States Ratchet Up Enforcement of Unclaimed Property Rules

Deficit-laden state governments are increasingly eying unclaimed property and are putting more pressure on companies to turn over abandoned assets.

They are also taking a broader view of what constitutes unclaimed property meaning companies must assess their risks and brush-up their compliance efforts on that point.

Recent, high-profile actions by states involving corporate giants like John Hancock, McKesson, and Staples have made clear that state governments are more aggressive than ever in collecting unclaimed property, says Noel Hall, principal and leader of the abandoned and unclaimed property practice at tax firm Ryan. “These audits are unlike anything I've seen in 30 years of doing this,” he says. “I've sat in on some of the conference calls with auditors and in some cases it's clear that it's a fishing expedition.”

States have held authority over abandoned or unclaimed property since the 1960s, collecting it from corporations or other institutions when it is left unclaimed by its rightful owners. Unclaimed property has long included items such as abandoned bank accounts, uncashed checks, traveler's checks, stocks, bonds, trust distributions, utility or rent deposits, insurance policies, refunds, and other orphaned assets. The National Association of Unclaimed Property Administrators says state treasurers are sitting on nearly $33 billion in unclaimed funds, waiting for the rightful owners to stake their claim. States pursue unclaimed property to prop up their general funds because they rarely reunite much of that property with the rightful owners. Technically states are the custodians of those unclaimed assets, not the owners, but the low claim rate on such funds makes them a sweet source of revenue without raising new taxes.

It's no secret that state governments are strapped for cash and looking for revenue, especially in ways that don't involve raising taxes, says Marc Musyl, a partner with law firm Greenberg Traurig. For fiscal 2012, the combined deficit for 42 states with budget shortfalls and the District of Columbia is expected to be $103 billion, according to the think-tank Center on Budget and Policy Priorities. “States are becoming more aggressive in looking for as broad a definition of abandoned property as they can come up with,” Musyl says. “And they're looking for ways to recover that as efficiently as they can.”

Actions against Hancock, McKesson, and Staples illustrate the new direction, experts say. In the case of Hancock, for example, California unleashed a third-party audit firm working on a contingent-fee basis to search for unclaimed property. Ultimately, Hancock relinquished $20 million in undelivered death benefits and matured annuities owed to Hancock clients, says Cathleen Bucholtz, managing director of tax firm True Partners Consulting.

“Because they settled, a lot of the particulars will never be known,” she says. “Historically, banks and insurance companies were thought to be in substantial compliance. If a state is going to go after a company that has historically filed its unclaimed property, it will certainly go after companies that they know are non-compliant.”

“These audits are unlike anything I've seen in 30 years of doing this. I've sat in on some of the conference calls with auditors and it's clear that it's a fishing expedition.”

—Noel Hall,

Principal, Leader of Abandoned & Unclaimed Property Practice,

Ryan

The Hancock settlement has set off deeper investigations of major insurers, says Mary Jane Wilson-Bilik, a partner with law firm Sutherland Asbill & Brennan. States are sending in not just unclaimed property auditors but also insurance commissioners and other enforcement agencies to search for further market conduct problems. “I've never seen this before,” she says. “This is very unprecedented.”

The case against Staples, which has been working its way through the Delaware courts for a few years, boiled over recently, Hall says, when Staples fought back against the state's assertions that it could estimate unclaimed property liability if records were missing. The company and the state's auditor are sure to come up with different numbers when estimating such a liability, he says, especially if the state's auditor is paid on contingency.

Outside the Boundaries

Some disputes are arising over what constitutes unclaimed property, as states attempt to broaden the definition. For example, in a case against McKesson, Delaware has asserted unclaimed property rights over mismatches between inventory received and amounts paid for inventory, prompting McKesson to fight back, says Sarah Niemiec Seedig, a lawyer with Greenberg Traurig. In this case, the state is targeting complementary drug samples. “These are items not traditionally considered unclaimed property,” she says.

In addition to traditional general ledger searches, states also are examining securities transactions, says Debbie Zumoff, chief compliance officer at unclaimed property advisory firm Keane. The states' third-party auditors are looking for any stock-related assets, including common stock, preferred stock, restricted stock, unexchanged or unredeemed proceeds resulting from mergers and acquisitions, and others, she says. “These are broad information requests,” she says. “The volume of information requested and the type of requests are falling way outside the typical boundaries of unclaimed property audits.”

UNCLAIMED PROPERTY FACTS

The National Association of Unclaimed Property Administrators provides information on what constitutes unclaimed property and how to access missing funds below:

Fast Facts About Unclaimed Property

Every U.S. state, District of Columbia, Puerto Rico, the U.S. Virgin Islands - and Quebec, British Columbia and Alberta in Canada have unclaimed property programs that actively find owners of lost and forgotten assets.

