KeepUP™ Blog

As we find ourselves preparing for Spring reporting (corporations must start the Spring season by submitting reports to Delaware by March 1^st), it is worth highlighting several aspects of the due diligence and reporting processes.

Due Diligence Notices. The due diligence letter is a state mandated requirement that the holder provide notice to the owner before the property is reported and remitted to the state as unclaimed property and is also the holder’s last attempt to establish contact with the owner of dormant property before escheatment.

Method, Timing and Content of the Notice. Typically, a first-class mailing must be sent to the owner 60 to 120 days prior to filing the report, though as is common in unclaimed property, time frames vary state to state. Moreover, certified mail may be required in lieu of, or in addition to, first-class mail (e.g., New York: certified mail for property valued at $1000 or more and for all dividend reinvestment plans). Publication is also required for certain holders in New York, where requirements vary by property type). Many states also provide an exception for mailing to a known bad address, but again, this varies by state.

In states that have adopted a law based on the 2016 Revised Uniform Property Act (“RUUPA”), the time frame for mailing is generally 60-180 days before filing the report, though there are outliers here as well (e.g., Illinois requires notice to be sent 60 days to 1 year prior to the report, and by certified mail for securities valued at $1000 or more, 60 days prior to filing the report). These states have also adopted specific header and language requirements for the notice.

On January 12, 2021, the Department of Labor (DOL) issued a series of guidance for pension plan fiduciaries related to missing or nonresponsive participants, which can assist them in their review of their policies and procedures surrounding locating these participants and their beneficiaries and as related to uncashed checks.

Financial institutions, like other entities, must comply with state unclaimed property laws, which include sending customers due diligence notices and reporting dormant accounts to the states on an annual basis.

Banking property, including checking accounts, savings accounts, and certificate of deposits are considered dormant absent owner-generated activity within a period of time defined by the state (typically 3 or 5 years). The recent adoption by several states of revised unclaimed property laws modeled on the 2016 Revised Uniform Unclaimed Property Act (RUUPA) and the continued introduction of similar legislation (North Dakota and Indiana in early January 2021), illustrates the ever-changing nature of these laws and the need to monitor legislative changes. States adopting a “RUUPA” – like law may adopt the shorter dormancy period (3 years) for most property types, alter the 60-180 due diligence timeframes and/or add the requirement that notice be sent to the owner via first class mail and email (if the owner has consented to electronic mail communications from the holder).

Taking a proactive approach to the escheatment process by communicating early and often with your customers decreases the population of reportable property, meaning less costs associated with due diligence (certified mail, return receipt requested, is required in some states, particularly above a certain dollar threshold) and with the reporting process itself.

After the Shareholder Services Association (SSA) and Securities Transfer Association (STA) voiced their concerns via a joint letter to the National Association of Unclaimed Property Administrators (NAUPA) regarding the interruption of international mail delivery due to the COVID-19 pandemic, NAUPA sent a survey to its member states in May 2020.  

The apprehensions raised were surrounding the suspension of mail service, which would prevent the successful completion of due diligence and ultimately the reporting property without a last attempt at reunification with the property owner.  It is notable that states may liquidate securities property, making it difficult for the shareholder to retrieve it in its native form.   In connection with ongoing concerns expressed by UPPO and the holder community, NAUPA recently released the responses from 19 states to the following questions:

The 2016 Revised Uniform Unclaimed Property Act (“RUUPA”) is a model act designed to assist states in updating their unclaimed property laws, which for the most part, are outdated, since they are based on either a 1981 or 1995 version of the act.   Certain provisions of RUUPA address modern technology and have been incorporated into the laws of states that have recently enacted RUUPA-like laws.

For example, RUUPA requires that holders reach out to owners of retirement, securities or custodial accounts that have consented to receive electronic communications from the holder via email no later than 2 years after the owner’s last indication of interest in the property. This pre-due diligence requirement must be followed up promptly with first class mail if the holder lacks an email address for the owner or believes an email to be invalid, if the email bounces back, or if the owner does not respond within 30 days.

RUUPA also requires that if an owner consented to electronic communications, the due diligence notice must be sent via first class mail and email. Both the pre-due diligence outreach and the electronic due diligence requirements have been adopted in Tennessee, Utah, Illinois, Kentucky, Maine, and Colorado (email optional), Vermont (effective 1/1/2021), and Nevada. RUUPA-like bills have been introduced in the District of Columbia, Minnesota, Washington, and Wisconsin, and we expect additional states to also follow suit.

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.

Every business is required to report unclaimed property annually. If you are unsure if your company is reporting unclaimed property (“escheating”), start by asking your finance or accounting team members. A few examples of unclaimed property are unpaid or unreconciled liabilities such as payments to vendors, refunds or credits owed to customers, unpaid wages and/or commissions, unpaid insurance claims and lost/abandoned bank accounts or investment accounts.

Unclaimed property compliance is not an option; it is a requirement. The risks of non-compliance could result in fines and/or penalties being imposed. Additionally, a company could be subjected to an exhaustive escheat audit where the disruptions to time, resources and greater amounts of monies owed are at risk.

Organizations should conduct regular reviews to ensure their compliance. The following, while not exhaustive, contains the most important tasks for you to perform and consider establishing policy and procedures to create an efficient unclaimed property program.

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".