The Hawaii paycheck protection fraud case is a foretaste of widespread abuse


It will be many years before government officials know the extent of the federal pandemic aid that has been wrongly received by companies in Hawaii and across the country.

That expectation was recently shared by a regulator overseeing the integrity of the U.S. Small Business Administration’s financial aid to corporations affected by COVID-19, including the paycheck protection program and grants for restaurant and entertainment companies.

These programs offered companies up to $ 10 million each, but many awards were given to unqualified applicants in a scramble amid flowing rules and oversight that prevented others from getting much-needed help.

So far, only one local pandemic business aid enforcement action has come to light – a case made public by federal law enforcement officers nearly a year ago in which Martin Kao, the owner and then chief executive of the defense research and development firm, reported the was long known as Navatek.

But many more are expected across the country and possibly Hawaii.

Earlier this year, the SBA’s Independent Health and Safety Authority reported that nearly 55,000 PPP loans totaling approximately $ 7 billion had been made to potentially ineligible businesses.

Hannibal “Mike” Ware, chief inspector general’s office, told Congress in a report earlier this year that justice has been done to more than 200 scammers who misused SBA pandemic aid programs, seizing or recovering $ 600 million became.

Ware also said fighting this fraud will be a priority for “many years” with thousands of investigations expected, some of which stem from over 150,000 hotline complaints.

To date, Kao’s case is among the largest of approximately 85 cases published by the US Department of Justice in which individuals across the country have been arrested, pleaded guilty, charged, or sentenced to prison terms for PPP fraud.

Kao, who renamed his Honolulu-based company the Martin Defense Group last year, is charged with applying for three forgivable PPP loans totaling $ 15.6 million – and two for $ 12.8 million Received US dollars based on inflated payroll information to determine the loan amount.

After his arrest in September, federal authorities filed a criminal complaint against Kao in the US District Court in May. In November he stepped down as CEO.

A local FBI representative, who works with other law enforcement agencies to step up the prosecution of pandemic-related fraud, declined to say whether any PPP fraud investigations other than Kao are pending in Hawaii. As a guideline, the FBI does not disclose cases that have not resulted in public records.

Data on how many Hawaii PPP loans have been deemed ineligible or checked is not available from SBA.

Over two rounds of PPPs last year and this year, approximately 45,000 loans totaling $ 3.8 billion were granted to Hawaiian companies.

At the national level, there were nearly 12 million PPP loans totaling approximately $ 800 billion.

The role of the banks

The SBA relied on private lenders to extend the loans according to the program rules, with the lenders receiving fees for the loans guaranteed by the SBA. The agency can review any loan, and has a policy to review any $ 2 million loan, though lending is largely left to the lenders.

The four largest Hawaiian banks shared varying degrees of information about the PPP loans they made.

The Central Pacific Bank said that 70% of its PPP loans have been waived to date, 1% have been scrutinized by the SBA, and less than 1% have been denied. CPB, which provided the only local loan to Navatek, also said their loan volume with uncovered borrower abuse was 0.008%.

The Bank of Hawaii said none of its PPP borrowers was deemed ineligible despite granting a loan that the SBA canceled because the borrower had made a different application. The bank was not involved in any Navatek loans.

First Hawaiian Bank said it could not disclose the number of its audited PPP loans.

American Savings Bank declined to share information on the status of PPP loans.

The Federal Inspector General said in a March report that the SBA must conduct credit reviews and take immediate action to fix potentially improper PPP loan disbursements.

“This is because sufficient controls have not been implemented in advance to prevent improper loans from occurring,” the report said.

Inconsistent results

Improper credit could result in both fraud and loan recipients who are deemed ineligible after being applied for under “tentative” rules that have been replaced by numerous updates to the SBA guidelines.

Companies with publicly traded stocks and nonprofits that benefit private members belong to the latter category, which still seems confused.

For example, Maui Land & Pineapple Co. returned a $ 246,500 PPP loan last year after federal officials released evidence that the program was not intended for companies that can raise capital in the stock market.

Another publicly traded Hawaii company, Cyanotech Corp., received a $ 1.4 million PPP loan that was granted in December.

