Regulation & The Environment: The RINs fraud and its aftermath

Renewable Identification Numbers were supposed to be — and in fact, are — the tool that the renewable fuels mandate in the US could be reached without a lot of top-down regulation. The market was going to be allowed to set the value of the ability to buy your way around the RFS, rather than being forced to blend to it regardless of the tightness of supply of blendstocks. But as the industry has found in the last few years, it was also a program ripe for fraud. Meghan Gordon, in this week’s Oilgram News column Regulation & The Environment, discusses how this mess was created.

Supposed biodiesel producers caught in the past year creating lucrative renewable fuel credits out of thin air left a lot of people wondering how the fraud escaped notice for so long, and at every level — among US regulators, legitimate biodiesel producers and some of the biggest oil companies in the world.

Warning signs were there, as we learned from testimony in the first criminal case to reach a jury. But the fraudsters managed to do a heap of damage before investigators with the US Secret Service and the Environmental Protection Agency shut down three sellers of bogus renewable identification numbers (RINs).

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The fraud damaged reputations across the biodiesel industry, as all but the biggest producers had to prove that they were making bona fide fuel if they wanted to sell any more RINs, which for many are essential to their bottom line.

Some producers like Double Diamond Biodiesel in Dimmitt, Texas, have faced an extra hurdle in restoring their names. That’s because one of the sellers of fake RINs used the Texas company’s plant identification code as part of the scheme.

Greg Odom, Double Diamond’s operations manager, said he first realized something was amiss in mid-2011. A RINs broker asked him if he had sold any credits through Absolute Fuels, another Texas biodiesel company registered with EPA.

“I said I hadn’t done any business with those [people] in a year and a half,” Odom told me in a recent interview. (He used a somewhat more colorful term than “people.”)

In late 2009, he had sold about 110,000 gallons of Double Diamond fuel and the corresponding RINs to Jeffrey Gunselman, owner of Absolute Fuels. Odom said he had cut ties with Gunselman when several of his checks bounced.

So when the RINs broker approached him more than a year later, he got suspicious and called the EPA to find out if anyone else was using Double Diamond’s plant identification code to sell renewable fuel credits. Odom said the EPA staffer responded: “We’re not at liberty to give out that information.”

“I said it’s my company, my numbers,” Odom said. “Basically, I don’t think they knew. They didn’t have any way to control it at the time.”

Odom said Absolute Fuels sold about 10 million RINs using Double Diamond’s information, and he suspects Gunselman learned how to generate bogus credits during those 2009 fuel sales.

“It’s created a headache for us, it damn sure has,” Odom said. “It’s one of those deals you didn’t even know you were a deer in the headlights until it happened.”

The latest headache for Double Diamond came last month when the firm’s name appeared in a lawsuit between Cargill and RINs broker International Exchange Services (IES). The agriculture giant says it bought 1.2 million RINs from the broker in April 2010, then sold them to other companies. Cargill subsequently learned that most were tied to Double Diamond and turned out to be fake.

Cargill alleges IES violated its contract and the Clean Air Act by refusing to replace the credits with valid ones.

The lawsuit doesn’t go after Double Diamond, but it nevertheless fails to explain that the Texas producer had no knowledge of the transaction. Odom didn’t even know about it until Platts called him.

Eric Rubury, whose firm OceanConnect traded biodiesel credits before the market seized up, compared producers’ codes to easily accessible credit card numbers.

“It’s just a 38-digit number, and it’s probably not that hard to get ahold of the codes,” Rubury said. “All you need is one Double Diamond 38-digit code and you could be on your way. I would be surprised if Jeffrey Gunselman was the only one out there who figured that out.”

Gunselman sits in a Lubbock jail awaiting trial on 51 counts of wire fraud, 24 counts of money laundering and four counts of violating the Clean Air Act. A grand jury indictment says he sold 48.3 million RINs between September 2010 and October 2011 without making a drop of biodiesel.

A federal judge scheduled his trial to start December 3 in Lubbock. Four days earlier, a federal judge in Baltimore will sentence Rodney Hailey, owner of Clean Green Fuel, for his own bout of RINs fraud.

A jury convicted Hailey in June on similar charges by selling $9.1 million in credits without making any biodiesel.

Double Diamond has managed to dust off its reputation while it keeps cranking out biodiesel at the plant, which has an annual capacity of 30 million gallons. Odom said sales of the fuel and associated RINs have picked up, now that buyers have visited his plant to see for themselves that he runs a legitimate operation—something few brokers or oil companies bothered to do before the fraud.

“It’s made it tough on all small producers, but it’s also opened some doors for me to larger companies that got burned on some of those RINs,” Odom said. “They flat send people out here and they say, ‘You’re the real deal.’ And I say, ‘If you [SOBs] would have called me, I’d a told you a long time ago.'”

Meghan Gordon in Washington

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