Starting from the Ground Up: Building an Unclaimed Property Compliance Program
By Joe Lichty, Director of Marketing
July 12, 2018
July 12, 2018
Building an unclaimed property compliance program tends to be a responsibility that is often delayed, transitioned, or passed from department to department.
In our 65+ years of business, countless individuals have reached out to us and asked, “I’ve just been made responsible for unclaimed property. What is it, and what am I supposed to do now?”
While many individuals in this situation may choose to rush into filing annual escheat reports as soon as possible, that approach often creates more problems instead of solving them. Rushing to report, in the absence of well-defined processes, can lead to incorrect reports that may raise red flags triggering an audit from multiple states and third-party auditors.
In our experience, individuals tasked with bringing their organization into compliance for the first time are best suited by implementing a comprehensive compliance program for unclaimed property, serving as the foundation for ongoing escheat reporting and compliance efforts.
This same approach is true for individuals who inherited the responsibility for an existing escheat compliance program and want to test its effectiveness.
In either scenario, below are several components critical to establishing (or evaluating) an unclaimed property compliance program.
Understand the significance of unclaimed property compliance.
By making the decision to implement a compliance program for unclaimed property, you’ve already acknowledged the significance of the issue. Despite what you may have heard, state unclaimed property laws are not optional. All companies, regardless of size and industry, must file an annual report to all applicable jurisdictions.
Failure to do so may result in penalty and interest assessments for late or incorrect reports. Ultimately, states may also choose to conduct an audit using a third-party contingent fee auditor to assess your organization’s level of compliance.
An inadequate unclaimed property compliance program can also give rise to reputational risks, especially for companies in the banking, insurance and financial services sectors. In recent years, companies in these industries have faced additional scrutiny through increased audits and ever-changing unclaimed property requirements.
Establish the Scope of Your Unclaimed Property Compliance Program… and Address Your Potential Risks.
If you haven’t already done so, you’ll want to ensure a solid understanding of your starting point from an unclaimed property perspective. Without knowing your potential gaps and areas of exposure, how can you be sure your newly created compliance program will address all possible risks?
- Are you currently reporting, and do you have a consistent history of compliance?
- Are you capturing all potential sources of unclaimed property exposure?
- Do you have copies of previous reports? If so, how far back?
- Are all departments and/or lines of business identifying potentially escheatable properties in the same manner and in accordance with state requirements?
Conducting a Risk Assessment or Self-Audit is one of the most effective ways to answer these questions and uncover additional potential risks that need to be accounted for within your unclaimed property compliance program.
If conducting a risk assessment review with internal resources is not feasible, consider engaging an experienced unclaimed property services provider with expertise in your particular industry. These firms specialize in helping organizations identify and understand their risks and potential liabilities – and recommend practical measures for remediation and ongoing compliance.
The risk assessment should include a thorough review of your financial books and records as well as existing systems used to track and monitor financial transactions including outstanding disbursements, unapplied cash and aged credit balances.
Special attention should also be paid to any historical or recent mergers or acquisitions, as your organization may have unknowingly acquired a population of unclaimed property liabilities as a result of that corporate action.
Include All Lines of Business & Stakeholders
It is extremely important to verify that the risk assessment covers all subsidiaries and lines of business across your organization that could generate potential unclaimed property exposure. If your organization is highly decentralized this is an extremely critical first step.
In many cases, the tax, accounting, and finance departments tend to be the primary stakeholders tasked with unclaimed property compliance responsibilities. It is important to note, that while these departments may have the reporting responsibility associated with escheatment, the accuracy and completeness of the data used to determine what property is reported is contingent on the information provided by accounts payable, payroll, accounts receivable, etc.
If the various accounting departments provide inaccurate or incomplete information, the reports prepared for the states will be inaccurate or incomplete. As such, it is very important to confirm with each accounting department what constitutes potential unclaimed property including actions that can be taken with outstanding and voided checks and appropriate handling of unapplied cash and aged credit balances.
Additionally, in many cases your unclaimed property compliance program will also require the involvement of various departments or functional areas outside of finance that are also critical to the organization’s unclaimed property risk assessment.
If you’re a publicly traded company, it is important to contact your investor relations or shareholder services department to confirm the responsibilities pertaining to inactive shareholders and outstanding distributions, including those handled by third party transfer agents. Securities-related property has its own unique set of requirements; and failing to follow these rules may result in the premature escheatment of investors’ shares.
Rest assured, your shareholders will not be happy if their shares escheat pre-maturely and are subsequently liquidated by the states.
For banks and credit unions it is especially important to ensure that all products and services are captured within the compliance program including, but not limited to, retail operations, loans, credit cards, escrow, safe deposit boxes, and personal and corporate trust.
Customers and members are the lifeblood of financial institutions. Accounts with no owner-initiated contact for three to five years are likely to be considered potentially escheatable.
As such, unclaimed property compliance programs need to ensure that all potential sources of owner-initiated contact and activity are being captured and tracked to ensure that active accounts are not improperly reported to the states. Unclaimed property programs should also include procedures to help re-establish owner contact to preserve and protect accounts from being reported to the states.
