Hawaii paycheck protection fraud case is a snapshot of widespread abuse
It will be many years before government officials know the extent of federal pandemic assistance poorly obtained by businesses in Hawaii and across the country.
This is the expectation shared recently by a regulator overseeing the integrity of US Small Business Administration financial assistance to businesses affected by COVID-19, including the Paycheck Protection Program and grants for businesses in the United States. restaurant and entertainment industry.
These programs offered companies up to $ 10 million each, but numerous awards were given to ineligible applicants in a rush amid fluid rules and loose oversight that prevented others from getting the help they wanted. they desperately needed it.
So far, only one local pandemic business assistance enforcement measure has come to light – a case made public by federal law enforcement officials nearly a year ago. involving Martin Kao, owner and then CEO of the defense industry research and development company long known as Navatek.
Still, many more are expected across the country and possibly in Hawaii.
Earlier this year, the SBA’s independent integrity regulator reported that it had identified nearly 55,000 PPP loans totaling around $ 7 billion made to potentially ineligible companies.
Hannibal “Mike” Ware, head of the Office of the Inspector General, told Congress in a report earlier this year that so far justice has been served on more than 200 fraudsters who have abused emergency relief programs. pandemic, resulting in the seizure or recovery of $ 600 million.
Ware also said tackling such fraud will be a priority for “many years” with thousands of investigations expected resulting in part from more than 150,000 hotline complaints.
To date, the Kao case has been one of the most important of 85 cases released by the US Department of Justice involving people across the country arrested, pleaded guilty, charged or sentenced to prison terms for fraudulent fraud. PPP.
Kao, which renamed his Honolulu-based company Martin Defense Group last year, is accused of applying for three repayable PPP loans totaling $ 15.6 million last year – and receiving two for 12, $ 8 million – based on inflated payroll information to determine loan amount.
Federal authorities filed a criminal complaint against Kao in the US District Court in May after his arrest in September. He stepped down as CEO in November.
A local FBI official, who is working with other law enforcement agencies to try to bolster the prosecution of pandemic-related fraud, declined to say whether any investigations of PPP fraud in Hawaii other than that of Kao are in progress. Typically, the FBI does not disclose cases that have not resulted in public records.
Data on the number of Hawaii PPP loans deemed inappropriate or audited is not available from the SBA.
During two PPP rounds last year and this year, approximately 45,000 loans totaling $ 3.8 billion were made to Hawaiian companies.
Nationally, there were nearly 12 million PPP loans totaling around $ 800 billion.
The role of banks
The SBA relied on private lenders to provide loans in accordance with program rules, with lenders receiving fees for loans guaranteed by the SBA. The agency can audit any loan and has a policy of reviewing each loan over $ 2 million, although loan forgiveness is largely left to lenders.
Hawaii’s four largest banks have shared varying degrees of information about their PPP loans.
The Pacific Central Bank said that 70% of its PPP loans to date have been canceled, 1% have been audited by the SBA and less than 1% have been refused. CPB, which provided the only local loan to Navatek, also said its volume of loans involving abuse of uncovered borrowers was 0.008%.
The Bank of Hawaii said none of its PPP borrowers were found to be ineligible, despite granting a loan that the SBA canceled due to the borrower’s demand elsewhere. The bank was not involved in any Navatek loans.
The First Hawaiian Bank said it could not disclose the number of its audited PPP loans.
American Savings Bank declined to share any information on the status of PPP loans.
The Federal Inspector General’s Office said in a March report that the SBA should conduct loan reviews and take immediate action to address any inappropriate PPP loan disbursements.
“This is because sufficient controls were not in place from the start to prevent the occurrence of inappropriate loans,” the report said.
Inappropriate loans could lead to fraud as well as loan recipients deemed ineligible after applying under “interim” rules that have been superseded by many updates to the SBA guidelines.
Companies with publicly traded stocks and nonprofit social clubs that benefit private members fall into the latter category which still seems confused.
For example, Maui Land & Pineapple Co. repaid a $ 246,500 PPP loan last year after federal officials said the program was not intended to benefit companies that can raise capital in the stock market. .
Another Hawaii-listed company, Cyanotech Corp., received a $ 1.4 million PPP loan that was canceled in December.
