Escheatment Unclaimed Property – What Every Credit Manager Needs to Know

Valerie M. Jundt, Director Pamela J. Wentz, Senior Manager

NACM Credit Learning Center

GENERAL OVERVIEW What is Unclaimed Property?

Intangible personal property that has gone unclaimed by the rightful owner after a specified period of time.

Escheat vs. Custodial

PURPOSE OF THE UNCLAIMED PROPERTY LAW • Protect the interests and property rights of the lost owner. • Relieve the holders from the expense and liability associated with the property. • Ensure that any economic windfalls benefit the public, not an individual holder.

Examples of Reportable Unclaimed Property • Customer Credit Refunds • Credit Balances

•Insurance Proceeds •Utility deposits

• Unidentified Cash • Deposit accounts

•Securities related property

• Money orders, travelers checks

•Payroll, commissions

• Uncashed checks

•Court deposits

• Customer credit refunds • Gift cards/certificates and rebates

•Mineral proceeds and interest

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Common Definitions (Source: Corporate Practice Series Portfolio 74-2nd, Unclaimed Property released May 2006)

Abandoned (Unclaimed) Property: Fixed and certain interest in intangible property that is held, issued, or owed in the course of a holder’s business that has gone unclaimed for a specific period of time by the rightful owner. Activity: Action taken on property by the owner which has the effect of tolling or restarting the running of the applicable dormancy period under the law of the relevant jurisdiction. Examples: owner making a deposit or withdrawal, receipt of a written memorandum by the holder or any action that state statute deems adequate for this purpose. Aggregate Amount: The threshold dollar value of an individual owner’s account that will require owner detail on the unclaimed property report and may often trigger due diligence efforts.

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Common Definitions Custodian: An individual or entity who holds property until it is delivered to the rightful owner. Most states’ laws make the unclaimed property division a custodian of the property remitted to the state. Due Diligence: The degree of effort required by law that a holder must perform to locate the owner before reporting and remitting property to the state. Generally speaking, the required activity involves the holder sending some form of written notice to the owner. Dormancy (Abandonment) Period: The continuous period of time that must elapse without any activity being taken by the owner before property will be considered “presumed abandoned” and, thus, reportable in accordance with state unclaimed property laws.

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Common Definitions

Dormancy Date/Date of Last Activity: The date of last contact by the owner as evidenced by the records of the holder. Escheat: A physical transfer of property to the state that has the effect of making the state the legal owner, rather than the custodian, of the transferred property. Few states operate under a pure escheat provision as it relates to unclaimed property. Holder: The entity that is in possession of, or controls, property belonging to another. The term Holder is widely used in state reporting instructions to refer to the entity responsible for filing an unclaimed property report.

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Common Definitions Indemnification: Refers to the protection from subsequent claims (whether made by an owner or by another state) that may be provided by a state to a holder that remits property to a state. Intangible Property: Personal property that has no intrinsic value but is merely the representation or evidence of valuable property rights. Intangible property includes stock certificates, checks, drafts, deposits, customer credit balances, gift cards, security deposits, unpaid wages and royalty payments. Last Known Address: A description, as identified in the holder’s books and records, of the location of the owner of unclaimed property sufficient for the purposes of the delivery of mail. Owner: Any person, as identified in a holder’s books and records, having a legal or equitable interest in property held by a holder, including, but not limited to, a creditor, claimant or payee.

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Common Definitions Statutes of Limitation: Establishes time limits for pursuing a legal claim, which are often contingent on the holder having reported and remitted the property. In unclaimed property law, statutes of limitation are sometimes used to determine how far back a state may reach to claim funds held by a holder. Most state unclaimed property statutes contain an “anti-limitation” provision, which generally provide that statutes of limitation other than those defined within the unclaimed property laws themselves, generally will not apply to defeat a state’s right to unclaimed funds.

