Unclaimed Property: The Best Defense Is a Good Offense

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By Christa DeOliveira

Christa DeOliveira CIA CCEP is the compliance officer for Ryan’s Tracker software products, a leading abandoned and unclaimed property compliance system. She has managed unclaimed property needs at a large national retailer, as well as supported clients in the many aspects related to unclaimed property compliance. Ms. DeOliveira is a member and past president of the Unclaimed Property Professionals Organization (UPPO). She is the editor of the TRACKER Unclaimed Property Bulletin and the assistant editor of Ryan's Abandoned and Unclaimed Property Newsletter. She has authored numerous blogs and articles and is a regular speaker on unclaimed property topics.

All companies generate unclaimed property, though some lack the internal controls and structure necessary to adequately manage the myriad of state laws that govern unclaimed property. When it comes to unclaimed property compliance and audits, the best defense is a good offense in the form of a healthy and robust compliance program.

Companies, also known as holders, (as they “hold” unclaimed property due to others) can generate unclaimed property in many forms, including dormant bank accounts, payroll checks, vendor checks, accounts receivable credit balances, customer refunds, unused balances on gift cards, or unclaimed stocks and dividends.

State-level laws dictate that such unclaimed property must be turned over to the state of the owner's address, or under specified conditions, the state of the corporate domicile of the company holding the properties (known as escheatment). Failure to do so can, in some cases, lead to interest, penalty, and the application of estimation techniques that are many times greater than the value of the unclaimed property itself.

In recent years, states and jurisdictions have come to value unclaimed property as a non-tax revenue source and a cash infusion to balance budgets. This has led states to expand the included types of unclaimed property, closely monitor remittances and other aspects of compliance, shorten dormancy periods for a one- time revenue push, and enforce laws more strictly, including increasing audit activity.

In order to avoid non-compliance and/or expensive, burdensome, resource intensive audits, companies can take a proactive approach and take concrete measures to create a solid unclaimed property compliance program. This article outlines five key components of best practices for companies to follow in order to mitigate the compliance and audit risks associated with unclaimed property.

Develop an Understanding, Then Monitor

A prerequisite to creating a program to support compliance is to understand the underlying laws of each state or jurisdiction (hereafter references to “state or jurisdiction” will be referred to as state). Additionally, holders must understand regulatory and reporting requirements. Another important area to understand is your own company and what types of unclaimed property it generates. Incidentally, this includes understanding any functions that may have been delegated to third parties. For example, third-party payroll processors, claims administrators, benefit plan third-party administrators, transfer agents for securities-related property, etc.

Although there is definitely a backbone of similarities across states, unclaimed property laws are not uniform, and the precise details that holders need to follow in order to be compliant with unclaimed property laws and requirements vary widely by state. It is important to note, not everyone involved with unclaimed property compliance needs to know all of the variations, but for the folks not in the trenches of the day-to-day compliance, it is useful to keep in mind there is a lot of variation.

State laws and regulations addressing unclaimed property are continuously evolving,1 requiring companies to constantly monitor these changes in order to remain in compliance. Some of the more common types of changes include shortening dormancy periods, changing report filing deadlines, or including new types of property. In practice, any aspect of a state's unclaimed property laws, regulations, or requirements can be changed due to multiple factors—from states reinterpreting existing laws, modifications to state regulations, or even something as mundane as an update to a mailing address.

Develop and Maintain Solid Policies and Procedures

Developing solid policies and procedures with appropriate internal controls will put your company in the driver's seat. Such policies include implementing appropriate internal controls and monitoring, assigning responsibility to a key stakeholder or stakeholders, and essentially converting unclaimed property laws and requirements into operational steps. It is helpful if policies and procedures also include an unclaimed property project plan or workflow chart documenting the necessary compliance steps and tracking status of completion.

In order to keep abreast of ever-changing regulatory requirements, holders should be ready to review and update policies and procedures. For example, if a state changed its law to include a requirement that owner notification letters must be sent via certified mail, this would lead to a relevant process change for the impacted state.

Train, Train, and Train Again

While awareness of unclaimed property has been steadily increasing, as a discipline, it is unique and contains oddities, so it is often misunderstood and underestimated. For example, nexus, the concept so prevalent in the tax context, has no bearing on determining where to report unclaimed property. Rather, the owner's address on a company's books and records comes into play, as well as a company's state of incorporation. Also, for most states and property types, there are generally no de minimis exemptions, so amounts as low as $0.01 are frequently required to be reported, which is rather different from the accounting principle of materiality. From a practical perspective, most states allow companies to report such small amounts in the aggregate without corresponding owner detail. These aggregate reporting thresholds vary from state to state. Often, as a result of an underdeveloped understanding of compliance and data requirements, compliance resource needs are underestimated, leading to insufficient compliance.

