Stop

Fuel
Fraud
Fuel fraud funds crime by stealing tax
revenues and economic development funds,
denying citizens their benefits.
Fuel marking programs have been shown to
help governments substantially mitigate tax
evasion and subsidy abuse.

© 2013 Authentix. All Rights Reserved. 1|Page

Table of
Contents
Executive Summary 3
The Implications of Fuel Fraud 4
How Fuel Fraud Happens 6
Tax Evasion 7
Subsidy Abuse 8
Simultaneous Tax Evasion and Subsidy Abuse 8
How to Build Integrity into Your Petroleum Supply Chain 9
Fuel Marking Program Design 10
Authenticating the Entire Supply Chain 11
The Right Solution for the Right Outcome 12
Fuel Marking Program Operations 13
Enforcement Models Drive Cost and Complexity 15
Return on Investment 20
Conclusion 25
References 26

© 2013 Authentix. All Rights Reserved. 2|Page

Executive
Summary
In most countries, petroleum products are the lifeblood of the economy. From exploration
and production to power generation to distribution and retail, petroleum is an integral part of
daily life. Governments have developed various fuel taxes that fund the state’s essential
services to the benefit of citizens. In many cases, these taxes are a significant portion of the
country’s total tax revenue. At the same time, a large number of governments spend
significant portions of their revenues to subsidize lower prices for certain fuels. These fuel
subsidies encourage economic growth, provide assistance to the needy or distribute the
benefits of an abundant natural resource to citizens.
Unfortunately, every society has a criminal element which perpetrates various fuel frauds to
divert the benefits of government programs to its own illicit gain. Fuel-related schemes
typically fall into two categories: tax evasion and subsidy abuse. Sometimes both are
perpetrated at once. The price differential between taxed, high-cost fuels and subsidized, low-
cost fuels creates significant temptation for criminals. Fuel fraud typically involves diluting
high-priced, taxed fuels with cheaper or low-taxed products. Often, subsidized fuels become
the adulterants for highly taxed fuels. When this happens, government revenues are stolen
twice: taxes are evaded and subsidy expenditures end up in the hands of criminals instead of
funding their intended beneficial purposes.
Fuel marking programs help governments collect the target revenues that fuel excise tax
programs were enacted to generate. Effectively, governments collect more fuel taxes from the
existing programs, increasing their total revenue without raising taxes. Fuel marking
programs also help ensure that fuel subsidies are not being diverted and being used as
adulterants in taxable fuel. By addressing diverted fuel volumes, governments can reduce
subsidies while maintaining the scope and scale of benefits received by the population.
Today’s successful fuel marking programs accurately determine when taxed fuels are being
diluted and when subsidized fuels are attempted to be smuggled out of a country or used
domestically as adulterants. They do so by identifying taxed and subsidized fuels throughout
the downstream fuel supply chain from the refinery or fuel depot to the retail outlet or border
crossing. Fuel marking programs are designed as sophisticated management systems that
include key program elements such as overall program design, methods to authenticate the
entire supply chain, operational details and enforcement strategies to achieve program goals
and objectives including a robust return on investment. The key output of these programs is
timely, actionable information with which governments can mitigate tax evasion and subsidy
abuse.

© 2013 Authentix. All Rights Reserved. 3|Page

The
Implications
of Fuel Fraud
Criminal activities in a country’s fuel sector have extensive negative impacts that undermine
the foundations of society. When legitimate tax revenues are stolen from the government,
government services must be reduced. These services support all strata in a society: the poor,
families, youth entering the workforce, the disabled and disadvantaged, and others who need
government support. Increased crime and ineffective government services lead to
dissatisfaction, frustration and possibly unrest among the citizenry.
In countries that derive a significant portion of their total revenues from fuel taxes, fuel fraud
severely limits the effectiveness of government services. A report by the World Bank on
“Petroleum Taxes”1 asserted that “taxes on petroleum products are a critical source of
government revenue.” The report states: “The reason (why fuel taxes are important to
governments) is that taxing fuel is one of the easiest ways to get revenue: collecting fuel taxes
is relatively straightforward, and the consumption of fuels as a group is relatively price
inelastic and income elastic, ensuring buoyant (tax) revenue as
(personal) income rises and tax rates are increased.” When The European
revenues from fuel taxes decrease as a result of fuel fraud, other
government taxes on law abiding citizens are sometimes Union is losing
increased to make up for the shortfall. This further exacerbates more than $4
dissatisfaction and frustration. billion dollars in
All countries are susceptible to fuel fraud. In emerging tax revenue to
economies, fuel fraud can substantially reduce the fuel fraud every
government’s total revenues. For example, Algeria reportedly
lost $1.3 billion in tax revenues to cross-border fuel smuggling.2 year.
Even large, developed countries are not immune to fuel fraud.
A recent survey of refinery executives in the European Union -- Bloomberg
compiled by the Bloomberg3 news service found that the EU is News Service
losing more than $4 billion dollars yearly in tax revenue to fuel
fraud.
Several oil executives surveyed by Bloomberg described how fuel fraud can shake the very
foundations of a society. “[Fuel fraud] is undermining the fabric of the legitimate petroleum
industry and the state at a time when economic challenges have never been so great. Illegal
activity has been allowed to grow at such a large scale unimpeded,” said Tom Noonan,
chairman of the Irish Petroleum Industry Association and Chief Executive Officer of the
petroleum retailer, Maxol Group.
The most recent yearly figures cited by Bloomberg on tax revenues lost to fuel fraud are
staggering: UK forfeited £1.1 billion, Poland lost $943 million and Greece failed to collect
€600 million.

