The Nickel Report

While still early in the new administration, emerging enforcement trends are beginning to indicate that EPA and the U.S. Department of Justice (DOJ) will continue to pursue cases involving fraud in the Renewable Fuel Standard (RFS) program. We noted last summer that EPA and DOJ have pursued numerous enforcement actions against renewable fuel producers and importers that generated invalid Renewable Identification Numbers (RINs), which are the “currency” of the RFS program. Although it is reasonable to assume the vast majority of program participants comply with EPA’s regulations, the program has suffered from high profile cases of fraud and abuse requiring federal enforcement, including criminal prosecutions. Recent cases and statements by DOJ and EPA officials show that federal prosecution of RFS fraud, particularly that involving multi-state schemes, will continue. And RFS fraud cases may even occupy a larger portion of EPA’s enforcement bandwidth as EPA gives greater deference to states in enforcement of delegated programs like the Clean Water Act, Clean Air Act, and Resource Conservation and Recovery Act.

Since last May, three major RIN fraud enforcement actions by DOJ have concluded. While these cases were initiated during the prior administration, the outcomes, including lengthy prison sentences and money judgments, show the continued federal interest and involvement in this area. On July 18, 2017, co-owners of a biofuel company received multi-year prison sentences (57 months for one and 30 months for the other) for fraudulently generating $60 million of tax credits and RINs. In October, the owner of a renewable fuel trading company pled guilty to conspiracy to generate fraudulent tax credits and RINs. The trader was part of a scheme that ultimately generated fraudulent RINs valued at over $47 million. In February, a New York man was sentenced to 87 months and required to pay a $10.5 million criminal fine for creating approximately $42 million of fraudulent RINs.

These cases illustrate many of the factors that are likely to lead to federal criminal enforcement in the Trump administration. They involved fraudulent conduct and conspiracies between multiple defendants typically perpetuated by entities across multiple states, resulting in costs to compliance entities (and taxpayers) in the tens of millions of dollars. Federal enforcement will continue to be likely in cases with such a large magnitude of fraud.

Statements by DOJ and EPA officials indicate that this administration will continue to emphasize fraud cases, especially in the RFS area. EPA Administrator Scott Pruitt stated that the outcome in the fuel trader case discussed above “shows that EPA and its law enforcement partners are serious about ensuring a level playing field for businesses that follow the law and punishing those who break the rules in the name of personal gain.” Jeffrey Wood, Acting Assistant Attorney General for the DOJ’s Environment and Natural Resources Division, concurred, stating that DOJ “vigorously prosecutes those who defraud the federal government through unlawful RFS schemes like the one at issue in this case.” Regarding the most recent fraud case, Wood stated that “the Department of Justice will continue to vigorously prosecute those who defraud the federal government and the American taxpayer through unlawful schemes.” These comments are consistent with Wood’s previous testimony to the U.S. House of Representatives, in which he stated “[p]rosecutions in this area help to reassure the industry that the government is serious about attacking criminal conduct that undermines the industry as a whole, hurts law-abiding operators, and defrauds the taxpaying public.”

Federal RFS enforcement will also likely continue because it fits squarely in the administration’s cooperative federalism paradigm. As we reported last fall, EPA’s draft strategic plan for 2018-2022 strongly emphasizes cooperative federalism and increased partnership with states in the future. This push has made its way into the enforcement arena. Last month, Susan Bodine, Assistant Administrator of EPA’s Office of Enforcement and Compliance Assistance, issued “Interim OECA Guidance on Enhancing Regional-State Planning and Communication on Compliance Assurance Work in Authorized States.” This guidance strongly shifts environmental enforcement to the state level for statutes under which states are operating under authorized programs, such as the Clean Air Act and Clean Water Act. For “inspections and enforcement” under these authorized state programs, “EPA will generally defer to [the states] as the primary day-to-day implementer,” except for specific enumerated exceptions. Even if EPA is the agency to first identify violations, if “the State requests that it take the lead for remedying the violations, the Region should defer to the State” unless one of the specified exceptions are present.

The decrease of federal actions for authorized state programs may increase federal enforcement of statues such as RFS for which there are no state-authorized programs.