Ahh, the Fall. The change of seasons. The air is crisp and the leaves are bursting with color. For those of us who own the responsibility of reporting and delivering unclaimed property to the states, we watch much of the Fall pass us by from our office window.   Unclaimed property compliance is a year-round job, but with the majority of states having a reporting deadline on October 31 or November 1, the Fall reporting season can be an extremely busy time for unclaimed property practitioners. Whether you perform the function in house or outsource, there is a lot of effort and cooperation required to be compliant with all of the deadlines. For those who like the adrenaline rush of making it just under the deadline, keep doing what you’re doing. For the rest of us, a little planning and preparation goes a long way. Things you can do year round to make reporting easier: A calendar/timeline of events is your best friend. Establish a year-long calendar of events or take advantage of the calendar in your reporting software. This will ensure that you hit all of the compliance deadlines for due diligence and reporting. Realize that once you stray from the timeline it has can have a snowball effect and push everything closer to, or beyond, the final reporting deadline. Perform customer outreach early and often. Send courtesy letters prior to the account tolling the dormancy period. Invest in owner location services. You not only have a greater opportunity to reach the customer, you can save due diligence costs in the future. Ensure that you have policies and procedures in place for paying claims initiated by the courtesy letters or due diligence letters. Consider what will be required to pay multiple owner claims, estates, businesses, foreign owners, etc. Be aware that fraud is pervasive in this area. Make use of state online resources and holder handbooks to make certain that you have the most up-to-date information for report delivery, making payment and transferring securities, mutual funds or safe deposit box contents. This information can change annually and some states have been known to make updates very close to the reporting deadline. (Que the insanity!) Utilize the report upload feature on the state’s web site. Be aware that some require you to register or obtain a unique holder ID so don’t wait until the last minute. There may be a lag time between registration and obtaining your credentials. Be aware that if you need to file an extension, some states require 30 days’ notice. If you have a catastrophic event close to the deadline, many states will cooperate in extending the deadline, though you may have to direct your appeal to the state administrator rather than a staff member. Note that a few states require payment to be made by the deadline, even when filing an extension, and some states will not grant extensions two years in a row. Prepare to set aside a reserve to pay penalties and interest for property that is being reported late to states that actively assess them. Interest assessments are not always immediate, and can arrive months or years after reports have been reconciled by the state. Have a plan in place for customers who are late in responding to due diligence notices. (And this will inevitably happen) If you have already locked down your accounts or reported the funds to the state, what is your protocol? Do you refer the customer to the state or do you make the customer whole and seek a reimbursement from the state? File your report as soon as it is completed. You don’t have to wait until the deadline to file. The states receive thousands and even tens of thousands of reports on the deadline. The earlier they receive your report, the sooner it will be reconciled and made available for your customers to file claims. For all unclaimed property practitioners, gurus and novices alike, you can’t always foresee the roadblocks that lie ahead but we can be prepared to take action when they get in our way. As they say, “Only someone who is well prepared has the opportunity to improvise!” That is the least we can do to save our sanity during reporting season.

Congratulations! You just successfully completed an acquisition, and the business press and your industry peers have all taken notice. Another group is following your transaction as well: state unclaimed property auditors. Unclaimed property review, as part of transactional due diligence in a merger or acquisition, often goes overlooked. Armed with this knowledge, state unclaimed property auditors include a company’s history of transactions in audit proceedings, and states review M&A activity in their jurisdiction for likely audit candidates. This can lead to a costly process for companies that haven’t performed the proper due diligence, as the audit scope can expand to include the acquirer’s unclaimed property reporting history, the acquired company’s reporting history, plus the reporting history from other, previous acquisitions. Unclaimed property due diligence can have a direct impact on a deal price. If the company is not in compliance with state unclaimed property laws, and has written these unresolved transactions off as income, the acquiring company can be paying an inflated purchase price for the acquisition as well as acquiring the liability, depending on the nature of the acquisition. In an asset purchase, the buyer generally acquires the liabilities that are explicit in the purchase agreement. Under this circumstance, the probability of acquiring an unknown unclaimed property liability is diminished. However, in a stock purchase agreement, the buyer generally acquires all disclosed and undisclosed liabilities. Investing the time and effort into an unclaimed property review as part of transactional due diligence will enable a buyer to evaluate risk, provide opportunity for mitigation, and reinforce or reevaluate the purchase price of the transaction. The review should include: Policies and procedures for resolution of credit balances, unapplied cash, accounts payable and all uncashed checks; Policies and procedures for unclaimed property liabilities and reporting; Annual unclaimed property reporting history, including copies of reports, voluntary compliance agreements and audit history; Exemption and due diligence history; Current liabilities that have not yet tolled the dormancy period; Third party agreements, including stock transfer agents, payroll administrators, rebate administrators, etc.; and, Merger and acquisition history including state of incorporation for all entities. One factor that can hinder an unclaimed property review is record retention. The preferred record retention period for unclaimed property is at least ten years, since most unclaimed property audit lookback periods are ten years or greater. If the target company was compliant with unclaimed property laws but failed to retain evidence, it could further prolong the review period. Non-compliance altogether could also delay the acquisition until estimations are completed and mitigation efforts or a resolution plan is implemented. So, Caveat Emptor. Be sure to include an unclaimed property review in your transactional due diligence. Otherwise, you could end up with an unclaimed property headache and a real case of buyer’s remorse.

