WASHINGTON – The Trump administration has used a $17 billion loan fund meant for businesses critical to U.S. national security to help a hodgepodge of little-known companies with unclear importance to national defense, and the fund remains mostly unspent nearly eight months after Congress approved it as part of a $2 trillion stimulus bill.
Aircraft manufacturers including Boeing were the fund’s intended recipients but balked at the terms and did not apply. Instead, the 11 companies that have tapped the fund so far include a company that has pitched its products as an enabling technology for the facial recognition tracking of immigrants, a manufacturer of roadblock barriers and surveillance firms.
One company that received a loan is an experimental spaceflight technology firm backed by deep-pocketed venture capital investors. Others have a history of financial losses. One manufacturer relies on minimum-wage prison labor to make wire harnesses for military and commercial customers.
“The most important information to be transparent about is why these firms deserve these funds,” said Mandy Smithberger, a defense industry analyst at the Project on Government Oversight. “Understanding that these are limited funds, why were these companies the priorities?”
The Treasury Department announced the first national security loan, $700 million to trucking company YRC Worldwide, in a news release in July. The 10 following loans – worth about $36 million total – have been subsequently posted on Treasury’s website in the past month. Given the timing of the disclosures – in the days just before and after a contentious presidential election and in the midst of a sharp spike in coronavirus cases nationwide – the new loans have received little scrutiny thus far.
It is unclear how the remaining $16.26 billion in appropriated funds will be spent. But some industry experts and congressional aides say they are disappointed with how the program has been administered so far, as billions of dollars intended to save jobs in the fragile aerospace industry went unspent for seven months.
A Treasury Department spokeswoman, Rebecca Miller, declined to comment on the record. Jessica Maxwell, a Defense Department spokeswoman, said the Pentagon, which was involved in the loan approvals, acted in accordance with the Cares Act, which established the program.
“It appears again that some misunderstand the intentions of the CARES Act – to get money into American businesses and to American workers who are dealing with the financial toll of COVID in a rapid, efficient and responsible manner,” Maxwell said in a statement. “That is what DoD did.”
The Congressional Oversight Commission, created by the Cares Act, is scrutinizing the national security loans and plans a public hearing next month with officials from Treasury, the Pentagon and the Office of the Director of National Intelligence, said the commission’s chief clerk, Amber Venzon.
The defense industry was largely uninterested in the loan terms offered by Treasury. Only 74 companies have submitted applications, standing in stark contrast to the millions that sought loans from the Small Business Administration. Just a handful of applications are still being reviewed. Treasury Secretary Steven Mnuchin said in an appearance on Fox Business last month that, with congressional approval, the unused national security loan funds could be reallocated to help airlines.
“If they were trying to set up a fund which no one would use, it’s not clear to me what else they could have done,” said David Berteau, who is president of the Professional Services Council, a trade association for government contractors.
Manufacturers were discouraged by overly restrictive and shifting requirements, Berteau said. Others, including Boeing, may have found the loan terms unattractive: Publicly traded companies had to give stock or stock warrants to the government to receive a loan, something spelled out by Congress in the Cares Act. Firms also faced restrictions with respect to stock buybacks, executive compensation and layoffs.
When Congress passed the Cares Act in late March, the $17 billion national security fund was intended to preserve jobs at a range of companies that sell jets and aircraft components to the military and to commercial airlines, people involved in the conversations told The Washington Post at the time.
Boeing and the aviation division of General Electric were seen as likely beneficiaries of the program, Mnuchin later clarified. Those companies and hundreds of others that supply them were decimated by the sudden, near-complete shutdown in global air travel starting in March. (Boeing’s bottom line had also taken a beating after its flagship 737 Max jet was grounded following two crashes that killed 346 people.)
But major aerospace companies did not access the loan fund, opting instead to raise funds elsewhere and cut costs through mass layoffs. Boeing plans to reduce its workforce to roughly 130,000 by the end of 2021; it stood at 160,000 before the pandemic. GE Aviation, a major jet engine supplier, is cutting a quarter of its workforce.
The application period opened April 23, with a May 1 deadline for “expedited review,” Treasury Department documents show, meaning most of the loan applicants spent only about a week preparing their requests.
The Treasury Department then turned to a pair of private consultants ― the law firm Davis Polk & Wardwell and the financial advisory firm Perella Weinberg Partners ― to handle most of the work of evaluating companies’ applications. Treasury awarded Davis Polk a $650,000 contract on May 1, and applicants started hearing from both firms soon after. Neither firm responded to requests for comment.
It was another two months before Treasury issued the first loan from the fund: $700 million to YRC Worldwide, a struggling trucking company that lost more than $100 million last year, long before the pandemic hit. A YRC spokesman declined to comment. The 10 other loans issued so far each took about six months to process.
Several applicants told The Post they spent hundreds of hours on financial due diligence and other paperwork with consultants from Davis Polk and Perella Weinberg. But the Treasury Department was rarely a part of the conversation, they said, making it hard for applicants to figure out who in the government was making decisions about their applications and on what criteria. It was unclear to them who determined that they met the national security requirements.
“The only stuff I had to do pertaining to national security were the initial documents, like a handful of pages,” said Gareth Block, whose Austin-based drone software company Third Insight, also known as Visual Semantics, received a $1 million loan, and qualified thanks to a certification from the Pentagon. The terms of the Treasury loan, unsecured and at a 5.5 percent interest rate, are far more favorable than those the company would have received from venture capital funds, Block said.
