Unclaimed Property Reporting 101: The Principles of Escheatment & Guide to Compliance

Transcription

1 Unclaimed Property Reporting 101: The Principles of Escheatment & Guide to Compliance

2 Introduction When you were tasked with managing your organizations unclaimed property program, how many of you asked What s my job? Unclaimed property is not exactly a household term, nor do they teach unclaimed property in college. Even our accounting and finance majors admit to never hearing the words unclaimed property during all of their advanced coursework. Now that you are hired and have unclaimed property compliance on your list of to dos, where do you begin? Picking up where a predecessor left off may not always be the right answer. Within this whitepaper, we will walk you through the unclaimed property reporting and escheatment process, by breaking down this often complex process into three core functions: Data Collection & Analysis Effective Due Diligence Unclaimed Property Reporting & Remitting By reviewing these three functions, you will be able to identify the factors that can help your organization report efficiently and effectively and achieve compliance.

3 Lesson 1: Data Collection & Analysis What Are Your Obligations as a Holder of Unclaimed Property? First, it is important to know and understand your company s obligations as a holder of unclaimed property. A holder is a business or organization in possession, custody, or control of property belonging to another person or indebted to another on an obligation. As a holder, you are obligated to do the following: Adhere to the unclaimed property laws and requirements for the appropriate reporting jurisdictions. This includes periodic review of records to determine if your organization holds outstanding items that could qualify as unclaimed property. Report and remit every applicable property type generated by your organization. Perform due diligence within the state-mandated time frames and in compliance with state requirements. File the reports and remit in the appropriate state formats or methods. Retain copies of the reports and remittances and documentation supporting what was and was not reported. Maintain the unclaimed property until it is reported and transferred to the state. Getting Your House in Order Now that you know what is expected, how do you fulfill these obligations and achieve your company s compliance goals? Start by getting your house in order. Identify the business areas and accounts within your organization that may generate or hold unclaimed property, a task which often begins with a review of the organizational chart and chart of accounts. Ultimately, this task may require examining multiple lines of business, subsidiaries, shared services, investor services and third party administrators, as all of the above could be generating unclaimed property liabilities. In addition, merged and/or acquired businesses may bring with them their own set of unclaimed property liabilities. The bottom line is, leave no stone unturned. Gaps in reporting or major fluctuations in amounts and property types included on reports can land your company on a state s watch list, or worse, on the audit target list. 2

4 Data Collection In many organizations, the collection of data can involve numerous separate databases and/or accounts. It is important to include all databases/accounts for all lines of business that could potentially generate unclaimed property; whether it is an uncashed check, dormant account, unused refund, credit balance or memo, flexible or commuter spending distribution, dividend payment, etc. While state dormancy periods range from three to five years for most property types, the dormancy period for wages, commissions and property held in the course of dissolution can have an accelerated dormancy period of as low as one year. To ensure the accuracy of your analyses, ensure your provider (or you, as the case may be) periodically updates their systems with the most up-to-date state dormancy and other pertinent information for each reporting and legislative cycle. Once the eligible property has been identified, you have tackled the most challenging task in unclaimed property compliance and are a third of the way through the reporting process. Because of this, a suggested practice is to review all property that has remained uncashed or outstanding for one year. A list of outstanding items is then compiled and evaluated to determine which of the items is eligible for state prescribed due diligence and reporting. Eligibility Analysis Quite possibly, the most challenging aspect of unclaimed property reporting is determining exactly what to report, where to report it, and when it should be reported. Identifying outstanding items that are eligible for due diligence and reporting on the upcoming reporting deadlines requires up to date information about state dormancy triggers, dormancy periods, cut-off dates and reporting deadlines and how they are applied. Maintaining current state administrative guidance, statutory directives, and rules and regulations can be a formidable task. For uncashed checks, the eligibility analysis entails an easy calculation of check issue date plus the state prescribed dormancy period. The calculation for other property types, such as banking and securities property, is more complex and involves the evaluation of multiple dates, such as date of last contact and lost date (the date mail was returned from the post office). Due to the potential for error, particularly when multiple calculations are involved, manually making these calculations could pose a risk to your organization. If using unclaimed property software or a third-party provider to perform escheat reporting, confirm with your provider that any rules engines that perform an eligibility analysis can appropriately handle the multiple dormancy calculations that may be necessary to accurately report certain property types. Key Takeaways from Lesson 1: Data Collection & Analysis Know your company s reporting obligations. Identify gaps in reporting or major fluctuations in outstanding property amounts or types. When collecting data, include all databases/ accounts for all lines of business. Dormancy periods can range from 1 to 7 years, depending on the property type. Review all property that has remained outstanding for one year or more. To ensure accurate eligibility analysis, maintain up-to-date information on applicable state laws/regulations or seek useful resources, such as an outsourced reporting solution. 3

