By Carol D. Leonnig, Clarence Williams and David Nakamura
Washington Post Staff Writers
Thursday, November 8, 2007
Two mid-level D.C. government employees used phony paperwork to collect more than $16 million from illegal tax refunds, avoiding detection for at least three years while issuing more than 40 checks cashed by friends and family members in on the scam, prosecutors said yesterday.
By day, Harriette Walters and Diane Gustus worked at the District's Office of Tax and Revenue. In their free time, prosecutors said, they worked with others to raid the city's treasury to stock up on luxury items including fancy cars, homes, furs, precious jewelry, designer handbags and clothing. Walters alone spent more than $1.4 million at Neiman Marcus, according to charging papers.
Authorities called it the largest theft ever uncovered in local government in the Washington area. Four top officials in the tax office resigned yesterday amid criticism that they did not spot what was going on. About $4 million of the money has been found, authorities said.
Walters, a 25-year D.C. employee, was a mid-level manager in charge of property tax refunds, with a salary of $81,000 a year. Gustus, a tax specialist, was paid about $55,000. Both were arrested yesterday and jailed overnight pending appearances today at U.S. District Court in Washington.
A bank employee raised questions this summer, refusing to cash a $410,000 refund check and triggering a federal investigation. Raids yesterday, conducted by at least 100 law enforcement officials, turned up a $160,000 Bentley in the garage of Walters's brother Richard Walters and designer purses and shoes bearing the labels of Chanel, Louis Vuitton and Hermes at Harriette Walters's home, law enforcement officials said. Authorities also found records tying Walters to the purchase of a $26,000 handbag, but the purse itself did not turn up.
Box loads of records also were carted from the D.C. tax office on North Capitol Street NE.
Three people close to Walters are charged with providing phony company accounts where the refund checks could be deposited -- and laundered. They are her niece Jayrece Turnbull; Richard Walters; and Turnbull's friend Connie Alexander, all of Bowie. Richard Walters and Alexander were released on bond, and Turnbull is jailed pending a court hearing.
Authorities say they have evidence of doctored refunds dating to 2004, but some law enforcement sources said yesterday that the total could grow and that the activity might have started as early as 2000.
U.S. Attorneys Jeffrey A. Taylor of the District and Rod J. Rosenstein of Maryland announced the criminal charges and arrests yesterday at a news conference in the District, saying they wanted to stop the harm as soon as they could after gathering sufficient evidence.
"The extent of this scheme is very broad and is still under investigation," Taylor said. "It may date back much further."
The news had immediate repercussions. Chief Financial Officer Natwar M. Gandhi asked for the resignations at the tax office, starting with Sherryl Hobbs Newman, its director since 2005. Her deputy director, Matthew Braman; the director of real property tax administration, Martin A. Skolnik; and chief assessor Thomas Branham also left. None was implicated in the fraud, but officials said they left because of their failure to catch it.
The most frequent question asked in the city, particularly of Gandhi, was how such a large theft could go undetected for years inside the office in charge of safeguarding taxpayers' money. Gandhi has championed multimillion-dollar investments in audits citywide and a computer-tracking system specifically for the Office of Tax and Revenue to spot financial irregularities and fraud.
The average amount for the refund checks generated in the scam was a staggering $388,000, and the losses amounted to several million a year, authorities said. The average alone would constitute an extremely high tax bill, not to speak of a refund, for all but the largest D.C. property owners. In all of fiscal 2007, for example, the office refunded a total of $20.7 million in real property taxes.
Gandhi, who came to the news conference as a spectator but was questioned repeatedly by reporters, emphasized that the loss of $16 million is "immaterial" to the overall financial stability of the District. He called the scam's apparent success a "major management failure" at the tax office and said he would ask the Internal Revenue Service and D.C. inspector general to look into operations.
Still, he said, "The most sophisticated audits won't be able to find this kind of corruption."
Mayor Adrian M. Fenty (D), who took office in January, said the charges go "to the heart" of the relationship of trust that city government must maintain with taxpayers.
"If these allegations are true . . . this represents one of the most serious breaches of the public trust," Fenty said.
Walters, 51, whose extended family is from the Virgin Islands, had been the manager of the D.C. Real Property Tax Administration Adjustments Unit since 2004. She had worked in the D.C. government since 1981. Gustus, 54, was a program specialist in the office. Sources said the women had a reputation for lavishing their co-workers with gifts from time to time.
At least five other tax and revenue employees are implicated as playing a role in preparing or approving fake refunds, but they were not charged, according to court records. They include a customer service specialist, described as "K.F."; a real property program specialist, "C.W."; a tax sales manager, "C.H."; and two accounting technicians, "G.R." and "S.J." In court papers, authorities said that "K.F." got $10,000 and that "C.W." got $8,000 after one phony refund, totaling $350,000, was cashed in 2005.
Some of these unidentified co-conspirators acknowledged to prosecutors that they received money and gifts, authorities said, and law enforcement sources said investigators hope to win their cooperation in the case.
Meanwhile, an additional 20 employees of the tax office are being interviewed by city officials, and the Fenty administration is holding an "all-hands" meeting for employees of the Office of Tax and Revenue at the Washington Convention Center today.
A longtime employee of the tax office said yesterday that it was difficult for everyone there. "It was like close friends had died suddenly," said the employee, who spoke on the condition of anonymity because of the sensitivity of the case. "This is such a shock. A lot of folks have worked together for a long time. It's always a shock when you find someone you work with is a crook."
Attempts to reach family members of Walters and Gustus were unsuccessful. No one was at the medium-size ranch house that overlooks Rock Creek Park in Northwest Washington that authorities listed as Walters's address. A man who answered the front door at a house listed as Gustus's address in Clinton would not comment on the case. The house, a modest split-level, is in a working-class neighborhood near Surratts Road.
A charging affidavit does not say who came up with the plan. Authorities said Walters and Gustus found ways to prepare and approve the false property tax refunds, as if people's assessment had been unfairly set too high or they had overpaid their taxes.
The refund checks would be made out to sham companies controlled by Walters's relatives and friends or to legitimate companies or law firms but with Walters's friends listed as the purported co-payees. The scheme was able to thrive, according to the affidavit, because tax employees went along with approving documentation that was fake and Walters had the authority to get the payments approved.
Some of the cash was sent to a money exchange institution in the Dominican Republic, authorities said. In the United States, Walters and Turnbull had help from an assistant manager at a Bank of America branch in Baltimore, the affidavit says. That person, who was not charged, was questioned this year and subsequently fired.
The plot began to unravel in July, after an employee at a SunTrust branch in Bowie raised concerns.
The scandal marks another embarrassment for the city. Former Washington Teachers' Union president Barbara Bullock is serving a nine-year prison sentence for her part in bilking the union of almost $5 million. An auction of her $800,000 in designer purses and other goods, seized by the FBI, is set for this weekend.
Staff writers Paul Duggan, Hamil R. Harris, Nikita Stewart and Yolanda Woodlee and staff researchers Dan Keating and Rena Kirsch contributed to this report.