Inflation Reduction Act’s expanded biofuel incentives raise concerns

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…