October 11, 2023
It’s spooky season! A time filled with ghosts and goblins and…a report by the Office of Inspector General (OIG) on fraud potential within the Renewable Fuel Standard (RFS). Recently, OIG completed an audit of the RFS to identify areas of improvement to prevent opportunities for RIN fraud.
The words “fraud” and “Renewable fuel Standard” or “RINs” used in the same sentence can be a little scary. I’ll admit it. When this report was first published, before I had read it, I passed it on to my boss with the message: “This doesn’t look good.” Even some of the headlines that were released on the same day the report was published showed varying degrees of alarm: “EPA Takes Action to Manage Fraud Potential in the RFS,” “EPA Agrees To RFS Enforcement Improvements In Response To OIG,” and my personal favorite: “US Renewable Fuel Program Beset by Fraud, EPA’s Watchdog Says.” It was like every headline was saying “Boo!” at the same time, just to give the industry a good jump scare.
From the sounds of things, it seems like EPA might not be doing a good enough job protecting RFS participants from RIN fraud…but is that the truth? To quote the report directly: “The EPA has strengthened controls over the…RFS program since its inception, primarily in response to several instance of companies generating and selling fraudulent…RINs[1].” The report goes on to cite EPA’s noteworthy achievements, including the Office of Transportation and Air Quality’s (OTAQ) implementation of numerous controls to track RINs and reduce RIN fraud[2]. These controls include things that many RFS participants have grown accustomed to seeing, such as engineering reviews to ensure RINs are being generated correctly, the performance of attest engagements to aid in RIN tracking and auditing, and the implementation of EPA’s Electronic Moderated Transaction System to provide “a mechanism to screen RIN Transactions to reduce the number of reporting errors and has made the RIN reporting process more efficient[3]”.
So, where does the report address RIN fraud? On page 4 of the report, there is a “fraud table” with some stated facts. What is not known about these facts is the time period during which they happened. The data collected from the table is from 2005 through 2021, presumably[4]. OIG doesn’t really specify the range of years covered by the data in the “fraud table.” Additionally, what the table doesn’t tell is the story of the improvements made from the dark early days until now.
As many RFS participants recall, the first iteration of the RFS (“RFS1”) was not the best iteration of the RFS. The entire “upgrade” from RFS1 to the second iteration of the RFS (“RFS2”) was done to prevent RIN fraud issues that were plaguing the RFS at that time. However, when RFS2 was implemented, regulatory actions were put into place to ensure compliance with the law, such as the aforementioned, engineering reviews, attest engagements, and other mechanisms to control instances of RIN fraud. This is why the time period for the data in the “fraud table” is important: it’s hard to tell whether those instances were made prior to or after the improved controls were put into place.
But did the report point out ways EPA could improve the RFS program? Yes, but keep in mind that was the point of this type of an audit: to make sure the controls that EPA put in place are actually working. Accordingly, some of those things the report pointed out were things like how EPA allows for flexibility in the submission of RIN Transactions to EMTS and how EPA doesn’t verify RIN Transactions entered into EMTS despite RFS2 prohibiting any party from creating or transferring invalid RINs. There are many legitimate explanations for why these types of things might happen that have nothing to do with bad actors wanting to commit RIN fraud.
Does this mean that the RFS is rampant with fraud and we should all be really concerned? No, it doesn’t mean that at all. As the report notes, EPA has come a long way since the inception of the RFS. I don’t think it’s fair to ignore all the protections EPA has put in place and the progress it has made because OIG used the word “fraud” in a title and a table.
So, during this “spooky” season, watch out for ghosts and goblins, but one thing you won’t have to be scared of is this audit report performed by OIG.
[1] The EPA Must Improve Controls and Integrate Its Information System to Manage Fraud Potential in the Renewable Fuel Standard Program, Report No. 23-P-0032, At a Glance, (Sept. 19, 2023).
[2] Id.
[3] Id.; See also Id. at 5.
[4] Id. at 9.