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Biodiesel is seen through a tube.ENRIQUE MARCARIAN/Reuters

The federal government will give $65-million in subsidies to a company that is set to become the biggest producer of biodiesel in the country, but which is linked to companies being investigated for a series of fraudulent shipments of American fuel to Europe.

Canadian and European officials are investigating more than $100-million in fuel trades that went from the U.S. into Canada, before being shipped to Romania and other European countries. According to search warrants, Toronto-based Bioversel Trading Inc. and a related firm called Spectrum Chemicals Inc. circumvented anti-dumping duties on American biodiesel by pretending to be exporting Canadian biodiesel.

The Canada Border Services Agency raided in May the Toronto offices of Bioversel Trading, which also house the offices of Great Lakes Biodiesel Inc., government records show.

It is Great Lakes Biodiesel that is building Canada's biggest biodiesel plant in Welland, Ont., and will receive up to $65.4-million in production incentives from a federal program called ecoENERGY for Biofuels – a $1.5-billion fund for ethanol and biodiesel producers.

The contract with Great Lakes Biodiesel and the investigation into Bioversal Trading may draw unwelcome attention to the Harper government's funding for green programs, which has had its share of controversies.

A year ago, the federal lobbying commissioner ruled that former Conservative MP Rahim Jaffer had conducted unregistered lobbying activities in an effort to obtain $178-million from the Green Infrastructure Fund. Opposition MPs and environmentalists have pressed Ottawa to keep a tighter check on environmental programs aimed at the private sector.

None of the allegations in the search warrants have been proven in court and no charges have been laid. CBSA refused to comment on the "on-going investigation."

It is unclear if Natural Resources Canada, which is in charge of the federal program, has been informed about the CBSA investigation. The department said in a statement that it can suspend or terminate contracts "if a signatory of the agreement does not comply with terms of the agreement including non-compliance with all applicable laws and regulations."

Bioversel Trading and Spectrum Chemicals have launched legal proceedings to quash the search warrants, arguing they are the victims of efforts by a cartel of European biodiesel producers to protect their market.

"We never lied, we never violated one Canadian law," Arie Mazur, a director of Great Lakes Biodiesel and former director of Bioversel Trading, said in an interview.

Mr. Mazur said the CBSA raids are part of "a fishing expedition on behalf of foreign interests," arguing his company followed all Canadian rules on the origin of its exported products.

"We ship Canadian-origin biodiesel," he said.

According to the CBSA search warrants, the shipments from Bioversel Trading started after the European Union imposed anti-dumping duties against biodiesel of American origin in March, 2009. Canadian exports of biodiesel to Europe rose sharply to 123,000 metric tonnes after the tariffs were imposed in 2009, up from only 1,700 metric tonnes in all of 2008.

From March, 2009, to August, 2010, Bioversel Trading exported 110,000 metric tonnes of biodiesel to Europe from the port in Quebec City. The 17 shipments were allegedly made in contravention of provisions in the Customs Act on the origin of the exported product, court records say.

CBSA and EU anti-fraud investigators allege the products that were exported by Bioversel Trading originated in large part from Lake Erie Biofuels LLC, based in Pennsylvania, and other American producers.

Another search warrant alleges that Spectrum Chemicals exported biodiesel in 2011 and 2012 that was labeled as fatty acids, a product exempt from anti-dumping duties.

Bioversel Trading and Spectrum Chemicals are denying any wrongdoing. In addition to efforts to quash the search warrants, the firms have filed a lawsuit seeking damages from the federal government. The firms are asserting that Canadian officials had no basis in law to launch their investigation, and that Ottawa did not have the right to share its findings with EU officials.

Conservative MP Rick Dykstra has defended the Great Lakes Biodiesel plant being built in his riding of St. Catharines, stating that it will create sustainable jobs while "decreasing Canada's environmental footprint."

The plant will produce 170 million litres of fuel a year, which is more than one-third of the total that is eligible for biodiesel subsidies under the ecoENERGY program. In 2012-2013, the subsidies will be worth $0.14 a litre, falling gradually to $0.04 in the fifth year of the contract.

Great Lakes Biodiesel was originally incorporated as Bioversel Sarnia Inc. in May, 2007, at the same time as Bioversel Inc. and two months before the incorporation of Bioversel Trading. All firms – as well as Spectrum Chemicals – are located at the same address on Bloor Street West in Toronto, according to provincial records and the CBSA.

As part of the probe into Bioversel Trading, CBSA investigators were interested in electronic communications involving Barry Kramble, who is the CEO of Great Lakes Biodiesel, the court records show. Mr. Mazur is listed as a director of Great Lakes Biodiesel and the president of Bioversel Inc. (now called Einer Canada Inc.) in provincial records.

With reports from Rhéal Séguin in Quebec City, Ian Bailey in Vancouver, and Celia Donnelly and Stephanie Chambers in Toronto

Editor's Note: Great Lakes Biodiesel Inc. is building a biodiesel plant in Welland, Ont. An incorrect location was given in the original newspaper and online versions of this story. This version has been corrected.