The U.S. Attorney for the District of Hawaii, Kenji Price, has announced that his office will pursue criminal charges against Martin Kao, the chief executive officer of Martin Defense Group, previously known as Navatek LLC, for allegedly obtaining more than $12 million in federal COVID-19 relief funds as part of a fraud scheme involving the Paycheck Protection Program. According to allegations raised in the criminal complaint, filed in the U.S. District Court for the District of Hawaii, Kao submitted at least two fraudulent PPP loan applications and received approximately $12.8 million in funds under the CARES Act, $2 million of which he then transferred to his own personal bank account. Kao was arrested by the U.S. Department of Justice on September 30 and is facing federal charges for bank fraud and money laundering.
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The CARES Act and Paycheck Protection Program
In the midst of the ongoing COVID-19 crisis, fraudulent activity related to the Paycheck Protection Program has emerged as a major concern for the federal government. Created by Congress as part of the $2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act, the Paycheck Protection Program was designed to provide emergency financial relief in the form of forgivable loans to individuals and small businesses suffering from the economic fallout of the coronavirus pandemic. In Hawaii, there were approximately 25,000 PPP loans distributed to businesses struggling to stay afloat during COVID-19, amounting to roughly $2.4 billion in relief funds. However, since the PPP program was created, there have been numerous attempts by individuals across the country to exploit the program and fraudulently obtain PPP loans guaranteed by the Small Business Administration (SBA).
PPP Fraud Charges Against Kao
The high-profile nature of this particular PPP fraud case is due at least in part to the fact that Kao is a prominent Hawaii defense contractor. Kao’s Honolulu-based company Navatek, now Martin Defense Group, provides research and development capabilities for the Department of Defense, NASA and other government agencies. Over the years, the company has received millions of dollars in federal contracts from the U.S. government, mainly to design state-of-the-art ship hulls for the Navy. According to the Department of Justice, Kao fraudulently obtained PPP funds by misrepresenting to lenders the number of employees he had, which allowed him to qualify for a larger loan than he was eligible for, and by using his subsidiary companies to conceal the fact that he had already obtained funds from other lenders, so he could double-dip into the PPP program. The complaint also highlights how Kao attempted to use his political connections to convince lenders to give him millions of dollars in PPP loan money that he was not eligible to receive.
In April, shortly after the PPP loan program was created, Kao reportedly filled out an application to obtain $10 million in PPP funds from Central Pacific Bank, claiming on the application that he had 490 employees at Navatek, which is headquartered in Honolulu but has branch offices in eight other states and Washington, D.C.. In reality, he only had 140 employees. Kao then attempted to influence the bank’s decision, sending a series of emails touting his company’s “growing presence” in the U.S. In one email, Kao stated that he works “very closely” with several U.S. senators who supported the CARES Act and hoped that he could let said senators know that the bank was able to secure the PPP loan on his company’s behalf. Days later, Kao sent another email, saying he had just spoken to a U.S. senator and member of Congress who “specifically asked about the status of our PPP loan application and were very adamant about stepping in if our application was getting stalled.”
In total, Kao attempted to obtain fraudulent PPP loans on three separate occasions, federal investigators reported. In addition to $10 million in funds transferred to Navatek by Central Pacific Bank, Kao’s company also received $2.8 million from Radius Bank, an online bank based in Boston, Massachusetts. A third attempt to obtain another $2.8 million from First Hawaiian Bank failed after a bank official raised questions about whether Kao had already received aid through the Paycheck Protection Program. Investigators also interviewed a former Navatek executive and another employee, both of whom told investigators that Navatek, which announced the name change to Martin Defense Group just days before Kao’s arrest, did not appear to be experiencing any financial difficulties during COVID-19. They stated that they believed Kao was overstating his needs on PPP loan applications.
Price: “We Will Hold You Accountable to the Fullest Extent of the Law”
“We are talking about an individual who is extremely greedy to exploit a global pandemic,” said Wayne Chan, supervisory special agent with the Criminal Investigations division of the Internal Revenue Service. “Mr. Kao stole money meant for honest, hardworking Americans who are trying to make ends meet and struggling American businesses who are trying to stay afloat,” Chan said. U.S. Attorney Kenji Price, a former federal prosecutor and Army Ranger, announced the PPP fraud charges against Kao in a virtual press conference on September 30, using the opportunity to send a “message” to others that the government will diligently investigate allegations of fraudulent activity involving the Paycheck Protection Program and bring offenders to justice. “The charges announced today send a very clear message to COVID-19 fraudsters,” Price said. “That message is very simple: If you game the system to get money that businesses so desperately need in Hawaii, we will find you, we will expose you and we will hold you accountable to the fullest extent of the law.”
