Minnesota Association of Financial Professionals

Minnesota Association of Financial Professionals Presents A Regulatory Update on Unclaimed Property Compliance April 24, 2012 Pamela Wentz, Senior Ma...
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Minnesota Association of Financial Professionals Presents

A Regulatory Update on Unclaimed Property Compliance April 24, 2012 Pamela Wentz, Senior Manager Keane Consulting & Advisory Services

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Fast Facts/Background  Definition – Intangible personal property that has gone unclaimed by the rightful owner after a specified period of time  Has its roots in English common law:  Escheat vs. Custodial

 Governed and enforced at the state level

 Fifty-four (54) reporting jurisdictions including, DC, Puerto Rico, Guam and U.S. Virgin Islands:  No two laws are exactly the same

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Rules of Jurisdiction  Texas v. New Jersey 379 U.S. 674 (1965) 

State of owner’s last known address



State of holder’s incorporation or domicile if address not known



*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 added in the 1981 Uniform Act Note – after nearly 40 years this remains the law of the land today

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Unclaimed Property   TAX  Use of contract auditors  Derivative rights doctrine  Nexus does not apply

 With few exceptions, there is no statute of limitations  Records retention requirements  Few states have a formal administrative appeals process  Agency and Political Head that governs  Filing deadlines vary  Additional regulatory oversight from other industries 4

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Compliance Requirements  Annual filing obligations  Dormancy periods  Negative report  Due diligence  Aggregate amounts  Burden of proof  Record retention

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Why Should I Care?  It’s the law!  States estimate that only 20% of companies are fully compliant  Increasing audit activity – Industry focused  Increase in number of contingent fee auditors  More states are looking at unclaimed property as a potential solution to budget deficits:  Interest and penalties are increasingly imposed

 Sarbanes-Oxley Section 302 & 404 implications  Whistleblowers 6

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Current Economic Environment  Impact of economic crisis on state budgets.  Unclaimed property is a tremendous source of revenue to the states ($35+ billion).  States are intensifying search for additional revenue without raising

taxes.  Translation = Increasing Audits.  States have tapped into unclaimed property funds to meet budget shortfalls.

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Current Economic Environment (Continued)

 More audits; more aggressive stance during audit  Lowering dormancy periods

 Looking for new abandoned property types (e.g. digital property; uninvoiced receipts)  Refusal to waive interest for non-compliance under audit  Good news – perhaps greater willingness to permit voluntary disclosure to bring in revenue while avoiding costly audits

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Unclaimed Property Audits  New Focus – securities/insurance  Contract auditors

 What, if any, standard guidelines are used  What oversight does the state exercise over contract auditors?  Authority to estimate – when and how?  How and when are interest and penalties applied?  What options/recourse is available for a holder?

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Legislative & Regulatory Trends  FURTHER REDUCTION OF THE DORMANCY PERIODS  CHANGING REPORTING DEADLINES TO COLLECT PROPERTY FASTER  ADDING NEW RULES OR POLICIES TO CUT ADMINISTRATIVE BURDENS OR REDUCE THE ABILITY TO REUNITE THE OWNER WITH THEIR FUNDS (i.e. Rhode Island)  ADDING NEW RULES TO RESPOND TO UNIQUE SITUATIONS (i.e. Nevada)  SPECIFIC AUTHORITY TO CONTRACT FOR AUDITS AND CREATE AN ESTIMATE

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Life Insurance Developments 35 states and National Association of Insurance Commissioners investigating industry wide practices of life insurers Issues:  Life insurers using the Social Security Administration’s Death Master File to cut off annuity payments when a contract holder dies, but not using the same information to determine if death benefit payments are due under life insurance policies, annuity contracts, or retained asset accounts.  Alleged to have failed to turn over unclaimed policies to states, or pay them to beneficiaries, even though they had knowledge that the insured's had passed away and no claim had been made.

