Fraud-Prone Aid Program Sent $7 Million to Family’s Fake Farms
(Bloomberg) -- The single-family house on Forestview Avenue in Euclid, Ohio, a suburb of Cleveland, shows no signs of farming activity. The only things growing on the one-eighth-acre plot are trees, shrubs and grass.
In all, the owner of the Forestview home and his family members created 72 companies with agrarian-sounding names at three Cleveland-area addresses and then used them to get approval for loans and grants totaling $7.2 million from the Small Business Administration’s Economic Injury Disaster Loan program, state and federal records show. There’s no sign of agricultural activity at any of the locations, or that any of the companies were active before Feb. 1, a requirement for pandemic aid. None of them was registered with the Ohio Secretary of State’s office before May.
A lawyer for Zaur Kalantarli, the owner of the Forestview house, acknowledged in an interview this week that at least some of the loans were questionable and may have to be repaid. The lawyer, Edward La Rue of Cleveland, said he contacted federal prosecutors in Ohio on Monday and brought the matter to their attention. La Rue said Kalantarli hired him on Nov. 12 after an inquiry from Bloomberg News.
The Kalantarli loans are the latest sign of mismanagement in the SBA’s $212 billion disaster-relief program, which the agency’s inspector general warned in July was beset by “potentially rampant fraud.” They raised red flags that even the most basic controls should have spotted: more than a dozen loans flowing to the same street address and companies created after the eligibility date.
The disaster-relief program has distributed 3.6 million loans worth $192 billion to small businesses since March, as well as 5.8 million grants that don’t have to be repaid totaling $20 billion. It’s distinct from the SBA’s $525 billion Paycheck Protection Program, which relied on banks to distribute forgivable loans meant to cover payroll.
A $750 million computer program set up by the SBA in April was supposed to flag suspicious disaster-aid applications before they were approved, but last month Bloomberg News quoted current and former SBA workers and outside fraud investigators describing widespread fraud that the computers had failed to catch. Even a person posing as President Donald Trump made off with a $5,000 grant.
A spokesperson for the SBA said the agency wouldn’t comment on individual borrowers but that it “takes very seriously its stewardship of taxpayer funds and is committed to mitigating risks of fraud, waste and abuse.”
Bloomberg News spotted the Kalantarli loans by searching for companies that got disaster aid despite being created after the eligibility date. Names and states of loan recipients were matched to companies in a database provided by OpenCorporates Ltd., a U.K. firm that aggregates corporate records. That yielded a list of 10,685 loans that went to entities created on Feb. 1 or after. In examining this list for multiple loans at the same street address, Kalantarli’s popped out.
Not all of the 10,685 companies are ineligible for aid. Some were in business for years and incorporated only recently. But a random sampling suggests that a significant number are registered to residential addresses, with no digital sign of business activity, such as a business license or a presence on Google or Facebook. Several clusters of loan recipients, like Kalantarli’s companies, were created by the same person in rapid succession. The loan data made public by the SBA show only approval decisions and don’t indicate if all the loans were funded or if some were later canceled.
Last month, SBA Inspector General Hannibal “Mike” Ware said he found 22,706 loans and 45,385 grants, worth a total of $1.1 billion, that went to companies that obtained tax identification numbers on Feb. 1 or later. He faulted the agency for not checking tax ID registration dates prior to issuing aid. The SBA disagreed, saying a late creation date isn’t definitive proof of fraud and that it hadn’t been able to get access to the relevant data from the Internal Revenue Service.
The creation of new, phony companies is probably responsible for only a small fraction of the fraud that occurred in the program. Applicants don’t need a formal legal entity or tax ID to be eligible. Bloomberg News reviewed several fraud tutorials posted on social media, all of which recommended applying as an unincorporated sole proprietor.
But nobody outside the SBA can check for fraud among sole proprietors because the agency has chosen to keep names and street addresses of these recipients secret. These redactions amount to 46% of grant recipients and 41% of loan recipients. In May, media organizations including Bloomberg News sued to force the SBA to release this information under the Freedom of Information Act. The SBA argued that the redactions were necessary to protect borrower privacy. On Nov. 5, a federal judge ordered the SBA to make the data public. The agency is considering an appeal.
Kalantarli’s postings on social media portray a hard-working entrepreneur who immigrated to the U.S. from Azerbaijan in 2015 after winning the permanent-resident lottery. He was later joined by two brothers. He operated a print and sign shop in Los Angeles and then branched into buying and repairing houses in the Cleveland area. Four companies that predated the pandemic, linked to the printing and real estate businesses, received SBA loans and grants in May and June, although one of those loans was later canceled for undisclosed reasons.
A day after the first of those loans was approved, Kalantarli registered the first of the 72 agriculture-themed companies, all of which used the address of his house on Forestview or two other suburban properties owned by a company he controls. A visit this month showed that each is a modest suburban home with a small yard and no sign of agricultural activity. The registered agents for the companies are Kalantarli, his relatives and another unidentified person who shares his last name. Although Kalantarli posts extensively on social media about his various business ventures, Bloomberg News found no mention of farming activity.
The new companies began winning approval for loans of $150,000 on June 17, with nine of the entities, including Ohio Almonds & Peanuts LLC and Agriculture Worms & Fertilizers LLC, getting approved on the same day. The SBA continued approving loans to the companies as late as Aug. 10, well after the inspector general first raised concern about the program, the data show. The companies also won $183,000 in SBA grants, an amount that corresponds to a headcount of 183 employees. Bloomberg News was unable to identify anyone who works for any of the companies.
“I certainly see why you noticed things that did not seem to comport with the SBA guidelines,” said La Rue, who is representing Kalantarli and two of his brothers. La Rue said he was still gathering information but that his clients may have misunderstood program rules. “This was done in a slapdash fashion, very quickly, in the mindset of, ‘This is coming to any business owner who wishes it,’” he said.
La Rue said none of the Kalantarli brothers had been contacted by law enforcement or by the SBA. He said his clients might have to return millions of dollars. “We are looking to move forward,” he said, “to do what we can do to ameliorate the situation.”
©2020 Bloomberg L.P.