Unclaimed Property: ensuring compliance and retaining shareholders

Publicly traded companies are facing increasing pressure from state regulatory agencies and their contract auditors to report and remit unclaimed securities-related property based on a new method of determining when property is ‘unclaimed’.

Historically, companies determined whether an owner was ‘lost’ or an account ‘dormant’ based on the non-return of mail. But state regulators have recently started to shift their focus to customer- generated account activity in determining whether a company has been appropriately reporting and remitting property to the states as ‘unclaimed’. Unfortunately, many organizations have not dedicated the internal resources or incorporated the processes required to properly evaluate and manage at-risk property based on this recent shift in regulatory enforcement.

Companies that fail to proactively incorporate comprehensive unclaimed property policies and procedures open themselves up to costly audits and risk damaging their hard-earned reputations with customers, shareholders and the public. Failing to report property in a timely fashion, reporting owner assets prematurely or failing to complete sufficient due diligence may not only subject your company to significant fines and penalties, but will also undermine the trust and corporate reputation that are fundamental to any firm’s success.

Implementing systematic and centralized processes and procedures for unclaimed property compliance is essential for retaining and protecting customer assets while avoiding state and federal penalties for non-compliance.

This can be difficult, however: there are 56 reporting jurisdictions with varying laws and deadlines that are constantly changing. Publicly traded companies with shareholders throughout the country may very well have an obligation to file a report to every jurisdiction. Staying compliant with the unique and ever-changing laws of each jurisdiction is a tremendous challenge for any company.

Last year, for example, Texas and Michigan changed their unclaimed property reporting deadlines from November 1 to July 1. Any organization that missed these new deadlines is in violation of the law and will likely receive an interest and penalty assessment and runs the risk of being targeted for an audit.

With few exceptions, there is no statute of limitations for how far back an auditor can look at records to determine whether the company is in compliance. For those that have experienced a merger/acquisition, this can be a real concern. Many companies fail to maintain sufficient records and preserve critical systems-related information to identify and track account owner details, all of which can subject the company to estimated liabilities, over-reporting and additional fines and penalties.

Proactive compliance best practices

For the reasons mentioned above, it is critical for companies to address unclaimed property compliance in a centralized and holistic manner in order to develop comprehensive processes. Potentially disastrous situations can be circumvented by implementing standardized processes and procedures for tracking and confirming customers’ accounts are active and for ensuring that information has been updated prior to accounts becoming ‘dormant’.

To reduce the risk of an audit and retain customer and shareholder accounts, company officers would be wise to consider implementing the following best practices:

• C-suite support must be established because it is critical to any successful unclaimed property compliance program.
• Dedicate full-time staff members with the appropriate skills and resources to effectively manage all unclaimed property requirements in all jurisdictions.
• In addition to dedicated personnel, create an unclaimed property compliance ‘committee’, that includes people from legal, risk management and internal audit.
• Create a culture of unclaimed property compliance and establish comprehensive unclaimed property policies and procedures.
• Add the capability in all IT systems to electronically track non-transactional customer activity.
• Use technology to track customer-generated activity and link related accounts.
• Aggressively pursue at-risk account owners with proactive outreach by account executives, database searches (credit bureaus, real estate and phone records, the National Change of Address system, and so on) and other methods, especially for those hard-to-find customers who may have moved out of state or are deployed overseas with the military.
• Test compliance via an internal audit rotation cycle.Ensure the unclaimed property team has access to the tools and resources necessary to remain apprised of regulatory and statutory changes.
• Every two or three years, secure an independent specialist to test the robustness of unclaimed property processes and conduct a risk analysis of the different business lines as well as of companies targeted for acquisition.
• Routinely review accounts-receivable aging reports to lower exposure to unclaimed property liabilities and improve customer relations.

These best practices, when implemented internally or with the advice and assistance of an experienced unclaimed property specialist, are any company’s best defense against costly audits, reputational risk and significant fines and penalties.

Valerie Jundt is managing director and Pamela Wentz is a director at Keane