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UNCLAIMED PROPERTY FOCUS is a blog written by and for UPPO members, featuring diverse perspectives and insights from unclaimed property practitioners across the U.S. and Canada. We welcome your submissions to Unclaimed Property Focus. Please contact Tim Dressen via tim@uppo.org with any questions about submitting a blog post for consideration and refer to our editorial guidelines when writing your blog post. Disclaimer: Information and/or comments to this blog is not intended as a substitute for legal advice on compliance or reporting requirements.

 

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Due Diligence Basics

Posted By Administration, Thursday, February 1, 2018

With unclaimed property audits being an ongoing concern for holders, it is more important than ever to get on track with performing due diligence if your company is not already in compliance. 

 

Unclaimed property due diligence is a specific type of communication deemed legally necessary by most states and territories to make individuals aware of the impending transfer of their property to another holder.

 

The objective of due diligence is to return unclaimed property that has remained dormant on a holder’s books to the rightful owner. Due diligence mailings to last-known addresses that the holder has on record are considered the most effective and efficient method of achieving this goal. 

 

Holders should review all addresses for completeness prior to mailing. If an address is known to be inaccurate, or if the address is unknown, the holder may want to attempt to locate a current address for the owner.

 

Unlike other types of mailed communications to property owners, such as courtesy mailings, due diligence is a formal notice at the end of a property’s dormancy period. Holders are responsible for sending letters to an owner’s last-known address, stating that property will be turned over to the state if the owner fails to respond within a specified timeframe.

 

Most states require that a written notice be sent via first-class mail. However, New Jersey, New York and Ohio require letters to be sent by certified mail with return receipt for accounts equal to or greater than $1,000. Notices for lower amounts can be sent by first-class mail.  

 

While the Uniform Unclaimed Property Act states that properties with value of $50 or more require due diligence, some states have determined alternative values that require due diligence. For example, the more lenient Texas requires mailings only for values of $250 or more, while Connecticut requires holders to send notification to all owners with a valid address, regardless of the value of the property. A small number of states and territories do not require due diligence at all. Because property value thresholds vary, holders should refer to individual state statutes.

 

Even if a particular property is not of value to require due diligence, there are still aggregate minimums for reporting purposes. It is important to note that while some states use the same thresholds for aggregate and due diligence limits, they can be different. Don’t confuse the two. For example, California has an aggregate threshold of $25, but a due diligence threshold of $50. In Michigan, if a holder is reporting 25,000 or more properties of at least $50 in value, due diligence notices must be sent only for properties valued at $100 or more. Oklahoma, however, lowers the threshold to below $50 (including items of all values) for items from a set of recurring payments, such as royalties, annuities, dividends, distributions, etc.

 

Most states and territories require that the due diligence letter include the language, “The holder is in possession of property subject to this Act.” This wording is significant because the due diligence mailings cannot include qualifying language, or any words and phrases that may lead owners to believe they may not be the owner of, or entitled to, the property. 

 

California, in particular, has stringent guidelines covering what is required in due diligence mailings to owners living in the state. The letter must contain a heading at the top that reads: “THE STATE OF CALIFORNIA REQUIRES US TO NOTIFY YOU THAT YOUR UNCLAIMED PROPERTY MAY BE TRANSFERRED TO THE STATE IF YOU DO NOT CONTACT US,” or uses substantially similar language.

 

The notice must specify the time that the property will escheat, and the effects of escheat, including the necessity for filing a claim to California for the return of the property.

 

The notice must also, in boldface type or in a font a minimum of two points larger than the rest of the notice, exclusive of the heading:

  1. Specify that since the date of last activity, or for the last two years, there has been no owner activity on the deposit, account, shares, or other interest.
  2. Identify the deposit, account, shares, or other interest by number or identifier, which need not exceed four digits;
  3. Indicate that the deposit, account, shares, or other interest is in danger of escheating to the state.
  4. Specify that the unclaimed property law requires business associations to transfer funds of a deposit, account, shares, or other interest if it has been inactive for three years.

California requires that the owner has the option to maintain the property on their account to be collected or used later, or has the option to be issued payment promptly. Other options can be allowed depending on the nature of the property. For example, if the property is a credit on a customer account, the customer could also be given the option to apply the credit to a past due or upcoming bill.

