A Small Business Administration program designed to help businesses in low-income areas get federal contracts gave a dozen firms, including three ineligible ones, 94 percent of the funding awarded over a six-month period last year.
The 12 companies received 34.9 million from the SBA's HUBZone program between July and December 2012, even though 367 firms were certified during that period, according to an audit made public Friday by the SBA inspector general.
To be eligible for the program, firms must have a primary office in a HUBZone; have at least 35 percent of employees living in a HUBZone; and have never been debarred or suspended from receiving federal contracts.
Three of the firms broke these rules, one through possible fraud, and received more than $1 million that should have gone to other businesses, the IG said.
"The HUBZone program is not meeting its mission to help small firms in certain communities gain access to federal contracting opportunities to the greatest extent possible," the IG said.
"Specifically, ineligible firms received federal contracts that should have been awarded to legitimate HUBZone companies, resulting in the diversion of economic benefits to an unintended target," the IG said.
One of 12 firms receiving the most money wasn't located in a HUBZone, but provided an address and phone number that were.
The company, a Maryland cleaning business, even including a water bill as proof of its location, but the bill showed no use for the dates billed, according to the IG.
"The OIG audit team visited the principal office at 10 a.m. on a weekday, but no one answered the door. We spoke to a neighbor who had never seen any evidence of a cleaning business," the IG said.
The company actually received federal funding in August 2012 and was identified as HUBZone-certified, at the time, one month before it was removed from the program.
Then, 48 days after being denied, it was certified, despite a 90-day waiting period required before re-application.
A second company told SBA it had never been debarred or suspended, even though it was blocked by the Department of Veterans Affairs from receiving federal contracts between February and September 2011.
The HUBZone application specifically asks whether the applicant has ever been debarred or suspended, and the owner said "no."
"This is a false statement. According to the director of the HUBZone program, a firm with a previous debarment that was not reported on the application is a false statement and the firm should not be admitted into the HUBZone program," the IG said.
A third company was eligible when its application was initially received, with 35 percent of employees living in a HUBZone.
But during the four months it took to receive certification, two employees' driver's licenses expired. Valid identification is required as proof of residency, meaning the firm was no longer eligible.
The biggest reason these companies all slipped through the cracks is that SBA doesn't have an official review process for certification, the IG said.
Until 2010, firms were allowed to self-certify, but SBA hasn't changed its operating procedure since 2007, relying instead on analysts' experience to catch ineligible and fraudulent applications.
The IG recommended SBA update its operating procedure and review the three businesses for de-certification. SBA said it plans to issue proposed decertification notices to the firms by Nov. 29.