Two city tax officials were arrested last Wednesday for allegedly stealing tens of millions of dollars in what law enforcement officials called the largest fraud in District of Columbia history. The full extent of the scam is not yet known, but it has already resulted in the resignation of four top officials in the Office of Tax and Revenue.
Harriette Walters, manager of the department in charge of tax refunds, and her colleague Diane Gustus are accused of preparing at least 58 fraudulent tax refund checks for non-existent companies whose bank accounts were controlled by family members and friends, according to an affidavit submitted by FBI agent Andrew Sekela. The money was used to buy houses, cars, designer bags and clothing. Since 2000, Walters has spent more than $1.4 million at Neiman Marcus alone.
“If these allegations are true … this represents one of the most serious breaches of public trust,” Mayor Adrian Fenty (D) said in a news conference the day of the arrests.
Walters and Gustus’ department, the Real Property Tax Administration Adjustments Unit, grants refunds to taxpayers who have paid more than is owed.
The scam began to unravel in June when a teller at the SunTrust Bank branch in Bowie, Md. voiced suspicions about a $410,000 check that was made out to the fictitious “First American Home” company.
It is still unclear how much was stolen or when the scam began. After an examination of city tax records, The Examiner claims to have found questionable checks dating back to July 1999, when D.C. Chief Financial Officer Natwar Gandhi was the director of the Office of Tax and Revenue. The Washington Post also analyzed city records and claims that the amount stolen could be as high as $31.7 million.
U.S. Attorney for Maryland Rod Rosenstein, who worked on the investigation, said the total could be even higher, but would not give an estimate.
“We have reason to believe it [the scam] has been in operation for quite some time,” Rosenstein said. “We have to go back and examine every check that’s been written by that office.”
Gandhi said in a November 7 news conference that the sum stolen was insignificant in terms of the overall D.C. economy, and that no audit would have been able to detect the scam.
Following the arrests, four high-ranking officials in the Office of Tax and Revenue, including Director Sherryl Hobbs Newman, resigned at Gandhi’s request. Although they were not implicated in the investigation, Gandhi said they should have been more proactive and failed to catch the fraud.
Gandhi placed two more employees in the real property assessment division on administrative leave last Friday. The affidavit implicates, but does not charge, five other OTR employees for helping in the preparation and approval of the fraudulent tax refunds.
Rosenstein hinted that more arrests would follow as authorities gathered more evidence.
“The investigation is continuing,” Rosenstein said. “We only charged people we had sufficient evidence to arrest.”
While Gandhi and OTR became involved with the investigation in August, Fenty and D.C. Council members were only told about it the morning of the arrests. Rosenstein said this was standard FBI procedure.
“When we conduct criminal investigations, we don’t alert politicians until the situation is public. If you allow anyone else to know, you allow for the possibility of leaks,” Rosenstein said.
Fenty continues to express confidence in Ghandi based on his success as CFO. During his tenure Gandhi has balanced the city budgets, raised bond ratings and turned $500 million in debt into hundred million dollar surpluses.
Councilman Jack Evans (D-Ward 2), who represents Georgetown and chairs the Finance and Revenue Committee, and Council Chairman Vincent Gray (D-Ward 7) will conduct oversight hearings into the management and oversight of the OTR today.
“We want to find out why this happened and what needs to be done to make sure this doesn’t happen in the future,” Gray’s Communication Director Denise Reed said.