The US Environmental Protection Agency's proposal to revoke Genscape's biofuel credit auditing program after it verified millions of fraudulent credits was surprising and draconian, according to the company.
The commodities data service was "taken aback" by a 4 January proposal to end Genscape's auditing of renewable identification numbers (RINs) that refiners, importers and other companies use to prove compliance with federal biofuel blending mandates, the company said.
The EPA's proposal to require Genscape to also replace 68mn RINs determined to be fraudulent "would far exceed the magnitude of the conduct alleged in the notice," the company said. Genscape's auditing service had uncovered the fraud that generated those RINs, the company said.
"Genscape disagrees strongly with EPA's conclusion that Genscape failed to fully implement its approved (auditing) program," the company said.
Obligated companies use RINs to prove blending requirements under the Renewable Fuel Standard. The EPA sets annual minimum volumes of advanced biofuels, biodiesel and total renewable fuels that must enter the domestic transportation supply. Companies generate RINs by blending those biofuels with conventional gasoline and diesel to produce finished fuel. Refiners who conduct this activity themselves collect RINs for compliance, while merchant refiners who lack sufficient blending capacity may purchase RINs from companies that operate such businesses.
That distance between the physical and regulatory uses of the fuel created the opportunity for fraud. Obligated companies that in good faith purchased fake RINs faced more than $200mn in fines and compliance costs after a wave of fraud in 2011 and 2012. Genscape was one of the first companies to take part in the EPA's Quality Assurance Program (QAP) aimed at shoring up confidence in the program when it was launched in 2012.
Companies who in good faith used audited RINs later found to be fraudulent did not face the same replacement costs or penalties. EPA estimates RINs audited under the QAP program represent roughly 12pc of the total compliance market.
EPA opened a 60-day comment period on its proposal to rescind Genscape's auditing service after two companies in a multi-state scheme generated millions of fraudulent credits that Genscape verified through its QAP program. Gen-X and Southern Resources and Commodities used reprocessed as well as fake fuels used to generate fraudulent but verified RINs between February 2013 and the end of 2014, according to a plea agreement.
Genscape said it worked with the EPA and the Justice department to unravel the scheme and that the fraud would not have been detected without the company's auditing. The company did not explain why its system failed to catch the 68mn fraudulent RINs at first.
"The unraveling of a major, complex fraud scheme where QAP was in play demonstrates the success of the QAP program," the company said. "Genscape welcomes the opportunity to provide its response to EPA's notice within the next 60 days and intends to defend its actions vigorously."