© 2013 Authentix. All Rights Reserved. 4|Page

In addition, the Bloomberg study found that untaxed fuel accounted for a very substantial
portion of the domestic fuel market in some Eastern European countries. Government data in
the Czech Republic showed that as much as 20 percent of the fuel consumed in the country
goes untaxed because of smuggling, adulteration, theft, mislabeling and other criminal means
of tax evasion.
In addition to fuel-related tax evasion, countries are plagued by
A country’s fuel subsidy abuse, which diverts government funds into the
currency and its hands of criminals. The harmful effects of subsidy abuse are
compounded when the open market petroleum prices rise
credit rating because governments must increase their spending on subsidies
could be to maintain current pricing or risk the social unrest associated
adversely with increasing subsidized product prices. In countries like India,
which imports approximately 75 percent of its crude oil, this
affected by type of situation can have serious effects on the financial
increasing fuel stability of the country. According to reports in the India News,
subsidy politicians are “reluctant to pass on the entire increase in the
costs (of petroleum) to consumers…”4 This same report goes on
expenditures. to say that financial analysts believe that the value of India’s
currency and quite possibly the country’s credit rating could be
adversely affected by increasing fuel subsidy expenditures. In these types of instances,
mitigating subsidy abuse would ensure that the government’s outlays on subsidy programs
are working as intended.
To compound the enormous financial losses, fuel fraud also causes harm to the environment.
Tax evasion and subsidy abuse schemes replace quality fuel with adulterants or waste by-
products. Highway fuel can be marginally diluted with other combustible liquids without
affecting vehicles immediately, but the mid- and long-term effects can be quite detrimental to
the vehicle and the environment. A vehicle’s engine life will be dramatically shortened and
costly repairs to motors and catalytic converters will also be required. But even more
harmful, inferior products or waste by-products introduce unregulated pollutants into the air
which cause long term and unpredictable damage to the environment. Unfortunately,
criminals have a comparatively sizeable financial incentive for this sort of reckless activity
since both inferior products and waste substances are typically much lower in cost than
highway fuels and these adulterants have no taxes associated with them. In fact, wastes
usually cost nothing, offering the criminal a huge incentive to use them as adulterants.

© 2013 Authentix. All Rights Reserved. 5|Page

How Fuel
Fraud
Happens
According to another report of the World Bank, “Abuses in Fuel Markets”: “Where products
of comparable quality have different prices, or consumers have trouble distinguishing
products of different qualities, unscrupulous operators will always try to exploit the situation
for illegal profits. Many countries have seen illegal practices in the retail fuel business…with
operators adulterating diesel with low-priced kerosene in Asia, smuggling low-priced fuels
out of Nigeria into neighboring countries, and evading fuel taxes in Brazil.”5 These fuel-
related criminal activities have devastating effects not just on society in general, but also on
individual consumers who are the ultimate victims. Although the crime of fuel fraud takes on
many forms – adulterating, diverting, smuggling and outright stealing, to name a few – when
it comes to fraud against the state the objectives of the criminals boil down to two: tax
evasion and subsidy abuse (see table below). By tax evasion and subsidy abuse, criminals
remove money from where it should be spent in an economy and apply it where it actually
harms the economy.

Tax Evasion Subsidy Abuse

Taxed fuels are diluted with products that Subsidized fuels are diverted from their
have lower taxes or no taxes, such as: intended supply chain, and are:

• Fuels smuggled IN from • Used domestically as

other countries adulterants in higher taxed
fuels
• Subsidized petroleum
products • Smuggled OUT to higher
priced markets in other
• Duty-free transit fuels
countries
• Stolen petroleum products
• Inferior products such as
solvents, waste oils, etc.

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Tax Evasion
Price differentials among various petroleum products
inevitably lead to a range of illicit schemes to evade taxes. One African country
Criminal perpetrators avoid paying taxes and keep the found that it was
government’s rightful revenues. A common tax evasion
scheme occurs when taxed fuels, such as highway gasoline or
failing to collect
diesel, are diluted with petroleum products with lower taxes more than 25
or no taxes at all. The resulting diluted fuel is then sold at the percent of excise
fully taxed retail price. The criminal pockets the difference
and the government does not collect its expected revenue.
taxes on domestic
highway fuels
The financial incentive for a criminal is greatest when the because of various
adulterant is a stolen fuel or another substance that has little
or no up-front cost. As the difference between the retail adulteration ploys.
market price of the taxed fuel and the illicitly acquired
adulterant narrows, the financial incentive for the fraud also narrows. The perpetrator’s risk
follows a similar trend line. As expected, the greater the risk the greater the illicit reward.
One African nation found that it was failing to collect more than 25 percent of its excise taxes
on domestic highway fuels because of various adulteration ploys.
Of course, large price differentials between neighboring countries can also provide a catalyst
for tax evasion. In a high tax country, fuel smuggling will flourish because a low-cost fuel
can be smuggled across the border and be illegally sold in the attractive higher priced market.
The end result is both countries lose.

