Convictions Numerous for Illegal Mixing of Fuel

When a Panorama City gas station owner was charged last month with selling illegally mixed diesel fuel, it wasn’t the first such allegation in Los Angeles County.

Since January 1997, 33 people in the Los Angeles Basin have been convicted of trying to evade fuel taxes with various diesel fuel scams, said Dennis Maciel, a supervisor for the state Board of Equalization’s Fuel Taxes Investigation and Enforcement Section.

Those prosecuted and convicted had tried to avoid paying state and federal taxes by blending diesel fuel with a non-taxed fuel substitute, such as kerosene or jet fuel, a process called “cocktailing.”

According to the U.S. attorney’s office, which has prosecuted most of the cases, the convictions are part of an ongoing joint state and federal investigation into fuel tax evasion and related crimes in Southern California. The probe, “Operation Gas Gangster,” has netted more than $6 million in property and $3 million in restitution, according to Assistant U.S. Atty. Stephen Larson, a member of the organized crime strike force in Los Angeles.

Most of those cases have involved links with Russian and Armenian organized crime, Maciel and Larson said.

In 1997, self-proclaimed “Armenian Mafia godfather,” Hovsep “Joe” Mikaelian, a former North Hollywood resident, was convicted of fuel excise tax evasion, narcotics trafficking, and mail and wire fraud. He was sentenced to 14 years in federal prison and ordered to pay $2.2 million in restitution to the state Board of Equalization and $170,000 to the Internal Revenue Service.

At least four other cases have been filed in Los Angeles Municipal Court since March 1997 as a result of covert investigations by the California Division of Measurement Standards, according to court and state records.

Diesel fuel scam artists are usually caught in covert operations undertaken by the measurement standards agency or the Board of Equalization and the state Air Resources Board, Maciel said.

“Most of the work we do is with undercover sampling,” said David Lazier, chief of Petroleum Products/Weighmaster Enforcement section for the Division of Measurement Standards. “Investigators for the division take roughly 1,200 to 1,500 diesel samples a year throughout the state, with 60% of those being south of the Grapevine.”

In the most recent case in Panorama City, prosecutors charge that the station owner was selling diesel fuel No. 2 with a flash point of 51 degrees. State law requires that diesel fuel have a minimum flash point of 125 degrees.

The flash point indicates the temperature at which a particular fuel’s vapor will ignite when it comes into contact with an ignition source, said Jeff Thuner, program supervisor for the Division of Measurement Standards. The normal flash point of diesel fuel is significantly lowered when mixed with another petroleum product, most often kerosene, jet fuel or automotive gasoline.

Only 1% automotive gasoline mixed with diesel fuel will reduce the flash point below 70 degrees, Lazier said. The flash point of a typical unleaded automotive gasoline is about minus 40 degrees.

Since it is difficult to pinpoint why or how such mixtures occur, the law is written so that the liability usually rests on the station owner who sells the illegal diesel hybrid, Thuner said.

“It’s a strict liability standard,” Thuner said. “The station owner is responsible for what he sells.”

There are a number of reasons that diesel fuel could become mixed improperly, such as a problem at the refinery, plumbing problems with the tank at the station, water leakage or something accidentally dropped into a tank.

But, officials say, the problem usually occurs during the transportation of the diesel fuel from the source to the station; for instance, if the truck’s tank was improperly cleaned after delivering another petroleum product.

Although the blending of diesel fuel is often a careless mistake, Larson said the cases that have been prosecuted show evidence of an evasion to pay the excise tax on the fuel.

The federal government collects 24.4 cents per gallon and California takes 18 cents on all fuel destined for use on the roads, with the revenue then earmarked for highway construction and repairs. Such a tax is not issued on fuel destined for off-road use, such as jet fuel.

Larson, who has won convictions in about three dozen diesel tax cases since “Operation Gas Gangster” began in 1994, said that in Los Angeles County, tens of thousands of dollars in back taxes were owed.

In a 1995 case prosecuted by Larson, Yousef Kamel Keroles of San Pedro was ordered to pay $2 million in back taxes to the state and Internal Revenue Service for cocktailing diesel fuel.

In the diesel fuel scams, the non-taxed fuel substitute is blended so that the road use tax does not apply. The resulting product is then sold as 100% diesel, which allows for bigger profits, at the same time undercutting market-rate prices.

For example: If Truck A’s 7,500-gallon tank is filled half with diesel and half with jet fuel, then $1,590 is owed in excise taxes. If Truck B has all 7,500 gallons of diesel, then $3,180 is owed.

Truck A can sell its load for less, at the same time reaping larger profits.

“It not only increases profits, but it also creates a tremendous competitive advantage against those whose operations are legal,” Larson said.

The results might also mean a lower price at the pump for consumers. Although the effects of the inferior product might not be noticed at first, use of the mixed diesel fuel over an extended period can damage an engine, Thuner said.

“If you’re driving down I-5 and you see $2.29, $2.29, $2.29 and then $2.17, you need to be cautious of the product that place might have.”