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Government and People
JOINT PUBLIC OVERSIGHT ROUNDTABLE ON
The Operations of the Office of Tax and Revenue
Before the Committee of the Whole,
Council of the District of Columbia
Committee on Finance and Revenue
November 15, 2007
Testimony of Natwar M. Gandhi, Chief Financial Officer
Good afternoon, Chairman Gray, Chairman Evans, and members of the Council. I am here to present testimony on the operations of the Office of Tax and Revenue in the wake of the massive fraud that was allegedly perpetrated over several years by certain OTR employees. I am joined here by Ben Lorigo, whom I have appointed the interim Director of the Office of Tax and Revenue.
First and foremost I want to express my deep regret that this OTR scandal has occurred. As you can imagine, I am personally outraged by it. As you know OTR falls under the CFO's authority and I take full responsibility. However, it is not enough to say that I take responsibility; I must also take action to repair what has been broken and to regain the public trust that has been so badly shaken. To that end, I have moved quickly to hold people accountable, appoint interim leadership, continue internal investigations to identify additional OCFO employees who are responsible, and immediately change the business processes so as to establish new controls and procedures.
In addition to these immediate changes, to inform our long-tern strategy, we are inviting two independent agencies (the D.C. Inspector General and the Internal Revenue Service) to look at OTR operations and internal controls to reform and recommend changes. We are also seeking expert advice from other sources. For example, I have already asked Judge Stanley Sporkin (Ret.) to review OTR operations and to suggest ways to strengthen our controls. Judge Sporkin spent twenty years with the SEC, serving seven as the Director of the Division of Enforcement. He then served for five years as the General Counsel to the CIA. He was appointed to the Federal Bench in 1985 where he served as a United States District Judge for the District of Columbia for fourteen years. All of these actions are being taken to assure that such fraudulent activities do not happen again.
The scheme, as we understand it, involved persons both internal and external to the Office of Tax and Revenue (OTR). These individuals allegedly conspired to defraud the Government through creating fraudulent real property tax adjustment refunds and directing them to "dummy" corporations.
Real property tax refunds were allegedly initiated by an employee of the Adjustment unit within the Real Property Assessment Services Division. Inconsistent with best practices, these refunds were approved only by the manager of that same unit, regardless of the size of the check. This practice was in direct violation of my explicit directive that required all Real Property Tax Refunds in excess of $150,000 be personally approved by the Director of Real Property Tax Administration (see attached 1997 memorandum) and Refunds in excess of $250,000 be approved by the Director of OTR. After a check was cut, it was not mailed but held for pick up by the manager of the Adjustment unit.
Although experts say the most frequent means of uncovering this type of fraud is a tip or by accident, we also must accept that this criminal enterprise was able to thrive because of a profound failure of internal management controls at the OTR. Not only must processes be in place, but managers and others must be alert to behavior that might be signs of wrong-doing - e.g., displays of wealth and extravagant gift-giving.
While data analysis should always be performed, it does not necessarily tell you much. In this regard, I would like to make several points regarding the report in today's Washington Post about the DC Auditor's report in the summer of 2004. First, the Washington Post article leaves the mistaken impression that the Auditor's report warned specifically about refunds.
However, a close reading of the report shows that the warning pertained to the projections of overall real property tax collections, not refunds - the concern was that we were overestimating real property tax collections. Second, the history of refunds and real property tax collections shows that refunds did indeed nearly double between 2001 and 2007, but total real property tax revenue grew even more, at 128 percent. (Note that it is best to look at the refunds over several years, as a refund does not necessarily track the year a tax bill was paid. As the DC Auditor noted, the District moved from triennial to annual assessments during this time.) Third, real property tax refunds did not grow as a share of total real property tax revenue from 2001 to 2007. In fact they declined, from 1.7 percent to 1.4 percent. The point is that because of the rapid pace of growth in property tax revenue over the period it would be difficult to tell from these data alone that something was awry just by looking at the growth in aggregate refunds over the years. To be fair, neither was this the point of the DC Auditor's report.
Internal controls rest on three legs - people, processes, and systems. We are focusing on all three legs.
First, I took swift, deliberate, and appropriate action against all OTR employees involved and responsible, including 01 R leadership, to hold them accountable and send a clear message that this type of activity, and lax management, will not be tolerated. As of today, fifteen OTR employees, including OTR's most senior managers, have resigned or been removed. We continue our internal review to identify additional OCFO employees who should be held accountable for lack of oversight and poor business processes.
Second, I have appointed Ben Lorigo, Director of the Office of Integrity and Oversight, to be interim Director of the Office of Tax and Revenue, while we engage in a national executive search for permanent leadership for OTR. Ben was the head of internal audit for me when I was OTR. As the head of 010 since 2000 when I became CFO, Mr. Lorigo created an audit and investigative organization that is responsible for assuring the integrity, efficiency and effectiveness of the operations of the entire Office of the Chief Financial Officer, and his office has assisted many Mayoral agencies and worked closely with the District's Inspector General on a number of audit issues.]