Subsidy Abuse
Governments subsidize fuels to improve the lives of citizens by reducing the cost of fuels
used for cooking, heating, electricity or transportation. Subsidies can also be targeted to grow
certain industries such as farming and fishing. These subsidy
programs artificially affect the prices on fuels in the supply The government’s
chain, establishing price differentials between subsidized
and non-subsidized fuels. Criminals exploit these price
expenditures on fuel
differentials through subsidy abuse schemes, which funnel subsidies could end
the government’s subsidy expenditures into their pockets up benefiting
instead of benefiting the economy and needy groups or
supporting other legitimate governmental programs. In
smugglers and not
countries where these types of entitlement and benefit the citizens of the
programs are prevalent, subsidy abuse can have a negative country.
financial impact many times greater than tax evasion.
Often the greatest price differential between a subsidized fuel and the open market pricing on
the same fuel will be across the border in neighboring countries. When this is the case, even
with high risk and severe consequences if caught, smugglers will transport low-cost
subsidized fuels from one country to its neighbor where prices are much higher. The low-cost
subsidized fuel will simply be resold in the higher-priced destination country. The
government’s expenditures on fuel subsidies benefit the smugglers, not the country’s law
abiding citizens.

© 2013 Authentix. All Rights Reserved. 7|Page

 Fuel
Fraud Transit Fuel
Smuggling
Smuggling Inferior Products

Programs

Programs
Revenue
Subsidy

Citizens Taxes
Helped Collected

Simultaneous Tax Evasion and Subsidy Abuse

A common form of fuel fraud typically involves both subsidy abuse and tax evasion. That is,
a taxed fuel is diluted with an adulterant which happens to be a subsidized fuel. In these
cases, a low-cost subsidized fuel does not have to leave the country to be involved in the
scheme. This fraud is particularly widespread when the same type of fuel is sold as a taxed
fuel at open market prices and as a subsidized low-cost fuel. For example, diesel fuel could
be sold on the open market at unsubsidized prices and at the same time at lower subsidized
prices to farmers. The diesel is identical, but one is taxed and the other is subsidized to
support a certain government objective. Similar fuels such as kerosene and diesel also pose a
challenge. Kerosene is often subsidized to serve the needs of the poor for a cooking and
heating fuel. Criminals can dilute highway diesel up to 20% with kerosene without affecting
the vehicle immediately. The diesel diluted with kerosene can be sold at a substantial profit.
When this happens, the effects on the government are:

• The poor are possibly denied their low-cost fuels

• Government expenditures on fuel subsidies are wasted because they end up in
the hands of criminals requiring incremental and unplanned government
spending
• Excise tax revenues from the sale of legitimate fuels are robbed from the
government
• The environment is damaged by use of inferior fuels

© 2013 Authentix. All Rights Reserved. 8|Page

How to Build
Integrity into
Your
Petroleum
Supply Chain
All countries have some level of criminal activity, but governments can effectively reduce
fuel fraud and minimize fuel-related tax evasion and subsidy abuse by adopting programs to
improve the integrity of the fuel supply chain. Increasing a government’s tax revenues
without increasing tax rates will accelerate economic growth, which in turn will increase the
government’s revenues again. Greater overall tax revenues will improve or expand state
services, leading to more stability within the society, improved confidence in the government
and a sense of satisfaction among citizens.
Effective fuel fraud prevention programs are designed and
put in place to reveal the quality and condition of the Fuel marking
supply chain. Often, merely shedding light on the various programs are
stages that make up the supply chain will improve the flow designed to reveal
of fuel in the country by deterring fraudulent activities that
thrive in the shadows. the quality and
condition of the
For decades, fuel marking programs have helped countries
mitigate fuel fraud that revolved around tax evasion and supply chain.
subsidy abuse. In the process, governments have collected
billions of dollars in incremental tax revenue and
prevented even greater amounts of misappropriated subsidy expenditures. Beyond these
financial benefits, significant environmental protection has been realized.
The objective of a fuel marking program is the illumination of the downstream supply chain,
beginning with the country’s refineries or fuel depots, following products through the
wholesale depots and transport network including trucking firms and pipelines, and
eventually verifying how petroleum products are sold at retail. Failing to illuminate every
step in the supply chain makes the entire chain more vulnerable. Every weakness in the chain
represents an opportunity for fraud.
Documented evidence convincingly shows that if a fuel marking program is substantially
disrupted or parts of it dismantled, fraudulent activities will quickly revert to their previous
levels or possibly increase to even higher levels. The success of a fuel marking program
requires a long term commitment on the part of the government.

© 2013 Authentix. All Rights Reserved. 9|Page

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).

Fuel Marking Program Design

Fuel marking programs are designed to monitor and control taxed and subsidized fuels in the
downstream fuel supply chain, from the refinery or fuel depot to the retail outlet. Typically
these programs comprise a range of interacting, interrelated modules, such as secure logistics,
marking, testing and legal case management that are coordinated to form a complete solution
as part of a sophisticated management system. The case file management system designed
during this phase will provide the timely, actionable information required to carry out the
enforcement strategy used to mitigate tax evasion and subsidy abuse.
Designing and planning for a fuel marking program begins with an analysis of the fuel supply
chain, including forces outside of the supply chain that affect its integrity. A close
examination of the dynamics of the current system is a prerequisite for changing the situation.
Best practices involve benchmarking the levels of tax evasion and abuse against which
improvements in excise tax collections and subsidy abuse prevention are measured. In
addition, and most importantly, this benchmark will be used to determine the ROI on the fuel
marking program.
Factors that should be examined during this phase include:

• Domestic challenges: what is the price differential between subsidized and

unsubsidized fuels?
• Border challenges: what is the price differential between one country’s fuels
and its neighbors?
• Transit challenges: is transit fuel allowed to pass through the country tax-free?
• Regulatory challenges: are regulations and laws in place to safeguard the fuel
supply chain?
Following a situational analysis, various tools and technologies should be examined and
analyzed to determine which best practices meet the situational requirements and will
produce the lowest total cost of ownership for the program.
Proper and thorough planning will comprise the first step toward a fuel marking program, but
some programs remain in the design stage for an inordinate period of time. This only benefits
the criminals and prolongs the discontinuities in the fuel supply chain. Certainly, a
government should invest the time to adequately plan the program and include the
involvement of key individuals during the program design phase, but planning must soon
give way to execution.