5 Lesson 2: Effective Due Diligence This lesson provides information about statutory due diligence requirements as well as best practices to ensure that your due diligence effort is successful in retaining property and reuniting rightful owners with their funds. Statutory Due Diligence In general, states require a notice to be sent to the last known address of the owner of the funds as indicated in the holder s records. In Delaware, the due diligence requirement is limited to securities-related property and has a $250 threshold. The purpose of the requirement is to give the owner one last opportunity to claim their funds or reactivate their account before it is turned over to the state. Over the years, states have placed greater emphasis on due diligence, with new or enhanced requirements on qualifications for due diligence, timing of the mailing, letter content, method of delivery and even attestations of mailing. Michigan requires letters to be mailed within 60 to 365 days prior to the report deadline, and New York requires first class letters to be mailed 90 days prior to the deadline and a certified mailing to take place (on accounts valued over $1,000) 60 days prior to the deadline. Mailing letters to owners in foreign countries is also required. Keep in mind that additional time may be needed for the mail to reach the owner and for the owner to respond. While most states do not mandate how much response time should be given to the owner, the standard recommendation is 30 to 45 days. Qualification In evaluating whether or not due diligence is required, there are several factors that must be considered, including: property type, state of the owner s last known address, value of the account, and possibly, whether or not the address is a known bad address. There are a few states that exempt the due diligence requirement if the address of record is known to be a bad address, meaning that mail has been returned as undeliverable to that address. Timing As with most things in life, timing is everything and due diligence is no exception. Mailing within 60 to 120 days prior to the reporting deadline is the most common time frame either mandated or recommended by the states. States began to impose timeframes for sending due diligence to discourage holders from mailing letters too close to the reporting deadline. Instead, the states wanted to allow the owner at least thirty days to respond to the letter, and acknowledge his or her ownership interest in the property held by the holder, prior to escheatment. Like all aspects of unclaimed property regulation, there are states that vary from the norm. Some, like California, require letters to be mailed within 180 to 365 days prior to the property becoming reportable. 4

6 Content While the state requirements on letter content vary, with California being the most precise in its specifications, the majority of states require that one or more of the following provisions or statements be contained in the due diligence notification: The nature and identifying number and/or description of the property A statement relaying that the property must be validated by the owner otherwise the property will be transferred to the State Treasurer/Controller. Information on the steps required to claim the property. The date the property will be reported to the state, if proof of claim is not satisfied. Contact information for your company. Method of Delivery While first class mail is the generally accepted or mandated method of delivery, there are a few states that require a notice to be sent via Certified Mail. Most notably, New Jersey requires all due diligence notices for properties greater than $50 to be mailed via Certified Mail and New York requires a certified letter to be mailed to all account holders valued at $1,000 and greater if they do not respond to a first class letter. Ohio requires a certified letter for accounts $1,000 and greater, and Iowa requires banks and financial institutions to mail notices certified. To offset the cost of the due diligence mailing, some states allow a deduction to be taken for a portion of the expenses. Consult the state statute for details on the allowance. State Enforcement of Due Diligence Requirements State auditors will ask for proof of due diligence compliance. To satisfy such a request, it is recommended that a holder retain documentation showing that statutory due diligence was performed including copies of the letters that were reported. Some states are now including a due diligence attestation as part of the annual reporting process while others are asking for the number of due diligence letters mailed to be documented on the state cover sheet. Spotlight on California Due Diligence Requirements: The face of the notice to contain a heading at the top of the letter stating: THE STATE OF CALIFORNIA REQUIRES US TO NOTIFY YOU THAT YOUR UNCLAIMED PROPERTY MAY BE TRANSFERRED TO THE STATE IF YOU DO NOT CONTACT US or substantially similar language. Specification that since the date of the last activity, or for the last two years, there has been no owner activity on the account (must be in boldface type or in a font a minimum of two points larger than the rest of the notice). Identification of the account number (which does not have to exceed four digits). Notice that the account is in danger of escheating to the state. A statement that the Unclaimed Property Law requires business associations to transfer funds that have been inactive for three years. *Note: These are only a partial listing of California due diligence requirements. Please refer to the state handbook for full details. 5

