D.C. Hit by Costliest Corruption Scandal in History

Federal law enforcement and Washington, D.C., city officials announced arrests and charges Wednesday in the costliest public corruption scandal to ever hit the district's government.

Five individuals are in custody for a scheme that allegedly defrauded the D.C. government out of more than $16 million. Charges against them include mail fraud, bank fraud, money laundering and conspiracy.

Officials say Harriette Walters, a manager at the D.C. Real Property Tax Administration Adjustments unit and Diane Gustus at the D.C. Office of Tax Revenue, were at the center of the operation. The pair allegedly approved and issued fraudulent property tax refund checks that averaged $388,000 per check.

Investigators say the funds were used to buy luxury goods, including jewelry, homes and clothing. According to affidavits filed in the case, Walter's annual salary as a District of Columbia employee was $81,000. From September 2000 to the present, Harriette Walters spent more than $1.4 million at Neiman Marcus.

"They abused the trust the district placed in them," U.S. attorney Jeff Taylor of the District of Columbia said at a news conference announcing the charges.

Investigators say that on more than 40 occasions, Walters, Gustus and other D.C. government employees generated the fake refunds that were deposited into shell companies that were established by Walters' relatives who lived in Maryland.

The alleged co-conspirators include Richard Walters, Connie Alexander and Jayrece Turnbull. The front companies included a home service firm and a sham plumbing and heating repair business.

An FBI affidavit in the case noted, "None of the fraudulent tax return voucher request packets has a legitimate order from the Superior Court Tax Division directing that a tax refund be paid. Significantly, a number of the vouchers use the exact same documentation to support different vouchers applying to different properties."

After the funds were distributed, officials said the conspirators and family members cashed out the funds through wire transfers and cashier checks. Although only the five individuals were arrested and charged Wednesday in criminal complaints, court records detail the possible involvement of other D.C. government employees in the Office of Tax Revenue, as well as a former assistant manager at the Bank of America.

The FBI affidavit notes, "The conspirators were also aided in their scheme by ... an assistant bank manager, [who] was able to assist the conspirators in moving money among and between accounts."

More than 100 investigators and FBI agents in Washington and Baltimore executed search warrants Wednesday morning and seized numerous luxury items -- fur coats and several automobiles, including a 2005 Bentley.

The investigation is ongoing but D.C. Chief Financial Officer Natwar Gandhi has asked for the resignation of several top officials, including the director of the tax revenue office.

ABC News has not been able to reach counsel for the accused.

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