© 2013 Authentix. All Rights Reserved. 10 | P a g e

Authenticating the Entire Supply Chain
The only way to ensure the integrity of the entire fuel supply chain is to design in safeguards
for every phase of the process. This leads to technologies that integrate security measures
directly into the fuels themselves. Fuel marking programs
that rely solely on safeguards outside of the fuels have Following a
inherent vulnerabilities.
situational analysis,
Authentication technologies that blend an invisible the general
marker with the fuel at very low concentrations provide composition,
the highest level of security for the entire supply chain.
Markers in this class have been successfully used to objectives and
combat both tax evasion and subsidy abuse and are requirements of a
robust, fit-for-purpose and extremely difficult to program for
compromise. Even at very low concentrations, their
presence or absence in a fuel can be detected at retail ensuring the
outlets with easy-to-use analyzers or test kits. integrity of the fuel
For example, test results showing a marker concentration supply chain can be
less than the expected level indicates fraudulent dilution developed.
activities in a tax evasion scheme. In subsidy abuse
schemes the presence of a marker outside of the
authorized supply chain at any concentration level indicates that the tested fuel has been
adulterated with a subsidized product.
When potential adulterants are being marked to combat subsidy abuse, criminals may attempt
to remove or “launder” the marker so the subsidized fuel will not be detected when it is used
to dilute a higher-priced taxed fuel. For example, some countries use a visible red dye to
differentiate subsidized agricultural diesel from fully taxed highway diesel. These dyes are
vulnerable to this type of relatively easy and cost-effective removal. However, the more
sophisticated fuel marking technologies based on invisible markers solve this issue.
Removing this class of markers is technically challenging, operationally difficult, dangerous
and, in most cases, cost prohibitive. Fuel fraud only takes place when the financial reward is
great enough to risk the possible punishment.
Some fuel marking tools or techniques address a narrow portion or just one link in the fuel
supply chain, while others, because they are integrated throughout the entire processing,
distribution, transportation and retail chain, are more comprehensive. These later techniques
simply shed more light on every aspect of the supply chain. Cracks or weaknesses in a fuel
marking program will encourage fraud at those vulnerable points. Solution architects for a
successful fuel marking program will take into account the situational analysis and develop a
program that is as strong as possible throughout the entire supply chain.
Many times, limited techniques are deployed in reaction to a specific case of unscrupulous
activities somewhere in the supply chain. For example, custody seals may be placed on tanker
trucks as they leave a refinery or depot because authorities suspect tampering during
transport. Another technique is the installation of GPS tracking systems on trucks to monitor
whether tankers are deviating from their predetermined routes. An intact seal on a truck or
proof that a tanker followed its prescribed route would indicate that the fuel has not been
tampered with. While these techniques provide some assurance of fuel integrity, if
implemented on a stand-alone basis they will quickly be compromised. They would also only

© 2013 Authentix. All Rights Reserved. 11 | P a g e

provide a partial answer. For example, these limited techniques fail completely at identifying
adulterants from outside of the country’s legal supply chain, such as fuels diverted from
subsidy programs, smuggled and stolen fuels, or inferior waste by-products.

The Right Solution for the Right Outcome

To ensure the integrity of the fuel delivered to consumers and the compliance with
government’s tax laws and subsidy programs, a fuel marking program must uniquely identify
fuel as it flows through the entire supply chain. Then, in the last step in the chain, the
authenticity of the fuel must be monitored at the point of sale. Fuel marking programs
uniquely mark identified fuels so they can be identified by type or tax/subsidy classification.
As part of a layered technology solution, the group of chosen fuel markers can range from
colored dyes to the sophisticated unique covert markers and their respective detection
methodologies. Fuel marking programs are typically instituted to address a wide range of
objectives. Since a particular program’s operational requirements are designed to meet the
program’s unique objectives, every fuel marking program is different. Several general
examples of how program objectives affect operational requirements are shown in the table
below.
Program Objective Operational Requirements Special Notes
Examples

Provide a “national marker” Quantitative dilution Marker identity

indicating fully tax paid fuel
detection of any adulterant
added to the supply chain
providing definitive proof of
tax evasion
confidentiality and secure
logistics with regular audits
and reconciliations are
critical for program integrity
Attempted marker
laundering is not an issue
since it would make the fuel
illegal

In combination with the Mark all possible adulterants This comprehensive

“national marker” scheme
above, additionally mark the
highest volume potential
adulterants to quickly
pinpoint the source of the
fraud
(pre-mix products, transit
fuel, kerosene, subsidized
fuels, solvents) with
appropriate markers and
check for their presence
outside their authorized
supply chain
approach in combination
with the national marker
simultaneously provides
robust and quick
remediation of tax evasion
and subsidy abuse
Laundering resistant
marking technology should
be considered

