We have discussed the potential for whistleblower actions grounded in the protection of the environment and compliance with environmental laws here before. Most depend on the unique circumstances of the case and the fraudulent scheme in order to fit within one of the whistleblower programs. With the Trump Administration in office, it is unclear how long these programs will continue in action. But to the extent that there is evidence of a fraudulent scheme that is unlawfully taking millions from taxpayer dollars, we would be interested in hearing about it. Here are the areas where we have seen speculation and enforcement actions about fraud recently:
Property-assessed clean energy (PACE) loans have been one of the fastest growing loan types in the United States. The PACE program is designed to help homeowners finance energy-efficient solar panels, window insulation and air-conditioning units. Since 2012, PACE loans have grown to almost $3.5 billion annually with this number expected to double in 2017.
PACE loans have been compared to the subprime mortgage industry already. Plumbers and repairmen serve as loan brokers that pitch the loans to consumers and earn referral fees from lenders. The government financing allows them to land contract jobs and lenders base the loans on the value of the home rather than creditworthiness. The loans are then packaged and sold to investors, like the subprime mortgages.
Defaults on PACE loans have so far been low but some in the industry are concerned that misrepresentations or inadequate disclosures in the marketing of the loans is misleading. Given the growth in the industry, the implied or real government backing and similarities to the subprime mortgage boom, there is concern that fraud in this industry could eventually cost investors and the government money.
For potential whistleblowers, this could implicate either the False Claims Act (fraud against the government), FIRREA (fraud against financial institutions), or the SEC whistleblower program (due to securitization).
Biodiesel RIN Fraud
The Renewable Fuel Standard is a federal law that requires gasoline manufacturers to incorporate renewable fuels such as ethanol into their blends, including transportation fuel, home heating oil and jet fuel. It was established by the Energy Policy Act of 2005 and modified through the Energy Independence and Security Act of 2007. Compliance with the law is demonstrated through Renewable Identification Numbers (RINs). RINs are generated by renewable fuel producers and can be either assigned to a batch of fuel or separated from the batch of fuel and traded among market participants. The RIN system allows renewable fuel producers to meet their obligation either by using renewable fuels or by purchasing extra credits in the market. The estimated market size of these biofuel credits was approximately $1 billion during the Obama Administration.
The law was initially enforced by the Environmental Protection Agency. In 2016, they asked the Commodity Futures Trading Commission for their assistance in policing the system. In March 2016, the CFTC and EPA signed a Memorandum of Understanding that allows for sharing data and analysis regarding the RFS program. If the CFTC takes a larger role in the enforcement of the RFS/RIN system because of its historical role as a commodity regulator, then information about fraud provided through the CFTC whistleblower program.
If the company is publicly traded and makes misleading statements in financial reports to the Securities and Exchange Commission, the SEC whistleblower program may also come into play.
The cost of the ethanol credits have fallen significantly in early 2017 as there is speculation that President Trump may eliminate the Renewable Fuel Standard. The EPA has delayed around 30 regulations regarding the 2017 biofuels requirements that were finalized during the Obama Administration. If the system is retained, biodiesel speculation and fraud could return to run amok.
In late 2016, there were several multi-million dollar enforcement actions resolving allegations of fraud in the renewable fuel credit market. The EPA has discovered hundreds of millions in biofuel scams since the program started. The EPA has said that fraud is happening in less than 1 percent of the billions of dollars of RIN transactions happening in the market. Nevertheless, several potential cases could have led to rewards.
Biofuel Tax Credit Fraud
There have also been several enforcement actions that could potentially involve claims under the IRS whistleblower program. Biodiesel manufacturers are eligible for a one dollar per gallon tax credit from the Internal Revenue Service for the first person to blend pure biodiesel (B100) with petroleum diesel. It is illegal to claim this tax credit if the biodiesel is not actually produced and it is available only once for any given volume of biodiesel. Several companies and individuals defrauded customers and claimed millions of dollars worth of tax credits with the federal government. Fuel tax credits have previously been on the IRS’ annual Dirty Dozen list of tax scams.