Tuesday, December 16, 2008

The case of Harriette Walters and the DC Property Tax Office
ACCT 744 – Fall 2008 @ George Mason University
By: Mulham Shbeib

Employee Fraud Case Overview

Almost one year ago, the Washington DC Metropolitan region was shocked to learn about the embezzlement case involving public servant employees and their local government. This embezzlement was led, orchestrated, and masterminded by Ms. Harriette Walters (hereunto referred as HW). As a mid level manager of the DC Real Property Tax Administration Adjustment Unit, she oversaw almost $48 million of fraudulent property tax refunds[1]. As manager, “HW” would sign off on refund checks to sham companies or individuals, and then in turn use the proceeds to benefit herself and her accomplices. These bogus checks, which were issued between 1989 and 2007, eventually led to twelve arrests. Two of the twelve arrested are blood relatives to “HW” and include her brother and niece. Among the more notable accomplices in this breach of public trust, was a bank employee. The bank employee was aware of the fraudulent checks and allowed the deposits to occur. Approximately half of the individuals involved in this fraud have already been sentenced, while the remaining are scheduled to be sentenced in early 2009. Prison sentences have ranged and are estimated to range anywhere from one year to twenty years, depending on involvement, charges, and cooperation.

As will be discussed throughout this paper, various “red flags” were present that should have alerted officials to the activities of “HW” and her accomplices. Furthermore, a failure of the implementation of solid internal controls also contributed to the embezzlement of DC funds. “HW” was a twenty six year employee of the District tax office, who was respected by her supervisors, subordinates, friends, and more. Her involvement and subsequent arrest startled many and enforces the notion that fraud is prevalent in society, and can occur to any entity, regardless of safeguards, size, or stature.

Today, “HW” remains jailed without bond, awaiting sentencing in March 2009. She has been incarcerated since November 2007, during which time she was placed on suicide watch. Although “HW” is 52 years old, she chose to plead guilty prior to trial, with the hope that she will be able to one day reunite with her family in the Caribbean.

Fraud Symptoms

When reviewing the facts associated with this case, it is astonishing that the embezzlement went undetected for almost twenty years. Fraud indicators were rampant throughout this embezzlement. “HW” had an annual salary of $81,000 per year, yet her personal spending habits on employees and herself implied she was earning a significantly higher salary based on her extravagant activities. Consider the following facts from the case[2]:

1. “HW” provided large cash gifts to four separate employees in the amount of $35,000, $25,000, $15,000 and $15,000. These “gifts” to coworkers were intended to remodel homes, pay off credit card debt, fund higher education, and use for shopping sprees. For someone whose annual salary peaked at $81,000, these gifts could have easily been scrutinized.

2. “HW” would lend large amounts of cash to employees without any follow up regarding repayment.

3. “HW” would take employees to Neiman Marcus, SAKS, and other high end retail shopping stores. She would pick up the tab on sprees often reaching four digits.

4. “HW” often presented cash gifts in the hundreds of dollars to security guards on the DC Property Tax Agency’s premises.

5. “HW” would provide her assistant cash to purchase breakfast for her department of 15 people, almost two or three times per week.

In reviewing the above items one through five, those individuals benefiting from “HW’s” generosity could have used better professional judgment, and voiced some concern over the “cash” perks levied by HW on their behalf. “HW” often used to tell people that her excess cash from two main sources:

1. Gambling winnings throughout the years
2. Inherited money from family in the Virgin Islands

In regards to analytical anomalies, the following mechanisms by either internal or external auditors may have assisted in detecting this fraud at a much earlier stage.

1. Compare the change of total property tax refunds from year to year, both in a dollar amount and a percentage amount. As evidenced by the Department of Justice[3], “HW” embezzled public funds ranging from almost $30,000 in 1989, to over $8.6 million in 2004. Assume for example that in 2002, $80 million in property tax refunds were issued, while in 2003 $120 million in property tax refunds were issued. The $40 million increase (or 50% increase) in property tax refunds would warrant additional follow up, review of documents, approvals, and more.

2. Compare the change of large property tax refunds (i.e. amounts greater than $100k), both in dollar amount and percentage amount. If for instance, in 1999, one out of every 100 refunds was over $100,000, yet in 2004, one of out every 50 refunds was over $100,000; a potential red flag would be present.

As mentioned earlier, a bank employee was one of the twelve arrested participants in this case. One analytic test that could have been conducted by his or her bank would have been as follows:

1. The bank reviews all of the deposits made by tellers. Assume for example all tellers average $1,000 per deposit and one teller is averaging $10,000 per deposit. If these averages were over a one month period and included the same amount of transactions, a potential red flag may exist on the validity and truthfulness of certain deposits. The bank could have placed more emphasis on the outlier deposits made by the teller.

