The Harmful Implications of Illicit Fuel Trade—the economy, the people, the environment

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Written by: Kevin McKenna, President, Oil & Gas, Authentix
Stop Fuel Fraud Series

People often ask me what I do for a living. When I state that I manage a business that helps detect and deter illicit fuel trade, most of the time the response is a confused look and the question, “What is illicit fuel trade, and is that really a problem?” My quick answer is that illicit fuel trade is likely the biggest problem that you have never heard of. The first step in tackling this menace is to shed light on its existence and the harm it inflicts on society.

For the past couple of weeks, we’ve produced some different blog posts discussing illicit fuel trade, a major worldwide problem stealing billions of dollars from governments, legitimate businesses, and consumers. “Illicit trade” can be the simple case of outright theft, which is very prevalent in Mexico today, where the state oil company, Pemex, says it lost about $1.6B in 2016 from fuel stolen from over 6,800 pipeline taps across the country. Another scheme of illicit trade is made possible by exploiting the differences in price between fuels or other petroleum products because of tax differences, subsidies, different grades, or product types (e.g., adulteration with non-fuel products such as solvents or waste oils).

Why fuel fraud is hard to detect

In both cases of illicit trade, the execution of the crime is simple – take a lower price (or stolen) product and either mix it with a higher priced product or replace it outright – sell the fuel at full price and pocket the difference. Even small differences in product prices can generate massive returns for criminals due to the sheer volume of petroleum products consumed every day. The crime is further enabled by the difficulty in detecting when it is perpetrated.

What does this mean to you?

Most consumers never see the road fuels that they purchase, and even if they did, an illicit product may look the same as legitimate product. If as a consumer, I unwittingly buy adulterated fuel at the premium price, obviously, I don’t get what I paid for; but it can also damage the engine of my car, reduce my fuel economy, and increase air pollution. The government doesn’t collect the taxes it needs, legitimate businesses suffer from unfair competition, and the reputation of oil marketing company brands may be unfairly tarnished.

At Authentix we believe that a system of fair and open commerce serves as a powerful agent for good throughout the world. When this system is compromised by illicit trade, civil society is weakened. The scope and scale of illicit fuel trade is particularly damaging in this regard – diverting money to organized crime and, in some cases, terrorist organizations, while defrauding governments of tax revenue necessary to fund programs in the service of their citizens. In many cases these taxes are a significant portion of the country’s total tax revenue – any shortfall in collection may necessitate higher taxes in other areas, placing an even larger tax burden on the populace.

The only people benefiting are the criminals perpetuating the crime – and it is BIG business. Our experience in several countries is that the illicit trade rate in the fuel supply chain was over 30% – translating into hundreds of millions of dollars each year lost to criminals in each of these countries.

Time to disrupt the business of illicit fuel trade

Fuel Marking Programs (FMPs) are a highly effective means to redistribute illicit gains away from organized crime and savings toward legitimate businesses and Government, while ensuring consumers get the quality products for which they have paid. In weeks to come, we will dive into FMPs and how we have seen FMPs assist governments in enforcement of policies prohibiting illicit fuel trade. Many of these programs deliver a significant return on investment of usually five to 10x the cost of the program.

I hope you recognize the lasting implications illicit fuel trade has on all of us. Usually after an awakening to how people’s everyday lives are affected, the next question is typically, “Why isn’t every government doing an FMP?” My personal opinion, it’s the same reason that most citizens aren’t aware of the problem and the harm it brings to their community – something we at Authentix are working diligently to change.

Click here to learn more about how Authentix’s Vigilant® offering is helping governments prevent fuel fraud. You can also learn more about Assure™, our brand protection fuel marking program for oil marketing companies.

How to Create a Secure, High-Quality Fuel Supply

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Introduction to Stop Fuel Fraud Blog Series

Every country around the globe is dependent on the use of petroleum products to move people and goods around, generate power and generally keep their economies growing. Because of this ubiquity in the economy, most governments have developed fuel taxation systems to fund essential services for the benefit of their citizens and at times, provide subsidies to lower prices for certain essential fuels.

The differential in price between taxed, high-cost fuels and subsidized, low-cost fuels creates an incentive for criminally-minded people to perpetrate fuel fraud. The money generated by this illicit activity has been used to fund drug cartels and other organized crime[1] as well as terrorists[2].

