D.C. Tax Scam Mastermind Expanded Existing Ploy

By Del Quentin Wilber
Washington Post Staff Writer
Wednesday, September 17, 2008

The woman who masterminded the biggest embezzlement in D.C. government history inherited a scam running in the city's tax office and relied on a culture of mismanagement and corruption so entrenched that she escaped notice for almost 20 years.

Harriette M. Walters learned how to steal in the mid-1980s from co-workers whose swindling ran the gamut, prosecutors revealed yesterday. They took cash and gifts from property owners in return for erasing penalties on overdue taxes, stole refund checks issued to deceased taxpayers and created phony property tax refunds with little effort or worry.

Yesterday, Walters pleaded guilty, as expected, to wire fraud, money laundering and other charges in a rip-off she designed that netted her and her co-conspirators $48.1 million. She could face 15 to 18 years in prison.

Walters, 51, spent her millions on dozens of gambling excursions to Las Vegas and Atlantic City, a 2005 family vacation to Paris and lavish spending sprees at high-end stores with a personal shopper.

She shared the money with friends and family members who helped engineer the thefts. But she also showered largesse on the people who worked in the tax office. The woman known as "Mother Harriette" doled out $1.2 million in checks and an undetermined amount of cash to her fellow employees from 2001 until her arrest last year, prosecutors disclosed.

U.S. District Judge Emmet G. Sullivan wondered why Walters was not brought to justice long ago. "It strikes me as amazing that this criminal activity can go undetected for 20 years and nobody knew she was stealing," he said. "There were no checks and balances?"

Walters, who wore a blue jail jumpsuit and spoke firmly when answering Sullivan's questions, is the 10th person to plead guilty in the scheme. Two others, including her niece, Jayrece Turnbull, and Diane Gustus, a former tax office employee, have been charged.

Yesterday evening, prosecutors filed a motion seeking to dismiss the case against Gustus, whose attorney has proclaimed her innocence since her arrest last fall.

"We are extremely pleased by the decision and we commend the U.S. attorney's office for reaching a fair and appropriate conclusion," said her attorney, A. Scott Bolden.

In pleading guilty, Walters said she wanted to "take full responsibility" for what happened. "It will give me an opportunity to get out of prison and go home and see my family," she told Sullivan. "It also gives myself a chance to repay" what was stolen.

She agreed to make restitution and has consented to the forfeiture of houses in Washington, New Jersey and the Virgin Islands, as well as items including her Mercedes, collectible Barbie dolls, crystal vases and an Oriental rug.

Sullivan accepted the plea provisionally but said he might reject it after reading a pre-sentence report written by probation authorities. He said he did not believe the sentence of 15 to 18 years was enough for "the staggering loss."

District officials expressed shock at the new disclosures.

"If this goes back that long and she inherited the business, could there be others who are possibly exploiting us in other ways? We just don't know," said D.C. Council Chairman Vincent C. Gray (D). "The other question, given how long it went on, is if there is just an incredible culture of secrecy or whether there was just such poor supervision that people could have done what they were doing."

Mayor Adrian M. Fenty (D) -- one of four mayors to lead the city while the scam went on -- issued a statement last night saying: "This scandal was a complete and utter breach of the public's trust. Walters's guilty plea is the first step in rectifying this horrible crime against the District."

Assistant U.S. Attorney Timothy G. Lynch said in court that Walters "was the leader of a sophisticated and ongoing conspiracy." She outlined her role in the fraud in a series of debriefings that began in February, three months after her arrest.

Prosecutors used her statements and other evidence to compile a 114-page "statement of the offense." In it, Lynch and other prosecutors wrote that Walters noticed "improprieties in her division" within a few years of joining the office in 1981. She saw other employees routinely receive fruit baskets, gifts and cash if they waived interest or penalties on property tax bills of large institutions.

"Holiday cards often contained cash in amounts ranging from $150 to $300," prosecutors wrote. One employee, identified only as "Participant Five," taught Walters how to remove interest and penalties to entice taxpayers to give District workers gifts in exchange, the prosecutors wrote.

