According to unclaimed property professionals, more than 65% of items reported as Unclaimed Property are actually just accounting errors. This disturbing statistic means that your company could be stockpiling mistakes that can create HUGE exposure under audit or slowly leaks profits to state unclaimed property offices each year. Implementing a few changes in how you deal with outstanding A/P checks can make a significant impact on your reportable unclaimed property obligation.
We are all doing our best to follow the confounding list of unclaimed property laws for each state where our company must report. This is a BIG job for the accounts payable department. Every check that remains outstanding for more than the statutorily devised holding period must be paid over to the correct state if we can’t get the account settled. We are all doing our part to make sure that our accounts payable departments are not underreporting items that could give our company exposure to fines and penalties under audit. The problem is, many of the items that we are reporting might not actually be subject to escheat. Companies are over-reporting because they lack the proof in their accounting records to show that some items are not truly abandoned.
Once the state has recovered the unclaimed funds, they are charged with safeguarding the assets for the true owner. The reason that the states are so willing to go after these “lost” assets on behalf of their citizens may be the fact that states can invest that money and keep all of the interest earned without ever having to pay the extra money earned over to the true owner, even if or when they come to claim it. The state is even permitted to charge an administrative fee to the true owner which they must pay to recover their own property, that the state has been collecting interest on, and can require the true owner to jump through multiple paperwork hoops to prove that they actually ARE the owners of the property. No wonder only about 20% of the abandoned property held by the state is ever successfully claimed by the true owner!
A LITTLE BACKGROUND….
First, let us address some terminology that you may not be familiar with. The most important term used in our discussion is Unclaimed Property. You will hear it called Abandoned Property, Escheat Property, and Unclaimed Property, but it all means the same thing: something tangible or intangible that the true owner has not claimed or exercised any powers of ownership over for a statutorily prescribed amount of time.
Another term that is bandied about is “holder.” What is a holder? Generally, it is the entity that is in possession of or controls abandoned property until it is transferred to the state on behalf of the lost owner. This is usually the business that issued the property, but that is not always the case. When a company buys another company, for example, the acquired company’s debts MAY become the obligation of the purchasing entity. In some cases, outstanding unclaimed property is transferred to the new company, along with the reporting obligation.
Another term to become familiar with is “Dormancy Period.” This is the period of time, according to state law, that must pass since the last date when an owner generated any action on their property. This can be the period of time that has passed since the date that an uncashed check was written. It can be the last time that a savings account holder made a deposit, withdrawal or inquiry regarding their account. The date of last contact by the owner as listed in the records of the holder is the date that state’s use to determine the start of the dormancy period for purposes of reporting unclaimed funds.
WHAT TYPES OF PROPERTY CAN BECOME ABANDONED PROPERTY?
Just about ANY type of intangible personal property can become abandoned. Some common examples of property that can become abandoned are financial institution safe deposit box contents, money orders, traveler’s checks, payroll checks, insurance settlement checks, utility deposits, securities, court deposits, mineral proceeds such as royalties and the underlying shares of mineral property, and many, many more items. Our society is more mobile than ever before and people sometimes lose track of their assets.
WHEN DOES AN ITEM BECOME UNCLAIMED PROPERTY?
Although there is no uniform set of unclaimed property laws that apply to all of the states and territories, the way property becomes abandoned is fairly uniform. Property is considered abandoned or unclaimed if it is (1) held in the ordinary course of a holder’s business, (2) constitutes a debt or obligation of the holder to a creditor or owner, and (3) remains unclaimed for more than the statutory dormancy period. It is important to know that re-issuing a check to replace a check that is about to become dormant does NOT start the dormancy clock over again! A check is just a document representing the underlying debt created to the payee when the check is written. The underlying debt is the focus of the dormancy clock; not the date of the piece of paper. Exchanging one piece of paper for another (i.e., re-issuing a check, does not satisfy the debt). If the new check is not cashed before the date that the original check would have become escheatable, then the amount must be reported on the date that the original check would have been due.