© 2013 Authentix. All Rights Reserved. 12 | P a g e

 Program Objective Operational Requirements Special Notes
Examples

Prevent subsidy abuse on Detect presence of Markers cannot contain

kerosene intended for poor
families for cooking and
heating
subsidized fuels at very low
concentrations anywhere
outside authorized supply
chain
halogens since incomplete
combustion can emit
harmful substances that
would risk the health of the
people the subsidy is
intended to help
Laundering resistant
marking technology should
be considered

Prevent subsidy abuse on Detect presence of Markers should be able to be

attempted smuggling of subsidized fuels at very low detected even if the
subsidized gasoline and concentrations at border smugglers attempt to blend
diesel out of the country crossings or disguise the subsidized
fuels.
Laundering resistant
marking technology should
be considered
After the completion of a situational analysis, a general description of objectives and an
outline of operational requirements, the plan for a fuel marking program will take into
consideration all of the operational details as well as enforcement outcomes.
Operational considerations include overall program management, staffing, auditing
procedures and frequencies, and the magnitude of the program’s scope and depth. Most
countries decide to outsource much if not all of the operations of their fuel marking programs.
This can provide a greater degree of security, certifiable and audited test results, and third-
party objectivity to the entire program.

Fuel Marking Program Operations

Fuel marking programs are comprised of a number of facets, including marking methods for
the fuels, supply chain security, field sampling and testing, lab testing, and data analytics.
These operational aspects are tightly linked to provide integrity and program efficiencies.
To provide objective evidence that proves any fraudulent activity relies on full traceability
and creation of a legal case file. Best practices dictate that a program should be administered
as a management system by an independent organization. The management system should
direct all aspects of the storage and secure transport of the markers, addition of unique
markers into the supply chain and the subsequent sampling and analysis of suspect materials
so that these policies are implemented and objectives are achieved. Often-times the
management of such a system of complex interrelationships is performed within the scope of
a “Total Quality Management System” which links together the various elements of the
supply chain and analytical processes and provides objective evidence on the integrity of the
fuel products.

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In some instances, operations should be certified to international process integrity standards
such as those published by the International Organization for Standardization (ISO). The
program’s various operations must be regularly audited for process compliance to ensure the
program is being managed transparently. When this is the case, a fuel marking program will
provide objective results that are independent of questionable influences. Moreover, the
program’s operations will be completely visible to
government agencies that are accountable for tax collections When several
and subsidy programs.
organizations share
Multiple operational aspects such as recruiting, training, responsibility for
calibration, sampling, testing, and analytics must be
managed from the outset of the program to provide portions of a
operational efficiencies. Later, these functions must be program,
continually monitored so that additional process accountability to
improvements can be incorporated into the program. The
lowest total program cost is achieved when a single entity any one party is
optimizes all functions across all of the program’s various usually missing. No
operations. This model holds a single entity accountable for one can be held
ongoing process improvements and vests one party with the
scope required to deliver key cost benefits. Additional accountable.
procedures to audit the single operator should also be
included in the program to further ensure its integrity.
The temptation to split up a program’s operations and assign related activities to multiple
vendors or to share functional responsibilities with government personnel is common.
Although multi-sourcing may increase vendor competition and utilizing government
personnel could create goodwill, the transitions in the program’s process flow from one entity
to the next will increase costs, reduce program efficiencies and create risks to the chain of
custody of fuel samples. These avoidable risks can threaten the integrity of the program.
Determining root cause of process failures is difficult when multiple entities share operations.
In addition, continual cross-entity process improvements will be limited, jeopardizing the
long-term program success.
The team should implement throughout the country a national operating infrastructure for full
chain of custody, complete traceability and quality assurance of the marker from storage in a
bonded warehouse to secure distribution to storage on site at each distribution terminal.
The central operational activities of a fuel marking program (Figure 1) begin when the
program is implemented. Standard best practices call for the team that will perform ongoing
operations to also implement the technologies and processes during the program’s early
phases because this team is most invested in an effective implementation. Once the program
is fully operational, best practices define a three-tiered model which reduces costs and
increases the efficiency of sampling and testing.
The first tier consists of supply chain analysis. Here, data is collected from refineries and
depots, fuel marking operations, point-of–sale terminals and other sources to identify
anomalies in the supply chain. These anomalies will then affect where field sampling
operations will be targeted.

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The second tier, field test, combines the
targeted sampling strategy defined in the first
tier with random sampling that will uncover
dilution from sources outside of the country’s
fuel supply chain. Field operations can vary
across a range of activities from simply
collecting and testing samples to procedures
that include more complex forensics analysis.
At a basic level, field operations will
concentrate on sampling. This enables a rapid
and broad deployment of sampling operations
in a short period of time and with minimal
personnel training. Thus, personnel costs are
minimized. All samples are sent to a central
lab for detailed analytic testing and to isolate
field personnel from the testing process. As a
result, field personnel will not be pressured or Figure 1
bullied to alter test results because they are not
involved in the testing process.
Field personnel can also be trained on mobile detection analyzers or test kits which provide
test results where the sample is collected. The types of tests performed by these mobile
analyzers or test kits can range from basic qualitative yes/no tests to more complex
quantitative forensic tests. These basic tests have the advantage of being cost-effective and
can be used to quickly roll out a broad sampling agenda. More complex forensic mobile
analyzers require additional personnel training, but the detailed test results they provide
enable immediate enforcement.
When warranted, the third tier of this best practices model consists of a central lab where
field samples are tested further to provide evidence in legal proceedings. This lab will feature
globally accepted chemical analytic technology staffed by local skilled professionals.
Samples are tested on a blind basis, mitigating the risk of tampering by lab personnel and
ensuring results of the highest integrity.
Each of these three major tiers would have its own set of supporting functions, such as
personnel training, procedural definition, stringent auditing processes to ensure the ongoing
objectivity and authenticity of the data, and feedback mechanisms to monitor results and
improve processes.