Training and communication are great vehicles to counterbalance this. Obviously, the staff executing the compliance steps will require tools and training. Companies should:

  •   Train unclaimed property reporting personnel,
  •   Ensure there is someone in legal (or a comparable resource) with a sound knowledge and understanding of unclaimed property,
  •   Educate management on the pervasive nature of unclaimed property being generated out of many areas of a company,
  •   Consider implementation of an unclaimed property committee, and
  •   Consider some level of education to all appropriate functional employees about unclaimed property.

    Naturally, there can be different approaches to achieve this, ranging from formal training sessions to communications in an employee newsletter. Getting the word out to frontline personnel can be especially helpful in the event a customer comes into a store, location, or branch with a due diligence letter, attempting to initiate a claim or reactivate an account. It is always better when an employee has an idea of what the letter is about, rather than thinking it is possible fraud.

    General knowledge of how an individual's job ties in with the creation of unclaimed property can be a powerful tool to help to reduce it. Consider the positive impact of employees being careful to consistently adhere to check voiding procedures or to verify and update contact and address information each time they work with a customer. Following appropriate check voiding procedures can avoid accounting errors masquerading as unclaimed property. Likewise, having current and accurate customer information could result in being able to make customers aware of an unused credit on their account, reducing unclaimed property liability, and creating good will along the way.

    Perform Compliance Steps

    The pivotal high-level compliance steps include gathering unclaimed property details, aging it according to the state with jurisdictions' defined time frames (dormancy periods), conducting statutory owner notification (due diligence), reporting and remitting unclaimed property that could not be reunited with its owners, and maintaining records. Another helpful step is to analyze patterns in generated unclaimed property to see if operational improvements are possible to reduce the creation of unclaimed property, such as researching and correcting accounting errors, and documenting and removing items that do not represent an outstanding obligation.

    All companies generate what is commonly referred to as general ledger unclaimed property from universal operational areas, such as accounts payable, accounts receivable, and payroll. However, often there are also industry-specific types of property created as a function of the type of business your company conducts. For example:

  •   Financial institutions could be holding mature certificates of deposit or safe deposit box contents;
  •   Life insurance, property and casualty insurance, and health insurance could be holding insurance premium refunds;
  •   Broker dealers, transfer agents, or corporate trust divisions could be holding securities;
  •   Publishers, music industry companies, mineral interest companies, etc. could be holding royalties;
  •   Retailers and other issuers of gift cards could be holding unredeemed cards; and
  •   Utility companies could be holding uncollected deposits.

    For full compliance, it is important to capture and report all of the different types of unclaimed property your company generates. In addition, in the event of any merger and acquisition activity where outstanding liabilities are included (i.e., stock acquisition versus an asset acquisition), it is important to perform a due diligence review of the unclaimed property activities of the entity proposed to be acquired. This protects companies by discovering any unclaimed property issues prior to a merger, and if material, allows them to potentially account for any previously hidden liabilities into the sales price.

    Of course, with sound policies and procedures, including the best practice of developing a project plan, it is easier to achieve and to track compliance. Also, robust software is available to assist companies with the complex reporting requirements and data format variations necessary for correct and accurate report generation.

    Be Prepared for an Audit

    With unclaimed property, there is a distinct risk an entity will be audited, with the related risk of potential exposure resulting from the audit findings. Unfortunately, no matter how strong and robust a compliance program is, there is always a risk an entity will be audited. If you work for a large and visible company, it is really just a matter of time. However, companies can control the potential exposure to any audit by coming into compliance and vigorously and continually maintaining it.

    Common audit triggers can be:

  •   An incomplete filing history (i.e., missed property type such as accounts receivable credits);
  •   Repeatedly filing negative reports, especially in a state where the company has a significant presence;
  •   An unusually large or small remittance relative to the company's size;
  •   Not including common property types for a company's industry;
  •   Paying state taxes (such as payroll, income, property, or sales and use) but not correspondingly reporting unclaimed property to the same state;
  •   The state observing from claims activity that owner notification appears not to have been completed;
  •   State of incorporation (some states, most notably Delaware, monitor if Delaware incorporated entities are actively reporting unclaimed property);
  •   Claiming unclaimed property from a state reported by another company, without being in compliance for reporting property in that state;
  •   Being involved in significant merger and acquisition activity;
  •   Whistle-blower action; and
  •   Failure to provide complete information on unclaimed property reports.

    In an effort to assess current compliance and determine future strategies, companies can either conduct internal reviews of the adequacy of their compliance programs or seek external assistance. External assistance can provide a range of services from customized policies and procedures drafting, business process improvements, quantitative risk assessments, to voluntary disclosure agreements. This gives the company an opportunity to proactively come into compliance and correct any weaknesses before receiving an audit notice.

    In the end, establishing and maintaining a strong unclaimed property compliance program puts holders in a position of control. The financial benefits of a compliance program include curtailing the length of any audits and the corresponding resource demands, as well as reducing or preventing audit findings, and any potential associated interest or penalties could compound the cost of any exposure. In addition, a critical soft benefit of having a strong unclaimed property compliance program, which may ultimately present critical value to the company, is protecting a company's hard-won reputation by avoiding negative attention and even unwanted lawsuits and media coverage.

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