Epic Scam At D.C. Tax Office

Posted by Mark Brousseau

An interesting article from today's Washington Post:


Tab in Scam At Tax Office In D.C. Nears $50 Million

By Carol D. LeonnigWashington Post Staff WriterWednesday, February 20, 2008; A01

Federal authorities think that nearly $50 million was stolen in an embezzlement scheme run out of the D.C. tax office, more than double the amount they had previously uncovered, four sources close to the investigation said.

The corruption at the D.C. Office of Tax and Revenue went undetected much longer than initially thought, the sources said, extending back almost 20 years. In addition to tracking the missing money, authorities are looking into gifts suspected of being provided to co-workers and others by the woman accused of leading the scam, former tax office manager Harriette Walters.

The scheme is the largest corruption case in the city's history. Witnesses have told investigators that Walters, who is accused of issuing larger and larger bogus tax refund checks over the years, lavishly spread the wealth, the sources said.

Security guards got cash, office mates got free meals and virtually anyone who made a request got something, said the sources, who spoke on condition of anonymity because the investigation is ongoing.

Two of the sources, who are familiar with the accounts of witnesses, said the gifts included $35,000 to a co-worker who wanted to remodel her house, $25,000 in cash and luxury gifts to an assistant whom Walters began mentoring and $15,000 each to help two co-workers' daughters pay for renovations and credit card bills.

Walters repeatedly lent huge chunks of cash to colleagues with no requests for repayment, the two sources quoted witnesses as saying. And, said the sources, citing witnesses, Walters paid for her goddaughter's college tuition and a New Jersey home for $855,000. The goddaughter's attorney declined to comment on the case.

Since Walters was arrested in November, authorities have issued subpoenas for financial records, interviewed dozens of witnesses and built a more complete picture of what happened, the sources said.

Prosecutors told a judge soon after Walters was arrested that they had confirmed she had helped steal $20 million in fraudulent refund checks since 2004. But the estimated losses have been growing as federal investigators have delved further into records at the Office of Tax and Revenue and found dozens more fraudulent checks made out to city employees. Sources said that the total is nearing $50 million.

In early December, a Washington Post analysis found that $44.3 million in suspicious property tax refund checks had been issued by the office from 1999 to 2007, the period for which computerized city records were available. The Post identified 160 checks that lacked court orders required for legitimate large refunds and were made out to companies that were either fictitious or were not due a tax refund.

The higher the official theft total, the greater the potential penalty faced by Walters and the nine other people charged in the case.

Authorities are scrutinizing the activities of at least 40 people who have not been charged and are trying to determine whether they received things of value or were involved in financial transactions with those accused of being conspirators, according to interviews and documents reviewed by The Post. Those people are largely city employees who signed off on refund paperwork and others who received the gifts in question.

Witnesses have told authorities in recent weeks that Walters and a small cadre of friends began issuing bogus refund checks for modest amounts and erasing property tax bills as early as 1989.

They told authorities that Walters told them that, by manipulating the manual, paper-based records of the office, they could prevent supervisors and computer tracking systems from checking behind them, the sources said.

Walters, 51, a 25-year tax office employee, remains jailed without bond on charges that she and others generated fraudulent property tax refund checks and used doctored paperwork and front companies to cash them. Her attorney, Steve Tabackman, declined to discuss the case.

"In the midst of an ongoing investigation, we're simply not in a position right now to comment on The Post's reporting," Tabackman said.

Only one other tax office employee has been charged in the case: Diane Gustus, 54, a tax specialist who worked under Walters. Gustus's attorney, A. Scott Bolden, said he has been independently researching who received things of value from Walters.

"The gift-giving and cash-giving was so prevalent, it should be embarrassing to the D.C. government that this culture was allowed to exist and expand," Bolden said.

Bolden confirmed that the Gustus family received cash and valuable gifts from Walters. He said that his clients weren't aware that the money and gifts were tainted and that Walters told co-workers she inherited considerable wealth from family in the Virgin Islands.

"The government says they got things," Bolden said. "My response is: Who didn't?"

The new details raise more questions about the level of supervision in the Office of the Chief Financial Officer, which failed to detect the fraud in the largest agency under its umbrella. In the past decade, mostly under the leadership of Natwar M. Gandhi, the office has spent more than $100 million on a new computer system for the tax office and at least $1 million a year on external city audits.

The potential penalties in the case are growing, even as lawyers say that some defendants are in plea negotiations. Those charged in a conspiracy to steal $20 million to $50 million would face an estimated 15 to 20 years in prison under federal sentencing guidelines. Those charged with helping to steal $50 million or more could face as much as 30 years.

Federal prosecutors in the District and Maryland, where many of the banking transactions took place, have said they are determined to get back as much of the missing money as possible.
Court records show that prosecutors are also trying to determine which city employees knew or should have known that they were close to a massive crime in progress.

William Sullivan, a criminal defense lawyer and former prosecutor, predicted that authorities will try to criminally charge some gift recipients under the legal theory of "willful blindness." In those cases, Sullivan said, prosecutors must show evidence that the defendants intentionally ignored "red flags" that would make a reasonable person suspect a crime.

Based on witness accounts, there were signs of trouble. Walters took young women in her office, even those she knew only casually, on four-figure shopping sprees at Saks and Neiman Marcus and picked up the tab, according to information provided to authorities. Witnesses have told investigators that Walters also gave hundreds of dollars, over time, to security guards outside the tax agency's North Capitol Street office, the sources familiar with the probe said.

It was not unusual, sources said, for Walters to give a wad of cash to her assistant to buy breakfast or lunch for her 15-member office -- two or three times a week.

Some of the missing city money went toward buying property in the Washington area, New Jersey and the Caribbean, prosecutors have said, as well as for luxury cars, Louis Vuitton handbags and gambling trips to Atlantic City and Las Vegas.

The houses and cars can be sold by the government to reclaim some of the money for taxpayers, and the designer goods will probably bring some fraction of their original purchase prices at public auction. Much of the money is gone forever, investigators said.

Alethia Grooms, a former D.C. government employee who is among those charged in the case, has told authorities about what might be the beginnings of the scheme, her attorney, Kevin McCants, confirmed.

As early as 1990, McCants said, Walters told Grooms and a few other friends about how they could get free city money through bogus tax refund checks. Walters said there was no backup computer system to notice the manipulated checks, McCants said.

Grooms got a check for a little more than $4,000 in 1990, records show. McCants said she is "very remorseful" but didn't continue taking city money or know about the ongoing scam until Walters contacted her in 2003 trying to cash another refund check.

"She was dumbfounded that Harriette had been doing it on a continuing basis all this time," McCants said. "She thought this was done a couple of times and then it was over. But then she learned it had been going on uninterrupted, and the stakes had grown obviously much higher."

Staff writer Paul Duggan, database editor Dan Keating and staff researcher Meg Smith contributed to this report.