Fuel fraud happens in a variety of ways. One form is smuggling in fuel from a neighboring country where prices are low. A striking example is Guyana, a small country in South America that shares a border with Venezuela, where the price of diesel is subsidized down to US$ 0.01 per liter. Guyana follows the prevailing market price for diesel, selling it at about US$ 0.70 per liter, so the incentive to bring fuel via ship or overland from Venezuela is quite strong.

Fuel fraud also occurs when high-priced, taxed product is diluted with cheaper or low-tax fuel products. An example of this is when diesel fuel intended for use in agriculture or mining carries a no- or low-tax rate and is diverted into the high-tax road diesel fuel supply.

Adulteration is a common type of fuel fraud that occurs when other types of hydrocarbons are introduced in the fuel supply. These are typically low- or no-value inferior products such as solvents or waste oils, which then adulterate the fuels meant for vehicles. These adulterants are both a source of additional air pollutants and can cause malfunctions, component failure and safety problems for engines that combust these compounds.

Fuel fraud is a rampant problem in the world, siphoning off needed tax revenues, harming air quality and damaging vehicle engines. This is the first in a series of articles about the ramifications of fuel fraud and a detailed review of the many ways it can occur. Stay tuned through the end of the series to learn how a well-designed, comprehensive fuel marking program – the introduction of environmentally-safe chemical markers into the fuel supply chain – can pay for itself in recapturing lost tax revenue while providing timely, actionable insights that allow government enforcement personnel to combat illicit fuel trade in their countries.

A secure, high quality fuel supply strengthens confidence in the government, provides a level playing field for the companies that sell and distribute fuel in the country and keeps vital funds out of the hands of the bad guys.

 

By: Gail Moser, Director of Marketing, Authentix

 

[1] https://www.nytimes.com/2017/04/26/world/americas/mexico-fuel-theft-crisis.html?_r=0

[2] https://www.usnews.com/news/the-report/articles/2015/11/23/financing-terror-where-does-the-islamic-state-group-get-its-money

A Product Owner’s Journey to Release the LSX 3000 Field Analyzer

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It was over a year ago now that I was tasked with taking up the role Product Owner for Authentix’s newest analyzer for our Fuel Marking Programs, christened the LSX 3000 Field Analyzer. At the beginning of my involvement in the project, I was looking up quite a steep hill and had some reservations; it was my first time acting as a Product Owner of a project that had been in motion for a few months. What’s more, both the engineering team and software team weren’t working with clear instructions of what exactly they were supposed to build (in product development lingo, they didn’t have all of the “requirements”).

I quickly came to realize that both teams had done a spectacular job of coming very close to meeting the base requirements while developing their separate parts of the project. However, both teams were missing some key information. We in the Product Group knew that when we launch LSX 3000, we didn’t want to just be close, we wanted LSX 3000 to be the fastest, most accurate, and most reliable field analyzer on the market.

In my experience, the best way to tackle a problem is by facing the challenge head on. We started by reviewing the list of requirements by team and identifying the issues that each were facing. Once those missing requirements were identified, we further dissected them into their smallest components. This ensured that each issue was fully understood and could be addressed by the right individuals, and in the right order of precedence. Fast forward a few months, glossing over all of the inevitable growing pains that come with new processes (everybody just loves change!), we finally had a prototype unit that was ready for its first field test!
We looked for the best location for a field test that would ensure that we would really put the prototype LSX 3000 through its paces. After some discussion, one of our partners in Africa agreed to participate in a trial of LSX 3000.

So, after a brief, refreshing 23-hour flight, my colleagues and I stepped onto the tarmac in Accra, Ghana to begin our two-week field trial.
As it turns out, we chose a “perfect” location for the test. Temperatures in the sub-Saharan northern part of the country flirted with 50°C / 122°F (heat stress, check) while in the southern regions of the country, we faced near 100% humidity, if not outright drenching rainfall (humidity/water resistance, check). During this trial, we collected data, more data, just a bit more data, and some invaluable feedback on usability and functionality. At the end of two weeks, I had a great tan and a stack of information that would help our teams refine and improve the already amazingly tough prototype design.

