Unclaimed Property: Dissecting Due Diligence

Holders: You’ve finally got all your outstanding checks in order and have ensured you are not remitting more than you need to the various States to comply with their unclaimed property reporting requirements.

As you perform a double check to make sure your company is totally compliant, you come across the State due diligence requirements.

Unclaimed property due diligence – what is it and what does your company need to do in order to comply.

One State defines due diligence as a “written notice sent by a Holder, after the appropriate dormancy period has elapsed, that informs the Owner that his/her property will be turned over to the State as abandoned property unless the Owner contacts the Holder”.

While another’s definition is “the use of reasonable and prudent methods under particular circumstances to locate apparent Owners of inactive or dormant accounts”.

Whatever State definition you look at, due diligence is an unclaimed property compliance function that requires Holders to reach out, normally through a first class mailing, to Owners of unclaimed property to try and re-establish contact. It’s the beast inside the beast of unclaimed property compliance reporting!

The object of Holder due diligence is to:

1) establish contact with the true Owner;

2) return unclaimed property to the rightful Owner;

3) and to find Owners of unclaimed property that has remained dormant on the Holder’s books and records for a specific period of time.

The Holder benefits achieved through the due diligence process include:

  1. Owner communication may be re-established.
  2. It may prevent current, past and future unclaimed property reporting obligations.
  3. Successful due diligence provides positive customer service.
  4. Positive Owner contact from due diligence may decrease workload (item is no longer unclaimed).
  5. It may even increase business by the Owner re-depositing the lost funds in to another account with the organization.
  6. Most importantly, performing due diligence alleviates possible fines or penalties for non-compliance.

What are the requirements of State due diligence?

Although Statutes do not normally prescribe the steps/letter specifics, some type of due diligence is required by the majority of State statutes.

In general, a search letter, sent first class mail, is required to be mailed 60 to 120 days before the report due date which means it should be mailed between July 1 and September 1 for most Holders.

However, for Insurance Companies and Holders with spring reports, this mailing should be done between January 1 and March 1, as a rule of thumb.

In most cases this mailing is required to be a first class mailing. In most States, the costs of these mailings cannot be deducted as the States consider it a “cost of doing business”.

Three States, Delaware, New York and Puerto Rico also require certain Holder types to advertise in local newspapers. Although for Puerto Rico its only applies to companies incorporated or physically located there, where for New York and Delaware it’s mostly for Financial Institutions and Insurance Companies. Please check with each State’s individual law for further instruction/information/requirements on this advertising function.

The basic components of a due diligence letter include:

  1. a statement that the unclaimed property will be reported to the State if the Owner does not respond;
  2. a statement of property type;
  3. a statement that the Owner can always reclaim the property from the State;
  4. a statement of the date by which the owner must respond back to the Holder in order to claim the property;
  5. and the name, address, email and phone number of the Holder contact person on the letter.

A typical State due diligence statute includes the following: The Holder has an address in their records for the apparent Owner and the records do not indicate that the address is bad or inaccurate. (some State statutes say an address where “mail can be delivered”). The claim of the apparent Owner is not barred by any other law of this State (child support/delinquent taxes). The value of the property is at least ____ dollars [$____]. In most States the due diligence amount corresponds with the State’s aggregate amount. So if a State has an aggregate amount of $50.00, then the Holder would only need to perform due diligence on property items valued over $50.00.

There are about a dozen or so States that require certification that the due diligence was done. This is normally fulfilled when an Officer of the company signs the State affidavit/verification & checklist.

There are a few States, where under certain situations, require the Holder to send out their search letters Certified Mail, and in some cases this mailing cost is deductible. These States include Iowa, New York, New Jersey and Ohio. Please refer to each State’s individual statutes for further information.

Although most States do not allow the cost of the search letter mailings to be deducted (it is considered the “cost of doing business”), California, Illinois and Nevada are three States where the Holder may deduct the cost of these mailings. Please refer to each State’s individual statutes for further information.

The Holder checklist for due diligence should include the following prior to any mailing.

  1. Has the Owner increase or decreased the account?
  2. Has the Owner contacted the Holder about the account?
  3. Has the Owner indicated an interest in property?
  4. Does the Owner have any other accounts with the Holder?
  5. Is the Owner a current employee of the Holder’s?
  6. Is the Owner a well-known individual business or government entity?

How long should the Owner have to respond to the search letter?

Some States prescribe a specific time period. Some States say 30 days, where others say 60. Some States say until October 1 before a November 1 report due date. Others actually suggest to “allow enough time for the Owner to respond”.

Are there audit concerns for non-compliant due diligence?

Yes. All Holders need to keep documentation to verify due diligence was performed and also keep a copy of what the actual letter looks like and says. Some State statutes now allow for penalties for due diligence non-compliance.

What are some best practices suggestions for Holder due diligence?

