UNCLAIMED PROPERTY: What You Don t Know Can Hurt You

UNCLAIMED PROPERTY: What You Don’t Know Can Hurt You June 10, 2009 Presentation to the International Accounts Payable Professionals Kathy Moyer, Senio...
6 downloads 2 Views 890KB Size
UNCLAIMED PROPERTY: What You Don’t Know Can Hurt You June 10, 2009 Presentation to the International Accounts Payable Professionals Kathy Moyer, Senior Manager Thomson Reuters Tax & Accounting Unclaimed Property Group

AGENDA • Myth vs. Reality

• Important Points to Consider

• History & Background

• Private Escheat

• Common Terms

• State Enforcement on the Rise

• Uniform Unclaimed Property Acts

• Unclaimed Property Audits

• General Purpose of the Unclaimed Property Laws

• When the Auditor Calls

• U.S. Supreme Court Rulings • Where to Report • How Unclaimed Property Differs From a Tax • Examples of Reportable Property • The States’ Responsibility

• Fines & Penalties • Amnesty vs. Voluntary Disclosure Initiatives • Internal Controls/Fraud • Prospective Reporting • Recent Legal Cases • In the News…

• Important Holder Obligations Under the Unclaimed Property Laws

• Leading Industry Practices

• Typical State Expectations

• Unclaimed Property Web Sites / Resources

MYTH VS. REALITY • Our company has been filing reports for years; we are in compliance. • Our company should focus on ensuring that we are in compliance with the state where our corporate headquarters is located. • Based on our records retention policy, our company’s records wouldn’t disclose any unclaimed property not previously reported. • Many holders may have unclaimed property not previously reported.

MYTH VS. REALITY (CONT’D) • Unclaimed Property Compliance is Mandatory. – All fifty (50) states have unclaimed property laws which require holders to remit relevant unclaimed funds to the state.

• In the absence of records, auditors are generally permitted to use estimation techniques to determine a holder’s past due unclaimed property. – Not surprisingly, estimation techniques can result in large assessments.

HISTORY & BACKGROUND • Origins in British Common Law • ESCHEAT – Traditional – Custodial

COMMON TERMS (Source: Corporate Practice Series Portfolio 74-2nd, Unclaimed Property released May 2008)

• Abandoned (Unclaimed) Property – Intangible personal property, and in some instances tangible personal property, that has gone unclaimed for a specific period of time by its 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 include: 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 to be included on the company’s unclaimed property report.

COMMON TERMS (CONT’D) (Source: Corporate Practice Series Portfolio 74-2nd, Unclaimed Property released May 2008)

• Custodian – An individual or entity who holds property until it is delivered to the rightful owner. Most states’ law 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. For example, if the state’s due diligence threshold is $25, a written notice should be sent by the holder to all individual accounts equal to or greater than $25 (i.e. perform due diligence mailings)

• Dormancy – The continuous period of time that must elapse without any activity being taken by the owner before the property will be considered “presumed abandoned” and, thus, reportable in accordance with state unclaimed property laws

COMMON TERMS (CONT’D) (Source: Corporate Practice Series Portfolio 74-2nd, Unclaimed Property released May 2008)

• 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 an 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.

• 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.

COMMON TERMS (CONT’D) (Source: Corporate Practice Series Portfolio 74-2nd, Unclaimed Property released May 2008)

• 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.

COMMON TERMS (CONT’D) (Source: Corporate Practice Series Portfolio 74-2nd, Unclaimed Property released May 2008)

• Statutes of Limitation – Establishes time limits for pursuing a legal claim. 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. However, 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.

UNIFORM UNCLAIMED PROPERTY ACTS • 1954 Uniform Unclaimed Property Act • 1966 Uniform Unclaimed Property Act • 1981 Uniform Unclaimed Property Act • 1995 Uniform Unclaimed Property Act

GENERAL PURPOSE OF THE UNCLAIMED PROPERTY LAWS • 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.