From an internal control perspective, the DC property tax center has appropriate written controls. The deficiency that occurred in this particular case pertained to the implementation of these controls. “HW” was able to circumvent controls, by using her strong understanding of the system to authorize, record, and maintain custody of certain assets. Her ability to forge documents, coupled with her position of authority, allowed the fraud to go undetected. Indeed, “HW” worked to ensure her operation was well organized and difficult to trace. “HW” never issued a refund in her name, nor did she deposit a fraudulent check into her account. As the fraud evolved and grew over time, her degree of sophistication grew as well. “HW” went from originally issuing checks to friends and families names, to a more comprehensive approach, where checks were issued under the names of fictitious companies.

Data Driven Approaches

1989 6 $31,734.57
1990 11 $47,016.79
1991 10 $160,153.08
1992 1 $4,711.29
1993 5 $246,301.15
1994 20 $1,237,425.12
1995 19 $1,423,237.59
1996 3 $243,424.61
1997 1 $543,423.50
1998 2 $275,893.90
1999 7 $1,244,522.43
2000 17 $3,157,343.53
2001 19 $3,515,671.85
2002 15 $3,296,280.80
2003 19 $4,771,776.55
2004 26 $8,641,750.34
2005 21 $7,107,129.71
2006 18 $7,317,097.17
2007 17 $4,850,556.91

The above chart shows the amount of public funds embezzled on behalf of “HW” from 1989 till 2007. A few data driven techniques that could have been used to detect this embezzlement much earlier could have been as follows:

1. Auditors (whether internal or external) could have scanned the addresses of those receiving fraudulent property tax refund checks. Instances with similar or exact matches would have warranted additional follow up such as a detailed review of check approval.

2. Auditors (whether internal or external) could have scanned the names of those receiving fraudulent property tax refund checks. Instances with similar or exact name matches would have warranted additional follow up such as a detailed review of check approval. Additionally, checks that were issued to companies, rather than individuals, should have required an additional approval process. Where these companies properly incorporated, registered, and having a unique taxpayer identification number? Did these companies have legitimate operations (phone number, web site, property tax bills, etc.)?

3. Auditors could have reviewed the timing of when each fraudulent property tax refund check was issued. Where these checks issued when certain employees were on vacation or out sick? Where checks issued around the holiday season? Finally, where checks issued outside of the normal testing of auditors (i.e. outside of the year end or subsequent testing periods)?

Investigative Methods

As mentioned earlier, “HW” claims to have received her excess cash through a family inheritance in the Caribbean, as well as large gambling winnings. A few of the mechanisms to investigate this theft include the following:

1. Determine if “HW” did in actuality inherit a large sum of money from family in the Caribbean’s. Since DC was embezzled out of almost $50 million, it would behoove the city to send someone to the Caribbean’s and inquire and observe the lifestyles of “HW’s” Caribbean family. If they are living among the elite, “HW’s” claim could have some validity. If it is proven her family is among the less fortunate, the credibility of “HW’s” family inheritance is probably untrue.

2. “HW” has claimed to have won numerous amounts of money via gambling. Investigators could seek proof of these gambling winnings. Did “HW” report these gambling winnings on her 1040? Did she gamble alone or with friends? Do travel records exist to confirm these gambling expeditions took place? Furthermore, did the gambling winnings take place while “HW” was on vacation? To elaborate further, it would be worthwhile to review “HW’s” personnel file and confirm she was on vacation when she said she earned her gambling winnings.

3. Another investigative method would be to review “HW’s” work email account and personal computer. Did she mention any of her fraudulent activities to any accomplices outside of the office? Did her internet history show her visiting any websites that discuss mechanisms for circumventing fraud? This form of electronic evidence could prove HW’s willful participation in the largest embezzlement case in the history of the District of Columbia[5].

The ability of the embezzlement to remain undetected for so long, is partially attributed to “HW’s” commitment to concealing the fraud. She was able to successfully conceal by having a large amount of accomplices (almost ten), with diverse tasks. This form of collusion is often most difficult to detect, but could have been minimized if the following did not occur[6]:

1. “HW” unique forgeries allowed her to create a package of materials designed to prove that a taxpayer was entitled to a refund. She would cut and paste documents to initiate the approval process. After approval, she would erase the name of the taxpayer and insert the company or person she wanted to get the approval.

