Identification of Unclaimed Property & Associated Risks

Identification of Unclaimed Property & Associated Risks

Definitions of Unclaimed Property

The U.S. laws govern unclaimed property disposition (for its all 50 states, along with the District of Colum­bia, Guam, Puerto Rico, and the Virgin Islands) and such property’s eventual conversion into state owned properties (mandated as escheatment). Such unclaimed properties can be both tangible in nature (like safe deposit box contents) or intangible (like securities-related property and general ledger property) or even due and owing to a third party (the owner) in situations where contact with the owner has been dormant. This dormancy period comprises the duration in which a property remains unclaimed before it is prophesied escheatable.

For example, a payroll check can be dormant for one, two, three, or five years, based upon the owner’s place of residence.

Once the dormancy period gets exhausted, the legal entity responsible for the obligation to the owner (the holder) needs to diligently seek the whereabouts of the abandoned property’s owner, before escheatment.

The holder of such abandoned property must essentially confirm his/her interest in the stated property in compliance with state thresholds. He/she should send a notice to the owner via a due diligence letter, email or even a local advertisement or notice in a newspaper. However, if the owner fails to revert the notice, the holder has the right to escheat the property to the appro­priate jurisdiction.

The requirement of sending the owner a notice can vary from state to state depending on the amount due to the owner along with the information available with the holder on their books and records. To exemplify, as long as a valid U.S. or international postal service address is in place, New York requires due diligence mailings to owners irrespective of the amount of the property owed to the owner, whereas Texas requires due diligence mailings to owners if the value of the property is greater than $250. Furthermore, some states also had adopted the 2016 Revised Uniform Unclaimed Property Act, which allow in some cases the usage of an email communication to notify the owners.

As per the 1965 Supreme Court case, Texas v. New Jersey, 379 U.S. 674 (1965), two priority rules were established to facilitate where the property or cash that represents the property is escheated.

  • First priority rule: Property escheats to the state of the owner/payee’s last known address.
  • Second priority rule: Property escheats to the state of domicile/incorporation for the company holding the property, where the holder’s records have no last known address associated with the stated property.

Uniform Unclaimed Property Act

RUUPA (Revised Uniform Unclaimed Property Act) is the latest version of the Uniform Unclaimed Property Act originally enacted in 1954 by the Uniform Law Commission and this was last amended in 2016. Normally, States have a practice to adopt a version comprising the various uniform acts in order to create their unclaimed property laws or rather, a written legislation specific to the needs of the states. Latest trend has been to increase the property types covered by these acts, while reducing the general dormancy period.

For example, in the 1954 act, the general dormancy period used to be seven years, however, at present the RUUPA specifies a general dormancy period of three years.

Often companies find themselves in a fix with different state adopting a different unclaimed property act, to have a standard compliance mechanism in place for unclaimed properties. To tackle the same, detailed internal policies and procedures are required covering all the state law variations.

Risk of Non-Compliance

Companies usually generate unclaimed property through their standard business operations like accounts payable, accounts receivable through customer overpayments, and payroll. Also, liabilities such as securities for public companies, certain retirement accounts for financial service providers, stored value (gift) cards for retailers, customer rebates for manufacturers, or mineral proceeds for oil and gas companies also call for unclaimed property risk. Many companies who falter on below measures can become an audit target:

  • Companies which lack reporting history or have inconsistent reporting history;
  • Fluctuations observed in amounts or types of property which are reported;
  • Companies which do not report property types common to a specific

Optional Voluntary Disclosure

Due to the complexity and longevity of audits, major­ity of states allow companies to report past due property via voluntary disclosure programs (amnesty programs or voluntary disclosure agreement (VDA) programs). Such programs comprise an important tool in a business’s unclaimed property risk mitigation toolbox, and hence allow organizations to be compli­ant, limit audit risks, and eliminate interest and penalties associated with late properties.

On-Going Compliance

Unclaimed property compliance (either through an audit or a VDA) usually is a multiyear endeavor. Once necessary time and effort is invested in gaining compliance, it is mandatory for a company to strengthen its internal policies and proce­dures which can largely be:

  • Listing the key contacts within each operational entity where unclaimed property may be generated;
  • Identifying the property types that are subject to various state unclaimed property laws;
  • Specifying best practices and provide guidelines for each type of property generated;
  • Outlining a cadence by which data is received and reviewed for operational entities or functional groups that generate unclaimed property;
  • Addressing the integration of procedures for merg­ers and acquisitions;
  • Describing the due diligence process;
  • Detailing the reporting process; and
  • Documenting record retention requirements.

Unclaimed property’s compliance responsibility varies from company to company (i.e., compliance can be related to tax, account­ing, financial reporting, or risk management). In whichever area the responsibility resides, maintain­ing compliance involves coordination between multiple departments, divisions, and entities. Internal audit departments should also ideally review unclaimed property while testing the company’s processes and procedures.

Those who will be working on the unclaimed property process need to essentially have a basic understanding of unclaimed property definition and its area of impact w.r.t the company’s compliance efforts (mainly, to assist in limiting noncompliance).

 Summary

Complying with unclaimed property laws save a company from financial and reputa­tional damage and hence this area of interest should not be ignored. In mid-2010s, the life insurance industry was scrutinized by states w.r.t their unclaimed property practices and risks involved. Because of audit settle­ments between life insurance companies and states, billions of dollars were returned to owners and escheated to the states by various companies.

In the light of the same, an unclaimed property audit, apart from invoking a financial risk, can also lead to reputational risk in case obligations with customers, employees, or vendors are not complied with companies in the right mannerism. Hence, it is the need of the hour for companies to recognize ‘compliance’ as critical to their operations and survival.

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