comscore Hawaii paycheck protection fraud case is a glimpse of widespread abuse | Honolulu Star-Advertiser
Hawaii News

Hawaii paycheck protection fraud case is a glimpse of widespread abuse

  • STAR-ADVERTISER FILE
                                To date, Martin Kao’s case has been among the biggest of about 85 cases publicized by the U.S. Department of Justice involving people around the country being arrested for, pleading guilty to, being charged with or receiving prison sentences for PPP fraud.

    STAR-ADVERTISER FILE

    To date, Martin Kao’s case has been among the biggest of about 85 cases publicized by the U.S. Department of Justice involving people around the country being arrested for, pleading guilty to, being charged with or receiving prison sentences for PPP fraud.

  • ASSOCIATED PRESS FILE
                                A local representative with the FBI, which is working with other law enforcement agencies in an attempt to bolster pursuit of pandemic-related fraud, declined to say whether any PPP fraud investigations in Hawaii other than Martin Kao’s are pending.

    ASSOCIATED PRESS FILE

    A local representative with the FBI, which is working with other law enforcement agencies in an attempt to bolster pursuit of pandemic-related fraud, declined to say whether any PPP fraud investigations in Hawaii other than Martin Kao’s are pending.

It will be many years before government officials know the extent of federal pandemic aid improperly obtained by businesses in Hawaii and across the nation.

That’s the expectation shared recently by a regulator overseeing the integrity of U.S. Small Business Administration financial assistance given to companies affected by COVID-19, including the Paycheck Protection Program and grants for restaurant and entertainment industry businesses.

These programs offered businesses as much as $10 million each, yet many awards were made to ineligible applicants in a scramble amid fluid rule guidance and loose oversight that impeded others from obtaining desperately needed help.

So far, only one local pandemic business aid enforcement action has come to light — a case publicized by federal law enforcement officials nearly a year ago involving Martin Kao, the owner and then-chief executive of the defense industry research and development firm long known as Navatek.

Yet many more are expected across the country and possibly in Hawaii.

Earlier this year, the SBA’s independent integrity regulator reported identifying nearly 55,000 PPP loans totaling roughly $7 billion made to potentially ineligible businesses.

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

Ware also said combating such fraud will be a priority for “many years” with thousands of expected investigations stemming in part from over 150,000 hotline complaints.

To date, Kao’s case has been among the biggest of about 85 cases publicized by the U.S. Department of Justice involving people around the country being arrested for, pleading guilty to, being charged with or receiving prison sentences for PPP fraud.

Kao, who renamed his Honolulu-based company Martin Defense Group last year, is accused of applying for three forgivable PPP loans totaling $15.6 million last year — and receiving two for $12.8 million — based on inflated payroll information to determine loan size.

Federal authorities filed a criminal complaint against Kao in U.S. District Court in May after his arrest in September. He stepped down as CEO in November.

A local representative with the FBI, which is working with other law enforcement agencies in an attempt to bolster pursuit of pandemic-related fraud, declined to say whether any PPP fraud investigations in Hawaii other than Kao’s are pending. As a policy, the FBI doesn’t disclose cases that haven’t resulted in public records.

Data on how many Hawaii PPP loans have been deemed improper or been audited isn’t available from SBA.

Over two PPP rounds last year and this year, about 45,000 loans totaling $3.8 billion were made to Hawaii businesses.

Nationally, there were close to 12 million PPP loans totalling about $800 billion.

The role of banks

SBA relied on private lenders to make the loans according to program rules, with lenders receiving fees for the loans guaranteed by SBA. The agency can audit any loan and has a policy to examine every loan over $2 million, though forgiving loans is largely left to lenders.

Hawaii’s four largest banks shared varying degrees of information about PPP loans they made.

Central Pacific Bank said 70% of its PPP loans to date have been forgiven, 1% have been audited by SBA and less than 1% were denied forgiveness. CPB, which made the only local loan to Navatek, also said its loan volume involving uncovered borrower abuse amounted to 0.008%.

Bank of Hawaii said none of its PPP borrowers have been deemed ineligible, though it made one loan that SBA canceled due to the borrower applying elsewhere. 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 any information on PPP loan status.

The federal Office of Inspector General said in a March report that SBA must conduct loan reviews and take immediate action to address potential improper PPP loan disbursements.

“This is because sufficient controls were not implemented up front to prevent improper loans from occurring,” the report said.

Inconsistent outcomes

Improper loans could involve fraud as well as loan recipients being deemed ineligible after they applied under “interim” rules that were superseded by numerous SBA guidance updates.