2. “HW” obtained the assistance of Mr. Walter Jones, a Bank of America branch manager. Mr. Jones would often cash the checks, knowing full well that fraudulent amounts were involved. “HW” was never involved in cashing checks at the bank. Rather her accomplices handled these transactions once the check was ready for pick up. Mr. Jones was fired from Bank of America for accepting a large gift in the amount of $145,000 from “HW” niece, Ms. Jayrece Turnbill. Following his arrest in February 2007, “HW” scheme quickly unraveled, as evidenced by her subsequent arrest a few months later.

“HW” did not have any problems converting her embezzlement funds into a lifestyle of extravagance. Documents show that “HW” spent 1.4 million at Neiman Marcus between 2001 and 2007[7]. Her checking account showed $8 million of deposits during those years as well. When agents raided her home, they found more than 100 handbags of Gucci, Louis Vuitton, and Channel. Additionally, a Bentley was parked, along with over 100 pieces of high priced jewelry, and various other high end clothing and shoes. On top of all this, titles were found to several homes, as well as a plethora of vacation receipts[8].

With current technological advancements of our society, it is very possible a simple internet search of “HW’s” prior to the arrest could have led to some interesting facts. As mentioned earlier, “HW” claimed to have inherited money from relatives. A simple inquiry into “HW” family background could have discredited “HW” stories. Numerous online databases would have confirmed “HW” facts, had they been true.

V. Interview Script

I: Interviewer (Mulham Shbeib)
R: Respondent (Harriette Walters)

I. “Good afternoon. My name is Mulham Shbeib and I am working on a small assignment. Do you mind if we chat for a few minutes?”

R. “Okay. I currently have some down time at work and am available to help out.”

I. “Great. I am reviewing the property tax refund procedures for DC Government and wanted your insight on a few of the procedures. Can you help me gain a better understanding of how the refund process works?”

R. “This appears it may take awhile. I am not sure the timing is right.”

I. “It’ll actually take no more than fifteen minutes. Is that fine?”

R. “Sure.”

I. “How long have you been working with DC government?”

R. “Approximately twenty five years.”

I. “Have you been a manager all twenty five years?”

R. “I was promoted in 2001.”

I. “Congrats. I imagine your thorough understanding of the property tax refund system contributed to your promotion.”

R. “Thanks. I worked hard to get to where I am in my life.”

I. “How exactly does the property tax refund process work?”

R. “It is fairly straightforward. Individuals often pay their property taxes and notify us in writing that the assessed property value seems high. They usually conduct an appraisal of their property and submit a formal petition to reduce the assessment. If the assessment is reduced and the appeal approved, we issue a refund check.”

I. “That seems like a very straight forward process. What processes do you have in place to eliminate fraudulent refunds from taking place?”

R. “Layers of supervision.”

I. “This is very helpful. Do you mind elaborating on what is meant by layers of supervision?”

R. “Refund checks need to have proper documentation.”

I. “Are you aware of any ways the documentation can be altered in any way, shape, or form?”

R. “Why would anyone do that?”

I. “Sometimes people have a certain lifestyle they want to maintain and feel the need to do something they know is wrong.”

R. “I agree with what you are saying. Occasionally, good people can make bad mistakes.”

I. “What I have learned in my time doing these inquiries is that when people are honest and upfront in the beginning, they end up feeling much better about themselves. They feel as if a burden has been lifted from their shoulders.”

R. “Are you implying something?”

I. “Not at all. Have I offended or upset you in anyway?”

R. “Not really. I have an idea of where this is going and I want to cooperate. I know I made a serious mistake in judgment and breached the fiduciary responsibilities of my position. I acted in a manner that was not consistent with my upbringing. Although I have been living an extravagant lifestyle these past years, it has taken an emotional and psychological toll on me. I find myself addicted to gambling and always feel as if I am being watched. I want this nightmare to end. It is probably best for me to contact a lawyer at this point.”

I. “Your honestly has surprised me. I commend you for doing what you have just done.”

[1] http://baltimore.fbi.gov/dojpressrel/pressrel08/ba121108.htm
[2] http://www.washingtonpost.com/wp-dyn/content/article/2008/02/19/AR2008021902928.html?referrer=emailarticleWashington
[3] http://www.prnewswire.com/cgi-bin/stories.pl?ACCT=104&STORY=/www/story/09-16-2008/0004886638&EDATE=
[4] http://www.prnewswire.com/cgi-bin/stories.pl?ACCT=104&STORY=/www/story/09-16-2008/0004886638&EDATE
[5] http://www.washingtonpost.com/wp-dyn/content/article/2007/11/21/AR2007112102115.html
[6] http://www.washingtonpost.com/wp-dyn/content/article/2008/09/16/AR2008091601817_pf.html
[7] http://www.washingtonpost.com/wp-dyn/content/article/2007/11/21/AR2007112102115_2.html
[8] http://www.badgirlscrimeblog.com/?p=12#more-12

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