 

This letter must also allow the owner to correct their address if necessary. The holder can also give the owner the option to return their response via fax or email.

 

California also sends its own due diligence letters based on the holder’s preliminary report. A sample of California’s due diligence letter can be found on the state’s website.

 

Ohio also has more specifications than most states when preparing due diligence mailings for its residents. Similar to California, the letter must list specifics of the property, notably its nature, ID number or description of the property, and amount. The notice must also inform the owner that the property will be transferred to the state within 30 days, unless the holder receives earlier contact. 

 

Unlike other states, Ohio requires the holder to provide owners with a self-addressed, stamped envelope for return communication. 

 

When mailing letters to owners in multiple states, the same body text may be used as long as content requirements of all states are met. Although Ohio and California are specific in what they require in a due diligence letter, most of these required elements can be considered best practices for all due diligence mailings.

 

A few jurisdictions currently have advertising or publication requirements, including New York and Puerto Rico. Each state varies but, in general, newspaper publication is are an acceptable form of advertisement. Refer to individual state statutes for specific requirements.  

 

As with other aspects of due diligence, little uniformity exists regarding the timing of mailings. Most states and territories follow the 1995 Uniform Unclaimed Property Act timing, which calls for sending the letters no more than 120 days before reporting the property to the state. Others states and territories have adopted their own timing standard. Holders need to confirm each state’s requirement when preparing their due diligence mailings.

 

When building your timeline for mailing due diligence letters, keep in mind that best practices recommend providing 30 to 60 days for the property owner’s response.

 

Providing a response deadline in due diligence letters lets owners know there is limited time to claim their property directly from the holder, so doing so is considered a best practice. Clearly state that after the property will no longer be in possession of the holder after the response deadline date. 

 

Finally, it is best to examine state statutes on a periodic basis before performing due diligence and reporting. This information is readily available through state websites. Laws are amended occasionally, and such changes can occur at any time. It is vital to be aware of any and all legislative changes to ensure that you and your company is fully compliant.

 

For additional information about due diligence, attend the Managing Your Due Diligence Program session at the UPPO Annual Conference, March 4-7, 2018, in Tampa, Florida, and see our previous blog post, “Due Diligence: Beyond the Minimum.” 

Tags:  due diligence 

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Record Retention Strategies

Posted By Administration, Thursday, January 25, 2018

Proper record retention is an essential part of any unclaimed property compliance program. Not only do state laws require holders to retain appropriate records, but doing so also provides an audit defense and can help avoid the use of estimation for determining unclaimed property liability.

 

“All states have some kind of requirement as it relates to the retention of unclaimed property records,” said Laurie Andrews, CFE, senior manager for Keane. “Failure to maintain those records can cause problems. In the event you are audited, it will make the audit much more burdensome and lead to extrapolations for periods where your records are unavailable. It’s far easier to keep and maintain records than to try to find them or recreate them when faced with an audit.”

 

Retained records are intended to demonstrate a holder’s historical compliance efforts. Records created at the time of reporting and properly maintained meet the burden of proof when being audited and provide a more powerful audit defense.

 

As with all areas of unclaimed property compliance, requirements for record retention vary from state to state. The Revised Uniform Unclaimed Property Act, which provides model requirements for states to consider, calls for holders to retain:

  • Information required to be included on the report by state law.
  • The date, place and nature of circumstances giving rise to the owner’s property right.
  • The value of the property.
  • The last address of the owner, if known.
  • For traveler’s checks, money orders, or similar instruments, the record of the state and date of issue.

In the event of an audit, unclaimed property holders need records to demonstrate compliance for a lookback period that often spans the dormancy period plus 10 years—sometimes longer, depending on the state conducting the audit.

 

Holders can take several steps to maintain effective record retention practices. In addition to generating and maintaining good records, indexing them effectively helps ensure you or future employees can locate them when needed.

 

“It can be tough understanding and recreating records from a period when you weren’t involved in the process,” Andrews said. “When you’re creating, filing or indexing records, think of the people who will be reviewing them many years from now. If you maintain records with no supporting documentation or explanation, it’s going to be difficult for your successor to understand the historical data.”