Companies with publicly traded stock and nonprofit social clubs that benefit private members are in the latter category that still appears muddled.

For instance, Maui Land & Pineapple Co. last year returned a $246,500 PPP loan after federal officials provided guidance that the program wasn’t intended to benefit businesses that can raise capital in the stock market.

Yet another Hawaii publicly traded firm, Cyanotech Corp., received a $1.4 million PPP loan that was forgiven in December.

Two of the biggest Hawaii PPP loans were made to affiliates of giant companies based in Japan with publicly traded stock.

Resorttrust Hawaii LLC, which owns The 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 along with membership-based golf courses and medical diagnostic and treatment centers.

Resorttrust Hawaii would not comment on the government’s guidance.

A Hawaii affiliate of another Japan-based public company, Reins International (USA) Co., received an $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 about the Hawaii PPP loan.

SBA data show that a forgiveness determination hasn’t yet been made for the Resorttrust or Reins loans.

In the area of private social clubs, PPP rules exclude such 501(c)(7) nonprofits from eligibility. Still, lenders approved PPP loans for at least three such clubs locally: Hilo Yacht Club, Lahaina Yacht Club and Mid-Pacific Country Club.

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

Lahaina Yacht Club had its roughly $171,000 loan forgiven in April.

Hilo Yacht Club received a $253,283 loan, and the club’s manager declined to discuss the loan. However, board meeting minutes show that club officials acknowledge the club wasn’t eligible for PPP but believe there isn’t much of a downside to pursuing forgiveness because the expected alternative is paying off the loan according to its two-year term at 1% interest.

“We took the loan in good faith and used the funds appropriately but there is a chance that we could have to pay back the funds,” meeting minutes read. “Worse case it becomes a long term low interest loan.”

Other SBA programs

PPP was the biggest SBA pandemic aid program, though two others also gave businesses up to $10 million.

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

The biggest local grant, for $10 million, went to the operator of Roy’s restaurants, which also received a $5.4 million PPP loan last year and a $2 million PPP loan in a second round this year that was open to first-round loan recipients.

The other targeted industry initiative is the $16 billion Shuttered Venue Operators Grant Program that is still awarding grants to independent entertainment industry businesses.

Concerns about this program were raised in an Inspector General report in April that said SBA doesn’t have necessary staff for effective oversight and that the agency’s audit plan “exposes billions of dollars to potential misuse of funds because the bulk of grant funds will not be subject to a reasonable degree of scrutiny.”

SBA’s plan includes auditing every $10 million grant, which would include one for the Polynesian Cultural Center and one for local concert production firm Dream Weekend LLP.

A dream grant

Jonathan “Jonny” Mack, one of two Dream Weekend partners, said the shuttered venue program had much more rigorous up-front scrutiny compared with PPP.

His company’s grant was based on SBA criteria setting grants at 45% of 2019 full-year gross income, or six times the average monthly gross income in 2019 if a business didn’t exist for the whole year.

Mack has produced events for more than a dec­ade with various partners, but two years ago simplified what he said had become an accounting mess by organizing several new companies for separate ventures such as concerts, New Year’s Eve festivals, Halloween events and talent booking.

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 couple of the other Mack companies got grants totaling about $1.5 million.

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

“This is not like free money where you’re running off,” Mack said. “It is to be put back into the economy. I’m not a millionaire.”

Recently, Mack was in Miami trying to arrange events there because Florida has few COVID-19 restrictions compared with Hawaii.

Big events, he added, take months or years of planning and expense with no income until an event takes place. For example, Mack said expenses for the stadium concert featuring Usher and other big-name artists were around $2 million.

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

Mack has heard wisecracks about Dream Weekend’s $10 million grant but said he is carefully following program rules and expects a high level of government scrutiny.

Report fraud

Suspected fraud in pandemic business relief programs can be reported at: sba.gov/oighotline

Comments (10)

By participating in online discussions you acknowledge that you have agreed to the Terms of Service. An insightful discussion of ideas and viewpoints is encouraged, but comments must be civil and in good taste, with no personal attacks. If your comments are inappropriate, you may be banned from posting. Report comments if you believe they do not follow our guidelines.

Having trouble with comments? Learn more here.

Click here to see our full coverage of the coronavirus outbreak. Submit your coronavirus news tip.

Be the first to know
Get web push notifications from Star-Advertiser when the next breaking story happens — it's FREE! You just need a supported web browser.
Subscribe for this feature

Scroll Up