KeepUP™ Blog

This blog was originally created at the request of the Association for Financial Professionals (AFP) organization and posted to their website in August 2019 in a series dedicated to the education of its’ members and attendees of the 2019 AFP Annual Conference in Boston, Oct, 20-23.

The likelihood of an unclaimed property audit has increased in recent years due to several factors, including the proliferation of third-party auditors, realization by states that significant amounts are involved, and the escalation of unclaimed property litigation. Escheat compliance is no longer optional and being audited is not a matter of if, but when.

Situations and events that may bring an auditor to your door include:

• Failure to file or filing late
• Filing negative reports year after year
• Filing incomplete reports or reports that don’t match remittance
• Not filing in the state’s required format
• Not reporting property types that are standard for your industry
• Reporting much less than similar organizations
• Filing to the incorrect state
• Mergers and acquisitions
• Claiming property without being compliant

Delaware continues to focus on unclaimed property compliance, with its’ Voluntary Disclosure Agreement (VDA) program at the forefront of this push.  Since the latter part of 2018, Delaware’s Secretary of State has been consistently mailing VDA invitations and continues this practice on an on-going basis. 

Based on correspondence that MarketSphere received on September 24, 2019 from the office of Delaware’s Secretary of State, the latest round of VDA invitations have recently been mailed to a number of Delaware incorporated companies.  Targeted companies now include middle market companies with annual revenues of $50M and above. Click here to see a sample correspondence from September 2019.   

The correspondence notes: 

Pursuant to 12 Del. C. §1173(b), the Delaware Secretary of State (SOS) recently sent out letters inviting companies to enter the Voluntary Disclosure Agreement (VDA) Program. Any company that receives a letter is encouraged to enroll in the SOS VDA Program to facilitate compliance with Delaware’s Abandoned or Unclaimed Property Law.

Invitees have 60 days from the date of the invitation to enroll in the SOS VDA Program by completing, executing and submitting Form VDA-1 Disclosure and Notice of Intent to Voluntarily Comply to the Secretary of State.  If an invitee does not enroll in the SOS VDA Program within 60 days of the invitation mailing, the company will be referred to the State Escheator for examination.

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.

Over the last several years the use of block-chain technologies and their associated cryptocurrencies have grown tremendously. As with many new areas of commerce, growth is usually followed by an onslaught of challenges brought on as governments and regulatory agencies try to decide how to adapt to or fit this new square peg into the round hole of already established laws and regulations.

In the world of unclaimed property, cryptocurrency is just now being recognized in various new statutes and proposed legislation.  Many states, including IL, KY, NV, TN and UT, have adopted some form of the 2016 Revised Uniform Unclaimed Property Act, which includes “virtual currency” in the legislative definition of “property”.  In addition, NY has recently introduced legislation calling for unclaimed cryptocurrency to be escheated to the state upon abandonment.

Whether you are a company that has emerged as a part of the support system to the cryptocurrency world (e.g., coin exchanges) or simply a company that has begun to accept Bitcoin or other similar cryptocurrencies as payment, it will be important that you are prepared for these challenges and are proactively addressing potential issues that can emerge. One often overlooked area for consideration, is the impact of the various states’ unclaimed property laws and regulations.

State enforcement of unclaimed property compliance continues to rise.  States are auditing more companies than ever in order to validate that unclaimed property is being reported accurately and completely.  To prevent an audit, many holders over-report property, escheating items that are not actually unclaimed property, or may not be reportable to the states. However, this practice could cause red flags.

The two most common transaction types that are not considered to be unclaimed property are accounting errors and exclusions/exemptions.

Accounting Errors

Accounting errors are not unclaimed property.  Unfortunately, errors in accounting systems do occur that cause items to appear to be outstanding or unresolved, when in fact they are not. This leads to the potential for over-reporting.  Examples of accounting errors include:

• duplicate payments
• voids that were never processed
• misapplied payments.

Prior to reporting, research should be performed to identify and correct accounting errors and avoid over-reporting.   

Exclusions/Exemptions

Many state statutes include provisions that exclude certain transactions from the definition of unclaimed property, or specifically exempt the property from reporting.  An example of a state exclusion appears in the Kansas unclaimed property law, whereby:

Annual unclaimed property reporting has many distinct steps.  These include, maintaining up-to-date compliance rules, compilation of potentially reportable transactions, identification of exemptions and deductions, mailing of due diligence notification letters, and reporting and remitting funds to the various jurisdictions.     

