Cargill says it's a victim in fraud scheme

Cargill Inc., one of the world's largest commodities traders, says it's a victim of an obscure type of business fraud involving the sale of fake renewable energy credits.

In a lawsuit filed in U.S. District Court in New York, Minnetonka-based Cargill said it arranged to buy 1.2 million biodiesel credits, known as RINs, from a New York broker in 2010, only to learn later that the credits were invalid.

RINs are part of the federal mandate to blend ethanol and biodiesel into the nation's motor fuels. Each gallon of biofuel produced gets a renewable identification number or RIN. Companies can use RINs as proof of compliance with the federal biofuel blending mandate.

The credits also can be legally traded on the commodities market separate from the fuel itself. That way a company with more than enough credits can sell extra ones to a company that hasn't blended enough biodiesel to satisfy the mandate, which is based on each firm's market share.

Although the U.S. Environmental Protection Agency set up the system, it says that trading in RINs is an unregulated "buyer-beware" market. Several oil companies, including Koch Industries, owner of a Minnesota refinery, also have been victims of the scam.

Federal prosecutors have filed criminal charges against two companies in Maryland and Texas that allegedly created more than $50 million in fraudulent biodiesel RINs and sold them to unsuspecting buyers. The owner of one firm was convicted and awaits sentencing in Baltimore.

In its lawsuit, Cargill said the invalid RINs it purchased were purportedly issued by a Texas producer. Cargill is not suing that company. Instead, it is suing the broker, International Exchange Services, which Cargill says refused to correct the problem. The suit seeks damages and an injunction.

International Exchange Services could not be reached to comment, but the company has said in other litigation that it was an innocent buyer and seller of fake RINs. Other suits against the company have been filed in Missouri and California.

Cargill sold the invalid RINs to other companies, putting it in another bind. If those companies relied on those credits to satisfy EPA requirements, they could be subject to federal enforcement action that carries fines of up to $37,500 per day.

In an e-mail response to questions from the Star Tribune, Cargill said its customers have been hurt, though it would not say whether Cargill has reimbursed them.

"While Cargill has not been subject to EPA enforcement related to invalid RINs, unfortunately, we have seen some companies we work with victimized by these scams," Cargill said. "We actively monitor every one of our transactions and if there is an indication of fraudulent activity we will take swift, corrective action to alleviate risk to Cargill and our trusted third-party counterparts."

Cargill, which produces biofuels, said that it buys and sells RINs to meet regulatory obligations and occasionally for the purposes of hedging and managing business risk.

"It's been very disruptive," Evans said. "A lot of our smaller producers have had trouble selling their RINs because obligated parties [such as oil companies] are reluctant to do business with them."

Evans said verification firms have begun certifying the validity of RINs to reassure buyers. He said the trade group has been talking with oil companies and the EPA about how to improve oversight of trading.

A House bill aims to accelerate the EPA response and protect unwitting purchasers of invalid RINs from enforcement action.