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 is 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 limitations 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

EXAMPLES OF REPORTABLE PROPERTY • Safe deposit boxes rented by financial institutions • Money orders, travelers checks • Uncashed checks (payroll, accounts payable, commissions, etc.) • Insurance proceeds • Utility deposits • Securities and related property • Accounts payable credit balances and uninvoiced receipts (GR/IR) • Gift cards/certificates • Mineral proceeds and interest • Accounts receivable credit balances and refunds • Rebates

THE STATES’ RESPONSIBILITY • Release and indemnify the holder from liability • Secure the funds in a custodial capacity • Make efforts to locate the owners • Pay claims

IMPORTANT HOLDER OBLIGATIONS UNDER THE UNCLAIMED PROPERTY LAW • Duty to file a report • Duty to perform due diligence • Duty to remit the property • Duty to maintain copies of the reports and supporting documentation • Duty to protect the funds until reported and transferred to the state

TYPICAL STATE EXPECTATIONS • Proper due diligence • Aggregate amounts • Electronic reporting • Standardized Reporting Codes • Reports that reconcile to the detail and payment • Maintain copies of reports that have been filed

IMPORTANT POINTS TO CONSIDER • Failure to properly account for unclaimed property liability could be in violation of Generally Accepted Accounting Principles (GAAP). • Unclaimed property compliance is required under all states’ unclaimed property statutes. • Sarbanes-Oxley Act – Section 302 requires that CEOs and CFOs include, with any periodic financial report filed at the SEC, a written statement certifying the accuracy of the report – Internal control is a significant focus of Sarbanes-Oxley due to recent financial and accounting scandals – Section 404 review includes identification and testing of the internal controls that have been implemented – Compliance by SEC registrants is non-negotiable


Causing the Loss of the Owner’s Property Rights Prior to the Time the Property is Reportable

STATE ENFORCEMENT ON THE RISE • Many states now view the enforcement of unclaimed property laws as a means to generate additional “revenue” with little downside and 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 typically triggers a state audit?

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

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

WHEN THE AUDITOR CALLS DO DON’T • Take the audit notice seriously. – THIS IS A STATE AUDIT!

• Assess your potential unclaimed property exposure. – 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 an exposure. – Virtually every company has some degree of unclaimed property exposure

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

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

• 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

AMNESTY VS. VOLUNTARY DISCLOSURE INITIATIVES • Amnesty – Statutory or Administrative Amnesty – Specific conditions are posted – Deadlines are provided – Generally no “pre-authorization” required

• Voluntary Disclosure Agreement (“VDA”) – Formal vs. informal – Conditions usually include reach-back and preauthorization – Formal signoff and release from penalties/interest – Ability to conduct audit is generally preserved

INTERNAL CONTROLS/FRAUD • Until the property is transferred, assess that adequate internal controls are in place! • Set up specific procedures for claims processing • Finders and fees • Whistle Blower laws!

PROSPECTIVE REPORTING • File unclaimed property reports in all applicable reporting jurisdictions. • Determine what part of the organizations will assume responsibility for tracking the laws, as well as preparing and signing the reports. • Ensure proper due diligence. • Maintain copies and supporting documentation of unclaimed property reports.

RECENT LEGAL CASES • CA, Inc. v. Cordrey (Delaware Court of Chancery, filed 2008) – In 2004, CA filed a voluntary disclosure agreement with Delaware – A dispute arose and Delaware asserted about $5 million (plus interest & penalty) more of additional liability that CA had self-reported – Delaware also served an audit notice for all periods back to 1981 – CA filed complaint in October 2008 seeking equitable, declaratory, injunctive and other relief – Delaware in turn filed a motion to dismiss based on sovereign immunity, want of jurisdiction, doctrine of unclean hands, and failure to state a claim – CA filed amended complaint in December 2008 restating bases in original complaint, and challenged the constitutionality of certain Delaware statutes that CA alleges deprive the company of property without due process of law – Case currently in litigation

