KeepUP™ Blog

Customer relationships are the foundation of a company’s success, but if customer assets are escheated to the states as unclaimed property, those relationships could be at risk.  Studies by Bain & Company show that acquiring a new customer can cost five times more than retaining an existing customer and increasing customer retention by 5% can significantly increase a company’s profits.

Millions of dollars are escheated annually. This results in angry customers and lost profits, especially when it is their retirement or savings account. It is therefore important to understand the steps a company can take to reduce the risk of escheatment and increase its’ customer retention rate.

Escheatment occurs when accounts are deemed dormant, which occurs when there has been no “owner-generated” activity on the account for a specified period of time (the dormancy period). If the account owner does not affirmatively act to remove the dormant status of an account, by law, the account must be escheated to the state of the owner’s address once the dormancy period for that type of property has expired. Generally speaking, dormancy periods range from 3 to 5 years.

A 3-year dormancy period may seem like sufficient time in which to reestablish contact with an account owner. However, the time-frame for action is actually shorter, as companies generally do not begin to initiate proactive communication with dormant account owners until the account has been inactive for at least 24 months. Leaving the account inactive until the performance of statutory due diligence (which occurs between 2 and 12 months before escheatment), generally results in up to 80% of those accounts being escheated.

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:

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-line fraud is becoming more prevalent when it comes to unclaimed property claims. 

In a recent case of fraud, the State of Arkansas was found to have paid more than $40,000 to at least one person who used stolen identities to make fraudulent claims through the State’s online claims tool.

Auditor of State Andrea Lea indicated that the fraud used stolen identities to allow the fraudsters to pose as owners of unclaimed property held by the Auditor's office and claim the property for themselves.

A spokesman for the Auditor's office, said that whoever submitted the fraudulent claims had access to the type of documents, such as a passport or driver's license, that the office required as proof of identity for people filling out online claims, and that "this person was an expert criminal". 

Each year in the United States, billions of dollars are escheated to the states. Nationwide, the total value of escheated properties in state custody may well exceed $40- $50 billion. However, even more unclaimed property sits dormant at government agencies, counties, municipalities, courts and other local agencies that will never be reported to the states as unclaimed property. 

Before an item is reported to the states as unclaimed property, outreach in the form of statutorily mandated due diligence letters must be mailed to the last known address of the owner.  However, property held by counties, municipalities, or courts may not be subject to state unclaimed property laws. In these instances, no communication to the owner is required. However, companies may receive letters indicating they are the owners of funds being held by these entities (an “Asset Recovery” letter.) Asset Recovery letters are typically sent by third party firms attempting to help your organization recover monies you did not know you were owed.   

So how does an organization distinguish between a statutorily required due diligence letter and an asset recovery letter?

Holders breathe a sigh of relief when December rolls around.  Fall unclaimed property filings are mostly complete with only a couple of December deadlines remaining.  Time to sit back and relax through the holidays, right?  Not if you want to make your spring and summer unclaimed property reporting seasons run smoothly.

The first spring unclaimed reporting deadlines start in March and roll on from there in a steady stream until the summer reports due at the beginning of July. Mixed in between now and those spring and summer deadlines are holidays, year-end close, financial reporting requirements, quarter closes, and all your other day to day tasks and deadlines not related to unclaimed property. Below are a few things that you and your unclaimed property team can start doing now to keep ahead of the game.

• Reissue checks for the due diligence responses you received during the fall mailings. Besides just being a good business practice, reissuing these items sooner rather than later will help keep down the complaints from property owners regarding delays in receiving their money. These properties have been dormant for years. Now that the owners know about them, they want their money as soon as possible.

• Every state and territory in the United States has unclaimed property reporting laws.
• Every company (holder) has a legal obligation to report unclaimed property to the state of the last known address of the property owner.
• Most holders, regardless of size or industry, have unclaimed property to report.

How do holders know if they have unclaimed property?

• Do you have any of these types of aged/old liabilities on your accounting records?
  • Payments due to vendors
  • Credits / Account balances owed to customers
  • Wages / Compensation due to employees
  • Other types of unreconciled/undischarged liabilities (insurance claims, dividend payments, etc.)

If you answered “yes” to any of these then you likely have unclaimed property to report. However, many businesses 1) write-off these liabilities or 2) just continue to carry them on their books, month-after-month.  These are not recommended practices because reporting unclaimed property is the law. Non-compliance puts an organization at risk for audit where fines and/or penalties can be imposed which may have a significant financial impact to your company.

Unclaimed property holders know the importance of staying up to date on legislative changes, keeping apprised of issues that could impact their compliance process and learning tips that can help them improve and maintain a successful escheat program. Every month we strive to deliver information that can help holders achieve their goals. In case you missed them, here is a rundown of articles we posted in Q2 2018.

• Corporate Asset Recovery – Tax Refunds. Government agencies of all sizes, from municipalities to even the federal level, are holding significant refunds owed to companies. Learn why these funds may be available and how to recover them.
• Financial Services: Unclaimed Property Compliance Beyond Securities. There are additional unique challenges facing the financial services industry beyond securities. The impact of unclaimed property issues on the financial services industry difficult to assess. Get started by answering two basic questions: how well do you know your organization, and how well do you know your clients?
• Modern Communication in Unclaimed Property Due Diligence. Guidelines for both contact and due diligence were primarily created before modern communication formats like email and online accounts became prevalent, making it somewhat difficult to discern whether an owner has met the statutory requirements for indicating an interest in the property.  Learn how these definitions are beginning to evolve.

Due diligence plays such an essential role in the unclaimed property process that all U.S. jurisdictions require some form of pre-report communication effort by property holders. The objective is to find rightful owners and return property that has remained dormant rather than escheating it to the state. By making an effort to return property, due diligence can also improve relations between holders and those with whom they do business. 

Typically, due diligence is conducted by U.S. mail. However, in this digital age, that may not be the preferred method of communication between businesses and their customers. Customers often prefer to be contacted electronically and, as businesses continually seek to automate and operate more efficiently, more of them push customers from the onset of the relationship to choose paperless options. Some even incentivize such choices by offering customers a gift card or discount for choosing to go paperless. 

Challenges

Conducting due diligence electronically can be more efficient and cost-effective. However, doing so also carries numerous challenges. Among the hurdles for implementing electronic due diligence practices are internal corporate policies. Most organizations have policies regarding what information can and cannot be communicated electronically due to privacy and security concerns. For example, including Social Security numbers, credit card numbers, gift card numbers or any personally identifiable information increases risk. If that information is inadvertently delivered to the wrong address, it could cause undue harm to the property owner.

Retail banks have a few common property types that share unclaimed property headaches.  Some are easier than others but all require a good set of policies and procedures to properly track the aging of the accounts.  The common types to look at are:

                Checking Accounts

                                    Savings Accounts

                               Certificate of Deposits (CD's)

Checking/Savings Accounts

Checking/Savings accounts are aged based on the last owner-directed activity or last owner contact date of the account.  Once these accounts age 3 to 5 years, they will need to follow the same protocols as used for all other property types and receive a due diligence communication to attempt to locate the owner prior to escheatment.  Many banks set policies to ensure property contact is being established and in some cases, they even close the account and issue a check if a certain period of time passes. The escheatment itself would only have an additional requirement if it was an interest-bearing account.  In this case, the rate would need to be included in the file going to the state as some states require accrued interest to be paid out on claims.