On Monday, the Department of Justice announced the sentence of Gregory Schnabel, an Ohio man who had been illegally acquiring biofuel credits from the Environmental Protection Agency (EPA) and reselling them. Schnabel is just the latest to be sentenced: filings from Southern Ohio's district court (PDF) detail a handful of co-conspirators, many of whom have been sentenced over the last three years.

The claims against Schnabel outline a complicated inter-state scheme to earn credits from the EPA for producing biofuel that was never produced, that was minimally processed, or that was re-sold for another round of credits. The ill-gotten credits were then sold to buyers under the pretense that the credits were legitimately earned. In Schnabel's case, the Justice Department claims that he helped generate a staggering $47 million in fraudulent credits and more than $12 million in fraudulent tax credits from the IRS.

Schnabel was sentenced to 63 months in prison and was required to pay more than $26 million in restitution.

A credit market

The various biofuel schemes that Schnabel was a part of took advantage of the fact that the EPA sets quotas for the amount of biofuel that is blended into gasoline in the US. Biofuel quotas are meant to reduce the overall carbon footprint of transportation. Although biofuels still generate carbon dioxide when they're burned, their sources are generally waste materials or plants that use carbon dioxide to grow. To promote the use of these fuels, the EPA issues credits, called Renewable Identification Numbers (RINs), on fuel that is developed with the appropriate chemistry. If producers sell their gallons of biofuel to refiners to blend in with gasoline, those refiners keep the RINs to show the EPA that they are compliant with the biofuel quotas.

If a refiner can't meet the EPA's biofuel quota for whatever reason, the refiner still has to buy RINs even if the company doesn't buy the biofuel with it. This has created something of a secondary market for RINs, where traders can buy and sell the credits separate of any gallons of biofuel.

In addition, around the time that Schnabel was trading fuels, tax credits were offered by the IRS on each gallon of biofuel produced, with different levels of credit depending on whether the biofuel was used for transportation or another purpose.

A tangled web

In Schnabel's case, he started two companies, called GRC Fuels and Gristle, in Oneonta, New York, to buy and sell renewable fuel itself as well as RINs and feedstock to produce renewable fuel. In one deal, the DOJ says that Schnabel contracted with a Texas-based renewable fuel company that had produced the incorrect grade of biofuel but collected RIN credits on it anyway. The Texas company shared the profits of that deal with Schnabel by selling the "bad" biofuel to him, along with the RINs, at a discount. Schnabel then turned around, sold the RINs to a buyer, and sold the fuel to another company for re-processing.

The DOJ also claims that the biofuel broker sold feedstock to a processor in Ohio called Chieftain Fuels, which would "minimally process" the feedstock "without producing biodiesel." Chieftain then told the EPA that it had produced biodiesel, and the company applied for the RINs and the IRS tax credits. According to the DOJ, Schnabel next bought the not-quite-biodiesel, did the paperwork to separate the gallons of biofuel from the RINs, and sold the separated RINs to an unnamed buyer.

Schnabel apparently contracted to receive up to 400,000 gallons of biofuel a month from at least one fraudulent processor. The complaint against Schnabel notes that, in an email to a client, he admitted, "the lab analysis you did on the dark biofuel... is accurate. I just had one done... I attached the lab results for your internal use." However, the attached lab results showed that the fuel "failed several of the parameters" necessary to qualify for EPA credits.

In another scheme, the DOJ says GRC Fuels or Gristle would buy incorrectly processed biodiesel from Chieftain and other companies, separate out the RINs, relabel the fuel as "Recycled Vegetable Oil Blend," and sell the fuel to a company called Unity. Unity would then "reprocess" the "Recycled Vegetable Oil Blend" and generate new RINs and tax credits on the same fuel. Then, Unity would sell the fuel back to GRC Fuels or Gristle.

No isolated case

A scheme this complicated requires many participants, and at least six people have been indicted and sentenced since 2015. Four individuals who operated the Texas-based biofuel producer and Chieftain Fuels were sentenced to between one and five years in prison in 2015. Those defendants together sold $15 million in fraudulent RINs. Two more Indiana-based biofuel producers who worked with Schnabel were sentenced in 2016 for claiming RIN credits that were specific to fuels used in transportation, while the owners of the company actually sold the fuel for wood fire starter and asphalt use. That scheme generated more than $60 million in fraudulent tax credits. The owner of Unity Fuels was also sentenced in 2017 to five years in prison for generating more than $7 million in tax credits and RINs.

Biodiesel Magazine suggests that more sentences may be coming down the line. "Earlier this month, on August 8, Calvin Glover, owner of Colorado-based renewable fuel company Shintan Inc., pleaded guilty to conspiracy to impair and impede the IRS for his role in a $7.2 million biodiesel tax credit scheme," the magazine wrote this week.

In addition, a Utah-based energy company was indicted this month for allegedly "scheming to file false claims for more than $511 million in renewable fuel tax credits for WRE," as Biodiesel notes.