Congress gave the Treasury Department wide latitude in deciding how to disburse the funds, neglecting to define in the legislation what makes a company “critical to maintaining national security.”
The agency came up with two criteria through which a company could qualify for the national security loans. Either a business had to already be performing on a “DX”-rated government contract – a type of urgent defense work that relatively few firms carry out – or operate under a high-level security clearance.
Those criteria turned away a lot of otherwise interested firms, industry representatives said. Companies could also qualify for the loans if the secretary of defense or director of national intelligence certified that they are critical to maintaining national security. Six of the 11 companies that have received loans so far got such a certification from the Defense Department.
Maxwell, the Defense Department spokeswoman, declined to share any of the loan justification documents it sent to Treasury as part of the approval process.
“DoD used the same criteria we used for other CARES Act funding opportunities to assess companies for DoD certification for Treasury loans,” Maxwell said.
Senate aides, who spoke on the condition of anonymity to describe internal conversations, said that they found Treasury’s standards for which companies qualify for the loans to be far too narrow and that those rules undermined Congress’s intent in creating the program. Treasury has ignored requests from members of the Senate Commerce Committee that it broaden the criteria for how companies qualify, the aides said.
One of the companies that received a Treasury loan this month is oVio Technologies, based in Newport Beach, Calif. The company, which had six U.S. employees in March, received a nearly $1.2 million unsecured loan, according to a Nov. 2 transaction summary disclosed by the Treasury Department. It qualified for the loan after the Defense Department certified its work was critical to national security.
In promotional videos, oVio boasts that its 3-D imaging technology can help law enforcement and immigration control agencies with facial recognition tracking. One video published several years ago says oVio’s technology can make it easier for governments to track immigrants and refugees.
Another video posted by the company on its Instagram account in September shows a heavily tattooed, Latino-looking man being photographed in an orange jumpsuit and placed behind bars. The advertisement boasted that oVio’s imaging scanners are “compatible with tier 1 facial recognition software providers.”
The video was removed after The Post asked oVio’s chief executive, George Rebensdorf, about the content.
“I don’t control our social media manager, who is always pulling and posting content,” Rebensdorf said in an email. “Maybe I should be more attentive.”
Civil rights advocates argue that facial recognition technology presents myriad privacy concerns because, unlike other biometric data, a digitized image of a person’s face can be captured without individuals’ knowledge or consent.
“Even if this technology was 100 percent accurate, the serious privacy concerns would still be present,” said Saira Hussain, an attorney at the Electronic Frontier Foundation. “The notion that this is critical to national security is a flawed premise and is a way to try to push facial recognition technology despite the increasing public concern.”
Rebensdorf said law enforcement work is “not currently a focus of” his company. He added that the company does not make or develop facial recognition software and only provides images for those platforms. In a phone interview, he declined to speak at length about the loan, except to say that the company’s experience with Treasury was positive and rigorous.
“I’ve never been through more due diligence in my life, and I’ve been through a lot of IPOs,” he said.
In a subsequent email, he said the company did not qualify for the loan based on its facial recognition work, but rather its other national security expertise. He cited a contract and memorandum of understanding with the U.S. Air Force to develop viewing and training platforms for aircraft. Public federal contracting data shows a $50,000 research and development contract to oVio this year from the Defense Department for “revolutionary identity management.”
Early this year, oVio disclosed in an investor presentation on an online crowdfunding site that it was “currently operating at a loss” and has a history of doing so. Asked about the disclosure, Rebensdorf said the company “went through four months of intensive financial and legal due diligence” to qualify for the loan.
Another company that received a Treasury loan is SpinLaunch, a spaceflight technology firm based in Long Beach, Calif. A Wired article this year detailed the company’s plans to build a centrifuge 100 yards wide that would spin a rocket in circles at speeds up to 5,000 mph before launching it into space. The firm has raised $80 million from prominent investors, including venture capital firms Airbus Ventures, Kleiner Perkins and GV, the venture capital arm of Google parent Alphabet.
SpinLaunch’s $2.5 million Treasury loan is secured by the company’s assets, and the company qualified for the loan based on a certification from the Defense Department. The company received a contract from the Pentagon to develop a satellite launch system prototype. SpinLaunch did not respond to an interview request.
Treasury also awarded a nearly $2 million loan to SemahTronix, an Arkansas firm that produces cable assemblies and wire harnesses. The company had earlier received a Small Business Administration loan worth between $350,000 and $1 million as part of a separate coronavirus relief program.
As of June, the company employed 97 prison inmates through a venture with the Arkansas Department of Corrections, according to a report from the National Correctional Industries Association (NCIA), which reviews prison jobs programs. The company’s website says its “innovative partnership” with the state prison system goes back to 2006.
SemahTronix President Travis Atkinson declined to comment. Cindy Murphy, a spokeswoman for the Arkansas Department of Corrections, said 66 female inmates and 39 male inmates are currently working for SemahTronix, earning between $10 and $10.21 per hour, which is approximately Arkansas’s minimum wage.
NCIA data shows that for the three-month period ending in June, the Arkansas Department of Corrections deducted, in aggregate, around 63 percent of inmates’ pay from SemahTronix to cover expenses including “room and board,” taxes, family support and victims’ programs.
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The Washington Post’s Dalton Bennett and Magda Jean-Louis contributed to this report.