Among the many compliance obligations that corporations have, one that can be the most complicated and costly to an organization, if neglected, is unclaimed property compliance. While each state has its own unclaimed property law, and no two laws are exactly alike, every state has the authority to audit the books and records of a holder if the state has “reason to believe” that the holder is not in compliance with the state’s unclaimed property law. [More]

Delaware has long been known for its aggressive position on unclaimed property audits that included prolonged lookback periods, debatable extrapolation methods and no express period for record retention. Despite improvements, there are still areas that remain unclear and require further definition. Holders considering taking any action in Delaware should carefully consider all of their options and risk tolerances and make an educated and informed decision that best suits their organizational goals. Finally, in June 2016, the Federal District Court in Delaware issued a decision in the Temple-Inland v. Delaware case affirming that these practices amounted to a “game of gotcha” that “shocked the conscience” and further violated the due process rights of Temple-Inland. As a result of this case, and after years of Delaware-incorporated companies complaining about the State’s aggressive position on unclaimed property, Delaware has made attempts to update and clarify its outdated unclaimed property law and provide holders with more opportunities for voluntary compliance by passing Delaware Senate Bill 13. With Bill 13 the State has adopted some of the provisions of the Federal 2016 Revised Uniform Unclaimed Property Act[1]. Notable attempts at clarification in Bill 13 include: · Defining an “indication of owner interest” which now includes written or oral communication and accessing account information. It also recognizes that activity in one account equals activity for all other accounts linked to the same owner. · Defining “last known address” as the description, code or other indication of the location of the owner which identifies the state of the address of the owner. · Defining the process and timeframe for disposal of securities being held by the state and provides options for owners claiming securities. It also affirms the current law that owners of securities must receive due diligence notice prior to sale of the security. · Defining the record retention period at 10 years from the date the unclaimed property report is submitted. · Adopting and defining the “knowledge of death” concept as a trigger for dormancy for life-insurance proceeds. · Adding the terms “goods” and “services” into Delaware’s gift card provision, stating “the amount unclaimed is the amount representing the maximum cost to the issuer of the merchandise, goods or services, represented by the card”. · Addressing the transfer of liability and providing that liability can only be transferred to related entities.   While attempting clarification, the law also seems to address the specific issues that arose in the Temple-Inland v. Delaware case, including: · Reducing the lookback period to 10 years for both audits and VDAs. · Setting the statute of limitations at 10 years from the date the unclaimed property obligation arose. · Mandating that the state must adopt extrapolation methodologies by July 1, 2017. · Eliminating the administrative review process and giving the state court the authority to review questions of law relating to an unclaimed property examination. · Prohibiting Delaware from taking property into custody that is exempted by the first priority rule. (Under the first priority rule, property containing a last known address is reported to the state of the owner’s last known address. If no address is known, it is reported to the state of incorporation, which in many cases is Delaware.) Finally, the changes in law present some opportunities to holders that could be beneficial to those currently under audit or those that find themselves out of compliance, including: · A two-year accelerated audit program is offered to holders currently under audit. This means that the state has two years to complete the audit but there is a caveat to the holder, the holder must respond to the auditor’s requests for information “within the time and in the manner established by the State Escheator”. · Conversion from audit to VDA. Holders under audit as of July 22, 2015 may enter into the VDA program and be relieved of penalties and interest that could be assessed in an audit. · Creation of a compliance review program – permitted when the State Escheator believes that the report filed was inaccurate, incomplete or false. All of the states need to update, clarify and define vague and outdated unclaimed property laws and we will see many states adopting portions of the 2016 Uniform Unclaimed Property Act in the months and years to come. Delaware may have been forced into early adoption due to the Temple-Inland case, but their efforts to take action are a step in the right direction. There are many opportunities for the holder community, particularly those who may be under audit or find themselves out of compliance, to give careful consideration. However, there are still areas that remain unclear and require further definition. Holders considering taking any action in Delaware should carefully consider all of their options and risk tolerances and make an educated and informed decision that best suits their organizational goals. [1] an effort by the Uniform Law Commission, with representation from the holder, state and industry-related associations, to update the 1995 Uniform Unclaimed Property Act and address electronic commerce and other means of doing business that have evolved over the last twenty plus years.