Response: National Conference of Insurance Legislators (NCOIL) approved Model Unclaimed Life Insurance Benefits Act.  Mandates use of Death Master File  Al, KY, MD, TN have introduced bills to enact a version of the Act. More to follow. 17

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Unclaimed Property Litigation Update  Staples v. Delaware  Staples filed litigation bringing many challenges to Delaware’s escheat policy  Recent Court Opinion addresses a single issue  Staples arguments: • the Statute of Limitations as to the rebates had run against the rightful owners • Rebates do not constitute “property” under Delaware’s Escheat Statute

 Court: • Rebates are “Bills of Exchange” or “Credits” under §1198(11) of Delaware’s Escheat Statute and are therefore “property.” • Does not address statute of limitations argument

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Unclaimed Property Litigation Update  New Jersey Gift Card Legislation  New Jersey Retail Merchants Association v. Sidamon-Eristoff  In 2010, the NJRMA challenged New Jersey’s amendments to its unclaimed property statute relating to gift cards  U.S. Court of Appeals finds that New Jersey’s retroactive escheatment of abandoned gift cards is unconstitutional  Priority Rules Preempted by Federal Law  Data Collection at the time of sale is permitted  Two -Year abandonment period is upheld  AMERICAN EXPRESS PULLING OUT OF NJ

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Industry Focus  Insurance:  Verus audits  John Hancock Settlements – multi millions  Task Force Hearings: o MetLife & Nationwide Insurance o Florida & 29 other states o California

 Healthcare & Pharmaceuticals  Financial Institutions  Oil & Gas 14

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Securities-Related Property Current Trends and Changes  States’ enforcement measure of the “Return by Post Office” (“RPO”) standard appears to be shifting to a standard of “Inactivity”:  More accounts are deemed eligible for reporting using inactivity as the trigger for reporting  RPO reporting significantly reduced as a direct result of the SEC 17AD-17 requirements

 Increased state scrutiny on “due diligence” as a direct result of successful security-related litigation. Holders are required to meet the due diligence requirements in order to gain states’ indemnification.

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Where do you begin?  Know the states, know the dates  Identify spring states, fall states, California  Learn the cutoff date for each state  Know the reporting deadline for each state

 Plan accordingly  Due diligence timeframes  Certified mailing requirements  Specific letter content and/or format and font  Dollar thresholds

 Advertising timeframes  Publish notice in newspapers 16

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Where To Begin (Continued)

 Securities and General Ledger reporting:  Credit department and Third Party Administrators have had recent focus  Who is handling this?

 Reciprocal reporting:  Where domiciled vs. incorporated  Not accepted by all states  Delay in remitting property to right state  Conflict within dormancy periods themselves

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Dormancy Decisions  Date of last activity/contact  Date returned from Post Office (RPO)  Maturity date

 Issue date  Customer’s age

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Filing a Report

 Reporting requirements  Electronic or paper Cover letters Notary requirements Qualified signatory

 Delivery methods Cash Securities oRegistration requirements

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Reporting Owner Information  Complete name and last known address  Social Security Number, if known  Account number  Amount  Property type

 Description of property  Date of birth, if known  Joint ownership or custodial information

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Common Reporting Errors  Incorrect property codes (NAUPA codes)  Incomplete owner information  Report and remittance does not reconcile  Incorrect cutoff date and/or dormancy period  Reporting only to the state of incorporation/assuming reciprocity

 Placing data in incorrect fields

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Common Reporting Errors  Reporting Property to the States:  Common Mistakes: o Not including correct property NAUPA property type (IR codes)

o Assumptions on reissuance of checks o Media requirements – NAUPA format o California, Texas, Michigan (3/31 cut off)  State Specific: o Cover letters o Remittance (EFT vs. check) o Notary 22

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FRAUD and UNCLAIMED PROPERTY Dormant and Lost Owners = Perfect Storm for Fraud

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Three Sources of Fraud Risk  Fraud for the benefit of the employee (Employee fraud)  Fraud for the benefit of the company (Management fraud)  Fraud for the benefit of a third party (External fraud)