States due diligence requirements are mandatory as a final step prior to escheat reporting and remittance. Holders can perform their own internal due diligence prior to the mandatory requirements. Holders may decide to send first class mailings 6-12 months prior to the dormancy to reduce certified mail candidates, or elect to send an easy to respond due diligence mailing 6-12 months prior to the dormancy period ending.

How can Holders increase positive due diligence responses?

Make sure outgoing envelopes do not look like junk mail. Print key words on the envelope itself such as: “Time Sensitive – Open Immediately”; “Mandatory Response Required”; or “Unclaimed Funds/Money”. Keep the due date time short to force a quick response, such as 30 or 45 days to respond to letter. Give options on how to respond such as by fax, mail, telephone, or email. Lastly, use understandable words, not “Escheat”.

All in all, fulfilling the State required due diligence requirements can be a burden. But with a thought out process, practice and good in house procedures, after the first couple of times it can become an afterthought incorporated into your in-house unclaimed property policies and procedures.

Think You’re In Compliance? – Think Again – You May Need Unclaimed Property Consulting from PEACC.com

How can a Holder/Company be reporting unclaimed property and still not be compliant?

– By disregarding or not performing the State mandated
annual due diligence/search letter mailing.
– By reporting all property to just one State or the State of
Incorporation.
– By reporting property using an incorrect holding/dormancy
period or ‘covered to/cut off” date.
– By assuming a third-party is reporting certain unclaimed
property on your behalf (benefits/payroll).
– By having a lapse in reporting history or consistency.
– By under or over reporting or failure to report all property.
dollar amounts or types.
– By not filing Negative or Nil Reports.
– By not understanding the customer/payee-generated contact
rules.

Unclaimed Property – Whats All The Fuss About? Visit PEACC.com

Although unclaimed property has been around for years, it is still a fairly new issue for some companies throughout the United States. Unclaimed property, also known as “escheat”, evolved during the days of English Common Law.

When an event disrupted the natural descent of property, such as no heirs, the property was “escheated” to the Lord of the Manor. Escheated property then became the sole property of the Lord of the Manor, and rightful heirs lost all claim to the property indefinitely.

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Evolution of Modern Day Unclaimed Property
Unclaimed property has come a long way from the days of English Common Law. In those days all unclaimed property was tangible, normally made up of land and stray animals, including  horses and cattle.

Today unclaimed property consists of intangible property, such as dormant bank accounts, uncashed checks,  unreturned deposits and credit balances. Unclaimed property normally falls under two separate categories, either general ledger property types, or securities related property.

Unclaimed property laws require reporting to the appropriate State jurisdiction, where each State has their own unclaimed property laws and regulations. Each State has specific due date(s) that unclaimed property must be reported by. The due dates are determined by dormancy period and type of property. Depending on the property type, the dormancy period, on average, ranges between one to five years.

Each State requires companies to perform this reporting process on an annual basis, along with the State mandated due diligence/search letter requirements.

Generally, and as a rule of thumb, most corporations, banks, and financial institutions are required to submit their reports and remittance by October 31 of each year.

Reports and remittance for most insurance companies are due by April 30 of each year. There are a few States where the reporting due dates may differ.

All States now act as custodians of this reported property and will turn the property back over to the rightful owner or heirs with true claims to it.

The goal on most State Unclaimed Property Offices is to get this unclaimed property back to the rightful owner’s hands.

Although, as history has it, on average maybe only 25% to 28% of this property is actually ever reclaimed and paid out by the States to the rightful owner.

California Decides Against Amnesty

The California State Controller’s Office (“SCO”) has been researching options for increasing Holder compliance to their unclaimed property reporting requirements for about a year. One of the options was to offer Holders an Amnesty Period that would waive any interest or penalties on any property reported past due. Numerous years ago the State offered the same type of Amnesty Period and it produced a major windfall of property revenue for the State.

However, upon completion of their research, and for some strange reason, the State decided NOT to offer an Amnesty Period because it was deemed “an ineffective solution to address noncompliance”. Additionally, the SCO also decided that implementing an Amnesty Program would “perpetuate inconsistent compliance” by the Holders which would lead to additional costs for the State due the number of unclaimed property reports that would potentially be received and processed.

The SCO’s reporting laws and guidelines do allow for Holders to report property late and, for any penalties and/or interest assessed, the Holders can request these penalties be abated if they can prove “reasonable cause”. This process essentially acts as a one-time amnesty program for the Holder.

Keep in mind the “reasonable cause” claimed by the Holder must be accepted by the State in order for any penalties to be waived. This acceptance process may take up to 9 months for the State to decide.

This SCO’s decision not to offer a Amnesty Period is a definite set back for the Holder Community. For further information on this recent decision and the best way to report unclaimed property to California or any other State(s), please feel free to contact PEACC to discuss all the options.