Maureen Ferrari-Grollman, Managing Partner, Unclaimed Property Advocates Due diligence, the official notification sent to the owner of a dormant account advising that their account will be reported to the state if no action is taken, is a mandatory step in the unclaimed property reporting process in all states. And because state laws vary, so too do the requirements for the due diligence mailing. In other words, one size does not fit all when it comes to meeting state’s requirements. Some variances in the due diligence process include: Timing of the mailing – Some states require due diligence letters to be sent 60-120 days prior to the reporting deadline. In other states it can be as much as nine months to one year or as little as 30 days. Content of the letter – Specific language may be required within the body of the due diligence letter. It can include certain disclosures about the account type and what happens to the account if the owner takes no action. Many states will post a sample due diligence letter on their web site. Mailing requirements – A few states require certified postage either for all letters or if the value of the property exceeds a certain amount. New York requires both first class and certified mailing for owners whose property is valued over $1,000 if they do not respond to the first class mailing. Meeting all of the special requirements warrants careful attention to the compliance details of each state, keeping in mind that they can change from year to year. Staying current with due diligence procedures and a year-long timeline is an effective way to manage this complex process. Can you get ahead of the game? Absolutely! Early outreach, before the state unclaimed property law requires it, is an excellent way to establish customer contact before the account becomes too “stale”. Reaching out to a customer six to twelve months after an account has become dormant, or a check remains uncashed, will significantly increase your chances of location and reunification. If you add some owner location efforts for those account holders who are non-responsive or lost, you can increase the likelihood of returning the property to the owner, or reinstating/reactivating an account before it reaches the mandatory dormancy period. In addition, you can reach an owner via first class mail before a state requires the more expensive certified mailing. Early and often, with owner location efforts for high dollar value accounts, is the key to a customer-effective and cost-effective due diligence program. Inevitably, though, when a person receives a letter stating that they are owed money, there can be some element of skepticism; and rightfully so. Society has taught us that if it’s too good to be true, it probably is. Back in the mid-1990s when I worked for Pennsylvania’s Unclaimed Property Department, the PA Attorney General used the lure of an unclaimed property letter as the basis for a sting operation for wanted criminals. It took the Unclaimed Property Department a long time to regain credibility and reassure the public of the legitimacy of our letters, ads and outreach. Companies should have an awareness of consumer skepticism when crafting due diligence letters. While there is not much room for customized messages after incorporating the required language, you should ensure that the letter contains the same branding as other company correspondence and provides the contact information of an informed individual or call center that can be prepared to answer questions about the letter and unclaimed property in general. Enclosing a separate Frequently Asked Questions brochure can be helpful in explaining the purpose of the letter. While some who receive the letter may allege fraud, there are those that are willing to commit fraud in order to claim money that is not rightfully theirs. Management must be especially mindful of this possibility and have policies and procedures in place not only to ensure accurate payments to entitled parties, but identify the potential fraudsters and stop them in their tracks. Due diligence is undoubtedly a process. It involves crafting a letter that will uphold statutory language, sending it according to statutory timeframes, and processing returns to your customers, all with an awareness that the consumer may think the letter is a fraud and the responder may be trying to commit fraud. How UP Advocates Can Help UP Advocates can serve as your partner for a fully outsourced unclaimed property solution, or we can work with you to advise you on policies and procedures for best practices in the due diligence process. For more information, please contact Maureen Ferrari-Grollman at meferrari@upadvocates.com.

