Minnesota Association of Financial Professionalsc.ymcdn.com/sites/ 2012... · Good news – perhaps...
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www.KeaneUP.com Minnesota Association of Financial Professionals Presents A Regulatory Update on Unclaimed Property Compliance April 24, 2012 Pamela Wentz, Senior Manager Keane Consulting & Advisory Services
Transcript of Minnesota Association of Financial Professionalsc.ymcdn.com/sites/ 2012... · Good news – perhaps...
www.KeaneUP.com
Minnesota Association of Financial Professionals
Presents
A Regulatory Update on
Unclaimed Property Compliance
April 24, 2012
Pamela Wentz, Senior Manager
Keane Consulting & Advisory Services
www.KeaneUP.com
Fast Facts/Background
Definition – Intangible personal property that has gone unclaimed by
the rightful owner after a specified period of time
Has its roots in English common law:
Escheat vs. Custodial
Governed and enforced at the state level
Fifty-four (54) reporting jurisdictions including, DC, Puerto Rico, Guam
and U.S. Virgin Islands:
No two laws are exactly the same
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Rules of Jurisdiction
Texas v. New Jersey 379 U.S. 674 (1965)
State of owner’s last known address
State of holder’s incorporation or domicile if address not known
*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 added in the 1981 Uniform Act Note – after nearly 40 years this remains the law of the land today
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Use of contract auditors
Derivative rights doctrine
Nexus does not apply
With few exceptions, there is no statute of limitations
Records retention requirements
Few states have a formal administrative appeals process
Agency and Political Head that governs
Filing deadlines vary
Additional regulatory oversight from other industries
Unclaimed Property TAX
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Annual filing obligations
Dormancy periods
Negative report
Due diligence
Aggregate amounts
Burden of proof
Record retention
Compliance Requirements
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Why Should I Care?
It’s the law!
States estimate that only 20% of companies are fully compliant
Increasing audit activity – Industry focused
Increase in number of contingent fee auditors
More states are looking at unclaimed property as a potential solution to budget deficits:
Interest and penalties are increasingly imposed
Sarbanes-Oxley Section 302 & 404 implications
Whistleblowers
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Impact of economic crisis on state budgets.
Unclaimed property is a tremendous source of revenue to the states
($35+ billion).
States are intensifying search for additional revenue without raising
taxes.
Translation = Increasing Audits.
States have tapped into unclaimed property funds to meet budget
shortfalls.
Current Economic Environment
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More audits; more aggressive stance during audit
Lowering dormancy periods
Looking for new abandoned property types (e.g. digital property; un-
invoiced receipts)
Refusal to waive interest for non-compliance under audit
Good news – perhaps greater willingness to permit voluntary disclosure
to bring in revenue while avoiding costly audits
Current Economic Environment (Continued)
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New Focus – securities/insurance
Contract auditors
What, if any, standard guidelines are used
What oversight does the state exercise over contract auditors?
Authority to estimate – when and how?
How and when are interest and penalties applied?
What options/recourse is available for a holder?
Unclaimed Property Audits
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FURTHER REDUCTION OF THE DORMANCY PERIODS
CHANGING REPORTING DEADLINES TO COLLECT PROPERTY FASTER
ADDING NEW RULES OR POLICIES TO CUT ADMINISTRATIVE BURDENS
OR REDUCE THE ABILITY TO REUNITE THE OWNER WITH THEIR FUNDS
(i.e. Rhode Island)
ADDING NEW RULES TO RESPOND TO UNIQUE SITUATIONS (i.e. Nevada)
SPECIFIC AUTHORITY TO CONTRACT FOR AUDITS AND CREATE AN
ESTIMATE
Legislative & Regulatory Trends
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Life Insurance Developments
35 states and National Association of Insurance Commissioners investigating industry wide practices of life insurers
Issues:
Life insurers using the Social Security Administration’s Death Master File to cut off annuity payments when a contract holder dies, but not using the same information to determine if death benefit payments are due under life insurance policies, annuity contracts, or retained asset accounts.
