Oil, Gas and Unclaimed Property
Pamela J. Wentz & Jared Gustafson, Keane National Consulting & Advisory Services
January 27, 2012
January 27, 2012
Navigating state unclaimed property laws can prove challenging in any industry, but can be especially challenging in the oil & gas industry. In this discussion, we will pose several different compliance situations in which oil & gas companies typically experience difficulties and offer some best practices and recommendations.
Not reporting all applicable types of unclaimed property. The most commonly recognized property types in the oil & gas industry are related to mineral proceeds. However, there are many other types of unclaimed property that oil & gas companies may fail to report if they have not adopted a company-wide unclaimed property policy and successfully implemented comprehensive unclaimed property procedures. Common types of unclaimed property include accounts payables, payroll, accounts receivable, credit balances, gift cards, benefit plans, and worker’s compensation. Additional areas of concern are suspense accounts, branded credit card balances, equity related property and debt related property.
Companies must approach unclaimed property compliance with a comprehensive view of operations. It is important to identify all applicable types of unclaimed property that the company potentially generates and all legal entities that have an unclaimed property reporting obligation. We recommend that companies utilize a committee approach to unclaimed property compliance. The committee should include employees that are responsible for the identification and tracking of potential types of unclaimed property and if possible, someone from the legal department.
Reporting unclaimed property to the wrong state.
What is your state of incorporation? Or do you have several states of incorporation? If so, it is critical to confirm which company is legally considered the “holder.” We have also noted that there is sometimes confusion as to which state unclaimed royalties should be reported. As with other property types, royalties are generally due to the state of the owner’s last known address and the state of the holder’s incorporation/formation if there is no address. Some companies have mistakenly reported royalties to the state where the well was located. This confusion could be caused, at least in part, by the fact that some states, such as Oklahoma, have different requirements for forced pool royalties emanating from wells located in their state. We recommend that legal counsel be consulted in forced pool situations due to the complexity of the reporting requirements.
Finally, We are aware of some companies that have reported all unclaimed property to one state because that state has indicated it will forward the property to the other states through reciprocal agreements. Although this may seem like an easy solution for unclaimed property reporting difficulties, there are some facts to consider before choosing reciprocal reporting.
Not all states have reciprocal agreements in place. It is important to verify that the states in question do have an agreement in place before sending the funds. Additionally, the states that do have agreements in place can experience delays in exchanging the property. Also, the unclaimed property must be reported based on the holding period of the state to which it is due, not the holding period of the state to which it is being reported. Finally, reciprocal reporting can put at risk the indemnification states offer for accurate and timely reporting.
Ultimately, reciprocal reporting can result in increased difficulty for owners trying to claim their funds and potential interest and penalties if the unclaimed property is not received by the correct state in a timely manner. We recommend that companies consider reporting unclaimed funds directly to the state to which they are due.
Filing the unclaimed property reports after the due date.
Filing unclaimed property reports late can draw unnecessary attention to the reports. Some states, such as Florida, charge interest and/or penalties for every day the report is late. We recommend that companies start the reporting process early to avoid unnecessary and sometimes costly delays.
As a best practice, we recommend that companies have policies in place and start researching items early. It is much easier to determine if an outstanding check is a legitimate liability when it is six months old rather than three to five years old. Additionally, if it is a legitimate liability, it is much easier to locate and pay the owner when it is six months old as opposed to when it is three to five years old. Early research can help ensure that reports are filed on time and can help reduce the amount that is reported.
Not performing adequate due diligence.
Almost all states require that holders perform due diligence before the unclaimed property reports are filed. This state-mandated requirement is overlooked by many companies and results in an increased possibility for penalization. Generally speaking, states require that a first class letter be mailed to the owner’s last known address not more than 60 to 120 days prior to reporting the property to the state. Some states have additional requirements; for example – the state of New York requires that a second notice be sent via certified mail, return receipt requested, if the property has a value over $1,000.
Once your company has committed to the clean-up of past due unclaimed property, ensure the proper procedures are in place to remediate your liability as far as possible. An owner location service provider can help reunite oil & gas companies with their lost owners before the funds become reportable. Owner location service providers can conduct in-depth research to find the lost owners, or heirs thereof.
Not documenting the company’s unclaimed property reporting history.
Records retention requirements for unclaimed property reports are different than most other records retention requirements. Most states require that holders keep copies of unclaimed property reports filed and supporting documents for a minimum of ten-years after the report is filed. Although this ten-year requirement may seem excessive, we recommend that companies keep the copies forever, if possible. Copies of filed unclaimed property reports can help companies prove compliance in the case of an audit. We have actually seen contract auditors try to use current unclaimed property reports as a basis to calculate a liability for prior periods, where the holder neglected to keep copies of reports filed beyond the ten-year requirement.
Overlooking merger and acquisition activity.
