An 18-month probe by the 42nd Statewide Investigating Grand Jury found that between 2012 and 2017 a husband and wife team, “Christopher” Wing-Tat Chiu and Ivy Li, created 20 fake companies and used them to apply for the aforementioned tax credits 89 times.
Over this period, they submitted 62 R&D applications and 27 KIZ applications wrought with false information. They were awarded $10.6 million worth of credits.
“These programs are designed to help Pennsylvania businesses grow and create jobs, ultimately benefiting the communities of our Commonwealth,” Attorney General Shapiro said. “Instead, these bad actors exploited the inadequacies of the application and award processes, directly harming Pennsylvanians in the process.”
The point of these tax credit programs is to engage qualifying innovative companies to operate in Pennsylvania and assist them by reducing their tax liabilities. Taxpayers that receive KIZ and/or R&D credits can sell them to raise operational capital.
“None of the sham companies legitimately met the requirements for receiving tax credits, and the only revenue that could be traced to the fake establishments were the gains from the sale of the tax credits,” Shapiro said. “The fraudsters sold the credits, netting them $6.3 million in cash before their crimes were detected. They returned to Hong Kong while still perpetrating their scam on the commonwealth. Their ill-gotten proceeds were deposited into bank accounts in Hong Kong and were never used to benefit the Commonwealth.”
After a staffer noticed anomalies related to one of the R&D applications, the Pennsylvania Department of Revenue ordered a complete review of companies awarded R&D tax credits.
During its review, the Department of Revenue identified 21 suspicious companies. The case was then referred to the Pennsylvania Office of Attorney General in October 2017.
The Grand Jury’s investigation revealed that only one of the 21 suspicious companies was actually legitimate. All of the others were related to this scheme.
Shapiro said investigators visited the addresses of the 20 suspect companies and discovered not one maintained a physical presence at any address. Two addresses didn’t exist.
As a result of this investigation, the Pennsylvania departments of Revenue and Community and Economic Development have begun to implement changes into how they review tax credit applications.
In addition, the Grand Jury issued a report recommending the following changes:
-- Independent audits should be required for KIZ and R&D tax credits;
-- Applicants should be interviewed face-to-face and be required to submit photographic identification, receipts, account statements and financial records. IP addresses should be verified to ensure applications are being submitted from businesses operating in Pennsylvania;
-- Extend the amount of time regulators have to review applications;
-- KIZ coordinators should be required to conduct unscheduled site visits for each applicant and state, subject to penalty of perjury, they have verified a company’s existence. Unscheduled site visits should also be required for R&D tax credits to be awarded as well;
-- Require tax credit brokers to be licensed by Pennsylvania authorities; and
-- Require tax credit awardees to submit annual proof of how tax credits were used, or if they were sold, how the funds were used.
DCED and Revenue expressed their support of these recommendations through the Grand Jury investigation.
“Once our staff identified the inconsistencies in the tax credit applications submitted by the business entities associated with Mr. Chiu and Ms. Li, we acted as quickly as possible to refer the matter to the Office of Attorney General,” Revenue Secretary Dan Hassell said. “We recognized additional law enforcement resources were necessary to hold the responsible individuals accountable. Since that time, we have taken many steps to improve our review process and create a system that is better equipped to detect fraudulent applications. We agree with the Grand Jury’s recommendations and are willing to meet with lawmakers to discuss legislation that would address weaknesses in the current law.”
“Thanks to DCED, Revenue and the Wolf administration, we were able to charge these defendants who stole from PA taxpayers and will be able to work together to implement the real change needed to prevent this from happening again,” Shapiro said.
The Grand Jury recommended criminal charges against Chiu and Li that included: theft by deception, misapplication of entrusted property, tampering with public records or information, dealing in proceeds of unlawful activities, corrupt organizations, criminal use of communication facility, receiving stolen property, filing fraudulent returns, criminal attempt and criminal conspiracy.
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