in the RFS program are two VERY different things...

  • The key difference is that I generally warn people eating my "flourless" chocolate cake that there is a *little* bit of flour inside, and people eating a piece of chocolate cake know that they are not eating a rich and decadent slice of cake to be more healthy. No one gets hurt.  Not to mention that including a only few tablespoons of flour in a cake is generally not regarded as criminal conduct (in most circumstances).
  • The RFS is a different story...as the report aptly points out, the public has been largely unaware of the extent of the "large scale fraud" that had been occurring, taxpayers and consumers are getting hurt, criminal conduct is thriving and the policy principles that the program seeks to advance – energy security and greenhouse gas reduction – are substantially undermined.

The good news is that there are solutions for the RFS fraud problems proposed in the report – oversight and transparency are the critical recommended ingredients.

We need more cooks in the RFS kitchen...

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Melissa J. Lyon
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