By Carol D. Leonnig and David Nakamura
Washington Post Staff Writers
Friday, November 9, 2007
A massive D.C. public theft case grew overnight from $16 million to $20 million as federal officials tracked down more than a dozen additional phony tax refund checks that they said flowed out of government coffers and into the hands of two D.C. tax employees and their co-conspirators.
As federal agents announced yesterday that the scope of the fraud in the D.C. Office of Tax and Revenue was wider, they also accused tax assessment manager Harriette Walters and her friends of running the scam since 2001 -- twice as long as first thought.
A series of raids Wednesday and newly found bank records revealed that Walters, co-worker Diane Gustus and Walters's relatives and friends had fabricated 58 property tax refund checks, not 42, as originally announced Wednesday, authorities said.
In newly unsealed court papers, federal prosecutors alleged that Walters, who was paid a government salary of $81,000 this year, had deposited $8 million in her bank account over the course of the scam.
Prosecutors also moved in court yesterday to seize three homes worth $2.3 million, which they said Walters bought with stolen money. A rambler in Northwest Washington abutting Rock Creek Park is valued at $800,000. Two homes in New Jersey, in Bridgewater and Washington, were purchased within the last year with cash and have no mortgages, according to court papers.
Also yesterday, Rep. Thomas M. Davis III (R-Va.) called for the House Oversight and Government Reform Committee, of which he is the ranking minority member, to investigate the District government's failure to detect the theft.
Walters, 51, and Gustus, 54, who were arrested Wednesday, appeared in federal court in Washington yesterday, each charged with 10 felony counts of conspiracy and fraud. A magistrate judge agreed with prosecutors' request to temporarily hold Walters as a flight risk. She looked wide-eyed and shocked at the court spectators and reporters attending the hearing.
The judge released Gustus and ordered that she wear an electronic monitoring device, refrain from making any purchases larger than $5,000 and avoid contact with anyone in her old office, known as the Real Property Tax Assessment Adjustment unit.
One of the biggest questions, a day after the massive scheme was announced by federal authorities, was how Walters, Gustus and others allegedly could have gotten away with such a high-volume theft for so long. The fraud was never noticed by city officials, though Walters's office is part of Chief Financial Officer Natwar M. Gandhi's office.
The FBI started following the trail of checks after a bank employee questioned a D.C. refund check for a corporation that the account holder could not prove existed. According to court papers, Walters, accused of being the ringleader in the scam, was able to make millions of dollars in phony property tax refunds look legitimate -- at least at a cursory glance.
The 25-year veteran of city government had two key advantages, according to law enforcement authorities and city sources. She had the cooperation of fellow office employees who, having been showered with gifts, were willing to sign off on paperwork they either knew or suspected was bogus.
In addition, sources said, the city allowed Walters to operate with virtually no oversight. Her check writing was not monitored, and auditors never examined why the city's property tax refunds were steadily rising.
"At some point," one investigator said, "Harriette realized she was the last eyeball on these checks."
In her D.C. government office, where large corporations often appealed their tax assessments for high-rise buildings, Walters was the go-to person in charge of authorizing tax refunds when property owners persuaded the city to lower their assessments, officials said.
Sometimes those refund checks were for as little as $10,000. But checks for several hundred thousand dollars were not outside the norm for big commercial property owners, according to former tax officials. In unusual cases, in which an assessment was long-debated, the refund could rise as high as $1 million.
Authorities said Walters and her friends began small, preparing and authorizing refund applications for sham companies with bank accounts controlled by Walters's brother Richard Walters; her niece Jayrece Turnbull; her nephew, identified as R.W.; and her friend Connie Alexander. Turnbull, Alexander and Richard Walters were arrested and charged in the fraud Wednesday.
In many applications, the supporting material was identical to documentation provided in previous sham applications, and someone reading carefully would have easily spotted them as likely frauds, investigators said.
Under tax office policy, four people in Walters's unit had to sign off on refund applications before the city would issue a computer-generated check. Investigators say in affidavits that Gustus, along with five tax accounting technicians and clerks who have not been charged, signed off on the paperwork more than four dozen times. In some cases, investigators said, the employees acknowledge that they received gifts and sometimes money from Walters and that they never looked very closely at the applications.
"Incompetence may be a defense for some," a law enforcement source said. "They may not have known what was happening, because they just didn't look."
Walters's attorney, Peter Zeidenberg, declined to comment on the case.
The failure to detect such a large scam has raised numerous questions about the stewardship of Gandhi, often lauded for his careful monitoring of city funds. He addressed more than 600 tax office employees at a meeting yesterday at the Walter E. Washington Convention Center.
"I know you're angry. I'm angry, too," Gandhi said. "Some of us knew this and did not say a word. . . . I call on you this morning: We cannot allow such management failures again."
Gandhi, who learned about the investigation from authorities two months ago, said that ever since, "I've been sick to my stomach."
Mayor Adrian M. Fenty (D) learned of the investigation in a phone call from Gandhi at 6 a.m. Wednesday. Federal authorities said the mayor could not be told of the ongoing investigation because of court rules to protect the secrecy of grand jury investigations.
FBI agents continued interviewing tax office employees yesterday and cataloguing hundreds of items of evidence seized at the homes and workplaces of those accused. Investigators found more than 100 pieces of jewelry at Walters's home, including diamond rings and diamond, sapphire or ruby necklaces.
At the morning gathering at the Convention Center, Ben Lorigo -- whom Gandhi named acting director of the tax and revenue office after Sherryl Hobbs Newman resigned -- told employees: "The checks and balances have failed. Management has to be responsible. There was a very serious breakdown in internal control. I mean very serious."
In an interview, Lorigo said he is not certain whether Walters was required to get clearance from a superior before issuing refund checks. From now on, he said, all refunds of $10,000 or more will require his clearance. Because of glitches in the tax office's new $150 million computerized tracking system, the property tax office still processed refunds manually.
Lorigo has been in charge of running audits and investigations of various departments that report to Gandhi, but he acknowledged that in his five years on the job, he never scrutinized the real property tax division.
Asked why he didn't, Lorigo said: "That is a question I have pondered in my own mind."
Staff writers Paul Duggan, Nikita Stewart, Clarence Williams and Yolanda Woodlee and researcher Meg Smith contributed to this report.