7 Above & Beyond - Enhanced Due Diligence If you follow each state s statutory mandate, you will likely have a due diligence response rate of about 20%. To improve your response rate and retain assets under management, or ensure that the payment of funds is going from you to your customer instead of from the state to your customer, an enhanced customer outreach program is a suggested practice. If taking a few extra steps would increase your response rate from 20% to as high as 80%, what would these steps be? Search for an updated address. There is nothing in the state statutes precluding you from trying to locate the owner and sending a letter to the updated address. This could be done prior to the statutory due diligence mailing and may save money in the long run, especially for states that require certified mailings. Clearly state the purpose of the letter. While the state-mandated due diligence letters may have certain language that states require, an enhanced customer outreach letter can be more customer-friendly and reflect the company style and brand. Give the customer multiple options to respond such as returning the customer outreach letter, calling a toll-free number, ing, logging-into your website and selfauthenticating using a PIN and password, or visiting a branch location. Create a sense of urgency. Be sure your customers or investors understand the ramifications of not responding to your outreach. Make phone calls to customers with high dollar value accounts. While there are a plethora of state requirements involved in the due diligence process, it is possible to make the process work to achieve your organization s goals. Whether it is retaining accounts, minimizing your liability, or achieving compliance, an effective due diligence program can convert the statutory obligation into a win-win situation. Key Takeaways from Lesson 2: Effective Due Diligence States require a notice to be sent to the last known address of the owner of the funds as indicated in the holder s records. There are several factors to consider: property type, state of the owner s last known address, value of the account, and possibly, whether or not the address is a known bad address. Mailing due diligence letters within 60 to 120 days prior to the reporting deadline is the most common time frame. Most states require that due diligence notices be sent through first class mail. To offset the cost of the due diligence mailing, some states allow a deduction to be taken for a portion of the expenses. To prevent possible liability in an audit, maintain proof of compliance with due diligence requirements. Due Diligence Letters Ready? What s Next? Optimizing your organization s unclaimed property due diligence letters for both compliance and response is merely one half of the due diligence process. Facilitating the actual mailing of the letters, as well as managing the returned owner responses are the remaining tasks that organizations must complete. Many organizations are not well equipped to manage large scale mailing or customer service operations and therefore choose to outsource their due diligence processes as well as their analysis and final reporting operations. 6

8 Lesson 3: Unclaimed Property Reporting & Remitting Timely reporting and remitting of unclaimed property occurs at the culmination of the holder s entire compliance effort which should be directed toward avoiding risk and minimizing escheatment. After record review and statutory due diligence have been performed, the list of reportable outstanding items is narrowed and the work of compiling the state reports and creating remittances begins. The objective of the report and remittance process is the efficient development of deliverables that fully comply with state requirements. From the population of reportable outstanding items and the associated owner addresses, the practitioner knows the states for which reports and remittances must be devised and should become familiar with those states reporting requirements. Unfortunately, like the state due diligence specifications, state requirements for reporting and remitting are anything but uniform. Report Format & Codes The widely accepted electronic format for unclaimed property reports is called the NAUPA II Standard Electronic File Format. The National Association of Unclaimed Property Administrators (NAUPA) devised this format which every state unclaimed property program now requires for reports. Generally, states will no longer accept reports in an Excel format. In addition, most states require the use of property type and relationship codes when reporting property. The NAUPA II file format has corresponding standard property type and relationship codes that are accepted by almost all states. The property type code designates the category of property and the relationship code provides information as to the connection between owners when more than one owner is associated with the property. Each property type is represented by two letters and two numbers, i.e., CK13 = vendor check. The relationship is represented by a code comprised of two letters, i.e., JT = joint tenants. It is important to note that states frequently modify some of the NAUPA relationship and property type codes, customize the codes by changing the transactions included under particular codes, add new codes to the NAUPA set, or do not use or accept particular codes in the NAUPA set. For this reason, the practitioner should retrieve and use the code listings for the states to which reports will be filed. These listings are often included in reporting manuals or guides that state officials publish on their unclaimed property websites. Report Media & Formatting Identifying the media through which the state accepts reports is essential in developing compliant reports and avoiding state scrutiny. Most states no longer accept paper reports. Instead, they require that reports be submitted on CD, diskette, or electronically via Internet upload if the number of items to be reported is greater than a specified threshold. There are some states, like Iowa, Michigan and Tennessee, that require all reports to be filed in this manner regardless of the number of items reported. Increasingly, states are offering and/or mandating online upload reporting. For example, Indiana, Florida, Montana, Nevada, Oklahoma (if 15 items or more), Texas and Virginia require reporting online via upload through their websites. Other states offer but do not mandate online reporting. States that permit or require online reporting often require that the business contact the state to register prior to uploading reports. As examples, Indiana and Nevada require businesses to register prior to uploading reports for the first time. As states strive to reduce costs, it is anticipated that more will require report upload. In addition to the reports, states often require a specific state-created cover sheet be completed and filed. In some instances, states provide this cover sheet as a part of the online upload process or they publish the cover sheet on their websites and/or as part of their holder reporting manuals or guides. States that permit reports to be submitted on CD typically require a particular cover sheet to be included with the physical report delivery. Most states no longer accept paper reports. Instead, they require that reports be submitted on CD, diskette, or electronically. 7