Two of Hawaii’s biggest PPP loans have gone to subsidiaries of giant Japan-based companies with publicly traded stocks.
Resorttrust Hawaii LLC, owner of Kahala Hotel & Resort, received an $ 8.4 million loan. The company is a subsidiary of Resorttrust Inc., which is listed on the Tokyo Stock Exchange and operates 49 hotels as well as golf courses and medical diagnostic and treatment centers.
Resorttrust Hawaii declined to comment on government directions.
A Hawaiian subsidiary of another Japanese-based state-owned company, Reins International (USA) Co., received an $ 8.8 million PPP loan. Six local restaurant operator Gyu-Kaku is part of Japan’s largest yakiniku (grilled meat) restaurant chain, owned by COLOWIDE Co. Ltd., listed on the Tokyo Stock Exchange.
A representative for Reins in Japan did not respond to a request for comment on Hawaii’s PPP loan.
SBA data shows that a forgiveness decision has yet to be made for Resorttrust or Kidney loans.
In the area of private social clubs, the PPP rules exclude these 501 (c) (7) nonprofits from eligibility. Still, lenders have approved PPP loans for at least three of these clubs locally: Hilo Yacht Club, Lahaina Yacht Club, and Mid-Pacific Country Club.
Mid-Pac repaid an $ 830,000 loan it received, according to SBA data.
The Lahaina Yacht Club saw its loan of approximately $ 171,000 canceled in April.
Hilo Yacht Club received a loan of $ 253,283 and the club manager declined to discuss the loan. However, board meeting minutes show club officials admit the club was not eligible for PPP but believe there isn’t much downside to asking for a discount. because the expected alternative is to repay the loan according to its two-year duration at 1%. interest.
“We took out the loan in good faith and used the funds appropriately, but we may have to repay the funds,” the meeting minutes said. “In the worst case, it becomes a low interest long term loan. “
Other SBA programs
PPP was the SBA’s largest pandemic aid program, although two others have also given companies up to $ 10 million.
One, a $ 28 billion grant program called the Restaurant Revitalization Fund, distributed $ 414 million to 1,145 restaurants in Hawaii.
The largest local grant, in the amount of $ 10 million, went to restaurant operator Roy’s, who also received a PPP loan of $ 5.4 million last year and a PPP loan of 2 million dollars in a second round this year, open to first round loan recipients.
The other targeted industry initiative is the $ 16 billion Shuttered Venue Operators Grant Program, which continues to provide grants to independent companies in the entertainment industry.
Concerns about this program were raised in an Inspector General’s report in April that said the SBA lacked the staff needed for effective oversight and that the agency’s audit plan “exposes billions of dollars. dollars to a potential misappropriation of funds because the bulk of grant funds will not be subject to a reasonable degree of review.
The SBA’s plan includes an audit of each $ 10 million grant, including one for the Polynesian Cultural Center and one for the local concert production company Dream Weekend LLP.
A dream scholarship
Jonathan “Jonny” Mack, one of Dream Weekend’s two partners, said the closed-site program was under much more rigorous initial review than PPP.
His company’s grant was based on the SBA’s criteria setting grants at 45% of 2019 annual gross income, or six times the average monthly gross income in 2019 if a business did not exist for the entire year.
Mack produced events for over a decade with various partners, but two years ago he simplified what he said had become an accounting mess by organizing several new ventures for separate projects such as concerts, concerts, New Years festivals, Halloween events and talent bookings.
Because Dream Weekend was formed in August 2019, it qualified for a $ 10 million grant based on a December 2019 concert at Aloha Stadium that grossed over $ 2 million. A few other Mack companies got grants totaling about $ 1.5 million.
Each business can only use the grant money for a specific list of expenses in a year to keep the business going.
“It’s not like free money where you run away,” Mack said. “It is to be put back into the economy. I am not a millionaire.
Recently, Mack was in Miami trying to host events there because Florida has few COVID-19 restrictions compared to Hawaii.
Big events, he added, require months or years of planning and spending with no income until an event takes place. For example, Mack said the expense for the stadium concert featuring Usher and other top performers was around $ 2 million.
“This is a very unique company that we live in,” he said. “I call it high risk educated gambling. “
Mack has heard jokes about Dream Weekend’s $ 10 million grant, but said he follows the program’s rules carefully and expects a high level of government scrutiny.