Key Points from Delaware’s February 2020 VDA Invitation – PEACC.com

• Delaware’s Secretary Of State Voluntary Disclosure Agreement (“VDA”) invitations mailed out in February 2020 have been granted a response extention.
• Responses are now required by July 18, 2020.
• These extension only apply to companies that received the VDA invitation in February 2020.
• Recipients of this letter may include the CFO, General Counsel, Accounting Manager or others.
• It is important to inform all persons and departments of what action they should take if they have received this February 2020 DE VDE invitation letter.
• If recipients do not respond to the invitation by the July 18, 2020 due date, they may/will be referred for an unclaimed property audit.
If you firm is contemplating participating in the Delaware VDA invitation, please feel free to contact us at 410.303.5510 for a free discussion as to whether or not it may be right for you.

California Amnesty Update II – stayed tuned…..

California’s Governor recently signed the Budget Act of 2019 (SB 109). Within the Act, there is a provision which requires the Controller to provide the Joint Legislative Budget Committee and the chairpersons of the fiscal committees in each house of the legislature with a report on plans to provide for a one-time unclaimed property amnesty, or other options to increase compliance with the unclaimed property law in lieu of an amnesty program. The Controller must also provide options for increasing the return of unclaimed property to rightful owners. The due date for report is March 1, 2020. The State did offer an Amnesty Program about 20 years ago, for a year. Many Holders took advantage of it It was so successful and brought in so much unclaimed property penalty and interest free, the State extended the Program for a year.

Main Benefits of a Self Unclaimed Property Audit or a Voluntary Disclosure Agreement (“VDA”)

– Waiver of interest and penalties on property reported late or past due.
– Reduced look-back period. Normally 10 years plus the dormancy period.
– The company has more control of the audit/review process.
– The opportunity is there to correct any issues or discrepancies.
– If estimation is used, the company has more of a say in the process.
– The company’s specific facts and circumstances are applied throughout the self- audit/VDA process.

Unclaimed Property Audit Triggers –

With more and more States jumping on the audit bandwagon, below are issues that could trigger the dreaded unclaimed property audit:

1) Non-reporting – A company has not been reporting their unclaimed property and has never reported in the past.

2) Property owners contacting the state to claim their funds.

3) Submitting negative reports (a report saying this is no unclaimed property to report) or submitting negative reports in back to back years.

4) Not reporting all property types required. Submitting reports with only vendor checks and no accounts receivables, miscellaneous type property or payroll checks.

5) Not reporting the type of property or value of property comparable type companies are reporting.

6) Spikes and dips in reporting.  Is company reporting consistent?

7) Has company been in the news.  Has one company acquired another? Is a company making a big yearly profit?

8) Industry under audit.  Are state audits concentrating on the retail, hospitability, manufacturing, insurance, real estate industry, etc.

9) State unclaimed property employees talk amongst themselves informally at industry trade shows/seminars/conferences.

Delaware VDA Opportunity Notification Letters

Based on recent correspondence with the State of Delaware and the Holder community, it has come to PEACC’s attention that Delaware’s Secretary of State has recently mailed opportunity letters to participate in the State’s Voluntary Disclosure Agreement (“VDA”) program. These notices were mailed to hundreds of companies throughout the United States who are incorporated in Delaware. As stated in the State’s recently revised laws and regulations, companies receiving the VDA letter have 60 days to respond. Companies not responding to the letter will be referred to the Delaware Department of Finance for an unclaimed property audit. Historically, the State turns to aggressive third-party, contingency fee paid auditors to perform these audits.

With this new letter notification initiative in mind, it is a best practice for any companies incorporated in Delaware, not fully compliant with the State’s unclaimed property rules and regulations, to keep an eye out for these VDA notices so they do not miss this opportunity to participate in the State’s VDA program.  PEACC advises all companies incorporated in Delaware (not just the ones receiving the letter) ensure they are in full compliance with the unclaimed property State laws and requirements as they may again begin to aggressively enforce their reporting requirements through State and State sponsored audits.

PEACC is advising companies to let their mailrooms and other appropriate personnel know to keep an eye out for any correspondence letters from the State of Delaware so this opportunity to report through a VDA does not pass them by. Missing this opportunity will lead to an unclaimed property audit.

For further information about this Delaware VDA letter writing campaign or the State’s VDA program and its benefits, please contact PEACC at 410.303.5510 for a free confidential consultation.

California Anmesty Bill (A.B. 2773) Update

California VDA Program Update –
California A.B. 2773, a bill to establish an unclaimed property voluntary disclosure program in the state has recently been pulled. The California State Controller’s Office has expressed some concerns with the bill’s language. The bill’s author, Assemblyman Dante Acosta, has since decided to pull the bill from consideration.

However, there is hope that the the bill will be reintroduction during the next California legislative session.

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