Mr. Lorigo joined 01R upon his retirement from the Internal Revenue Service, where he capped a 30 year career in federal law enforcement in several agencies. At the IRS, Mr. Lorigo was the senior executive in charge of the IRS Internal Security Division, which was responsible for maintaining the integrity of the Internal Revenue Service, one of the most sensitive and complex organizations in the federal government. In this capacity, Mr. Lorigo directed approximately 500 criminal investigators nationwide. A recognized leader in the federal investigative community, Mr. Lorigo also served on the training committee for the President's Council on Integrity and Efficiency, and briefed senior federal government executives on threats to federal tax administration and representing the IRS on integrity and security issues before Congress.
Mr. Lorigo has made 4 interim appointments so far in the tax office, to the positions of:
All managers, even interim managers, will be held accountable for the successful implementation of internal controls and restoration of the public's confidence in our tax system. We will also soon initiate a national search for new permanent managers who are aggressive and proactive about their oversight and supervision.
Third, we are re-establishing and communicating clear written procedures on the preparation, approval, and issuance of real property tax adjustment refund checks, and providing the necessary training and cross-training. The procedures will describe the required supporting documentation and/or justification required to generate a refund. The procedures will clearly designate approval authority, and delineate senior management review as well as signatory authority for all refunds.
Initially, all real property tax refunds $10,000 and over are being reviewed by upper OTR management, and refunds under $10,000 will be spot-checked. A special unit reviews all details of real property tax refunds before they are finally authorized and paid. A refund will be held until an authorized user releases it.
Fourth, we are expanding our audit staff assigned to review and audit the tax operations. The additional staff will have specialized experience in auditing tax systems and will be on the ground full-time at OTR. We are consulting with the US Treasury Inspector General for Tax Administration for expertise in this area.
Fifth, we decided (as stated in our FY 2008 Budget Testimony) to embark on a "mid life" refresh and update of all main OCFO financial systems including ITS. The revised ITS must have a special emphasis on real property taxes. It may revert to a stand-alone real property tax system.
Let me assure you that in our view, the District's finances remain sound, and that this fraudulent activity does not compromise our ability to carry out District government functions or policy initiatives approved by the Council and the Mayor. Further, we placed calls to all three rating agencies to let them know about the situation. None expressed concern about the long-term financial viability of the District, or that it would affect the District's ability to pay its debt obligations in full and on time. So my assessment is that this will not lead to a downgrade in our bond ratings. (See attached 11/12/07 Bond Buyer Article - D.C.'s Office of Tax and Revenue Scam Won't Hurt Ratings).
Further, we are working diligently with the District's outside auditors on the closing of the fiscal year that ended last September 30. Based on our work so far, including our discussions with our auditors, it is our view that we will be able to produce the District's FY 2007 CAFR on time. Despite the additional work that will be prudent under these circumstances, we and the auditors agree that we can meet the deadline.
As for me, Mr. Chairman, I have heard from some in the community who have asked whether I would consider resigning from my position as CFO. As I have already indicated publicly, OTR's senior leadership resigned because I no longer had confidence that they could handle the complex tax matters that are the basis of OTR's mission. I have heard from the Mayor and the members of the Council, including you, Mr. Chairman, and Councilmember Evans, that you still have confidence in my ability to run the Office of the CFO. When I hear from the Mayor that he no longer has confidence in me, when I hear from the collective Council that they agree with the Mayor, that is the time when I too should resign. That day has not come, and despite the depth of sorrow that I feel personally for this very sorry situation, I am not a quitter, and it is not my intention to walk away from this problem until I bring every possible resource to bear to solve it once and for all on behalf of the District's taxpayers. I am confident that working with the Council, the Mayor and my OCFO colleagues, we will rebuild our tax administration and make it worthy of our nation's capital. I look forward to working with the Mayor and Council and the teams that we will assemble to address this matter together.
In conclusion, Mr. Chairman, though this scandal is unprecedented in its scope and deeply appalling, the District's overall financial viability and stability is strong and sound. My OCFO family is dealing with the painful reality that the actions of a criminal few in our organization has damaged the great reputation that the hard work, dedication and integrity of the rest of our organization has earned. Please be assured that we will continue to take remedial actions as aggressively as we have since the day this scandal became known. Our goal is to regain the public trust and confidence in our tax system.
Mr. Lorigo and I would be pleased to take any questions you may have.
GOVERNMENT OF THE DISTRICT OF COLUMBIA
Natwar M. Gandhi
Subject: Delegation of Authority
Date: July 21, 1997
I hereby delegate to Wm. Henry Riley, Director, Real Property Tax Administration my authority to act on behalf of the Office of Tax and Revenue in matters relating to the administration of the Real Property Tax Program.
I further authorize Mr. Riley to delegate this authority to to subordinates, as is necessary to properly administer the ongoing real property tax programs of the Office of Tax and Revenue.
Attached is a chart which outlines types of documents requiring supervisory approval and the level at which approval :ill be required.
2. M&T/SUPPORT - DENOTES THE MAPS AND TITLES/SUPPORT UNIT.
3. CHIEF, ASD - DENOTES CHIEF, ASSESSMENT SERVICES DIVISION
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