Unclaimed property laws have been around since at least the 1940s, but have become much broader and more enforced in the last 15 years. Unclaimed property is one of the original consumer protection programs.

$1.754 billion returned to the rightful owners in Fiscal Year 2006 from 1.929 million accounts

Total of at least $32.877 billion is currently being safeguarded by state treasurers and other agencies for 117 million accounts. Claims can be made into perpetuity in most cases - even by heirs.

Billions of dollars have been lost. Could some of it be yours?

NAUPA is the association of the state unclaimed property programs, but the databases are located and maintained by each state, not NAUPA. However, most states participate in MissingMoney and we suggest that you search there. You may also link to all state databases individually from this Website.

What is unclaimed property?

Unclaimed property (sometimes referred to as abandoned) refers to accounts in financial institutions and companies that have had no activity generated or contact with the owner for one year or a longer period. Common forms of unclaimed property include savings or checking accounts, stocks, uncashed dividends or payroll checks, refunds, traveler's checks, trust distributions, unredeemed money orders or gift certificates (in some states), insurance payments or refunds and life insurance policies, annuities, certificates of deposit, customer overpayments, utility security deposits, mineral royalty payments, and contents of safe deposit boxes.

I have received a notice that property has been found, but there is a fee to obtain it.

There are many businesses, sometimes called finders or locators, which find legitimate lost property for owners and offer to inform them of how to obtain it for a fee, usually a percentage of the total (some states limit the fee to 10 percent). Sometimes, companies will hire these firms to find you before they turn the funds over to the state. Ultimately the finder will ask you to sign a contract. The majority of firms that provide these services work within the law, but there are also many unclaimed property scams across the United States. Before signing any contract from a firm of this type, we recommend that you be cautious and contact the unclaimed property office in your state for more information.

How do I keep my property from becoming lost in the future?

Remember, property becomes lost due to a company having no communication with the owner. You should contact institutions that hold your money or property every year and especially when there is an address change or change in marital status. For security reasons, most financial institutions do not forward mail. Keep accurate financial records and record all insurance policies, bank account numbers with bank names and addresses, types of accounts, stock certificates, and rent and utility deposits.

Cash all checks for dividends, wages, and insurance settlements without delay.

Respond to requests for confirmation of account balances and stockholder proxies.

If you have a safe deposit box, record its number, bank name and address, and give the extra key to a trusted person.

Finally, prepare and file a will detailing the disposition of your assets.

Source: NAUPA: What Is Unclaimed Property?

The overarching messages for companies in all sectors is to broaden the view of what falls into the category of unclaimed property and shore up any gaps in compliance, experts say.

Companies need to take stock of their risk and consider entering states' voluntary disclosure programs, Zumoff says. “There's a lot of work to be done,” she says. “Most companies are very decentralized in terms of their unclaimed property shop. Typically the new kid on the block gets unclaimed property as his or her job, and there's a lot of turnover, so the intellectual capital is not really maintained as well as it should be.”

What's more, companies generally do a poor job at complying with unclaimed property regulations. Hall said industry estimates suggest about 20 to 25 percent of companies are generally compliant with unclaimed property reporting requirements. That leaves plenty of room for improvement, especially among companies that are diligent about reporting one or a few predominant areas of unclaimed property but are overlooking other areas. In Hall's view, the most vulnerable companies are those in the Fortune 1000 and those incorporated in or doing substantial business in the most aggressive states, such as Delaware and California.

Musyl says companies need to get up to speed on the kinds of unclaimed property states are pursuing, and consider whether they might be at risk. Most companies are aware to watch for uncashed checks, abandoned deposits, dormant accounts, even unused gift cards or prepaid cards or unclaimed layaways, but the net can be much wider.

Marlys Bergstrom, an attorney with Sutherland Asbill & Brennan, says companies that are in the bad habit of writing off outstanding checks or credit balances should adopt some new procedures. “If you're writing off outstanding checks, that's immediately a bad sign,” she says. She is advising companies to get their arms around all possible sources of unclaimed property, assess procedures, and determine if a voluntary disclosure program might be a good option. With unclaimed property subject to no statute of limitations, and states showing interest in estimating and extrapolating, the liabilities can become daunting, she says.

Hall warns companies to tread cautiously into voluntary disclosure programs. “I wouldn't advise anyone to just put some numbers on a form and turn it in,” he says. Staples, after all, began its present dispute with Delaware by entering a voluntary disclosure program, he says.

In one extreme case, a state auditor targeted unredeemed points earned on an Internet gaming site, Musyl says. “As you might imagine, the folks who play these games are hard to identify and find,” he says. “But if someone wins points that are redeemable for tangible property, that's going to be a hot area of concern for states that are looking to generate additional revenue.”

As states continue to push the bounds of what constitutes unclaimed property, companies will increasingly have to decide to turn over the goods, or fight back. Another possible strategy: Do more to find the rightful owner in the first place.