By Carol D. Leonnig and Clarence Williams
Washington Post Staff Writers
Sunday, November 11, 2007
They built their case in the middle of the night, being extra careful to put papers back exactly where they found them so that desks looked untouched when city workers returned in the morning.
Federal law enforcement authorities thought that they could not risk tipping off the D.C. Office of Tax and Revenue that it was the target in what is being called the biggest corruption case in the city government's history. So explosive was the probe that no one told even Mayor Adrian M. Fenty (D) until the arrests Wednesday.
The investigation began in late July, when an employee at a SunTrust branch inside a Bowie Safeway supermarket reported suspicions about a customer who tried to move $200,000 to another bank. By Labor Day weekend, the probe centered on the tax office and Harriette Walters, a mid-level employee who was signing off on bogus property tax refunds, authorities said.
Investigators said they found evidence that millions were being lost as Walters and another employee, Diane Gustus, signed off on huge refund checks, using sham paperwork and phony companies, that enriched themselves and others.
Speed became as important as secrecy as authorities combed through records in the North Capitol Street office. Among other items, authorities found evidence of two refund checks improperly issued on a single day -- May 23 -- totaling more than $950,000. They became consumed by the thought that millions more could be lost if they didn't act quickly.
One investigator said the team found it painful to count how much the city had lost. "We had to stop the hemorrhaging," said the investigator, who, like several others on the case, spoke on the condition of anonymity because of the sensitivity of the probe.
There was another fear: that the suspects might flee with the money. So, long before they knew the full extent of the scam or everyone involved, the agents decided to act.
Based on interviews with law enforcement officials and documents filed by prosecutors, a more complete picture is emerging into how the case moved so quickly from the bank employee's tip to Wednesday's pre-dawn arrests of Walters, Gustus and three others accused of wrongdoing. Since those arrests, authorities said they have reviewed additional records and determined that the loss figures "may go substantially higher" than $20 million. Of that, $4 million has been found so far.
Typically, a fraud investigation of this size would take more than a year, as agents surreptitiously developed leads and found cooperators willing to identify suspects and confirm details of the plot. Investigators might start, for example, with lower-level workers and work their way up.
"We got to a point we believed we had reasonably found a good portion of the [stolen] money, and we couldn't wait any longer," said U.S. Attorney Jeffrey A. Taylor in Washington. "There is always a risk that if you wait too long, there will be nothing left."
The SunTrust episode set everything in motion, according to a court affidavit prepared by the FBI. The affidavit describes it like this:
Gustus prepared a $410,000 refund check to a business listed as First American Home, purportedly for an overpayment of taxes on a downtown property. Walters signed off on the refund, and the money was deposited June 18 into a SunTrust account for First American Home, controlled by Walters's niece, Jayrece Turnbull of Bowie.
On June 25, Turnbull wrote a $200,000 check from the First American Home account and tried to deposit it into another account she controlled at Bank of America, the affidavit says. Two days later, the SunTrust employee balked at the transfer, questioning whether Turnbull had the right to make the transaction. A meeting was set up for July 9 with her at the bank.
The SunTrust employee, whose name has not been released, asked Turnbull for proof that she was an authorized agent of First American Home. Turnbull became verbally abusive, the employee reported, and accused the bank of breaking the law by refusing to make the transfer.
On July 10, the bank asked Turnbull to provide documents, such as articles of incorporation, to show that she was an officer of the company. The next day, Turnbull went to Prince George's County government offices and filed a trade name application for First American Home. When SunTrust received that paperwork from Turnbull, bank officials noticed it was filed after they started asking questions -- and well after the $410,000 check was issued.
Turnbull didn't get the money, and soon a fraud prosecutor in the U.S. attorney's Maryland office and an FBI agent in Calverton were digging into her activities. They found that the address given for First American Home in the tax refund paperwork belonged to a different company. They began looking into Turnbull's other banking habits and found more large checks.
By late August, authorities saw that Turnbull's checks were coming from a D.C. property tax assessment office where her aunt, Walters, was a manager -- and that some of Turnbull's deposits were being transferred to the bank accounts of Walters and others.
