Sandwich Isles Communications Inc., the politically connected Hawaii telecommunications company that provides services on Hawaiian home lands, is being warned that its Federal Communications Commission authorization to operate may be revoked.
Federal and state officials say they are committed to continuing telecom services to all customers on Hawaiian home lands without interruption, but events last week made it clear the embattled Sandwich Isles now faces threats to its survival as a business.
Last week the FCC announced it is imposing $76 million in federal penalties on the company for what it describes as “egregious misconduct,” and also ordered yet another investigation of the company’s finances. That new investigation will begin in 2017.
The commission also stated in orders last week that it may demand that Sandwich Isles repay money beyond the $76 million. The FCC said it is still trying to determine how much Sandwich Isles should be forced to refund the federal government for making “inflated and improper management fees” to its parent company, Waimana Enterprises Inc.
Commissioners Mignon Clyburn and Ajit Pai issued a joint statement in the case saying the commission “speaks with a unified voice” in its decision to punish Sandwich Isles.
The company improperly collected federal subsidies from the federal Universal Service Fund “that were intended to benefit the people of the Hawaiian Homeland, but instead lined the pockets of the company’s owner,” they said in their statement.
Sandwich Isles’ founder Albert Hee is now serving 46 months in federal prison for 2015 convictions on six counts of federal tax fraud and one count of corruptly impeding the Internal Revenue Service from calculating his actual tax liability.
The FCC in one of its orders last week gave Sandwich Isles 60 days to explain why the commission should not revoke the federal authorizations that allow the company to function as an interstate telecommunications carrier. The FCC is considering that action “in light of SIC’s egregious misconduct and demonstrated harm to the (Universal Service) Fund,” according to the order.
A public notice will be issued inviting testimony from the state Department of Hawaiian Home Lands and other interested parties who want to comment on the issue, according to the order.
The FCC has already choked off the flow of almost all federal telecommunications subsidies from the Universal Service Fund to Sandwich Isles, a step that has cost the company more than $24 million since June 2015.
Sandwich Isles also defaulted on more than $108 million in loans from the U.S. Department of Agriculture, which is money the company borrowed from 1997 to 2001 to finance construction of its telecommunications network in Hawaii. A USDA spokeswoman said that agency is now working with the U.S. Department of Justice to try to recover that money in a case that is separate from last week’s FCC action.
The flurry of federal enforcement actions presents a crisis for Sandwich Isles, which has about 80 employees and provides phone and other telecommunications services to about 3,600 customers on Hawaiian home lands.
It is unclear how the company can emerge from the turmoil, and Gov. David Ige said in an interview last week the Hawaiian Homes Commission should consider whether it is time to replace Sandwich Isles as the exclusive telecom carrier for Hawaiian home lands.
Ige said that whatever happens, the state is committed to ensuring service continues for homesteaders, and “clearly the state, whether it be the Hawaiian Home Lands or the PUC, needs to take action to assure that those residents on Hawaiian home lands who are currently served by Sandwich Isles continue to get service until some other arrangement can be made.”
Ige said he has not discussed Sandwich Isles with Hawaiian Homes Commission Chairwoman Jobie Masagatani or other commission members, but said the Public Utilities Commission is looking into the issue.
The Department of Hawaiian Home Lands issued a statement last week saying its primary concern is to protect the home lands trust and ensure that homesteaders have adequate telecommunications service.
The department announced last year that Hee’s tax convictions had triggered a “review and assessment” by the department to determine whether those issues could affect services for homesteaders, but the department has never made public the results of that review.
When asked if Sandwich Isles is contemplating bankruptcy, a spokesman for the company issued a statement last week saying only that Sandwich Isles “believes it used the high-cost support program (of the Universal Service Fund) to provide, maintain and upgrade its facilities and services, as the funds were intended, to serve its subscribers. We will be reviewing the allegations in the FCC order and will be responding to them.”
Sandwich Isles has received more than $249 million in federal Universal Service Fund subsidies since 2002, and the FCC orders issued last week allege that longstanding practices by Hee and his companies resulted in tens of millions of dollars in overpayments from the federal government to the company.
The Universal Service Fund is financed through fees collected from telecommunications customers across the country, and the fund offers special “high-cost” subsidies to telecom companies that provide service in isolated rural areas. Companies that install “Category 1” lines that serve customers in rural areas can qualify for the high-cost subsidies.
The FCC in one of its orders alleged Sandwich Isles extended lines to vacant Hawaiian home lands, and then improperly classified those lines as Category 1 in its reports to the federal government even though no customers were actually being served. That allowed the company to qualify for the special high-cost federal subsidies, according to the order.
That practice allowed Sandwich Isles to draw down $26.3 million in overpayments from the Universal Service Fund from 2003 to 2014, according to the FCC, and the agency ordered the fund to recover that money.
The FCC also issued a separate order that found Sandwich Isles is apparently liable for an additional forfeiture penalty of nearly $49.6 million for allegedly submitting false data to the agency from 2010 to 2013.
“We find that this proposed forfeiture penalty reasonably reflects the commission’s commitment to protect the (Universal Service) Fund from waste, fraud and abuse, as well as the magnitude of SIC’s violations,” the commission wrote. Sandwich Isles now has 30 days to either pay the penalty or submit a statement asking that it be reduced.
Self, political gifts
The FCC also wants to recover allegedly improper management fees Sandwich Isles paid to its parent company, Waimana Enterprises, according to the order. Waimana was also controlled by Hee, and spending by that company figured heavily into Hee’s convictions for tax cheating.
Hee’s trial on the tax charges in federal court last year revealed that Waimana had paid personal and family expenses on Hee’s behalf totaling more than $4 million, including $90,000 for massages; $55,232 for family vacations to France, Switzerland, Tahiti and Disney World; at least $630,103 toward the education of Hee’s children; and $1.6 million in salary and benefits for Hee’s wife, Wendy, and their children.
The FCC concluded that the management fees Sandwich Isles paid to Waimana “constituted nearly all of Waimana’s total revenue,” and those fees violated FCC rules. The agency said it is still trying to determine how much of those management fees should be repaid to the federal government.
Hee is the brother of former state Sen. Clayton Hee and has been a generous supporter of the local and national Democratic political establishments.
Hee and company executives of Waimana and Sandwich Isles have donated more than $500,000 to Democratic leaders and the Democratic Party over the past 15 years, with some of the largest contributions going to the late U.S. Sen. Daniel Inouye, former U.S. Rep. and Gov. Neil Abercrombie, and U.S. Rep. Colleen Hanabusa.
In addition to tens of thousands of dollars in political contributions made to Hawaii Democrats over the years, company executives also donated heavily to the Hawaii Democratic Party and Democratic Party organizations in North Carolina, Ohio, Florida, Wisconsin, Iowa, New Hampshire, Pennsylvania and Virginia.
When Hee faced sentencing on tax charges last year, supporters who submitted letters asking for leniency included former Public Utilities Commission Chairwoman Mina Morita, former Hawaii Supreme Court Associate Justice James Duffy, state Sen. Brickwood Galuteria, former state Rep. Heather Giugni, and Bill Kaneko, an attorney and campaign manager for Abercrombie.