 

Include record retention documentation within company policies and procedures. The unclaimed property compliance team may understand the need for maintaining specific records, but others may not. This could lead to record destruction practices that unintentionally increase unclaimed property risk.

 

Develop and enforce policies that protect records from destruction and alteration. If information needs to be added to records, it should be done in the same location where the records are stored. If the record exists in both a hard copy and electronic copy, added information should be attached to both.

 

If a third-party administrator manages the escheatment process, request and maintain copies of unclaimed property reports filed on your behalf. The holder is ultimately responsible for compliance and needs to ensure such records are properly retained.

 

Annually review record retention policies and periodically communicate them to anyone involved. Doing so helps ensure procedures stay current with changing requirements and that employees don’t forget about the importance of unclaimed property records. Occasionally verify that proper record backup processes are in place, reducing the threat of losing valuable data.

 

While all of this effort to retain records may seem daunting, evaluate the cost of retention versus the audit exposure created by not retaining records. Developing, following and monitoring record retention procedures may seem daunting, and storing records for long periods of time can be costly. However, the potential liability created when records are unavailable, and the effort required to recreate them when an audit occurs, likely make the cost and effort worthwhile.

 

For additional insight into record retention, attend the Technology & Record Retention and Developing Your Policies & Procedures sessions at the UPPO Annual Conference, March 4-7, 2018, in Tampa, Florida.

 

 

 

 

Tags:  audits  record retention 

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Mergers and Acquisitions Present Unclaimed Property Risks

Posted By Contribution from Troy Wangen, 2017/18 UPPO Second Vice President, Tuesday, January 16, 2018

The mergers and acquisitions (M&A) activity outlook in 2018 is very positive, and most experts foresee a renewed focus in larger deals. Unfortunately, no matter the M&A climate, companies often inadvertently inherit an unknown liability from the companies that they acquire (targets). That liability is unclaimed property, and it can remain hidden until long after the deal closes. 

 

All companies can generate unclaimed property, which arises when some liability of the company, such as a check to a vendor or a customer credit balance, isn’t resolved in a timely manner. These liabilities, which can go back for decades, are often overlooked by standard due diligence, and are often unknowingly acquired along with a target’s assets or stock. 

 

Common Mistakes in M&A Due Diligence Regarding Unclaimed Property

Some of the most common mistakes related to reviewing a target’s potential unclaimed property liabilities in the due diligence process include:

  • No one asked about unclaimed property. Probably the single most common mistake is that no one asked, or knew about, unclaimed property during due diligence.
  • The belief that an asset purchase does not generate successor liability. The common misconception around asset purchases is that the liability for unclaimed property prior to the acquisition remains with the seller. However, this isn’t always true, and a thorough review of the contract is always necessary to determine exactly which liabilities remain with the seller. 
  • Target’s poor record retention or target only provides one or two years’ worth of records. A standard look-back period under an unclaimed property audit or VDA can be 10-15 years or more. Without historical records, jurisdictions may use estimations to create factious liabilities for earlier years.
  • Buyer loses target’s history by eliminating staff over the first year. Knowledge of pre-acquisition practices is critical under a unclaimed property audit, such as understanding historical policies and procedures in order to assert that certain programs don’t constitute unclaimed property.
  • Target acquired other entities and assumed successor liabilities as part of their M&A transactions. The target you acquired may have been blind to the successor liabilities that it inherited in earlier transactions.   
  • Believing unclaimed property will not have an effect on purchase price. In some cases, a target’s potential unclaimed property liabilities can be so large that they significantly reduce the value of the target, especially when the Target is small or the bulk of its revenue comes from a single source (e.g., gift cards or royalties). A thorough review of one target revealed that the only reason it was profitable was that it was incorrectly taking unclaimed property into income.

