Renewable-fuels fraud cases expose weakness in EPA program

The luxury cars lined up on Catron Road in a suburban subdivision north of Baltimore. A baby blue Rolls-Royce, a white Maserati, a black Bentley and two Ferraris. More than a dozen jammed the street and driveway in front of Rodney R. Hailey’s five-bedroom colonial.

Hailey told people that his company, Clean Green Fuel, was in the business of making renewable fuel, but some neighbors grew suspicious. One eventually complained to law enforcement officials.

That tip led authorities to uncover what federal prosecutors in Maryland say was a multimillion-dollar scam.

Hailey, they allege, never produced so much as a drop of clean biodiesel. They say he sold phony renewable-fuel credits to major oil companies, brokers and producers, then simply pocketed the cash, spending lavishly on cars and jewelry.

The case landed Hailey, who denies the allegations, in federal court in Maryland. It also prompted calls for greater oversight of the fuel credit program run by the Environmental Protection Agency.

As the United States works to use more clean energy, companies that make or import gasoline or diesel are required to use a certain amount of renewable fuel. If they don’t, there’s another way to meet the mandate: They can buy credits that represent renewable fuel another company has made. Those credits are called renewable identification numbers — or RINs.

It’s all about incentives to boost production of renewable fuel. Companies can buy the credits even if they don’t buy the fuel — which still will be consumed in the United States.

But allegations against Hailey’s company, and another Texas company that also sold those credits, have exposed opportunities for fraud in the system, some in Congress say.

“We need to make sure that EPA is doing its job,” Rep. Ed Whitfield (R-Ky.), chairman of a House Energy and Commerce subcommittee, said in a statement. “That means addressing problems like RIN fraud before they get further out of hand and cause significant damage.”

Hailey, 33, sold 32 million credits representing more than 21 million gallons of “non-existent fuel” between March 2009 and December 2010, Maryland U.S. Attorney Rod J. Rosenstein said in an indictment. Clean Green was paid more than $9 million — money the government says he used to buy at least two-dozen luxury cars and high-end jewelry worth nearly $82,000.

Hailey, who appeared in U.S. District Court in Baltimore for a hearing last week, has pleaded not guilty to charges of wire fraud, money laundering and violating the Clean Air Act and is set to go to trial in June. His attorney, Joseph Evans, would not comment on the specifics of the case but said the government is “trying to smash him beyond all reason.”

When EPA inspectors visited Hailey at his White Marsh office after being tipped off by the neighbor, prosecutors say he told them that he made biodiesel by converting used vegetable oil from thousands of restaurants in the region, court papers say. When inspectors later tried to check out his production facility, Hailey said he had recently sold all of his equipment.

The businessman told authorities he could not remember who bought his equipment and could not document the restaurants that provided his company or contractors with used cooking oil, the indictment states.

Federal authorities say his whole story was fiction. “Hailey did not produce any biodiesel, nor did he have a facility capable of producing biodiesel fuel,” according to the indictment. His business “consisted solely of generating false RINs” and “marketing them to brokers and oil companies.”

The RIN trading program, which began in 2005 and expanded in 2007, stems from a congressional mandate to increase domestic renewable-fuel production. When the EPA drafted regulations implementing the new federal requirements, oil industry officials pressed the agency to include the trading of credits to provide greater flexibility and lower the costs of compliance.

“The overall approach to meeting the mandate makes sense,” said Iowa State University economist Bruce A. Babcock, who also directs the Biobased Industry Center. “You just have to make sure someone’s not out there with a printer running off RINs.”

Even critics of the current system suggest its greatest weakness stems from the fact that lawmakers overestimated how quickly the country could ramp up biodiesel production. Unlike corn ethanol, which is widely produced and enjoyed years of federal subsidies until recently, the biodiesel sector includes fuel made from sources such as soybean and canola oil, algae and cooking waste like beef tallow and chicken fat.

The fact that biodiesel has been scarcer than ethanol, Babcock noted, means “there’s a huge incentive to counterfeit RINs.”

And because credits can change hands multiple times, it is difficult for companies to determine “the pedigree” of a specific identification number tied to a gallon of biodiesel, said Sandra Dunphy, who directs assurance services for the public accounting firm Weaver and has earned the nickname “RINderella” for her mastery of the arcane fuels-trading system.

Legitimate producers of biofuels said the alleged fraud cases have hurt their businesses dramatically.

“The impact has been staggering,” said Jennifer Case, CEO of the San Diego-based company New Leaf Biofuel, which has had a dramatic slowdown in sales since Hailey’s indictment last fall. “We’re being penalized and having our businesses threatened because of a few bad actors.”

The EPA puts the burden on refiners and importers to ensure that the credits they purchase are valid. The agency has sent “notices of violation” to companies that used invalid RINs — including those that purchased credits from Hailey — and says it has 33 pending settlement offers with companies to resolve violations of the renewable fuels requirement.

Charles T. Drevna, president of the American Fuel and Petrochemical Manufacturers, said EPA officials should have alerted members of his trade association when they suspected that some companies registered with the agency were producing fraudulent credits.

“Penalizing refiners who unknowingly bought fraudulent RINs from sellers registered with EPA is unjust, irresponsible and bad policy because it punishes crime victims instead of criminals,” Drevna said.

But Nathanael Greene, director of renewable-energy policy for the advocacy group Natural Resources Defense Council, said oil firms have no right to complain about the program given their considerable resources.

“The oil companies have more than enough wherewithal to go out and figure out if the biofuel companies are legitimate,” Greene said.

EPA officials, for their part, say they have expanded their enforcement efforts and plan to hold fraudulent RIN dealers accountable for their actions.

“We’ve gone from 15 miles per hour to 75,” said one official, who spoke on the condition of anonymity on the grounds that criminal investigations are ongoing. “The coming months should yield significant results from our investigative efforts.”

In Texas, the EPA has been investigating another biodiesel company since May, according to an affidavit filed in federal court as part of a warrant against Absolute Fuels LLC. The warrant called for seizing property including a 1984 Gulfstream jet valued at $2.5 million and 11 automobiles, including a 2011 Bentley.

The cases “should serve as a reminder of why we need an EPA with the necessary resources to police and penalize fraudulent activity,” Rep. Henry A. Waxman (Calif.), the top Democrat on the House Energy and Commerce Committee, said in a statement.

In response to the alleged fraud, the biodiesel industry’s trade group has brought together producers, oil companies, brokers and the EPA to try to come up with safeguards to avoid future breakdowns in the trading system.

Already the program includes more vetting than when Hailey first entered the market, according to the National Biodiesel Board, a trade group. The government, for instance, now requires an independent engineering review and report on production facilities before a producer can register with the EPA.

Hailey “was crafty enough to figure out how to make some paper without actually making some biodiesel,” said Larry Schafer, senior adviser at the biodiesel board, where Hailey’s Clean Green briefly held a membership before it was canceled for failure to pay dues. “We’re cleaning up the mess to make sure it doesn’t happen again.”

Staff researcher Jennifer Jenkins contributed to this report.

Ann covers legal affairs in the District and Maryland for the Washington Post. Ann previously covered state government and politics in California, New Hampshire and Maryland. She joined the Post in 2005.
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