9 Usually, an appropriate officer of the business, typically the chief financial officer, must sign the cover sheet and in many cases the signature must be notarized. The cover sheet often includes a statement that the business officer acknowledges that the information in the report is true and accurate. Further, some states have added language to this statement requiring the holder s signatory to attest that due diligence has been performed as required by the state s law. States such as Illinois and Maryland require the business to use a holder number on its report cover sheet. If a holder is filing a report for the first time with these states, it must contact the state to retrieve the number prior to the first filing. It is important for businesses to use a state-assigned holder number when filing reports as the states computer systems use this number to identify the reports that have been received and whether they have been received on or before the reporting deadline. For this reason, using the holder number when reporting may save time and prevent costly failure to file or late filing penalties. In addition, proper identification of businesses that have a history of reporting may prevent an audit. There are a few other states including Massachusetts ($10,000 or greater), New Jersey ($50,000 or greater), Nevada ($10,000 or greater), and Texas (if reported $100,000 or more in the previous year s report as well), that have EFT, Fed Wire, or ACH transfer remittance requirements. Publicly-traded companies may have securities and securities-related distributions to report. Most states have special instructions for reporting and remitting certificated and book-entry shares which are specified in their reporting manuals or guides or on their websites. Usually, the state instructions include a method for reregistration of physical securities into the state s name (or nominee) and for the transfer of book entry shares via DTC, DRS, etc. In addition, some states have separate instructions for the remittance of shares in mutual funds or mutual fund accounts which may require liquidation. Note that some states require the reporting of worthless securities while others request that they not be reported. The Six Month Unclaimed Property Cycle Form of Remittance Typically, most businesses report cash as unclaimed property and the remittance that accompanies the unclaimed property report would simply be a check or electronic funds transfer (EFT). The check should reflect the total dollar amount of the report and be written to the payee specified in state reporting instructions. These instructions are usually provided with state report forms and/or in state reporting manuals or guides published on state websites. For example, check remittances written to the state of Illinois unclaimed property division should be made payable to the Illinois State Treasurer. Due to technological advances, expediency and the need for revenue, some states now require EFT, Fed Wire, or ACH transfer for the remittance if the dollar amount of the remittance is greater than a specified threshold. For example, California requires that if the remittance is greater than $20,000 it must be delivered by EFT in the specific manner designated in statute and regulations. Failure to remit such funds to California in the specified manner triggers a statutory penalty of two percent (2%) of the value of the payment. 8

10 Timing & Report/Remittance Delivery Method Of course, reports must be delivered to the state by the appropriate reporting deadline. Reporting deadlines vary by industry and sometimes by property type, depending upon the state. However, for most non-financial, non-insurance businesses, the state s reporting deadlines are in the fall. Some states, however, have deadlines in late winter or spring. Many states have a reporting deadline in the spring for life insurance companies. Texas and Michigan have a July 1st reporting deadline. While most businesses strive to meet the state reporting deadlines, there are circumstances that may require the business to request a filing extension. If an extension is necessary, the holder should contact the appropriate states and request that they be granted an extension of time to file their report and remittance. Some states require that the request be in writing, or be submitted on a particular form, and/or that the extension be requested within a specific period of time prior to the reporting deadline. The request should include an appeal for the waiver of any penalties and/or interest that the state could assess for late filing. Most states will grant an extension of up to thirty days for good cause. States normally do not consider the holder s failure to perform timely due diligence as an acceptable basis for granting an extension. Longer extensions may require more explanation and may not be granted. For example, the state of New Jersey typically grants extensions for good cause but will require that the holder estimate its liability and remit the value of its estimate on or before the statutory reporting deadline. In addition, some states may add late filing interest to reports filed late even though an extension has been granted. Another important reporting and remitting consideration is the creation and maintenance of proof that the report and remittance were delivered either on or prior to the pertinent state deadline. State unclaimed property laws often include fines for late filing, and to avoid these penalties a business must be able to verify the date that its report and remittance were actually delivered. To facilitate this, the practitioner should use a verifiable delivery method for physical report and remittance deliveries and maintain upload receipts for reports delivered to states via on-line upload. Note that states receive thousands of reports near their report deadlines. These reports may be documented as received, but may not be logged in on the date that they are actually received due to the sheer volume of reports delivered on that date. Further, computer glitches could cause an upload not to be received or to be received on a date later than the date of the upload. Maintaining proof of report and remittance delivery can save a business from being required to pay costly late filing penalties and interest. A few states require that even if an extension is granted, the holder estimate its remittance and pay the estimated remittance prior to the statutory reporting deadline. 9

