The need for reform and uniformity in unclaimed property practices

Failure to comply with the labyrinth of unclaimed property statutes that vary not just by property type but also from state to state exposes businesses of all types to audit risk and liability assessments, interest accruals and even civil and criminal penalties. The current environment has become so onerous that there is a renewed effort to standardize unclaimed property law. Uniform laws across US states and territories would enable companies holding property on behalf of others to better protect those assets from escheatment and easily stay compliant with the myriad regulations concerning that responsibility.

Unclaimed property is any financial obligation due and owing to another party – a customer, vendor, employee, investor or other stakeholder – that remains dormant for a period of time defined by the state, generally between three and five years. This property must be reported and remitted to the appropriate state agency if there is no owner-generated activity on the account during the specified time period. Keeping track of dormant accounts, missing shareholders and constantly changing laws and regulations is daunting, and the repercussions of non-compliance are significant. Firms that have been found to be out of compliance have faced multi-million-dollar penalties from state governments and the auditors that represent them.

Despite such risks, many experts estimate that less than 20 percent of all businesses are in compliance with unclaimed property laws, often because firms are unaware of the fluid and sometimes inconsistent requirements across the 55 jurisdictions of the US and its territories.

The impact of unclaimed property is not limited to the holders. According to figures from the National Association of Unclaimed Property Administrators (NAUPA), states collectively now hold more than $41 billion in unclaimed property, and less than 30 percent of it is ever returned to its rightful owners.

The Uniform Disposition of Unclaimed Property Act was passed in 1954 to provide some clarity, particularly when multiple states were involved. The act was revised in 1966, 1981 (when it became the Uniform Unclaimed Property Act, or UUPA) and 1995. But states have adopted different versions of the act and then individually modified it, increasing the irregularities. As more and more businesses find themselves in the crosshairs of unclaimed property audits and property owners unnecessarily have their assets liquidated shortly after they are escheated to state governments, there is a growing movement to achieve greater uniformity in unclaimed property law in order to simplify the compliance process for companies.

In April 2013 the Uniform Law Commission (ULC) established a study committee and invited around 40 stakeholders to comment in a non-judgmental forum on a list of issues and concerns regarding the current unclaimed property environment. A report issued by the ULC a few months later underscored the need to revisit the UUPA that was last revised nearly 20 years ago.

In February 2014, advisers from the American Bar Association and NAUPA, as well as stakeholder observers from various industry associations, some publicly held companies, commercial transfer agents and service providers with unclaimed property expertise, joined the ULC to help draft revised legislation that addresses the varying needs of the parties involved.

Proactive measures to protect your company

As the ULC wrestles with the issue of developing uniform unclaimed property regulations, there are some best practices companies can implement in order to avoid unnecessary state or multi-state audits.

• Conduct a thorough global audit with internal or third-party expertise to test the robustness of current and past reporting practices and to help the company understand compliance risk and mitigation options in empirical terms. This will enable the company to take corrective action as needed to lower exposure/liabilities. Most states provide amnesty or leniency to firms that voluntarily come forward about delinquent reporting when they uncover mistakes. Delaware, for instance, recently launched a voluntary compliance initiative that allows companies with a reporting obligation to the state to come forward without fear of an audit (see Delaware’s VDA program, above).
• Establish consistent accounting practices and comprehensive, dynamic unclaimed property policies and procedures that are implemented throughout the enterprise. This is the foundation of sound unclaimed property compliance and will help firms understand the root causes of unclaimed property problems so they can make corrections and prevent them from recurring.
• Corporate secretaries and other company officials responsible for compliance should seek out online subscription services, such as Keane’s compliance portal, that provide continual updates on unclaimed property regulations and legislation in all US states and territories. Ready access to this important and ever-changing information prevents unnecessary errors in reporting and can be used to develop a culture of compliance throughout the organization. When it comes to unclaimed property, an ounce of prevention is worth a pound of cure.