When is property NOT considered abandoned? It is not unclaimed if the owner has increased or decreased the amount in an account, if there has been written communication with the holder, if the owner has indicated an interest in the property which is reflected by a memo or record in the holder’s file or if the owner has another relationship with the holder where there has been owner-generated activity.
So, you know what unclaimed property is and why you are a Holder, but WHY do you have to report it to the state? Because the law says so…both the states and holders have statutory obligations.
The unclaimed property laws put a lot of responsibility for trying to find the true owners of abandoned property and reunite them with their assets squarely in the laps of the holders. Holders have the obligation, under the law, to report any escheatable unclaimed property that they are holding to the states. Before that property is turned over, however, most states also require holders to perform “due diligence,” or make some attempt to locate the true owner themselves. If they cannot find the true owner, the states require holders to remit that property to the state for safekeeping. The states ALL have enforcement powers to provide “incentives” for holders to do their duty under the law. If the property is not turned over the state, the holder can be subject to late reporting and “non-reporting” fines and penalties that can double and even quadruple the amount of money that the holder should have reported initially.
MINING FOR SAVINGS AMONG THE VAST ARRAY OF UNCLAIMED FUNDS BURIED IN YOUR COMPANY’S ACCOUNTING RECORDS
There are many different avenues that can lead to recovered money in your company’s unclaimed funds. The easiest and shortest route to savings is to investigate your accounting system for accounting errors.
As much as 80% of the unclaimed property on a company’s books can be made up of accounting errors. When you wait until the statutorily prescribed holding period for unclaimed property ends before you contact the true owner, chances are the issues will be unable to be resolved. The sooner you contact potential credit holders, to sooner you can clear up the mistakes in your accounting records and reduce the potential income that you lose to the unclaimed property divisions.
INVESTIGATE OUTSTANDING CHECKS SOONER, RATHER THAN LATER
We know that the law requires holders to attempt to find the unclaimed property’s true owner within a few weeks before we pay the funds over to the state. A much more practical step that would reduce the number of last-ditch-effort due diligence letters from being returned by the post office would be to institute a 90 or 120 day follow-up policy. Experience tells us that most checks are cashed within a relatively short time after they are issued. The vast majority of checks are cashed within 30 days of being issued. If a check is sitting on our outstanding check list for more than 90 days, chances are there is a problem. Institute a policy in your a/p department that you will do some follow-up on each and every check (no matter the amount) that is still outstanding for more than 90 days. Chances are, you will have a MUCH better chance of clearing the matter up than you will if you wait three to five years to do the follow-up required by state law. Make a telephone call. If that doesn’t yield results, write a simple letter calling the payee’s attention to the outstanding check and asking for a response. If you get no response and the check continues to be outstanding, it will probably remain on the unclaimed list.
PUT STANDARD REQUIREMENTS IN PLACE TO PREVENT FRAUDULENT CLAIMS AGAINST YOUR COMPANY. Another aspect of the holder’s obligations is the responsibility to keep the unclaimed property safe until it is either reunited with its rightful owner or turned over to the state for safekeeping. Holding unclaimed property can be more of a headache than you might think. This is an area where some businesses are the victims of FRAUD. If businesses do not safeguard property for the true owner during the time that it is in their custody, the holder may not be fully indemnified by the state they report the property to.
Unclaimed property is frequently the target for internal and external fraud. Because it is historically ignored by many companies, their outstanding unclaimed property can be a very temping and unsupervised area for the few employees in the know. Employees siphon unclaimed funds away from a company for years before anyone notices that funds have been misplaced. Outside parties set up elaborate schemes to pretend to be rightful owners and claim unclaimed funds belonging to other people. If your company is the victim of unclaimed property fraud, you will have to pay the funds TWICE—once to the fraudster and again to either the true owner or the state! In fact, your company can become the subject of a civil lawsuit brought by the true owners of property that you did not safeguard properly against fraud.
