Treasury professionals deal with myriad risk-related issues, ranging from accurate cash forecasting to short-term investment strategizing. However, practitioners may be unfamiliar with a hidden risk that can have a significant negative impact on their organization’s finances: failure to comply with unclaimed property laws.
Every company, regardless of industry or size, generates unclaimed property liabilities and each U.S. state, several territories, and some select Canadian provinces have laws that require companies to annually report and remit property that becomes “unclaimed”. Failure to meet these obligations or to do so accurately, can subject businesses to burdensome audits and costly penalty and interest assessments.
Any outstanding obligation—whether it’s an uncashed payroll or AP vendor check, accounts receivable credit balance, uncashed dividend, share of stock, or any other amount owed to an owner by a business (frequently referred in unclaimed property lingo as a “holder”)—can become unclaimed property and triggers obligations under state laws. Knowing which state law applies to an obligation is tricky.
Under the “priority” rules laid out in a series of U.S. Supreme Court cases, outstanding obligations are reportable to the last known address of the owner as shown on the books and records of the holder. If that is unknown (or in some instances, in a foreign country), the obligation is reportable to the holder’s state of incorporation. This means that businesses may have reporting obligations in jurisdictions where they do not have employees, customers or operations, which can make compliance particularly burdensome.
Unlike any other business regulatory schemes, state unclaimed property compliance and enforcement trends are complex, unpredictable, and ever-evolving. Ambiguities in the unclaimed property laws, combined with a lack of transparency in audits and scant judicial review of enforcement initiatives, make it difficult for businesses to confidently gauge the resiliency of their compliance programs and makes managing unclaimed property risks a unique challenge. To adapt, businesses, their compliance service providers, and consultants must constantly monitor legislative and administrative changes, review available documentation in ongoing litigation, and be aware of current trends to stay up-to-date on the changing unclaimed property regulatory landscape.
Meeting the challenges
While unclaimed property risks can never be fully eliminated, there are several proactive steps holders can take to mitigate their exposure in today’s changing environment. Some suggested practices, based on our experiences, include:
- The team approach: Assemble a team that is responsible for creation, enhancement and implementation of unclaimed property procedures. The team should at least be comprised of staff responsible for disbursements and credit areas; information systems staff, familiar with the structure and processing of the company’s financial records; and compliance or legal staff who have the authority to make statutory and regulatory interpretations.\
- Internal audit: To ensure adherence to the company’s unclaimed property policies and procedures (which should be written and periodically updated to accommodate for new business lines/practices, as well as changes in state unclaimed property law), internal audit staff must be tasked with periodically reviewing the unclaimed property process. Also, involvement of internal auditors will help prevent fraud and misfeasance that some businesses have experienced when records of outstanding funds are being handled for escheatment.
- Remediating open items: Periodically, outstanding or aged items that may become unclaimed property should be reviewed and resolved, if possible. Specific timing and tasks related to such a review should be a part of the company’s policies and procedures.
- Staying informed and updated: As indicated previously, escheatment trends, statutes and regulations are in a constant state of flux. Ensuring that your company’s unclaimed property policies and procedures adapt to the trends and changes is essential to managing this risk. Consider engaging an outside firm to provide you with necessary updates to maintain your compliance program internally or outsourcing all or a part of the compliance process to share the risk.
The upcoming AFP unclaimed property virtual seminar on May 10 and 11 is a major step towards staying informed. The training will include information about the latest unclaimed property trends, recent statutory and regulatory changes, and recently resolved and pending lawsuits. Register today.
Karen Anderson is vice president of reporting compliance and Will King is associate general counsel, both with Keane Unclaimed Property.