"Participant Five" also tutored Walters in how to obtain funds from checks written to deceased taxpayers that were returned in the mail and taught Walters how to create a fraudulent tax refund check, prosecutors said. That lesson set in motion the scam that Walters seemingly perfected on her own soon after, according to the "statement of the offense," which Walters signed.

The process was simple: Walters created a package of materials designed to prove that a taxpayer was entitled to a refund, cutting and pasting documents to get the money moving. After the tax refund was approved, she erased the name of the taxpayer and inserted the name of the company or person she wanted to receive the check, prosecutors wrote.

Although the mechanics changed over time, prosecutors wrote that "the basic method remained largely the same." Over the next 18 years, Walters would issue more than 230 fraudulent refund checks, embezzling $48.1 million from the District government. In 2001 -- a year in which she stole more than $3.5 million -- she became a manager in the office.

Prosecutors wrote that there were ample opportunities for someone to catch on to the scam if officials had been looking.

Walters forged canceled checks -- which she used to support her claims for fraudulent tax refunds -- by pasting mailing labels over the payee name on the check. But the labels didn't match the checks' background and were attached at angles, prosecutors wrote. Walters also used fake property identifier numbers in many cases to conceal what she was doing.

The documents were also filled with misspellings of the names of companies and individuals who were supposed to receive the fraudulent refunds, prosecutors wrote.

Tax office employees never examined the documents, simply corrected spelling and grammatical errors and sending the checks on their way, prosecutors disclosed. At one point, an outside auditor examined one of her fraudulent checks and vouchers but didn't catch on to the scam, prosecutors wrote.

Starting in 1989, Walters issued small checks to friends, including one she met while taking classes at the University of the District of Columbia and another she met when she was working as a cook at a carryout restaurant in Northwest Washington in the late 1970s.

Within a few years, Walters realized that she could write far bigger checks to businesses and enlisted the help of the owner of a Southwest Washington hair salon. By 1991, with the hair salon owner's help, Walters cut her first big check for $37,639, prosecutors wrote.

In 2000, Walters obtained the help of Walter Jones, a Bank of America branch manager, who often cashed the checks, the statement of offenses said. Walters also began enlisting relatives, including her brother, a nephew and a niece, who created corporations that received stolen funds, the document stated.

Walters used code words to alert the various co-conspirators that she was about to issue a fraudulent check and then told them "the package was ready" when it was processed, the statement added.

At the scam's peak in 2004, Walters issued 26 checks worth $8.6 million. In 2007, she issued 17 checks for $4.8 million, prosecutors wrote.

Besides 45 gambling trips to Las Vegas and Atlantic City, Walters charged more than $2.3 million on credit cards during shopping sprees at such high-end stores as Nordstrom and Neiman Marcus, where she had a personal shopper, prosecutors said.

The scheme began to unravel when Jones lost his job in February 2007. Bank officials discovered that he had been making large withdrawals from Jayrece Turnbull's account when she wasn't present, prosecutors wrote.

Bank officials also learned that Jones received $145,000 from Turnbull, and he was fired for accepting that gift, prosecutors said.

Walters tried to deal with the manager's ouster in several ways, prosecutors wrote. She expanded the group of people involved in the scheme, and she decreased the refund check amounts, in an apparent effort to avoid detection by bank employees.

But the scheme was uncovered in July 2007 by a SunTrust Bank employee who questioned a large deposit made by Turnbull.

Walters tried to trick the bank into accepting the check by forging two tax office documents and having a friend doctor a third on a computer, prosecutors wrote. After a back-and-forth between Turnbull and the bank, Turnbull even had a lawyer write a letter to the bank demanding that it deposit the check.

"You have no legal reason to continue to refuse to release the funds you are holding in Ms. Turnbull's account," wrote the lawyer, who was not identified in the court papers.

SunTrust didn't budge and alerted the FBI to the scheme.

Staff writers Dan Keating and David Nakamura contributed to this report.

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