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

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

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

The new law keeps the system in place for now, extends some credits that were set to expire, and adds new benefits for things like ethanol-based aviation fuel. It does not, however, include any new provisions to prevent fraud, which one industry compliance expert said could be a problem.

“In a program where, comparatively, you have little oversight, and there’s a way to generate a massive amount of money fraudulently with almost little effort, it seems like those possibilities (for fraud) will still exist,” said Peter Whitfield, a partner at law firm Sidley Austin in Washington, D.C., in an interview with CNBC’s “American Greed.”

The Environmental Protection Agency, which regulates the program, says its enforcement division has brought 16 renewable fuel fraud cases in just the last 10 years, levying civil fines as high as $27 million. Many more cases have been referred to the Justice Department for criminal prosecution.

Some of those 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 bilk the federal government out of some $1 billion in a scheme involving Renewable Fuel Standard credits and related IRS tax credits.

Using a series of shell companies and sham 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. That allowed them to rake in millions of dollars in incentives, even though they were producing very little fuel.

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

“You’re looking at this small plant in Northern Utah that’s claiming millions, then tens of millions, then hundreds of millions of dollars in credits from the IRS for producing biodiesel,” former Justice Department Trial Attorney Arthur Ewenczyk said. “And it doesn’t add up.”

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

Four members of the Order, including the scam’s confessed ringleader, 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, on multiple felony counts including conspiracy, fraud and money laundering. No sentencing dates have been set.

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 “plural marriage.”

The Justice Department said its investigation is continuing.

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

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

The EPA’s Criminal Investigation Division tracks the program, analyzing suspicious patterns and matching credits with actual fuel produced.

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

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

But Whitfield is skeptical about investigators’ ability to catch every fraud as the programs expand.

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

“Somebody may decide to build a facility that’s 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, the expansion of the incentive programs is encouraging bigger companies to get involved, he said. That could help reduce fraud, since the big players have less of a reason to cheat, and more resources to devote to compliance.

“You see more refining companies investing in the technology. You’re probably going to see airline companies investing in the technology,” he said. “You’re less likely to see fraud when some of the bigger companies and sophisticated companies are in the program.”  

Besides, many of the renewable fuel programs are widely 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 crooks out.

See how a determined teenage girl exposes a billion-dollar biofuel fraud, and helps cage “the Lion.” Watch the ALL-NEW season premiere of “American Greed,” Tuesday, September 27, at 10 p.m. ET only on CNBC.