Oil & Gas
The Oil & Gas industry has a unique set of risks specific to mineral proceeds and royalties, suspense accounts and JIB credit balances. Oil & Gas companies also need to be aware of various state requirements regarding current pay requirements. Inclusion of the Land Administration department is very important so that Division Order Analysts can identify potential exposures in accordance with state requirements.
Evaluate Your Options and Internal Capabilities
Now that you’ve assessed the scope of your unclaimed property obligation – the next step in implementing a compliance program is defining the responsibilities and actions.
What tasks and activities will be expected of your group? Below are several key questions that must be answered.
Who will be responsible for tracking all legislative or regulatory changes?
State escheat laws change frequently. It is important to stay on top of the changes that could affect your industry and reporting responsibilities. There are programs and services, such as Keane’s Compliance Portal, that provide monitoring of state changes and their impact on due diligence and reporting requirements. In addition to being aware of changes, you need to establish a protocol for sharing this information with others throughout the organization to ensure the consistent interpretation and application of rule changes.
How will you determine which property is eligible for escheatment – or past due?
Companies choose to tackle this critical first step in a variety of ways. Some companies rely on Excel spreadsheets and calculate dormancy manually, reviewing each state and property type separately. Others input their data into a commercial software platform to identify dormant property. Firms with sizable IT departments (and budgets) have actually built their own unclaimed property rules engines.
As you determine which property is eligible for reporting, you should also identify which items require a state mandated due diligence letter. While due diligence letters are a requirement in all 55 jurisdictions, not every item requires a letter to be sent because of minimum value thresholds and other potential exemptions.
Revisit your answer to Question #1 to be sure the responsible party is keeping up to date on these thresholds.
Who will be sending due diligence letters?
Depending on the volume of your outbound due diligence letters required, it may be a manageable process for your internal resources. If the volume is extreme, the services of an external mail house or fulfillment vendor may be necessary.
However you choose to perform these mailings, be mindful that states are very particular about what needs to be included in the letters. In some cases, very specific language, in specific places and in specific formats must be used.
Are you able to perform unclaimed property remediation activities?
By remediation, we’re referring to a form of outreach to owners of property that is either past-due or coming due in upcoming reporting cycles. While state mandated due diligence may be considered the bare minimum form of remediation, many firms choose to put extra effort into locating and communicating with property owners before their property is actually eligible to be reported.
This can come in the form of courtesy mailings, emails or phone calls to owners after an account has had no owner-generated activity for a given period of time, or mail is returned to the holder as undeliverable from the post office (RPO). It may also include outreach to your vendors, employees or other payees where a check or other liability remains outstanding.
You’ll need to set a time threshold that gives the owners adequate opportunity to update their accounts well before the statutory dormancy periods end and your reporting obligation must be met.
Establish an Annual Reporting Timeline
Once you know which aspects of the annual reporting process are going to be performed with internal resources and which are going to be performed by vendors or partners, you can begin to frame out a timeline for all involved parties to follow.
Your timeline should be year round. Activities for the Fall reporting deadlines, usually October 31st or November 1st, should begin in the Spring. Conversely, activities for the Spring reporting deadlines, which stretch from March through July, begin in late Fall or early Winter.
For additional details on the activities to take place for the six months prior to each reporting cycle, please refer to our Unclaimed Property Reporting Calendar.
Document and Communicate – Often.
By this point, you’ve included all appropriate lines of business and the key personnel for an effective unclaimed property compliance program. You know where your problem areas are, what activities you’re going to perform and when you’re going to perform them.
You’re ready to go, right? Not quite.
First, make sure everything is documented as part of your official policies and procedures. Having a documented set of escheat compliance policies and procedures is a critical step and one of the first things requested in the event of an audit. This living document should be frequently reviewed and updated as your business grows and evolves. It should serve as your reference manual, outlining what to do and how to do it.
So what happens if things go awry? You’ll also need to establish a Chain of Command and escalation path so that you can identify and mitigate any issues as soon as possible.
This Chain of Command should also establish who within your organization has the ability to enforce your policies and procedures to ensure that all lines of business and all employees abide by the same processes.
Communication protocols and primary contact points throughout the organization must be defined to ensure that the right people are being contacted. IT involvement may also be necessary to determine how internal systems will communicate with each other and feed relevant information to various members of the unclaimed property team.
Establishing an unclaimed property compliance program is not an easy undertaking. It requires the significant investment of time, resources, and talent. It is not an initiative that can be rushed, as it takes a fair amount of research, internal analysis, and collaboration to do it right.
However, when done correctly, a comprehensive program for unclaimed property compliance will pay dividends in the form of reduced risk, greater assets protected, increased customer retention and improved investor satisfaction.
If you’ve been tasked with building an escheat compliance program from the ground up and could use assistance, we can help. Keane’s National Consulting and Advisory Services Practice has helped countless firms establish comprehensive programs to ensure success going forward. Please contact us for additional information.