 

Questions that should be asked during due diligence

The due diligence checklist of any target should always address unclaimed property, and should include the following:

  • Does the Target have a unclaimed property filing history, and if so, for how long?
  • Has the target ever been under a unclaimed property audit or entered into voluntary disclosure agreements with any jurisdictions?
  • Does the target use third-party administrators to administer any programs such as payroll, benefits, rebates or shareholder services?
  • Does the target have internal policies specific to unclaimed property or specific policies for the handling of outstanding checks and aged credit balances?
  • Does the target have a history of voiding/writing off aged checks and/or credit balances or has it maintained a tolerance write-off policy?
  • Have all available bank statements/reconciliations and all electronic accounts receivable aging reports been provided vs. just the most recent years?

 

Divesting? 

It is equally important to understand your unclaimed property exposure during a divestiture, especially when determining whether you or the buyer will be responsible for any historical unclaimed property liability. 

 

For greater insight into issues surrounding mergers and acquisitions, register for UPPO’s Mergers and Acquisitions webinar on Feb. 7, 2018, and attend the Mergers & Acquisitions: Before, During and After session at the UPPO Annual Conference, March 4-7, 2018, in Tampa, Florida. 

Tags:  acquisitions  M&A  mergers 

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Unclaimed Property Trends Shape Annual Conference Sessions

Posted By Administration, Monday, January 8, 2018

For better or worse, this is not a dull time to be an unclaimed property professional. In recent years, numerous state legislatures have considered (and often approved) updating their unclaimed property statutes. Courts continue to look at state unclaimed property practices, including controversial audit practices. And companies from coast to coast and border to border face the ongoing challenge of minimizing their unclaimed property risk.

 

Throughout 2017, UPPO helped members keep up with the trends affecting unclaimed property professionals. Many of these same trends shape the agenda for the 2018 UPPO Annual Conference, March 4-7, 2018, in Tampa, Florida.

 

Delaware

In February 2017, Delaware Gov. John Carney signed S.B. 13 into law, triggering significant changes to the state’s unclaimed property practices. Since then, the state has adopted new audit rules and encouraged holders currently under audit to convert to the state’s VDA program.

 

As we approach the one-year mark since S.B. 13, its effects continue to unfold. The Delaware Reforms: One Year Later session at the 2018 UPPO Annual Conference will examine the status of changes in Delaware and their ramifications. The Advocacy Efforts in the Age of Reform session will shine a light on UPPO’s work to promote fair unclaimed property requirements not only in Delaware, but in all states.

 

Audits

Fueled by activity in Delaware, controversy continues to swirl around state audit practices. The use of third-party auditors incentivized by contingency fees has been the focus of litigation and advocacy efforts. As states update their unclaimed property statutes, some, such as Michigan, are enacting new audit standards. Some states also help offer a fairer playing field for holders by providing the opportunity to appeal audit assessments. The examination process, particularly that of multi-state audits, often strains holder resources, as it stretches over several years.  

 

The Audit 101, Navigating Your Audit and Mock Trial sessions, along with several of the Industry Focus sessions, at the 2018 UPPO Annual Conference will provide attendees with insight into strategies holders can employ when facing examination.

 

Litigation

The courts have provided several favorable rulings for holders in recent months. Appeals court rulings in cases brought by Plains All American Pipeline, Bed Bath and Beyond, and Marathon Petroleum have yielded positive results. Similar cases, including those brought by Office Depot and the multi-state squabble over MoneyGram official checks, continue to proceed through the courts.

 

Attendees at the 2018 UPPO Annual Conference will learn about these and other relevant litigation trends during the Legislative and Litigation Update session.

 

Operational Practices

In addition to exploring unclaimed property trends, the 2018 UPPO Annual Conference agenda is packed with sessions to provide practical knowledge attendees can apply to be more effective at their jobs. Sessions will examine a wide range of topics, including: state reporting basics, managing due diligence, self-assessments, record retention, exemptions and deductions, fraud, policies and procedures, foreign jurisdictions and much more.

 

View complete details about educational sessions and other 2018 UPPO Annual Conference events. The early-bird registration deadline is Jan. 10, so register today for the best rate.

Tags:  audits  Delaware  litigation  trends 

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Marathon Decision Signals Big Win for Holders

Posted By Administration, Thursday, January 4, 2018

Marathon Petroleum Corporation et al. v. Secretary of Finance, State of Delaware et al.