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U.S. SUPREME COURT RULINGS • Texas vs. New Jersey (1965) • Pennsylvania vs. New York (1972) • Delaware vs. New York (1993)

WHERE TO REPORT 1. State of owner’s last known address 2. State of holder’s incorporation or domicile if address not known 3. *State of holder’s incorporation or domicile if address of apparent owner is in a foreign country and if holder is incorporated or domiciled in the U.S. *Provision language added in the 1981 Uniform Act

HOW UNCLAIMED PROPERTY DIFFERS FROM A TAX • Derivative rights doctrine • Nexus does not apply • The majority of states do not provide relief for reach-back based on a statute of limitations – –

Where statute of limitations provisions exist, the limitation period is typically longer than that applicable in taxation Failure to report or the filing of a fraudulent report generally eliminates reach-back relief afforded by limitation provisions

• Few states provide for a traditional administrative appeals process/remedy • Records retention requirements • Use of Contract Auditors

How and why does this impact you, the Credit Manager/Department? • Large volumes of unclaimed property can be held and/or generated in the credit department • Examples include: – Customer credit refunds – Voided checks – Uncashed checks – Rebates – Accounts receivable credit balances etc….

What is your role? • Who is Responsible for Compliance • Ensure that the Credit Department is involved • Ensure that adequate policies & procedures are established to track, identify, remediate • Internal procedures, independent testing and controls • Business Process and system analysis

State Enforcement Efforts • Many states now view the enforcement of unclaimed property laws as a means to generate "revenue" with little downside political risk. • Although held in a custodial capacity for the true owner, most property is never claimed. • The majority of the states engage third-party contract auditors to perform audits on their behalf. • Contract auditors are usually compensated on a "percentage" basis.

Unclaimed Property Audits • Key problem indicators – What triggers a state audit

• Contract auditors – Who are they? – Why should you care?

• What sort of oversight does the state exercise over contract auditors? • What do auditors do in the absence of records? • How and when are interest and penalties assessed? • What recourse is available for a holder who disputes a state’s audit findings?

What To Do When the Auditor Calls DO DON’T – Take the audit notice seriously. This is a state audit.

– Assess your potential liability. Have an idea what the potential assessment may be.

– Determine how you will handle the audit. Internally or outside consultants.

– Make sure the scope of the audit is clearly defined.

– Assume you don’t have a liability. Virtually every company has some degree of liability.

– Ignore the audit notice. The auditors represent the states.

– Use stall tactics. The state has authority to assess interest and penalties.

– Give the auditor unsupervised access to your records. Assign one point of contact to assist.

Fines & Penalties A holder can be assessed penalties and/or interest for:

• Failure to report/remit the property • Failure to comply with the statute Interest generally applied at 10%–25% of property value Civil/Criminal penalties for failure to report/remit/deliver OR filing a fraudulent report may include • $100 – $200 per day ($10,000 maximum) • Varies from $1,000 – $25,000 fine plus some states assess an additional 25% of the value of the property • Some States – Class B misdemeanor • Note: Penalties/Interest vary widely from state to state

Corporate Considerations • Failure to report and remit unclaimed property liability could result in a material misstatement under FAS 5 • Failure to properly report may also have SEC ramifications (Banker’s Trust $63M assessment) • Whistle blower statutes • Litigation risks • Unclaimed property compliance is required under all state statutes • Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”)

Sarbanes-Oxley • Requires the CEO and CFO of a public company to certify quarterly and annually that they: – Are responsible for disclosure controls – Have designed controls to ensure that material information is known to them – Have evaluated the effectiveness of controls – Have presented their conclusions in the filing – Have disclosed to the audit committee and auditors significant control deficiencies and acts of fraud – Have indicated in the report significant changes to controls

• Introduces the concept of disclosure controls – Broadens the current emphasis of integrity and completeness controls relating to financial reporting – Examples: Executive compensation, legal matters, and MD&A of financial condition and results of operations

Sarbanes-Oxley • Requires the CEO and CFO to annually: – State their responsibility for establishing and maintaining an adequate internal control structure and procedures for financial reporting. – Conduct and provide an assessment of the effectiveness of the enterprise’s internal controls.

