Ethanol Blog

OMAHA (DTN) -- Court documents paint an ugly picture.

Texas-based Absolute Fuels LLC had not produced a single gallon of biodiesel in 2011.

Yet the company's founder, Jeffrey David Gunselman, allegedly banked more than $40 million -- all from sales of renewable identification numbers, or RINS, that didn't exist.

Federal investigators identified more than 10 victims who were promised actual RINs, according to court documents.

"They relied on his assertions that he had true RINs, when, in fact, he had none," according to court documents.

In June, a federal jury in Maryland found Rodney Hailey of Clean Green Fuel guilty of selling $9 million in fraudulent RINS.

Cargill Inc. alleges in a lawsuit against International Exchange Services LLC, that it bought some 1.2 million fraudulent RINS from the company in April 2010. Cargill then sold the RINS to other companies.

The ripple effects continue.

Biodiesel industry officials tell DTN that they believe producers have since taken steps to prevent fraud and that any additional fraud likely will come from cases that have already come to light.

While fraud has raised questions about the future of the biodiesel industry, one official told DTN that those cases have had little effect on farmers who produce oilseed crops used as biodiesel feedstocks including soybeans and canola.

Gary Haer, vice president of sales and manufacturing for the Renewable Energy Group based in Ames, Iowa, said demand for oilseed crops has increased. The biodiesel industry now is on pace to produce 1.1 to 1.2 billion gallons in 2012.

"The market is working and has benefitted other sectors," he said. "It really hasn't impacted the markets in a negative way. The petroleum industry and biodiesel industry have shown a willingness to work together.

"I think it's shown that the industry needs to exercise some diligence. I'm optimistic we'll be able to put this behind us. I would say we have made significant progress."

Every gallon of biodiesel produced is assigned a number.

This allows EPA to track production to make sure obligated parties including gasoline blenders, are either using biofuels or buying RINS from companies that have produced biodiesel.

These cases have hit smaller producers particularly hard -- some of which have shuttered operations.

George A. Sprague, owner of Union County Biodiesel Company LLC and Midwest Biodiesel Products LLC, and a fifth-generation Kentucky farmer, told Congress in July that RINS fraud brought down his business.

"On Jan. 2, 2012, we were effectively put out of business by the lack of confidence in the EPA's RIN program," he said in written testimony.

"We have been facing financial ruin and the closure of our businesses because everyone in the biodiesel industry feared what action the EPA was going take on the innocent participants of the EPA's own RIN system."

INDUSTRY DISRUPTION

Ben Evans, director of federal communication for the National Biodiesel Board, said fraud has disrupted the industry "significantly" in that obligated parties have been hesitant to buy RINS from smaller biodiesel producers.

"Refiners have tightened up buying and are buying only from big producers," he said. "It is hard and it has caused some income problems. And it is ongoing for a lot of producers. It disrupted the market. We believe it is very much fixable.

"I think it's never good when people come in and take advantage and commit fraud. I think it has been a distraction."

The private sector has stepped up its own efforts to audit and monitor RINS. As a result, Evans said NBB believes fraud is a "thing of the past."

Though the biodiesel industry is on track to meet the Renewable Fuels Standard mandate for production in 2012, he said the industry has been struggling of late.

There has been a push to waive the RFS and the EPA is slated to make a decision on a possible waiver in November. In addition, the $1 blenders tax credit for biodiesel has expired -- lost in the minutiae of Washington politics.

"We need to get back that momentum we gained in 2011," Evans said.

"When it comes to the tax credit, with the election there is not a lot of legislation. We feel like we're in a good position to have the tax credit extended. It has been in a number of packages. We feel like we're in a good position. It's a proven job creator."

Evans said the industry is working hard to make its case with lawmakers that it takes fraud seriously and will put broader safeguards in place.

"We tried to spread the word on Capitol Hill that we are not trying to act like there is nothing to see here," he said.

EPA SETTLEMENTS

EPA announced settlements in April with 30 obligated parties who allegedly purchased invalid RINS. Those companies paid fines totaling more than $3.4 million.

Obligated parties have expressed concern that it was unfair to pay penalties.

REG's Haer said the industry is coming together.

"There just weren't good checks and balances in place to catch offenders until after the fact," he said. "We need to be more diligent. The biodiesel industry had to put together a program that would restore confidence for members."

The industry went through a similar situation during its early days when there was inconsistency in the quality of biodiesel being sold, Haer said.

As a result of the recent fraud cases the industry has established a taskforce to work with EPA on possible solutions to prevent future fraud.

Haer, who serves on the taskforce, said part of its job is to work at developing confidence in RINS.

"It hasn't come as quickly as we'd hope but it we have made progress that we will restore confidence in system," he said.

The value of RINS has led to fraud, Haer said.

"Over the past 12 to 18 months they have been valued from $1 to $2 on the high side," he said.

"It makes them quite valuable. Any situation like that creates an opportunity."

(See http://bit.ly/… for what the Environmental Protection Agency formally announced last week regarding a rulemaking proposal to be completed by the end of the year that would provide validity assurance for all Renewable Identification Numbers.)

Todd Neeley can be reached at todd.neeley@telventdtn.com.

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