Kao Calls PPP Fraud Charges a “Complete Surprise”
Since making the first arrests linked to PPP loan fraud in early May, the Department of Justice has made it a priority to put its ongoing PPP fraud investigations in the public eye. On September 30, the same day Kao was arrested, the DOJ issued a press release detailing the COVID-19 relief fraud charges announced by Acting Assistant Attorney General Brian C. Rabbitt of the Justice Department’s Criminal Division and U.S. Attorney Kenji Price. “A Hawaii man has been taken into custody on allegations he fraudulently obtained more than $12.8 million in Paycheck Protection Program (PPP) loans guaranteed by the Small Business Administration (SBA) under the Coronavirus Aid, Relief, and Economic Security (CARES) Act,” the press release stated. “The complaint alleges that Kao, as Chief Executive Officer of Navatek LLC (now known as Martin Defense Group LLC), submitted at least two fraudulent PPP loan applications. In sum, Kao received approximately $12.8 million in PPP funds, over $2 million of which he transferred to his own personal accounts. According to the charges, Kao falsely inflated the number of employees on the loan application and falsely certified that the applicant and its affiliates would not receive, and had not received, another PPP loan.” In response to the federal charges, Kao issued a statement through spokesman Andrew Pereira. “Navatek is a highly reputable company with a long record of service to its clients and the people of Hawai‘i,” Pereira said. “The government’s actions today were a complete surprise. As a company, we will address the allegations and have retained legal counsel to review these claims.”
Dozens Facing Charges for PPP Fraud in U.S.
In announcing the charges against Kao, Price emphasized the fact that acts of PPP fraud are by no means limited to Hawaii. The Department of Justice has been very vocal about its promise to root out PPP fraud and aggressively prosecute offenders, and PPP fraud allegations are currently being investigated by agents from a variety of federal law enforcement agencies working in conjunction to uncover fraudulent activity involving the Paycheck Protection Program and the CARES Act.. Earlier this year, a special law enforcement group was formed in Hawaii to investigate criminal activity related to the coronavirus pandemic. The group is made up of agents from the FBI, the IRS, the Secret Service, the State Department of Commerce and Consumer Affairs and the Hawaii Attorney General’s Office. Nationwide, federal prosecutors have already filed charges against dozens of individuals accused of defrauding or attempting to defraud the PPP program out of millions of dollars in coronavirus relief aid.
“These investigations unfortunately reveal what experience teaches,” said Price, who revealed that his office is assisting with other current PPP fraud investigations. “When the federal government distributes money there is generally a fraudster out there who tries to get his or her hands on it illegally.” In some cases of PPP fraud, alleged offenders have been arrested for improperly spending PPP loan funds on personal purchases, while others have been accused of receiving PPP funds that they were not eligible for or making a false certification for loan forgiveness. In Kao’s case, evidence collected by federal investigators shows that Kao had inflated his employee count in order to qualify for a larger loan, received multiple PPP loans from different lenders, and transferred more than $2 million in PPP funds from his company to a personal account, though Price did not go into detail about how the money was spent. “My message to [these PPP fraudsters],” said Price, “is that the federal law enforcement community is working diligently to investigate your misconduct and find a home for you in federal prison.”
Types of PPP Loan Fraud
The Paycheck Protection Program contains a number of restrictions for obtaining and using PPP funds and qualifying for loan forgiveness, which is only available to businesses that legitimately qualified for a PPP loan and used the funds to retain their workforce and cover the cost of eligible business expenses. When submitting an application for PPP funds to a qualifying lender, applicants must make several certifications about their need for PPP funds, their eligibility for emergency financial assistance, and how the PPP funds will be used. Applicants must also certify that they will not receive another PPP loan from another lender. When seeking loan forgiveness, applicants must certify that they met the criteria for receiving a loan through the Paycheck Protection Program and used the PPP funds for authorized business expenses. In applying for, obtaining or using PPP funds, or in applying for loan forgiveness, there are many different kinds of misconduct that can result in federal charges, including the following:
- Fraudulently obtaining PPP funds – i.e. obtaining PPP funds from multiple lenders; or inflating payroll costs or the number of employees employed by the business;
- Using PPP funds for unauthorized purposes – i.e. using PPP funds for personal purchases or for business expenses beyond payroll costs, utilities, interest on mortgage obligations or rent/lease payments; or
- Fraudulently certifying for loan forgiveness – i.e. fraudulently claiming that a business meets the eligibility criteria for loan forgiveness and used the PPP loan for authorized business expenses.
“[Kao] inflated the number of employees that worked for Navatek, used the same employees to apply for more than one loan, he included employees in his loan application that were plainly not eligible,” said Price during the virtual press conference announcing the criminal charges. Not only is Kao accused of fraudulently obtaining PPP funds that he was not eligible for, he is also accused of depositing a portion of those funds into his own personal account and then applying for PPP loans from other lenders.
Penalties for Federal PPP Fraud Charges
Since, the Paycheck Protection Program was introduced in March, the federal government has arrested at least 60 individuals for PPP fraud, representing an estimated $100 million in losses. Some examples of the criminal charges being pursued against individuals accused of committing PPP loan fraud include bank fraud (18 U.S.C. § 1344), money laundering (18 U.S.C. § 1957), making false statements to a financial institution (18 U.S.C. § 1014) and other major violations of federal law.
According to the office of Kenji Price, the maximum penalty for the charges against Kao is 30 years’ imprisonment, a $1,000,000 fine, or both for federal bank fraud, and 10 years’ imprisonment, a $250,000 fine (or a fine equal to twice the amount of the criminally derived property involved in the transaction), or both for money laundering. Kao’s case was investigated by the Criminal Investigation division of the IRS and the SBA’s Office of Inspector General and will be prosecuted by Trial Attorney Tom Tynan of the Criminal Division’s Fraud Section and Assistant U.S. Attorney Craig Nolan for the District of Hawaii.