RECENT LEGAL CASES (CONT’D) • Taylor v. Westly (9th Cir. May 2007) – 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 procedures had been general newspaper advertisements advising people to check the State’s Web site. – During June 2007, temporary injunction was issued prohibiting California from accepting, taking title to, or possession of any unclaimed property – Temporary injunction was lifted on October 18, 2007

• Fitzgerald v. Young America (Iowa District Court filed in 2006) – Iowa Treasurer filed suit against Young American Corporation (“YAC”) on behalf of itself and other states. – Iowa subsequently amended the compliant to add Sprint, T-Mobile and Walgreens, as additional defendants

RECENT LEGAL CASES (CONT’D) • Fitzgerald v. Young America (Iowa District Court filed in 2006) – Sprint, T-Mobile and Walgreens moved for summary judgment contending that YAC possessed the uncashed rebate checks and they had no legal obligation to report the unclaimed rebate checks (i.e. not the “holder”) – District court agreed with the state that the merchant defendants, as a result of owing rebate payment obligations to their customers, might be the relevant “holders” and denied summary judgment – In addition, the District court also denied Iowa’s motion for partial summary judgment against the merchant defendants – Additional litigation and negotiations in progress

IN THE NEWS… Son of Delaware Lawmaker Pleads Guilty in State Finance Agency Theft New York (Associated Press), posted Tuesday, February 5, 2008

“A state finance official who is the son of a Republican House member pleaded guilty in federal court Tuesday to participating in a criminal scheme resulting in the theft of more than $1 million from the state Department of Finance…”

Two arrested in scheme to defraud Press release issued by Florida Department of Finance, October 20, 2006

TALLAHASSEE, FL – “Tom Gallagher, Florida’s chief financial officer, today announced the arrests of two men for scheming to defraud an elderly woman of nearly $75,000 in money due to her through Florida’s Unclaimed Property Program…”

Ex-Accountant guilty in check fraud: Former Chase worker admits to Embezzlement The News Journal, posted Thursday, October 19,2006

WILMINGTON, DE – “A former accountant in charge of tracking unclaimed money for a bank admitted Wednesday she improperly claimed nearly $1.3 million for herself or her associates…”

LEADING INDUSTRY PRACTICES • Determine potential unclaimed property exposure • 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 processes and procedures • Form an unclaimed property committee that is responsible for compliance – Include key personnel, including, but not limited to, internal audit, legal counsel, upper management, treasurer, comptroller and tax director.

UNCLAIMED PROPERTY WEB SITES & RESOURCES • www.uppo.org • www.unclaimed.org • www.missingmoney.com • Bureau of National Affairs Corporate Law Portfolio Unclaimed Property Portfolio 74-2nd www.bna.com

Contact Information & Biography Kathy Moyer

Senior Manager, Unclaimed Property Group ONESOURCETM Property Tax Phone: (609) 965-8920 E-mail: [email protected] Kathy is a Senior Manager in the Thomson Reuters Unclaimed Property Group and is based in Philadelphia, PA. Kathy has specialized in the field of unclaimed property since 1984 and has assisted major corporations with compliance reviews and multi-state unclaimed property audit defenses. In addition, Kathy has assisted clients with the preparation of state unclaimed property filings, due diligence mailings, and the design and implementation of unclaimed property polices and procedures. Kathy is widely recognized as a specialist in unclaimed property compliance and has developed unclaimed property policies and procedures cited as examples of “best practices” within the unclaimed property community. Kathy is a frequent speaker at unclaimed property seminars around the country and has co-authored articles on unclaimed property issues. Prior to joining Thomson Reuters, Kathy was a Senior Manager in the Deloitte & Touche LLP National Unclaimed Property Services Group for nine years. Previous to Deloitte, as the unclaimed property manager for the largest U,S. insurance company with 264 subsidiaries, Kathy effectively managed unclaimed property issues in such diverse businesses as insurance, banking, securities and real estate.


Additional Information: • 1) COST Unclaimed Property Scorecard – January 2009 • 2) States Scooping Up Assets – WSJ February 4, 2008 • 3) COST – October 17, 2007

Suggest Documents