The development process continued throughout the summer and fall, including several more trips abroad to test each new and improved version of the analyzer. Each time we returned, our stack of needed “improvements” grew shorter. The whole team knew we were getting close to a product that reflects customer and market needs, but we made the decision to do one final trial, only this time as observers. This trial tested the premise that a user with minimal training could operate the instrument and address any problem. Users were presented with different situations (uncharged/no power state, no wireless connection, etc.) and asked if they could resolve the situation themselves. The users were able to quickly and easily correct the problems on their own – positively reinforcing our premise and demonstrating that our new analyzer would be user friendly and simple to operate, one of the key requirements.

Additionally, the sampling data was a great resource for Chemometrics team members here in Texas. They used the insight to make changes to the analyzer’s mathematical models and the analytics processes of each successive prototype, making each version better and more accurate. All of the team’s work paid off. With a little over 18 months under our belt, LSX 3000 launched on 22 June 2017, under our Vigilant offering as the fastest, most accurate, and most reliable field analyzer available today.

Click here to learn more about Vigilant. You can also contact Authentix at info@authentix.com.

In Africa, fuel quality is on the rise.

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The African Refiners and Distributors Association (ARA) held its annual conference in Cape Town, South Africa last week. The meeting’s theme was “Achieving Clean Fuels in Africa”, a topic that has received much attention lately. In September of 2016 in a report released by the African Centre for Energy Policy (ACEP) partner, Public Eye, it was revealed that Swiss commodity trading firms are exploiting lax regulatory standards to sell to African consumers. (1) The long and comprehensive report documents the way certain traders take advantage of fuel standards in Africa that allow for high contents of sulfur that would not meet modern environmental regulations in Europe and other developed markets. The results are poor air quality in many African cities that have far less fuel consumption than major European metropolitan areas.

The report was not without its critics, including the Ghanaian National Petroleum Authority (NPA). (2) The now former CEO of the NPA, Moses Asaga said much of the criticism of the African authority was borne out of a lack of understanding of the authority’s responsibilities. While the report highlighted that many African nations, including Ghana, have sulfur standards that range as high as 300 times the levels in Europe and the United States, it did not comment on the costs associated with bringing nations into compliance with lower standards. For example, the NPA estimates that it would cost Ghana about 300 million US dollars to bring infrastructure into compliance to produce low sulfur diesels. These types of policy decisions therefore are not solely up to petroleum agencies like the NPA, but have economic impacts that go far beyond the operating budgets of such agencies.

And there is good reason to believe the NPA and other agencies do take their fuel quality seriously. For the past 4 years, the NPA has run a comprehensive fuel marking program aimed at ensuring stations are providing good quality fuel to consumers. (3) A side benefit of this program has been the reduction of subsidy abuse of kerosene and marine diesel, as well as tax evasion of on-road diesel and petrol by dilution. The program is working with technology provided by Authentix, with an estimated savings to the Ghanaian government of over $11 million, while ensuring the nations fuel supply is of high quality having minimal environmental impact.

This is a great example of how governments can effectively reduce fuel fraud and minimize subsidy abuse by adopting programs to improve the quality of the fuel supply chain. Effective fuel fraud prevention programs are designed and put in place to reveal the quality and condition of the supply chain. Often, merely shedding light on the various stages that make up the supply chain will improve the flow of fuel in the country by deterring fraudulent activities that thrive in the shadows. Ensuring integrity of the fuel supply chain also ensures minimal environmental impact by keeping fuels up to specification at the retail pump.

The most successful fuel marking programs involve a number of best practices which are adjusted and modified to meet the unique requirements of each country via an interactive program design phase followed by full implementation and operation. Regular program reviews and audits ensure the program is meeting or exceeding its stated objectives and return on investment (ROI). By stopping illicit trade of fuels through monitoring retail outlets for diverted subsidized fuels or diluted fuels, environmental impact of automobiles is kept to a minimum.

And that is why the focus of the ARA annual meeting was so promising. Ultimately, further raising environmental conditions in many Africa nations will require investment in the infrastructure of the fuel refining industry to produce low sulfur fuels. That investment will come from investors when they have confidence in a strong independent regulatory function in these countries that ensure the investments made in low sulfur diesel infrastructure will pay returns. With the good governance shown by agencies such as Ghana’s NPA, as new regulations are adopted, investors should feel good that there are strong independent agencies already in place to enforce and maintain these new standards.

1. https://www.publiceye.ch/fileadmin/files/documents/2016_DirtyDiesel_A-Public-Eye-Investigation_final.pdf
2. http://citibusinessnews.com/index.php/2016/09/17/acep-displayed-ignorance-in-dirty-diesel-report-moses-asaga/
3. http://www.imaniafrica.org/2016/04/21/imani-africa-report-prevent-fuel-fraud-africa/

Europol Confirms Link Between Organised Crime and Fuel Fraud.