11 Negative Reporting In some years, a holder may not have any unclaimed property to report to a particular state. Unfortunately, some unclaimed property laws or regulations require that the holder file a negative report if the holder has no unclaimed property eligible for reporting in a particular report year. States like California and Texas do not require a negative report and other states, such as Maine, require negative reporting only if the business is located or incorporated in Maine and have never filed an unclaimed property report before or have filed a positive report within the last three years. In other words, negative reporting requirements vary dramatically from state to state. Generally, states that require negative reporting designate a form that must be completed and timely filed in order to meet the negative filing requirement. A few states, like Maine and Nevada permit negative reporting online. Key Takeaways from Lesson 3: Reporting & Remitting States frequently add, modify, and customize the NAUPA relationship and property type codes. Most states no longer accept paper reports; Instead, they require that reports be submitted on CD, diskette, or electronically. States often require a specific state-created cover sheet be completed and filed. Most businesses report cash as unclaimed property and the remittance that accompanies the unclaimed property report would simply be a check or electronic funds transfer (EFT). Reporting deadlines vary by industry and sometimes by property type, depending upon the state. Maintaining proof of report and remittance delivery, can save a business from being required to pay costly late filing penalties and interest. Congratulations! You ve earned your Unclaimed Property Reporting Diploma. Each of the three lessons in this whitepaper provides information regarding a holder s unclaimed property compliance obligations. Common to all of these obligations is the business creation or enhancement of its policies and procedures such that the tasks associated with annual data review, due diligence and reporting/remitting are specified and assigned to staff. Further, compiling and maintaining the requirements of the appropriate states is equally as important as appropriately carrying out the tasks listed and scheduled within the policies and procedures. Remember, timely and accurate compliance minimizes the risk of liability for penalties and interest that states may assess if the business is audited! 10

12 Lean on Keane Keane is the country s leading provider of comprehensive outsourced unclaimed property solutions. Keane provides corporations, mutual funds, banks, brokerages, insurance companies and transfer agents with a full suite of professional outsourced services, including locating account owners or beneficiaries, risk mitigation, customer communication programs, recovery of escheated assets, consulting, reporting and other unclaimed property compliance-related services. Led by an experienced group of industry executives, Keane employs more than 200 people across the country. Keane is headquartered in New York, NY with a main operating facility in King of Prussia, PA, and has various satellite offices across the country. For more information on Keane, please visit Unclaimed property. Uncompromising performance. Corporate Offices: 450 Seventh Avenue, Suite 905 New York, NY Operations Center: 640 Freedom Business Center Drive, Suite 600 King of Prussia, PA Keane

13 Struggling with Unclaimed Property? We can help. If unclaimed property compliance is a challenge for your organization, you aren t alone. Inconsistent state laws and complex operational requirements can easily strain internal resources. That s why many organizations choose to supplement or enhance their unclaimed property compliance and reporting processes through Keane. Keane is the country s leading provider of comprehensive unclaimed property solutions, serving both public and private corporations across all industries. Our full suite of professional compliance services includes outsourced annual reporting & escheatment, risk & liability assessments, state voluntary disclosure agreements, audit support, and locating account owners or beneficiaries. With Keane, achieving and maintaining compliance with state unclaimed property laws becomes considerably more efficient and cost effective, allowing you to focus on your organization s core capabilities and responsibilities. Why Keane? Trusted by thousands of business entities across all industries More than 65 years of experience A staff comprised solely of unclaimed property professionals Customized solutions to address all challenges and budgets Unclaimed property services and support is all we do - and we re ready to help you solve your compliance challenges next. For more information on Keane, please visit or contact us at (800) to speak with a specialist. Corporate Offices: 450 Seventh Avenue, Suite 905 New York, NY Operation Center: 640 Freedom Business Center Drive, Suite 600 King of Prussia, PA Keane