Investigators now suspected a much larger fraud was brewing inside the tax agency, part of the bureaucracy under Natwar M. Gandhi, the District's chief financial officer.
On Aug. 30, U.S. Attorney Rod J. Rosenstein, who oversees federal prosecutors in Maryland, summoned Gandhi's auditors to meet with him and the FBI. Federal investigators told the city officials what they had found.
Authorities wanted cooperation but also help in keeping the probe secret. Investigators needed city officials to explain how the refund operation worked, and they also wanted copies of internal records without any tax employees, who were all potential suspects at that point, finding out, Rosenstein explained.
Rosenstein concluded that the real action in the case was centered in Washington, and he handed off much of the probe to Taylor, the U.S. attorney in Washington, in early September. Both offices continued to develop leads as the probe expanded significantly.
One "aha" moment came when investigators saw that menial service contractors that no one had heard of, including Chappa Home Services and Legna Home Services, were getting multiple and sizable property tax refund checks of $200,000 to $540,000 in the same year. Thirty such checks were issued over four years, authorities said. Such refunds seemed illogical for all but the city's largest commercial landowners.
"How do housecleaning companies get multiple refunds?" one investigator asked.
A quick look at the second page of the tax refund applications made it fairly easy to confirm them as frauds, authorities said. Often, the company listed as being owed a refund had no connection to the company names listed in supporting documents. Conflicting information appeared throughout the same application. And copies of the same unrelated checks were repeatedly used in multiple applications to show that different companies had overpaid their taxes.
The magnitude of the case became apparent: The District issued $20.7 million in property tax refunds in fiscal 2007, and the amount going to Walters and her cohorts might amount to as much as 20 percent of that, authorities said.
The records showed that Walters and others were picking up the pace in recent months, authorities said. The pattern seemed the same: Gustus, they said, typically generated the refund paperwork, Walters signed it, others deposited the money and the illicit proceeds were passed along. Other city workers also signed paperwork, and investigators said they wondered if they, too, were involved.
While one team of agents went over tax materials, another pored over bank records, trying to trace money to real estate, big-dollar purchases and bank accounts. Authorities said they thought some of the money went to pay for Walters's house in the 6800 block of Oregon Avenue NW and other proceeds went toward properties in Bridgewater and Washington, N.J. But agents were nervous about how little cash they were finding.
Meanwhile, Gandhi and his auditors were urging both U.S. attorney's offices to make arrests as soon as possible.
Prosecutors needed to gather more facts but had their own sense of urgency. As Rosenstein explained, "We didn't want to be in a position at the end of extending the investigation and learning later that millions more had been lost while we were investigating."
For fear of tipping off the others, investigators didn't interview the other five lower-level Tax and Revenue employees who the records showed had helped approve refunds that were patently bogus. Instead, they mobilized for action.
On Oct. 23, an agent from an FBI public corruption squad put out word that he would need help in searches involving a probe into the Office of the Chief Financial Officer, said Debbie Weierman, spokeswoman for the FBI. The date was set: Wednesday, Nov. 7.
A day before the raids, FBI agents from the Washington office met with assistant U.S. attorneys for about an hour to go over details of raids and the plans to arrest Walters, Gustus and the others -- Richard Walters, Walters's brother; Turnbull, and Turnbull's friend, Connie Alexander.
Prosecutors got permission from a federal judge to begin the raids at 5 a.m. instead of 6 a.m. to increase the chances that the suspects would be caught off guard.
At 4:30 a.m. Wednesday, about 120 agents from the Washington and Baltimore field offices arrived at staging areas near the suspects' homes and city offices. They marched up to the doors 30 minutes later, joined by FBI computer forensic experts and investigators from the Internal Revenue Service and D.C. inspector general's office.
Now, with the suspects arrested on fraud and other charges, authorities can move more methodically in the case. The day of the raids, they assessed the loss to the city at $16 million. That figure has grown, and, as Taylor said, "we're still counting."
Staff researcher Meg Smith and staff writers Allan Lengel and David Nakamura contributed to this report.
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