As previously mentioned, many oil & gas companies have a long history of acquisitions and mergers. The parent company may be in compliance with unclaimed property laws, but what about the acquired entities? In an unclaimed property audit, these acquired companies will be of particular importance. The auditors will request the same information for these entities as they do for the parent corporation – unclaimed property reports, policies and procedures, etc. When you consider your company’s unclaimed property compliance history, do not forget about mergers and acquisitions. As a best practice, we recommend that unclaimed property compliance be added to the due diligence that companies perform when making an acquisition.
Auditors will typically look for “clean ups” that may occur prior to or after a system conversion. It is important to document any “clean ups” and the entire conversion process. It is important to maintain the date of last customer contact. In some cases, original dates are lost and the conversion date becomes the last activity date. This can result in unclaimed property being reported past due, which could subject the entity to unforeseen interest and penalty assessments.
Make sure adequate mapping is maintained from the legacy system to the new system. A well-documented conversion would include ending balances on the old system with a clear link to beginning balances on a new system. This can be nearly impossible if a mapping from old account numbers to new account numbers is not maintained. In the event of an unclaimed property audit, this mapping will be essential in proving that no balances were written off at the time of conversion.
Document any “clean-up” of customer accounts that occur prior to or after the conversion. Clearly identify such things as customer credits that may have been netted against bad debt write-offs and stale-dated credit balances that may have been refunded or moved into an unclaimed property liability account.
Overlooking unclaimed property generated by third-party administrators (TPAs).
Companies should also consider those entities with which it contracts, such as payroll services providers, dividend paying agents and third-party administrators that disburse benefit payments. Of recent concern for many companies is the audit of equity related property; auditors have expanded into this area and are now also requesting agreements and other information of transfer agents.
All third-party administrator contracts should be reviewed to determine who is responsible for unclaimed property compliance. All too often, unclaimed property is not addressed in the agreements. Read the contracts with these agents to determine who is responsible for unclaimed property compliance. If the agent is responsible, ask them to provide copies of the unclaimed property reports filed on your behalf. Review the reports and keep copies in order to support compliance.
Accounts receivable credit balance policies.
Accounts receivable credit balances are a significant challenge for oil & gas companies because buying, selling and/or trading oil & gas can result in accounting adjustments or “true-ups” due to volume, timing or pricing issues. If these adjustments are not made in a timely manner, it can create the appearance that the company is simply writing-off aged outstanding credit balances. The problem with this practice is the way it appears to outside auditors unfamiliar with the industry. Without the proper documentation, an auditor may consider a credit balance in these accounts as unclaimed property.
Lack of a formal policy and procedures.
Written policies and procedures should include methodologies for identifying, tracking and reporting unclaimed property. They should also address record retention requirements as most state laws require companies to maintain copies of unclaimed property reports and supporting documents for 10 years.
These policies and procedures should be distributed and implemented organizationwide. If some of the legal entities within your organization are not fully compliant, now is the time to start identifying and remediating your potential unclaimed property liability.
Additional recommendations and helpful resources.
If these unclaimed property tasks seem overwhelming, you may want to consider forming an Unclaimed Property Committee. The committee could include a representative from each area of the company that generates unclaimed property and someone from the legal department. There are a number of advantages to having an unclaimed property compliance committee. Spreading the tracking and reporting burden amongst several departments can help the company better manage resources while helping to ensure that the reports are complete. The committee also provides for continuity and retention of information within the organization. All too often a company will have one person in charge of unclaimed property; if that person leaves the company the compliance process falls apart. There are resources available that can provide assistance with unclaimed property compliance.
- Keane provides legislative update notifications, at no cost, in order to help companies stay up to date with the changes in unclaimed property law. Your company can sign up for these alerts at www.Keanotes.com
- The BNA C.P.S. Unclaimed Property Portfolio offers current and detailed information on a number of compliance issues. It has been updated frequently, and can be purchased via www.bna.com.
- The Unclaimed Property Professionals Organization (UPPO) is a not-for-profit organization that provides unclaimed property education, information, networking and advocacy. Visit www.uppo.org to find out more.
- The National Association of Unclaimed Property Administrators (NAUPA) also has a website that can be a great resource; www.unclaimed.org. Among other things, the website offers a direct link to each state’s unclaimed property website.
- You can find out if you or your company is the lost owner of unclaimed property at www.missingmoney.com. This website includes a link to a database that includes owners of unclaimed property from over 40 states. If you find unclaimed property due your company, we would suggest that you proceed with caution. Ensure that the company is in compliance with the state unclaimed property laws before filing a claim. Most states will review a company’s reporting history before they pay the claim. The worst case: your claim could trigger an audit.
Unclaimed property compliance can be a daunting task. However, if you start with a strong commitment from management, apply the right mix of company resources, seek and assistance (both internally and externally) when it is needed, it can become a manageable task.