Maureen Ferrari-Grollman, Managing Partner, Unclaimed Property Advocates A review of recent unclaimed property related news reveals state’s jurisdictional battles playing out in the courts, legislators proposing laws to broaden unclaimed property laws and plug budget shortfalls, and states seeking jurisdiction over matured federal savings bonds. The pressure to increase non-tax revenue among the states is real (take it from a former state unclaimed property administrator). Because of this, enforcement of unclaimed property laws has been at an all-time high. Through the use of contingency fee audit firms, or via their own internal audit staff, states are exercising their statutory authority to audit the books and records of unclaimed property “holders” believed to be out of compliance with unclaimed property laws, either from lack of reporting altogether, under-reporting, or inaccurate reporting. And finally, penalties and interest are being applied by some states for late reporting or not complying with the reporting format or payment methods. Lack of Reporting If your company has never reported unclaimed property, or has not consistently filed reports over the years, it is probably only a matter of time before you end up on the state’s radar. Most likely, your state of incorporation, your corporate headquarters or any state where you have a large footprint, will be raising the red flag. Even publicity, good or bad, can draw the attention of the state’s unclaimed property administrator. Over the years, state agencies have been more cooperative in sharing information with the unclaimed property department. This information may include companies incorporated in the state, companies paying state corporation taxes, companies with liens and fines. And, if your company files a claim to recover unclaimed property, and has never filed an unclaimed property report, you can almost guarantee an increased level of scrutiny before any money is ever paid out. Under-Reporting Think you are in compliance by filing a report annually with the states? Think again. Under-reporting, (not turning over all property due and owed to the state) can also land your company on the state’s audit radar. Based on industry type, the states have expectations about what property types should be reported. There is also an expectation that all divisions and subsidiaries will be in compliance as well. States compare you to your competitors and others in your industry of similar size and revenue. If company A is reporting an average of $100,000 in unclaimed property each year and Company B is reporting $10,000 in property, it may lead to increased scrutiny for Company B. Similarly, if Company A is reporting wages, commissions, accounts payable, and accounts receivable but Company B is reporting only wages, commissions and accounts payable; at minimum, Company B may receive an inquiry from the state regarding the accounts receivables. Inaccurate Reporting Preparing and filing unclaimed property reports can be a complicated, arduous task. Just as the act of filing the state report does not necessarily equal compliance, it also does not assume complete accuracy of the data reported. The most common mistakes are incorrectly determining the dormancy period and reporting property to the incorrect state. Dormancy periods vary by state and by property type. They require frequent monitoring to ensure that they are up-to-date and accurate. Most unclaimed property software companies will provide updates as part of the subscription, but if they are not applied, or if you are using free online reporting software and thus performing your own dormancy calculations, there is a high level of risk that the incorrect dormancy periods could be applied. In addition to incorrect dormancy calculations, reporting property to the incorrect state is prevalent. In a Supreme Court decision, upheld for over fifty years, the first rule of jurisdiction holds that the property must be reported to the state of the owner’s last known address. Absent an address, the property is reported to the state of the company’s incorporation.[1] One common mistake is reporting all property to the state of incorporation, either as a way of dumping all unclaimed property onto one report, or under the misconception that states have reciprocal agreements and will send the property to the appropriate state. While some states advise that they will accept de minimis amounts property on behalf of other states, the practice of reporting all property to one state is ill-advised. The concept of reciprocity among the states is both fleeting and inconsistent at best. While some states make a good faith effort to send property due to other states on a regular (usually annual) basis, other states do so as time and resources permit, and will often only reciprocate to those states that send property to them. In addition, reporting all property to one state does not negate the dormancy rules of the other states. You are still obligated to apply the proper state dormancy periods to ensure that the property is being reported at the appropriate time required by law. Late Reporting Missing a state’s reporting deadline, not filing in the appropriate format or not abiding by the state’s rules for preferred payment method can also result in penalties and/or interest according to some state laws and, at minimum, increased visibility on the state radar. While the states, for the most part, will accept the NAUPA (National Association of Unclaimed Property Administrators) format, there are some state-specific variations that may apply, depending upon the type of property being reported. Reporting formats, payment methods and remittance directions can usually be found on the state web site. Making it Right If