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Last week, Europol released its European Union (EU) Serious and Organised Crime Threat Assessment 2017 (SOCTA 2017)1. The SOCTA is “Europol’s flagship product providing information to Europe’s law enforcement community and decision makers. It serves as the cornerstone of the EU Policy Cycle for Serious and Organised Crime.” The report serves to inform member states on key priorities that Europol feels require inter-state cooperation to effectively combat. The 2017 report identifies about 5,000 international organised crime groups currently being investigated in the EU. That number is up from 3,600 groups in 2013.

But the 2107 report is interesting for another reason. For the first time, it calls out fuel fraud as a growing phenomenon amongst these organised crime groups. The linkage between organized crime and fuel fraud is not a surprise to Authentix. We have been a quiet partner to over a dozen foreign governments in the last twenty-years, helping them shut off the supply of illegal fuel to fund organized crime.

The illicit trading of fuel has many names: fuel fraud, fuel piracy, and fuel smuggling just to name a few. Most people, especially in the developed world, may never have heard these terms or realized that fuel fraud is such an important problem to solve. The illicit trade of refined fuels is estimated to be valued at $100B2, and fuel is the #1 most smuggled natural resource in the world.

If you happen to be reading this in the United States, you may be interested to know that the IRS estimates that 10% of our $23B downstream fuel market illegally crosses state lines to take advantage of lower taxes and higher selling prices in neighboring states. The United Kingdom knows all too well the correlation between fuel smuggling and organised crime as it has marked fuel traveling between Ireland and England for over 15 years to crack down on illegal funding of the IRA. The European Union estimates it loses $4B euros a year in excise tax revenue on fuel smuggling. Thus, fuel fraud is not just a challenge in emerging economies but very much a problem in developed economies.

What is fuel fraud? Fuel fraud involves the dilution, adulteration, or smuggling of fuels to exploit price arbitrage conditions in a market. When taxes and/or subsidies create a large difference in prices between fuel products, unscrupulous parties can take advantage of this price arbitrage by perpetrating various fuel frauds to funnel huge profits into their coffers. The schemes typically fall into two categories: tax evasion and subsidy abuse. In tax evasion, higher-priced taxed fuels are diluted by lower-priced fuels. The resulting mixture is sold as authentic high value fuel. When this scheme is carried out in countries that have both a subsidized and taxed fuel, it can result in government revenues being stolen twice. The government loses the taxes on the higher-priced fuels and pays for the volume of subsidized fuels used for the dilution. In addition, lower-priced subsidized fuels can be transported across national borders into countries without subsidization programs, and possibly even high taxes on the smuggled product.

While counterfeit drugs and designer goods gain large headlines, the billions of dollars of public funds being misappropriated by fuel fraud goes largely unreported. Stopping this activity, whether it is subsidy abuse or tax evasion, results in immediate positive financial impact on a governments budget without reducing a subsidy or increasing the tax burden of its citizens. When a government employs a successful strategy to curb fuel fraud, the benefits are not limited to fiscal policies. A large source of funding of organised crime and terrorist groups is cut off. It also stems the negative impact that fuel fraud has on the environment by ensuring the fuel supply in the country is unadulterated, leading to cleaner burning and better running engines in the country.

Authentix has been working with national governments and Oil Marketing Companies around the globe and has covertly marked over 1.5 trillion liters of fuel. In our experience, the cost of deploying and enforcing a covert fuel marking program returns value orders of magnitude on the investment. It is not uncommon for Vigilant fuel marking program to return USD $100s of millions in lost revenue in a year.
To start combatting the illicit trade of fuel visit https://authentix.com/offerings/vigilant/.


1. https://www.europol.europa.eu/newsroom/news/crime-in-age-of-technology-%E2%80%93-europol%E2%80%99s-serious-and-organised-crime-threat-assessment-2017

2. “How Chemistry is Helping Defeat Fuel Fraud,” Alex Scott, Chemical & Engineering News, Vol. 94, Issue 5, pp. 20 – 21.

3. https://www.bloomberg.com/news/articles/2013-08-26/fuel-smugglers-costing-europe-more-than-4-billion-in-lost-taxes