Two of the largest PPP loans in Hawaii were made to affiliates of giant Japan-based companies with publicly traded stocks.

Resorttrust Hawaii LLC, which owns The Kahala Hotel & Resort, received a $ 8.4 million loan. The company is a subsidiary of Resorttrust Inc. which is listed on the Tokyo Stock Exchange and operates 49 hotels, membership-based golf courses and medical diagnosis and treatment centers.

Resort Trust Hawaii did not want to comment on the government’s instructions.

A Hawaii-based subsidiary of another Japanese public company, Reins International (USA) Co., received a $ 8.8 million PPP loan. The operator of six local gyu kaku restaurants is part of Japan’s largest yakiniku or grilled meat restaurant chain owned by COLOWIDE Co. Ltd., which is listed on the Tokyo Stock Exchange.

A Reins representative in Japan did not respond to a request for comment on the Hawaii PPP loan.

SBA data shows that the Resort Trust or Reins loan has not yet been awarded a decision.

In the area of ​​private social associations, the PPP rules exclude such 501 (c) (7) non-profit organizations from the right to participate. Still, lenders approved PPP loans for at least three of these local clubs: Hilo Yacht Club, Lahaina Yacht Club, and Mid-Pacific Country Club.

Mid-Pac returned a received loan of $ 830,000, according to SBA data.

In April, the Lahaina Yacht Club was waived a loan of approximately $ 171,000.

The Hilo Yacht Club received a loan of $ 253,283 and the club’s manager declined to discuss the loan. However, from the minutes of the board meeting, it appears that club officials acknowledge that the club is not eligible for PPP, but believe that there are no major downsides to seeking forgiveness as the expected alternative is to take the loan as per its two-year term 1% repayment of the term. Interest.

“We took out the loan in good faith and used the funds appropriately, but there is a possibility that we will have to repay the funds,” said the minutes of the meeting. “In the worst case, it turns into a long-term, low-interest loan.”

Other SBA programs

PPP was the largest SBA pandemic relief program, though two other companies also lent up to $ 10 million.

One, a $ 28 billion grant program called the Restaurant Revitalization Fund, distributed $ 414 million to 1,145 restaurants in Hawaii.

Largest local grant of $ 10 million

The other targeted industry initiative is the $ 16 billion Shuttered Venue Operators Grant Program, which is still making grants to independent entertainment companies.

An April Inspector General’s report raised concerns about the program, which stated that the SBA did not have the staff to operate effectively and that the agency’s audit schedule “exposes billions of dollars to potential misuse of funds because of most of the grant funds are not made available ”. be subjected to an appropriate examination. “

The SBA’s plan is to look at every $ 10 million, including one for the Polynesian Cultural Center and one for local concert production company Dream Weekend LLP.

A dream scholarship

Jonathan “Jonny” Mack, one of two Dream Weekend partners, said the closed event program was much more rigorously pre-screened compared to PPP.

His company’s grant was based on SBA criteria, which set grants at 45% of 2019 full year gross income, or six times 2019 average gross monthly income if a company did not exist for the full year.

Mack has been producing events with various partners for more than a decade, but two years ago simplifying what he said had turned into an accounting mess by hiring several new companies for separate projects like concerts, New Years Eve festivals, Halloween events and talent Booking organized.

Since Dream Weekend was founded in August 2019, it qualified for a $ 10 million grant based on a December 2019 concert at Aloha Stadium that raised over $ 2 million. Some of the other Mack companies received grants totaling approximately $ 1.5 million.

Any business can only use grant money for a specific list of expenses within a year to keep business going.

“It’s not like free money where you run away,” said Mack. “It should be returned to the economy. I’m not a millionaire. “

Mack recently went to Miami to arrange events because Florida has few COVID-19 restrictions compared to Hawaii.

Large events, he added, require months or years of planning and cost of no revenue before an event takes place. Mack said, for example, spending on the stadium concert with Usher and other notable performers was around $ 2 million.

“It’s a very unique business that we live in,” he said. “I call it high risk gambling.”

Mack has heard jokes about Dream Weekend’s $ 10 million grant, but said he follows program rules carefully and expects high levels of government scrutiny.

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