Hawaii Salary Protection Fraud Case – A Glimpse of Widespread Abuses

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It will be many years before government officials learn of the magnitude of federal aid in the wake of the pandemic misappropriated by businesses in Hawaii and across the country.

This is an expectation recently shared by the regulator overseeing the integrity of US Small Business Administration financial assistance to companies affected by COVID-19, including the Payroll Protection Program and grants for restaurants and entertainment businesses.

These programs offered businesses $ 10 million each, but many candidates received ineligible applicants due to an ongoing battle against a backdrop of flexible rules and weak oversight that prevented others from receiving desperately needed help.

So far, only one local enforcement action has been identified to help businesses in the wake of the pandemic – a case leaked by federal law enforcement officials almost a year ago involving Martin Cao, owner and then-CEO of a defense industry research firm long known as Navatek. …

However, much more is expected across the country and possibly in Hawaii.

Earlier this year, independent ethics regulator SBA announced the identification of nearly 55,000 PPP loans totaling approximately $ 7 billion to potentially ineligible businesses.

Hannibal “Mike” Ware, head of the Office of the Inspector General, told Congress in a report earlier this year that so far more than 200 scammers have been brought to justice who have abused the SBA’s pandemic relief programs, resulting in the seizure or return of $ 600 million.

Ware also said tackling such fraud will be a priority for “many years,” as thousands of investigations are pending, in part related to more than 150,000 hotline complaints.

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

Kao, who renamed his company from Honolulu to Martin Defense Group last year, is accused of applying for three forgiveable loans last year, totaling $ 15.6 million and receiving two, worth $ 12.8 million. USA based on inflated wage information to determine the size of the loan.

Federal authorities filed a criminal case against Kao in the US District Court in May following his arrest in September. He stepped down as CEO in November.

A local FBI spokesman, which is working with other law enforcement agencies in an effort to support the prosecution of the pandemic-related fraud, declined to say if any investigations into the PPP fraud in Hawaii are pending other than Kao’s. Typically, the FBI does not disclose cases that have not been released.

The SBA does not have data on how many PPP loans in Hawaii were deemed inappropriate or audited.

In two rounds of PPPs last year and this year, about 45,000 loans totaling $ 3.8 billion were disbursed to companies in Hawaii.

At the national level, about 12 million PPP loans have been disbursed for a total of about $ 800 billion.

Role of banks

The SBA relied on private lenders to make loans in accordance with the program’s rules, with lenders receiving a commission on SBA-guaranteed loans. The agency can screen any loan and has a check policy for every loan over $ 2 million, although loan forgiveness is largely at the discretion of lenders.

The four largest banks in Hawaii have shared varying degrees of information on their PPP loans.

Central Pacific Bank said that to date, 70% of its PPP loans have been forgiven, 1% have been reviewed by the SBA and less than 1% have been denied forgiveness. CPB, which provided Navatek’s only local loan, also said its loan volume related to exposure of borrower abuse was 0.008%.

Bank of Hawaii said none of its PPP borrowers were deemed ineligible, although it issued one loan, which the SBA canceled due to the borrower applying elsewhere. The bank did not deal with any loans to Navatek.

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

The American Savings Bank declined to provide any information on the status of the PPP loan.

The Federal Office of the Inspector General said in a March report that the SBA should review the loans and take immediate action to address possible improper payments on PPP loans.

“This is due to the fact that sufficient control measures were not implemented in advance to prevent improper loans,” the report says.

Inconsistent results

Inappropriate loans can be fraudulent or ineligible for loan recipients after they apply under the “interim” rules, which have been superseded by numerous updates to the SBA guidelines.

Publicly traded companies and nonprofit social clubs that benefit private members fall into the latter category, which still seems confusing.

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 businesses that could raise capital in the stock market.

Another Hawaiian publicly traded firm, Cyanotech Corp. received a $ 1.4 million PPP loan that was forgiven in December.

The two largest PPP loans in Hawaii were made to subsidiaries of giant Japan-based companies with publicly traded shares.

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

Resorttrust Hawaii did not comment on the government’s instructions.

A subsidiary of another Japanese public company, Reins International (USA) Co. in Hawaii received a loan of US $ 8.8 million. Operator of six local restaurants, Gyu-Kaku is part of Japan’s largest yakiniku (grilled meat) restaurant chain, owned by the COLOWIDE Co. Ltd., listed on the Tokyo Stock Exchange.

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

SBA data show that a pardon decision has yet to be made for either Resorttrust or Reins loans.

For private social clubs, PPP rules exclude such non-profit organizations under 501 (c) (7) from eligibility. However, lenders have approved PPP loans for at least three such clubs locally: Hilo Yacht Club, Lahaina Yacht Club and Mid-Pacific Country Club.

According to the SBA, Mid-Pac has repaid its $ 830,000 loan.

In April, Lahaina Yacht Club was forgiven about $ 171,000 in loans.

Hilo Yacht Club received a loan of $ 253,283 and the club manager declined to discuss the loan. However, board minutes show that club officials admit that the club is not eligible for PPPs, but believe that the downside is of little importance as the expected alternative is to repay the loan in accordance with its two-year maturity under 1 %. interest.

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

Other SBA Programs

PPPs were the SBA’s largest pandemic relief program, although the other two also provided businesses with up to $ 10 million.

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

The largest local grant of $ 10 million went to restaurant operator Roy’s, which also received a $ 5.4 million loan last year and a $ 2 million loan in the second round of this year, which was opened to loan recipients in first round.

Another targeted industry initiative is the $ 16 billion Indoor Operator Grant Program, which still provides grants to independent entertainment businesses.

Concerns about the program were expressed in the Inspector General’s April report, which said the SBA did not have the necessary staff to effectively oversee and that the agency’s audit plan “exposes billions of dollars to potential misuse of funds as most of the grant funds will not be used. subject to a reasonable degree of verification. “

The SBA’s plan includes an audit of each $ 10 million grant, which will include one for the Polynesian Cultural Center and one for the local concert production firm Dream Weekend LLP.

Dream grant

Jonathan “Johnny” Mack, one of two Dream Weekend partners, said the indoor program has undergone a much more thorough pre-screening than PPP.

His company’s grant was based on SBA criteria, according to which the size of the grants was 45% of the annual gross income for 2019, or six times the average monthly gross income in 2019 if the business did not exist for the entire year.

Mac has hosted events for over a decade with various partners, but two years ago he simplified what he said turned into an accounting mess by organizing several new companies for individual ventures, such as concerts, New Years, Halloween events, and talent scouting.

Since Dream Weekend was founded in August 2019, it has been eligible for a $ 10 million grant based on a December 2019 concert at Aloha Stadium that raised over $ 2 million. A couple of other Mack companies have received grants totaling about $ 1.5 million.

Each company can only use the grant money for a specific list of expenses during the year to keep the business running.

“It doesn’t feel like free money when you run away,” Mac said. “It needs to be returned to the economy. I’m not a millionaire. “

Mac was recently in Miami trying to organize events there because Florida has few COVID-19 restrictions compared to Hawaii.

He added that major events require months or years of planning and spending with no income until the event takes place. For example, Mack said that the cost of a stadium concert featuring Usher and other famous artists was around $ 2 million.

“We live in a unique business,” he said. “I call it high risk gambling.”

Mack heard jokes about the $ 10 million Dream Weekend grant, but said he adheres to the program’s rules carefully and expects a high level of government oversight.



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