Enforcement Models Drive Cost and Complexity

The output of fuel marking programs must allow a state to affect changes in business
relationships, impose financial penalties and legally prosecute violators. To enable
enforcement, the program operations must be performed with the highest level of integrity,
ensuring the chain of custody for fuel samples, and providing valid and accurate test results.
Effective fuel marking programs will prescribe an escalating path of successively more
severe deterrent actions for authorities to follow. If compliance is not achieved initially, the
next more severe action is taken. Several deterrent actions not requiring legal proceedings
could be included in this path. For example, actions against unscrupulous retail operators

© 2013 Authentix. All Rights Reserved. 15 | P a g e

such as fines, revoking discounts and others can be undertaken to achieve compliance without
taking legal actions.
The pervasiveness of criminal activity in the society as well as the regulatory and legal
environment in the country will affect how a fuel marking program is operated. For example,
if a country’s criminal element is highly organized and it benefits greatly from fuel fraud,
direct legal confrontation in the court system may be the only deterrent. When organized
crime is the primary cause of tax evasion and subsidy abuse, much more evidence and rigor is
required to build a case that can be successfully prosecuted.
While a successful marking program will reduce the availability of illicit fuel in a country as
well as demand for it, a certain level of organized criminal activity will always remain and
seek new opportunities for fuel fraud. To affect this layer of criminal activity, local laws,
politics, infrastructure, the character of the workforce and several other factors should be
taken into account when defining the enforcement model best suited to a particular fuel
marking program. Ultimately, this enforcement model will have a major impact on the degree
to which tax evasion and subsidy abuse will be eliminated.
Outlined below is an example of a graduated enforcement scale, beginning with fraud
deterrence through visible testing and progressing to the threat of immediately locking a retail
fuel station as a result of a failed sample.
The total cost of program ownership will differ by each model of enforcement described in
the table below. It is important to note that these enforcement models are not ranked on any
sort of scale. Instead, they describe five equally valid choices with pros, cons and
requirements for that relate to politics, legislation, resources and law enforcement. The most
effective enforcement method will be the one that aligns most directly with the program
objectives as defined by the government. The extreme case of enforcement requirements
arises when combating organized crime. Dealing with hardened organized crime requires
specific program design, quality and chain of custody controls, and multi-faceted forensic
evidence in order to accomplish a legal victory.

© 2013 Authentix. All Rights Reserved. 16 | P a g e

 Program operations raise awareness of continual monitoring. Deterrent
Visible effects can be heightened by sharing test results with station managers
immediately following sampling or by follow-up visits by customs or
law enforcement personnel with results in hand.
Design Principles Strengths Weaknesses
Target the station Only one or a Unless test results
manager to reduce the relatively few test eventually form the
number of outlets evidence thresholds basis for legal
supplying illicit or are defined and no prosecution followed
contraband fuel. root cause analysis is by convictions, the
Several different required before the deterrent effect will
models, each with its station manager is diminish over time.
own set of tradeoffs, confronted. Publicity This model focuses on
can be implemented. can create consumer the station manager
The range of models preference for outlets and does not include
includes deputized or with high integrity business owners or
sampling staff fuels. other criminal
immediately sharing elements.
results to officials
delivering results later
in a very visible
manner.

Program test results justify contractual proceedings such as cease-and-

Contractual desist or breach-of-contract communications. Additional training could
be required. Arbitration with the threat of suspension of service or
contract termination could be pursued with the business owner or
contracting entity.

Design Principles Strengths Weaknesses

Target owners and Evidence threshold is Alternative sources of
contracting entities by limited to illicit fuel could allow
threatening their demonstrating the the owner to switch
business network. problem exists in a sources rather than
Owners force single station within a comply and lose
compliance on retail network. The market share. Training
opportunistic station business owner may not correct this
managers below them. becomes the point of issue.
Leverages top-down leverage for all outlets
business relationships within a network.
and market awareness.

© 2013 Authentix. All Rights Reserved. 17 | P a g e

 Building on the contractual deterrence of the previous level, financial
Financial deterrents can be enforced if their terms are present in the contract or if
the contract can be amended. Program results will justify decreasing
discounts or imposing penalties for a period of time to offset the cost of
compliance monitoring.

Design Principles Strengths Weaknesses

Extends the principles More powerful Financial penalties
of the contract level enforcement leverage often produce legal
and increases than contractual proceedings where test
enforcement deterrence because results as evidence
effectiveness, financial penalties can must clearly
especially in single- be applied to all of an demonstrate fault on
supplier markets. owners assets. Less the part of the owner.
Focuses on business evidence required than Enforcement actions
owners. Leverage a court case, but must be defined in the
increases with larger financial penalties can owner’s contract with
entities because lead to legal action. the authorities.
decreasing discounts
across all of an
owner’s holdings will
have far-reaching
effects beyond the
scope of a few
misbehaving stations.

Criminal prosecutions of offending parties in a court of law.