Once a holder has analyzed its’ data to determine potentially reportable items, the next step is the performance of due diligence, which includes determining which accounts require a statutory due diligence mailing, when the states require the mailing of the letters and the content of the letter.

States generally require a notice to be sent to the last known address of the owner of the funds as indicated in the holder’s records before the property can be escheated to the states. This gives the owner one last opportunity to claim their funds before they are turned over to the state. Over the years, states have placed greater emphasis on due diligence and various components of the process, including:

Delaware continues to focus on unclaimed property compliance, with its’ Voluntary Disclosure Agreement (VDA) program at the forefront of this push.  Since the latter part of 2018, Delaware’s Secretary of State has been consistently mailing VDA invitations, and our information is that Delaware will continue this practice on an on-going basis. 

Based on correspondence that MarketSphere has received on May 20, 2019 from the office of Delaware’s Secretary of State, the latest round of VDA invitations will be mailed to a number of Delaware incorporated companies in the very near future.    

The correspondence notes: 

Pursuant to 12 Del. C. §1173(b), the Delaware Secretary of State (SOS) soon will distribute letters inviting companies to enter the Voluntary Disclosure Agreement (VDA) Program. Any company that receives a letter is encouraged to enroll in the SOS VDA Program to facilitate compliance with Delaware’s Abandoned or Unclaimed Property Law.

Invitees have 60 days from the date of the invitation to enroll in the SOS VDA Program by completing, executing and submitting Form VDA-1 Disclosure and Notice of Intent to Voluntarily Comply to the Secretary of State.  If an invitee does not enroll in the SOS VDA Program within 60 days of the invitation mailing, the company will be referred to the State Escheator for examination.

Even though it seems like a long way away, Fall unclaimed property reports will be due before you know it.  With Fall states reports generally having deadlines of November 1, now is the time to create a checklist to ensure you meet the deadlines.  The following, while not in-depth, contains the most important tasks for you to perform.

1. Understand State Requirements

Before starting the process, it is imperative that holders understand existing state statutes and regulations, and determine whether there have been any changes from the previous year that may impact the current year’s filings.  If you use software, you should ensure that you are using the most current update provided by the software vendor. Unclaimed property law is a dynamic environment. Over the last few years, some states have made minor changes to their unclaimed property laws and administrative rules while other states have significantly overhauled their unclaimed property laws.  With all of these changes and more changes likely on the horizon, it is more vital than ever to keep current with the statutory environment.

On April 16, 2019 Colorado joined the growing group of states that has adopted RUUPA, when the governor signed S.B. 19-088, the Revised Uniform Unclaimed Property Act (“Act”) into law.  The Act is effective July 1, 2020 and while it contains many of RUUPA’s provisions it also includes certain provisions that are not contained in RUUPA. 

The legislation makes many changes to the existing statute, the highlights of which include repealing the existing reporting deduction, stipulating record retention requirements, allowing use of estimation methods for the failure to retain records, imposing interest and penalties for failure to act in a timely manner and providing a transitional provision.

Reporting deduction eliminated

Colorado’s current unclaimed property statute provides that “A holder may voluntarily, prior to payment or delivery of said abandoned property, deduct and retain [2%] of the value of the property or [$25] whichever is more per item…”. The Act does not include a similar provision.

Retention of records

The Act provides that “a holder required to file a[n unclaimed property] report … shall retain records for ten years after the later of the date the report was filed or the last date a timely report was due to be filed, unless a shorter period is provided by rule of the administrator”.

Companies are generally familiar with the unclaimed property that they generate and the process for reporting and remitting that property to the various states.  Having good policies and procedures that help you identify, evaluate, mitigate and ultimately report unclaimed property housed on your books and records allow for companies to comply with state statutes.

But what happens when any unresolved liabilities are not recorded on your books and records?

This situation occurs when a company uses the services of a third-party administrator (TPA).  Companies use TPA’s for a variety of property types, including stocks and bonds, payroll, rebates, gift cards and benefit programs.

In these cases, the TPA’s maintain the records and the company may have limited to no visibility about any unresolved liabilities.  Why is this a problem?  Unless the contract between a company and a TPA includes specific language transferring the escheat responsibility to the TPA, states will consider the company the holder of any related unclaimed property and expect the company to report that unclaimed property.  Obviously, this is a problem if the TPA has all the relevant books and records. 

What should a company that employs TPA’s do to ensure it remains compliant with the unclaimed property statutes?