Having specific and thorough claims procedures and internal controls can help prevent fraud from costing you more than you actually owe in an unclaimed property audit. Require a copy of an official government issued identification (like a driver’s license or passport) identifying a claimant that is an individual or the front page of a tax form or business license from a company making a claim for reimbursement that is more than 90 days old. If the person is representing an estate where a deceased was the original payee or a company is claiming on behalf of a bankrupt or sold entity, require some official court documentation of the transfer of ownership or responsibility before paying over the dormant funds. Require that the signature of the claimant be notarized. While getting your signature notarized is generally free and can be done at your local bank branch, this extra step will discourage common fraudsters. Ask questions about the claimant and their situation (Why wasn’t the check cashed? Have you moved addresses? Where is the original check?). Being probed for information will make fraudsters nervous and may discourage them from attempting to cheat you. If you take a little extra time in probing into claims against dormant accounts, you may save your company from paying the same check twice- once to the fraudster and again to the state under audit!
SEARCH DILIGENTLY FOR UNCLAIMED FUNDS DUE TO YOUR COMPANY. Each state and territory in the United States that collects unclaimed property also maintains a list of unclaimed property in their passion and the name of the true owner that it rightfully belongs to. If your company has been in business for a number of years or if you have acquired a company that has been in business for more than 5 years, chances are you have outstanding unclaimed property sitting in some state’s coffers. Every state maintains a website where you can search for your company’s name ( or the previous name of a company you acquired) to see if you have unclaimed funds coming to you. There is a centralized website (http://www.missingmoney.com) where 31 states collectively report their unclaimed property, making it even easier to search to your forgotten wealth. Each state has a formal reimbursement process that requires proof of ownership and will require some high-ranking member of your company’s leadership to sign forms, but you can often recover significant amounts of cash that your company had forgotten it was owed or had, perhaps, written off as uncollectable in the past.
CAUTION: This recovery process should NOT be entered into if your company is not filing unclaimed property reports correctly. If you have never filed unclaimed property reports or if you were formerly filing, but stopped being compliant, you should not attempt to recover funds from a state agency until you are up-to-date with your compliance. If you attempt to recover funds from a state, they will automatically review your filing status and could possibly contact you for an audit if you appear to be a company that is not filing properly. The most likely state to audit you if you attempt to recover funds without filing yourself is your company’s state of incorporation. Most companies owe some amount of unclaimed funds to a state each year. Many states REQUIRE each company that is incorporated or organized in their state to file an unclaimed funds report each year, even if they owe nothing, in order to track compliance with the state laws. If you are not filing and should be, you will automatically be put on an audit list for requesting a refund. No amount of refund is worth triggering an audit if you are not in compliance!
INVEST THE DORMANT UNCLAIMED PROPERTY THAT YOU ARE HOLDING IN AN INTEREST-BEARING VEHICLE. As state laws require holders to safeguard unclaimed property for a significant period of time before turning it over to the states, your company has a significant opportunity to make some return on these funds while they are in legal limbo. Payroll checks that are dormant are to be held for a minimum of 1 year in most states, but other types of property, like accounts receivable credits and accounts payable checks are to be held for at least 3 years, if not 5 years, before they are turned over to a state as unclaimed property. Some states have 7 year holding periods for unclaimed amounts before they are reportable. Industry averages show that checks are generally cashed within 90 days of their issuance, if they are ever going to be cashed at all. After credits or checks have aged 90 days and are still outstanding, chances are they will not be cashed or cleared until you do some extra follow-up. Once you have attempted to clear the issue up through the normal channels and the amounts appear to be un-resolvable, let them create some income to offset the cost to your company of maintaining the assets for the statutorily prescribed dormancy period. Make the most of these funds by investing them while you are legally responsible to maintain the amounts. Even a short-term investment like a 6 month certificate of deposit will generally bear more interest than leaving the funds sitting in your company’s checking account. Administering unclaimed property is a cost for companies. If you can recover something to off-set the cost of this burden, it would certainly help your bottom-line.
IMPLEMENT SERVICE CHARGES ON DORMANT ACCOUNTS. As a holder, you have the responsibility to maintain and safeguard funds in your possession that belong to someone else. This is the law. Obeying the law is costly. The states recognize that there is a financial cost that companies bear to maintaining outstanding unclaimed property. In order to offset the cost, most states allow companies to charge “reasonable” service charges on dormant accounts, as long as the holder follows strict guidelines.