Legal
Design Principles Strengths Weaknesses
Target station Targeting individuals Evidence must meet
managers, business and entities with legal the same rigorous
owners and Oil proceedings and requirements of all
Marketing convictions can legal prosecutions and
Companies (OMC), provide tremendous be strong enough to
as the case evidence visibility to deter other discourage counter
indicates and in offenders. suits. Failing to win
accordance with convictions or
current and successful appeals of
enforceable laws and convictions could
precedence. threaten the
effectiveness of the
fuel marking program.

© 2013 Authentix. All Rights Reserved. 18 | P a g e

 Immediate closure of stations based on test results. Usually, this is
Immediate performed by a deputized sampling staff or by customs or law
Closure enforcement officials who accompany the sampling staff.

Design Principles Strengths Weaknesses

Enforce laws This will be the Field test results must
immediately. Based highest deterrence stand up under legal
on the evidence of a level because penalties appeal or the validity
field test, a station is are enforced of the entire fuel
closed and/or immediately. Risks to marking program is
managers are arrested offenders are the called into question.
or fined. greatest.
Immediate
enforcement is
susceptible to bribery
abuse.

© 2013 Authentix. All Rights Reserved. 19 | P a g e

Return on
Investment
The cost to a government of an effective fuel marking program is quickly recovered.

• Fuel tax evasion fraud is reduced, increasing the tax revenues collected by the
government
• Fuel subsidy abuse and overall subsidy spending are minimized, ensuring the
intended recipients benefit and providing additional government funds for
other services to benefit the country
Even though the ROI is compelling, the government should plan and budget for a cash outlay
to fund a fuel marking program’s implementation and first six to twelve months of operation.
Depending on the complexity of the implementation, financial benefits to the government
will definitely begin accruing during the first year. By the second year, the program will not
only be self-funding but will have achieved a sizeable ROI.
To demonstrate this point in a scalable format that can be tailored to each governments
particular situation, the following graphs show the significant ROI provided by fuel marking
programs even using conservative inputs and assumptions:

Graph ROI

Example Fuel Marking Program Impact on Excise Tax Collections

1 for Low Tax and High Tax Cases
2.8X – 12.6X

Example Fuel Marking Program Impact Adding Reduction in

2 Subsidy Abuse to the Low Tax Case in Graph 1
6.5X

Actual Case of Fuel Marking Program Impact on Excise Tax

3 Collections and Reduction in Subsidy Abuse
5.7X

4 Example Fuel Marking Program Impact on Subsidy Abuse 7.6X

© 2013 Authentix. All Rights Reserved. 20 | P a g e

Graph 1: Example Fuel Marking Program Impact on Excise Tax
Collections for Low Tax and High Tax Cases

To recover excise tax revenue lost to fuel fraud, a fuel marking program is a wise investment
no matter the annual fuel volumes or amount of tax levied. As shown in the graph below, for
only 1 billion liters of fuel per year, a low 10% fuel excise tax rate, and a 15% dilution rate,
the ROI is 2.8X over the first 60 months of the program. By using these exact same
assumptions and only changing the fuel excise tax rate to 30%, the ROI increases
significantly to 12.6X. These assumptions and performance are scalable and would be
indicative regardless of fuel volumes and taxation levels.
In this model, between $15 and $55 million in fuel taxes were evaded every year before a fuel
marking program was implemented. The year after the launch of the program, tax evasions
dropped drastically and tax collections increased a like amount making the program self-
funding and providing a ROI. In the following years, tax collections continue to increase until
the majority of the tax evasion is eradicated.

60 30% Fuel Tax

$ Millions

40 Program (18)
Benefit

Incremental Tax 246

20 Net Collections 227
ROI 12.6X
0 10% Fuel Tax
(20) Program (18)
Loss

Incremental Tax 68
 Recovery of taxes Net Collections 50
(40)
 Losses due to tax evasion
ROI 2.8X

Month 0 12 24 36 48 60

Assumptions Modeled on 1B liter annual fuel volume, 4% CAGR

60% Diesel, 40% Petrol
15% Dilution
60 month model, includes program costs
Recovery rate based on Authentix best practices

© 2013 Authentix. All Rights Reserved. 21 | P a g e

Graph 2: Example Fuel Marking Program Impact Adding Reduction
in Subsidy Abuse to the Low Tax Case in Graph 1

In the case where there is not only fuel taxation in a country but also some level of subsidized
fuel that can be used to dilute the taxed fuel, the government is getting hit by fraud twice.
They suffer reduced excise tax collections and the subsidy investment is being diverted for
illicit gain. A properly designed fuel marking program can help remedy both of these issues.
Using the low tax case from Graph 1 and adding the benefit of reduction in subsidy abuse
increases the ROI from 2.8X to 6.5X.
In this model, a combined $32 million in fuel excise tax and diverted subsidies were lost
every year before a fuel marking program was implemented. For the subsidy abuse
calculation, only 25% and 33% of the diluent for diesel and petrol respectively were counted
as subsidized. The year after the launch of the program, tax collections increase and the
amount of funds required to subsidize the beneficial government programs decreased.
Similar to Graph 1, the fuel marking program very quickly becomes self-funding and
provides a significant ROI for the government.