 

On Dec. 4, 2017, the Third Circuit Court of Appeals overturned a lower court’s dismissal of Marathon Petroleum’s lawsuit against Delaware. The appeals court decision is exciting for holders for multiple reasons:

  1. It provides holders reassurance that they can sue for violations of federal common law.
  2. It limits states’ ability to look at subsidiaries only to confirm that they’re legitimate and not simply alter egos of the parent company.
  3. It reassures holders that they can “just say no” when faced with unreasonable information requests.

Background

Marathon uses a gift card management company incorporated in Ohio, a state that exempts such property from escheatment. After Marathon objected to an $8 million estimated liability for gift certificates for which the company said it had issuance and redemption records, third-party auditor Kelmar – on behalf of Delaware – requested records related to the gift card company’s creation and operations. 

 

Among the information requested were contracts, meeting minutes, vendor agreements and accounting records. Marathon refused, arguing that such a request is outside of Delaware’s jurisdiction. Again, Kelmar suggested it would turn over the issue to the attorney general for enforcement action. 

 

In February 2016, Marathon filed suit. arguing violation of the federal priority rules and the Fourth Amendment. The Marathon case also took issue with the state’s estimation practices. 

 

Delaware argued that Texas v. New Jersey applies only to disputes between states, not audits of private entities. The defendants also argued that Marathon’s claims were premature, as they would have their chance to make their case in state court if they continued to resist turning over requested documents. Attorneys for Marathon took issue with the state’s interpretation of federal law and compared the nine-year audit of the company to a “fishing expedition.”

 

The Decision

On Sept. 23, 2016, a U.S. District Court agreed with Delaware’s arguments and dismissed the case. In overturning the District Court ruling, the Third Circuit Court of Appeals stated, “…we disagree with [the] conclusion that private parties cannot invoke federal common law to challenge a state’s authority to escheat property.”

 

The Appeals Court, however, agreed with the earlier court’s ruling that the case was not yet “ripe.” “To the extent the companies are challenging the scope or means of the examination in this case, the claim is not ripe, since the state has taken no formal steps to compel compliance with the audit,” the court wrote.

 

The case has been referred back to the District Court to clarify that the case’s dismissal is without prejudice, giving the plaintiffs time to refile the lawsuit at a later date.

 

Effects of the Decision

Through its decision, the appeals court confirmed that holders can rely on the federal common law priority rules from Texas v. New Jersey. The decision tells holders that the priority rules apply to all relationships involving the remittance of unclaimed property to a state, not just disputes between states.

 

“To finally have confirmation that holders have standing to sue under the federal common law rules for violations and potential alleged violations is a really big win for holders,” said Jameel Turner, attorney at Bailey Cavalieri LLC. “It forces the states to negotiate audit settlements in good faith because any audit or audit dispute could lead to a federal lawsuit.”

 

Looking at the holder-subsidiary relationship, the court tackled the long-standing question of what extent the state can investigate subsidiaries incorporated in in another jurisdiction as part of an audit examination. The court confirmed that states have the ability to conduct an inquiry into subsidiaries to determine if they are legitimate and not just alter egos of the parent.

 

“If the holder asserts that its gift card subsidiary is incorporated in Virginia and holds the company’s gift card liabilities, then producing a certificate of good standing, the articles of organization and a sample journal entry to show how liabilities are booked should be sufficient,” Turner said. “Beyond that, there’s no need to go down a rabbit hole with the state and look at voluminous card-level detail and other irrelevant documents that are typically requested. To receive some clarity about what records holders need to produce relative to their gift card subsidiaries is a significant win for the holder community.”

 

These limits reassure holders of the ability to “just say no” to information requests outside states’ audit authority. If the state disagrees, it would need to sue and let a court decide.

 

“I think this case will embolden holders to stand firm in their legal rights,” Turner said. “When they think a state is making information requests that are outside the scope of the state’s audit authority, holders will be more apt to just say no. Marathon provides holders with legal authority to say no to unlawful information requests and force a state to file an enforcement action.”

 

Disclaimer: This case summary contains a general description of the case. It is not intended as business, financial, legal, tax, reporting or compliance or other professional advice or services. This summary blog is not a substitute for such professional advice.

Tags:  gift cards  litigation 

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