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KeepUP™ Blog

9/19/19 8:27 AM

Electronic Payments and Unclaimed Property

by Brian McGill

One Finger Presses Green Button Electronic Funds Transfer on Black Computer Keyboard. Closeup View. Selective Focus.In today’s business world, companies are using more and more electronic payments to pay what they owe instead of using paper checks.  The widespread use of direct deposits, wires and ACH’s came about because they are quicker, easier, and have a much lower chance of becoming an unresolved liability (than an uncashed check), because the amounts are being deposited directly into accounts provided by the payees.

Using electronic payments lessens the possibility for the creation of unclaimed property as these payments types rarely fail.  However, when they do fail, it is important that the payor identify and research the reason for the failure and correct any errors to ensure the obligation is paid and does not go unresolved.

As electronic payments rarely fail, they are not high on the list of potential unclaimed property types that companies might focus on.  Unfortunately, unclaimed property auditors are beginning to highlight these payment types focusing on rejections and bounce backs to see how the related obligations are satisfied.

Why Auditors Are Highlighting Unresolved Electronic Payments

If documentation is not available to show how direct deposit/wire/ACH bounce backs are reissued and cleared due to process gaps, it could lead to auditors asserting that unresolved funds related to bounce backs are potential unclaimed property.

In addition, due to the volume of electronic payments associated with foreign transactions, when a company’s state of incorporation is a participant in an audit, an auditor is likely to be more interested in failed electronic payments, as the state of incorporation may claim foreign addressed unclaimed property under the second priority rule.

What Companies Should Do To Combat Auditors

The best defense from auditors is to ensure a company is correctly handling these types of transactions.  The following lists some suggestions for companies to consider when an electronic bounce backs occurs.

When a direct deposit/wire/ACH is rejected (e.g. the payee’s account is closed), a company should follow appropriate policies and procedures that limit the creation of unclaimed property.

  • If a check is issued, the company should maintain linkage between the direct deposit/wire/ACH and the reissued check and ensure the check clears the bank.
  • If a direct deposit/wire/ACH is reissued electronically, the company should maintain linkage between the original and reissued payment and ensure the payment clears the bank.
  • If a third-party administrator (TPA) is involved, (e.g., a payroll processor), the company should ensure that the funds are returned to the company when direct deposits/wires/ACH’s are rejected, so that the company can pay the obligation by check or can acquire updated bank account information from the payee and reissue the payment electronically.
  • If the funds are not returned, the company should ensure that the TPA will escheat any unresolved amounts and provide the company with proof of the escheatment.

If not already in place, a company should create formal policies and procedures to document how rejected electronic payments are to be resolved.  Included in these policies should be the maintenance of documentation linking the original with the subsequent, cleared transactions.

MarketSphere Unclaimed Property Specialists can provide expert guidance to holders in need of review, creation, and implementation of escheat policy and procedures, as well as, providing services to meet any unclaimed property challenge. Contact Us today and schedule a no cost/no risk consultation to discuss your needs.

Topics: Compliance, Audit, Best Practices