you find that your company has committed one or more of the infringements above, there are remedies available that leave you in control of the process before the states come knocking at your door. To get into compliance, states sometimes offer one-time amnesty programs with generous provisions for reporting large amounts of out-of-compliance property. More often, you have the option of enrolling in a state’s Voluntary Disclosure Agreement (VDA) Program. The program requirements vary by state but generally offer a way to report out-of-compliance property penalty and/or interest free and be relieved from audit of the property reported. In some states, the process of obtaining a VDA can be as remarkably simple as making a phone call to the unclaimed property administrator, in other states it will require a formal agreement along with disclosure of the methodologies used for determining the liability. Navigating the various state rules surrounding VDAs can be time consuming, but well worth the effort to be in control of the process and avoid fines and penalties that can sometimes exceed the liability. In the event that circumstances beyond your control will prevent you from filing a report on time, many states are reasonable in working with you to extend the deadline. Extensions are usually granted for system issues, sudden personnel changes, natural disasters, weather-related emergencies and other unforeseen events. This is a viable option when making the deadline is not. How Unclaimed Property Advocates Can Help We can assist you in determining your unclaimed property liability. Once this determination is made, using our state and holder advocacy experience, we can establish a state by state strategy for resolving the liability. This can be done through mitigation, enrolling in a VDA program, or simply filing an unclaimed property report. We will work with you to create a customized solution that minimizes risk while carefully considering the cost effectiveness of the approach. Once you are in compliance, we can turn the annual compliance process back over to you or we can become your partner moving forward. We can create policies and procedures for ongoing compliance, conduct staff training and development to manage an effective unclaimed property program, or become your outsourced provider for annual compliance reporting. For more information please contact Maureen Ferrari-Grollman at meferrari@upadvocates.com. [1] Texas v New Jersey, U.S. Supreme Court, 1965

States have “discovered” unclaimed property revenue can be an alternative to a tax increase, and consequently it is an increasingly important source of operating funds among all 50 states. As a result of this increased attention, unclaimed property laws, and states’ administration and enforcement practices, are regularly changing. Businesses need to keep pace to protect their interests. Under unclaimed property laws, a “holder” of unclaimed property is required to report and remit unclaimed property to a state after the property has remained unclaimed by its owner for a specified period of time (usually three or five years, depending on state law). States have the statutory authority to audit any business for compliance. They may do so with their own internal resources, or they may hire third party audit firms that have a contingent financial interest in the property that they turn over to the state. Interest and penalties can be assessed for over 100% of the underlying liabilities, going as far back as 1981. Given this environment, if your business has not actively been pursuing unclaimed property compliance, it may be time to take a closer look. Following are some considerations to help you evaluate the applicability to your business relative to annual reporting, compliance and risk management: Annual unclaimed property reporting is required in every state Reporting can be complex, as all state laws are different Non-compliance with annual reporting requirements can be costly, with States possessing growing statutory authority to issues fines, penalties and to conduct audits of business records The average penalty imposed by the state is 12% of the individual account value, with the interest beginning on the date the property should have been reported In some circumstances, the fine far exceeds the value of the property In select states, unclaimed property revenue serves as a non-tax form of revenue to fill budget gaps Most unclaimed property audits involve multiple states, lasting 3-5 years, and are conducted by outside audit firms that work on a contingency basis Recent jurisdictional disputes among the states have reached the level of the Supreme Court States are becoming more aggressive in changing laws to lower dormancy periods (the amount of time a company is required to hold an account or credit on their books before it qualifies as unclaimed property) to generate more unclaimed property required to be reported to the state For example, Pennsylvania recently lowered its dormancy period from five to three years and also redefined the requirements for when Individual Retirement Accounts become reportable, which can be long before the date of mandatory distribution Unclaimed property compliance should be part of your merger and acquisition review Acquisition of a large unclaimed property liability places your company at risk, and liabilities that have been written off into income can overstate the value of a company Given these considerations, unclaimed property compliance is not something that can be ignored in any organization. Having an active, robust program, that is part of your company's risk management and compliance programs, can help you maintain positive customer relationships and be good corporate citizens at the same time.