The legal treatment of unclaimed property service charges and dormancy fees are not always limited to the unclaimed property laws in each state. Consumer protection laws, banking regulations, and other federal and state statutory provisions can affect these charges and you should have your legal advisor thoroughly review the entire body of law in this area for each state involved before you begin imposing any of these types of fees.
In states where dormancy fees and service charges are allowed to be applied to unclaimed property, there are generally criteria that must be met for the charges to be considered legitimate:
1. An enforceable contract must exist between the Holder and the owner to establish the holder’s right to impose the charge;
2. The Holder must, in fact, regularly and consistently apply the charge without regularly refunding the charge if an owner claims the abandoned property; and
3. The amount of the charge must be reasonable, based on the facts and circumstance of the transactions.
While some states, like Ohio, permit holders to deduct a small fee from the value of each unclaimed item remitted to cover their administrative costs, most states frown upon any attempt that Holders make to reduce the value of abandoned property for their own gain. Most Holders would be wise to avoid charging these types of service charges at all, but if you feel that you can legitimately meet the requirements, remember that they must be strictly enforced. Your policy to apply service charges or dormancy fees must be clearly spelled out to your customer, in writing, somewhere conspicuous. Just putting notice of these charges in fine print somewhere in the transaction documents will most likely be disallowed as notice by unclaimed property enforcement agencies. You also have to be very consistent in both applying and not removing these service charges. If you regularly reinstate the service charges for people that complain, or good customers that come back after a period of being absent, you will fail to prove your case to an Unclaimed Property Administrator and the dormancy fees that you did not reimburse will be “reinstated” on your unclaimed property audit assessment.
You will also need to be reasonable about the rate and amount of any service charges that you impose. If the dollar or two a month that you charge after a gift certificate or savings account has been abandoned for the statutory dormancy period is to cover the cost of tracking the true owner, performing due diligence and paying for postage is reasonable, most administrators would probably allow the deductions. If, however, the amount of the charges is unreasonable, like $1 a day after the property reaches dormancy, and it appears that the sole purpose of the charges is to reduce the value of the outstanding unclaimed property to zero and avoid escheat, an administrator will probably disallow ALL of your dormancy charges. Service charges are tricky…these dormancy fees should carry a warning--“Proceed with Caution.”
REDUCE YOUR ADMINISTRATIVE COST WITH EARLY REPORTING. . Unclaimed property laws require, generally, that you hold unclaimed property for the entire statutorily determined dormancy period before turning it over to the states in the hope that you, as the holder, will be better equipped to find the true owner than the state is. This is not always the case, however. In many situations, your company has absolutely no way of contacting a true owner to return their funds. Maybe you have attempted to call or write them a letter and the number you have is disconnected and the letter was returned by the post office. You have reached a dead end. No matter how long you hold the unclaimed funds, chances are you are not going to be able to find the true owner. States understand this situation and will often permit holders to report funds early, with adequate explanation, IF A HOLDER ASKS PERMISSION. I do not suggest that you just report all of your unclaimed property before the statutorily required dormancy period has passed. States will often just reject your filing and return the funds to you. You must contact the states that are due to receive the funds and request permission to file early, with appropriate reasons for doing so. If you do not wish to invest the unclaimed funds in an interest bearing vehicle to benefit your company, early reporting can free your company’s personnel from the burden of administering dead-end unclaimed property a little early, thus saving you the costs of administering and protecting the assets.
CONCLUSION. Let’s face it….administering unclaimed property costs your company time and man-power. This is a real financial burden. Over-filing because of accounting errors and allowing the dormant funds to sit without earning interest can cost a company real dollars that can otherwise be recovered. Even filing property early or implementing a modest dormant account service charge can reduce your company’s cost of doing business. Lastly, once your unclaimed property compliance is running smoothly, don’t forget to search for and recover any unclaimed funds in state coffers that rightfully belong to your company. The real price of unclaimed property administration is leaving your company’s OWN money on the table.
© Tracey Reid, 2009, All Rights Reserved