Realizing he was set up, Gittes assumes that Hollis Mulwray is the real target. Before he can question him, Lieutenant Lou Escobar fishes Mulwray, drowned, from a reservoir. Under retainer to Mrs. Mulwray, Gittes investigates his suspicions of murder and notices that although there is a drought, huge quantities of water are being released from the reservoir every night. Gittes is warned off by Water Department Security Chief Claude Mulvihill and a henchman who slashes Gittes' nose. Back at his office, Gittes receives a call from Ida Sessions, who identifies herself as the imposter Mrs. Mulwray. She is afraid to identify her employer but tells Gittes to check the day's obituaries.
Gittes learns that Mulwray was once the business partner of his wife's wealthy father, Noah Cross. Over lunch at his personal club, Cross warns Gittes that he does not understand the forces at work, and offers to double Gittes' fee to search for Mulwray's missing mistress. At the hall of records, Gittes discovers that much of the Northwest Valley has recently changed ownership. Investigating the valley, he is attacked by angry landowners who believe he is an agent of the water department attempting to force them out by sabotaging their water supply.
Gittes deduces that the water department is drying up the land so it can be bought at a reduced price and that Mulwray was murdered when he discovered the plan. He discovers that a former retirement home resident is one of the valley's new landowners who seemingly purchased the property a week after his death. Gittes and Evelyn bluff their way into the home and confirm that the real-estate deals were surreptitiously completed in the names of several of the home's residents. Their visit is interrupted by the suspicious retirement-home director, who has called Mulvihill.
After fleeing Mulvihill and his thugs, Gittes and Evelyn hide at Evelyn's house and sleep together. Early in the morning, Evelyn gets a phone call and must leave suddenly; she warns Gittes that her father is dangerous. Gittes follows Evelyn's car to a house, where he spies her through the windows comforting Mulwray's mistress, Katherine. He accuses Evelyn of holding the woman against her will, but she says Katherine is her sister.
The next day, an anonymous call draws Gittes to Ida Sessions' apartment, where he finds her murdered and Escobar waiting for Gittes' arrival. Escobar tells him the coroner's report found salt water in Mulwray's lungs, indicating that he did not drown in the fresh water of the reservoir. Escobar suspects Evelyn of the murder and tells Gittes to produce her quickly. At Evelyn's mansion, Gittes finds her servants packing her things. He realizes her garden pond is salt water and discovers a pair of bifocals in it. He confronts Evelyn about Katherine, whom Evelyn now claims is her daughter. After Gittes slaps her, she tells him that Katherine is her sister and her daughter: her father raped her when she was 15. She says that the eyeglasses are not Mulwray's, as he did not wear bifocals.
Gittes arranges for the women to flee to Mexico and instructs Evelyn to meet him at her butler's home in Chinatown. He summons Cross to the Mulwray home to settle their deal. Cross admits his intention to annex the Northwest Valley into the City of Los Angeles, then irrigate and develop it. Gittes accuses Cross of murdering Mulwray. Cross takes the bifocals at gunpoint, and he and Mulvihill force Gittes to drive them to the women. When they reach the Chinatown address, the police are already there and detain Gittes. When Cross approaches Katherine, Evelyn shoots him in the arm and starts to drive away with Katherine. The police open fire, killing Evelyn. Cross clutches Katherine and leads her away, while Escobar orders Gittes released. Lawrence Walsh, one of Gittes's associates, tells him: "Forget it, Jake. It's Chinatown."
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