60
$ Millions

40
Benefit

20 10% Fuel Tax

+
0 Subsidy Abuse

 Recovery of taxes
Program (18)
(20) Incremental Tax 68
 Prevented subsidy abuse
Loss

 Losses due to tax evasion Subsidy Benefit 67

(40)  Losses due to subsidized fuels
Net Benefit 117
being used as adulterants
ROI 6.5X
Month 0 12 24 36 48 60

Assumptions Modeled on 1B liter annual fuel volume, 4% CAGR

60% Diesel modeled at 15% dilution
- 4% subsidized adulterants
- 11% transit, contraband and other unknown adulterants
40% Petrol modeled at 15% dilution
- 5% subsidized adulterants
- 10% transit, contraband and other unknown adulterants
60 month model, includes program costs
Recovery rate based on Authentix best practices

© 2013 Authentix. All Rights Reserved. 22 | P a g e

Graph 3: Example of Fuel Marking Program Impact on Excise Tax
Collections and Reduction in Subsidy Abuse based on Real World
Data

Following is an example based on actual fuel marking program data. Based on findings from
the program, the benefit of curbing tax evasion is $206M over 5 years, alone a 3.6X ROI. An
even greater benefit is realized when calculating the value of preventing the dilution of taxed
fuels with subsidized adulterants, in this case being kerosene in diesel and 2 stroke pre-mix in
petrol. Including this additional benefit drove the ROI up to 5.7X.
$ Millions

200

150
Benefit

100
Actual Fuel
50 Integrity
Program Model
0
Program (57)
(50) Incremental Tax 206
Subsidy Benefit 174
 Prevented subsidy abuse
Loss

 Recovery of taxes
Net Benefit $323M
(100)
 Losses due to tax evasion ROI 5.7X
 Losses due to subsidized fuels
(150) being used as adulterants

(200)
Month 0 12 24 36 48 60

Findings Country of ~$US 40B GDP, population of ~25M, and ~1M cars
Diesel volume of 1.53B liters, sampling showed average dilution of 18.3%
- 4% of total diesel subsidized kerosene
- 2% agricultural and/or marine diesel
- 12.3% transit, contraband and other unknown adulterants
Petrol volume of 1.47B liters, sampling showed average dilution of 17.1%
- 2% of total petrol subsidized 2-stroke pre-mix
- 15.1% transit, contraband and other unknown adulterants
60 month model, includes program costs
Recovery rate based on Authentix best practices

© 2013 Authentix. All Rights Reserved. 23 | P a g e

Graph 4: Example Fuel Marking Program Impact on Subsidy Abuse

In countries that provide very low cost petroleum products to their citizens as a national
benefit, there is significant incentive for diverting these untaxed or subsidized fuels. This type
of fuel fraud can provide substantial funding for the criminals perpetrating the schemes,
consumes national resources without benefiting the population, and acts as a destabilizing
influence in the region. Modeling 5 billion liters of subsidized fuel per year and a diversion
rate of 20%, the ROI is 7.6X. Approximately 50% of the abuse is mitigated during the first
full year of operation ramping up to the majority of the abuse under control by year three.

300
$ Millions

Benefit

200
100 40% Subsidy
0 Program (118)
(100) Subsidy Benefit 1,014
Loss

 Prevented subsidy abuse

Net Benefit 896
(200)  Losses due to subsidized fuels ROI 7.6X
being used as adulterants
(300)
Month 0 12 24 36 48 60

Assumptions Modeled on 5B liter annual fuel volume, 2% CAGR

100% Diesel
20% starting subsidy abuse level
60 month model, includes program costs
Recovery rate based on Authentix best practices

© 2013 Authentix. All Rights Reserved. 24 | P a g e

Conclusion
Of course, increasing fuel tax collections and minimizing subsidy abuse are the key monetary
measures of the value of fuel marking programs. In addition to these, a wide range of
intangible side effects also benefit the country. For example, a more secure supply chain with
efficient internal safeguards will increase the quality of the fuel consumed by reducing
adulteration. This would mean that fewer adulterants would be found in the fuel supply. The
environment would be healthier and the fuel efficiency and mechanical operations of the
country’s vehicles would improve.
For the country as a whole, a secure and high-integrity fuel supply strengthens confidence in
the government. Every day when they fill their gas tanks, citizens will experience firsthand
the effectiveness of their government and efficiency of the economy. Foreign investment and
economic growth will be encouraged as businesses, factories, farmers and all aspects of
society will have greater trust in the fuel supply. The economic growth resulting from a fuel
marking program will benefit law abiding citizens – not criminals – adding to the prosperity
and stability of the country.

Published by
Authentix
+1.469.737.4400
info@authentix.com
4355 Excel Parkway, Suite 100
Addison, TX 75001 USA

© 2013 Authentix. All Rights Reserved. 25 | P a g e

References
1. “Petroleum Taxes – Public Policy for the Private Sector”, Robert Bacon, The World Bank,
September 2001.
2. “Algeria smuggling crackdown cuts fuel line to Morocco”, Shoaib-ur-Rehman Siddiqui,
Business Recorder, September 28, 2013
3. “Fuel Fraud Costing Europe More Than $4 Billion in Lost Taxes”, by Konstantim
Rozhnov and Marek Strzelecki, Bloomberg, August 27, 2013.
4. “Subsidies, Oil Prices to Put Pressure on India’s Rupee, Fiscal Gap” by Biman Mukherii,
Sudeep Jain and Saurabh Chaturvedi, India News, August 28, 2013
5. “Abuses in Fuel Markets -- Public Policy for the Private Sector”, Masami Kojima and
Robert Bacon, The World Bank, September 2001

© 2013 Authentix. All Rights Reserved. 26 | P a g e