Unclaimed Property Risk Associated with Third-Party Administrators

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?

• Identify whether the company currently uses or has historically used TPA’s.  If the answer is yes, create a listing of these TPA’s and obtain all relevant documentation (e.g., contracts).  As audits can cover up to 15 years, obtaining data on old TPA’s is an important component of this analysis.
• Review the contracts to see whether they address escheat responsibility.  As part of this review, determine who has made “the promise to pay”.  This is important as the states’ position on reporting obligation is that the party that has “made a promise to pay” (i.e., “the obligor”) is ultimately responsible for reporting any unclaimed property.
• If the contracts address that the TPA has responsibility for escheatment, obtain copies of all escheat reports and supporting documentation (e.g., copy remittances).  Also, ensure that the TPA has or is performing appropriate due diligence prior to the remittance of any unclaimed property to the states.
• If the contracts do not address escheatment, perform a risk assessment to determine the magnitude of any potential exposure.  Once this is done, determine the best option to mitigate any exposure such as entering states’ voluntary disclosure programs.
• Determine whether to amend your TPA contracts to include specific provisions regarding escheatment, including who has the responsibility for filing.  If the company determines to maintain the escheat responsibility, ensure that you create policies and procedures defining when data pertaining to unresolved liabilities will be provided by the TPA and how you will incorporate this data into your existing escheat protocols.

In the past few years, states and their third-party auditors have begun to focus more heavily on TPA arrangements.  In fact, the major stock transfer agents (companies who handle shareholder ownership and related records) are currently the subject of on-going audits.  You may not even be aware that an audit of your stock transfer agent or other TPA is happening and may only learn about this if your company becomes the subject of an audit.

As states are increasing the number of unclaimed property audits and knowing that TPA arrangements are a focus of these audits, having a pro-active attention on this area will allow you to determine whether any risk exists for your company. 

Holders may want to consider engaging an unclaimed property professional who can provide guidance when working with a TPA to ensure unclaimed property is being managed and support you on the right track of managing escheat compliance.