Holder’s Rights: Legal Rights Due Process The fundamental premise underlying the Texas v. New Jersey priority rules is that the Due Process Clause of the Fourteenth Amendment “prevents more than one state from escheating an item of abandoned property.” 379 U.S. 674, 676 (1965).

Holder’s Rights: Legal Rights Federal Preemption • ERISA retirement and health benefit plans • Bankruptcy: – Property that is presumed abandoned prior to bankruptcy filing = State is a creditor, must file claim to property. Bankruptcy judge/court may also reject this claim. – Property presumed abandoned after bankruptcy filing = State is not a creditor, no claim to property. – Distributed funds left in estate after bankruptcy proceeding are not unclaimed or abandoned property. Disposition governed by Bankruptcy Code.

• Federal Banking Laws • Other Federal Laws: – Rail and motor carriers. Mason and Dixon Lines v. Eagerton, 555 F. Supp. 434 (M.D. Ala. 1982) – Telecommunications

Significant Legal Cases California Injunction • Initiated by two plaintiffs alleging that the Controller of the State of California took possession of, and liquidated, their “abandoned” securities without notice, violating their state and federal due process rights. California notice procedure had been general newspaper advertisements advising people to check the State’s website. • 9th Circuit agreed: Rejected California notice procedure and stated that due process “requires the government to provide notice reasonably calculated, under all the circumstances” to afford an individual the opportunity to object to the taking of his or her property. Taylor v. Westly, 488 F.3d 1197, 1202 (9th Cir. May 31, 2007). • Remanded to District Court, who issued an injunction prohibiting California Controller from accepting, taking title to, or possession of any unclaimed property. See, Taylor v. Chiang, 2007 WL 1628050 (E.D.Cal. 2007)(Slip Copy). • August 2007: California enacted Senate Bill 86, which required California to mail a notice to apparent owners with addressed property entitled to property valued at $50 or more. • Temporary injunction was lifted on October 18, 2007.

Significant Legal Cases – – – – – –

Bank of America Computer Associates Young America McKesson Coldwell Banker A.W. Financial

Internal Controls/Fraud • Until the property is transferred, ensure that proper internal controls are in place! • Set up specific procedures for claims processing • Finders and fees • Whistle Blower laws!

Amnesty vs. Voluntary Disclosure Agreement • AMNESTY –Statutory or Administrative Amnesty –Specific conditions are posted –Deadlines are provided –Generally no “pre-authorization” required

• VOLUNTARY DISCLOSURE AGREEMENTS (VDA) –Formal vs. informal –Conditions include reach-back and pre-authorization –Formal signoff and release from penalties/interest –Ability to conduct audit is generally preserved

Best Practices • Determine potential liability • Get into compliance with applicable state requirements • Develop and maintain detailed processes and procedures for tracking and reporting unclaimed property • Conduct internal audits of unclaimed property procedures • Be proactive on M&A transactions • Form an unclaimed property committee that is responsible for compliance – Include key personnel, including but not limited to Credit Manager/Director, internal audit, legal counsel, upper management, treasurer, comptroller and tax director.

Unclaimed Property Websites/Resources • www.nacm.org • www.uppo.org • www.nccusl.org • Bureau of National Affairs Corporate Law Portfolio Unclaimed Property Portfolio 74-2nd www.bna.com

CONTACTS

Valerie M. Jundt

Pamela J. Wentz

Valerie M. Jundt Director, Thomson Reuters Phone: (701) 224-1224 E-mail: [email protected]

Pamela J. Wentz Senior Manager, Thomson Reuters Phone: (701) 224-0134 E-mail: [email protected]

Thank You. This ends the module