Approximately 30% of fraud involves collusion - with parties inside or outside the organization

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The Fraud Triangle

Integrity and Ability to Rationalize

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Financial Pressure    

Living beyond available means High debt load Financial reversal Greed

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Opportunity

    

Fraudster’s perception of opportunity Controls/obstacles Lack of responsibility Lack of deterrence Possibility of collusion

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Possible Rationalizations       

Not criminal I’m just borrowing I deserve it I’m not hurting anyone Others are doing it For the company No choice

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Typical Employee Fraudster – On the Surface       

Long-time employee Position of trust Doesn’t want help Doesn’t take vacations Appears to be extremely dedicated Possible behavioral changes Unexplained cash or other wealth - usually assumed to be lottery winnings, inheritance or family money

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RECENT Unclaimed Property Issues relating to Fraud  Minnesota – IDS Mutual Funds employee of the company responsible for filing unclaimed property reports. is found guilty of embezzlement – Sentenced to 11 years and $1M restitution  Delaware – state employee working in the abandoned property division (claims processing unit) found guilty of embezzlement. Over $1.25M in securities transferred to friends and acquaintances in a fraud scheme. Sentenced to 5 years and restitution.

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Performing a Self Review  Analyze corporate structure  Understand and document the current and historical policies and procedures  Document and review historical unclaimed property reporting history  Identify potential types of unclaimed property your company may generate  Quantify the potential liability for each property type  Research items to verify that they are unclaimed and pay owner where possible

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Gathering Relevant Data

       

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Corporate Structure Merger & Acquisition History General Ledger / Chart of Accounts Bank Reconciliations / Outstanding Check Lists Journal Entries Accounts Receivable Aging Reports De-Minimis / Automatic system write-offs Contracts w/applicable service providers

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Quantifying the Potential Liability  Identify periods where detailed records are available  Review records and schedule items that are potential unclaimed property. For example:  Stale dated outstanding checks  Voided checks that were not reissued  Stale dated credit balances

 Research items to determine if they represent a fixed and certain obligation

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Typical System Related Issues  Transaction Data not Properly Codified:      

Last Customer Initiated Activity Property Type At Risk Dormancy Date Date Remitted to State State of Remittance Report ID

 Lack of Seamless Integration between LOB systems and reporting system  Lack of Closed Loop Process

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Amnesty vs. Voluntary Compliance Programs

Amnesty Broadly applied Can be initiated by the agency or legislature Not eligible if already selected for an audit

Voluntary Compliance Initiatives: Formal Informal Not eligible if already selected for an audit Right to examine generally preserved

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Unclaimed Property Audits    

State Audits vs. Contract audits Authority to estimate – when and how? How and when are interest and penalties applied? What options/recourse is available for a holder?

 NOTEWORTHY: Many if not all states may have the right to conduct an audit. Most states also outsource enforcement to and through a third party.

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Audit Triggers  State registration and payment of other taxes with no unclaimed property compliance history  Filing only negative unclaimed property reports  Failing to file all property types  Claiming property without being compliant  Merger & acquisition history  Transient workforce  State of incorporation  Media event / publicity

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Benefits of Voluntary Compliance         

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Accurate financials (SOX) Improved chance of penalty and interest abatement Limited “look-back” period Reduced assessments Risk of Audit Avoid laborious auditor requests Set own timetable for compliance Avoid whistleblowers Avoid litigation

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Best Practices and Next Steps  Determine your company’s compliance status  Identify areas of potential exposure  Consider voluntary compliance programs in jurisdictions where exposure exists  Implement policies, procedures and mechanisms through which to

report  TEST your current procedures  Begin your compliance program today!!

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Additional Helpful Unclaimed Property Websites/Resources KEANE www.KeaneUP.com Unclaimed Property Professional’s Organization www.uppo.org NAUPA www.unclaimed.org

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Questions

Pamela Wentz Senior Manager [email protected] 701-222-0134

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