Alleged to have failed to turn over unclaimed policies to states, or pay them to beneficiaries, even though they had knowledge that the insured's had passed away and no claim had been made.
Response:
National Conference of Insurance Legislators (NCOIL) approved Model Unclaimed Life Insurance Benefits Act.
Mandates use of Death Master File
Al, KY, MD, TN have introduced bills to enact a version of the Act. More to follow.
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Unclaimed Property Litigation Update
Staples v. Delaware
Staples filed litigation bringing many challenges to Delaware’s escheat policy
Recent Court Opinion addresses a single issue
Staples arguments:
• the Statute of Limitations as to the rebates had run against the rightful owners
• Rebates do not constitute “property” under Delaware’s Escheat Statute
Court:
• Rebates are “Bills of Exchange” or “Credits” under §1198(11) of Delaware’s Escheat Statute and are therefore “property.”
• Does not address statute of limitations argument
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New Jersey Gift Card Legislation
New Jersey Retail Merchants Association v. Sidamon-Eristoff
In 2010, the NJRMA challenged New Jersey’s amendments to its unclaimed property statute relating to gift cards
U.S. Court of Appeals finds that New Jersey’s retroactive escheatment of abandoned gift cards is unconstitutional
Priority Rules Preempted by Federal Law
Data Collection at the time of sale is permitted
Two -Year abandonment period is upheld
AMERICAN EXPRESS PULLING OUT OF NJ
Unclaimed Property Litigation Update
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Insurance:
Verus audits
John Hancock Settlements – multi millions
Task Force Hearings:
o MetLife & Nationwide Insurance
o Florida & 29 other states
o California
Healthcare & Pharmaceuticals
Financial Institutions
Oil & Gas
Industry Focus
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States’ enforcement measure of the “Return by Post Office” (“RPO”) standard appears to be shifting to a standard of “Inactivity”:
More accounts are deemed eligible for reporting using inactivity as the
trigger for reporting
RPO reporting significantly reduced as a direct result of the SEC 17AD-17
requirements
Increased state scrutiny on “due diligence” as a direct result of successful security-related litigation. Holders are required to meet the due diligence requirements in order to gain states’ indemnification.
Securities-Related Property Current Trends and Changes
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Know the states, know the dates
Identify spring states, fall states, California
Learn the cutoff date for each state
Know the reporting deadline for each state
Plan accordingly
Due diligence timeframes
Certified mailing requirements
Specific letter content and/or format and font
Dollar thresholds
Advertising timeframes
Publish notice in newspapers
Where do you begin?
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Securities and General Ledger reporting:
Credit department and Third Party Administrators have had recent focus
Who is handling this?
Reciprocal reporting:
Where domiciled vs. incorporated
Not accepted by all states
Delay in remitting property to right state
Conflict within dormancy periods themselves
Where To Begin (Continued)
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Dormancy Decisions
Date of last activity/contact
Date returned from Post Office (RPO)
Maturity date
Issue date
Customer’s age
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Reporting requirements
Electronic or paper
Cover letters
Notary requirements
Qualified signatory
Delivery methods
Cash
Securities
oRegistration requirements
Filing a Report
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Complete name and last known address
Social Security Number, if known
Account number
Amount
Property type
Description of property
Date of birth, if known
Joint ownership or custodial information
Reporting Owner Information
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Incorrect property codes (NAUPA codes)
Incomplete owner information
Report and remittance does not reconcile
Incorrect cutoff date and/or dormancy period
Reporting only to the state of incorporation/assuming reciprocity
Placing data in incorrect fields
Common Reporting Errors
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Reporting Property to the States:
Common Mistakes:
o Not including correct property NAUPA property type (IR codes)
o Assumptions on reissuance of checks
o Media requirements – NAUPA format
o California, Texas, Michigan (3/31 cut off)
State Specific:
o Cover letters
o Remittance (EFT vs. check)
o Notary
Common Reporting Errors
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FRAUD and UNCLAIMED PROPERTY
Dormant and Lost Owners = Perfect Storm for Fraud
www.KeaneUP.com
Three Sources of Fraud Risk
Fraud for the benefit of the employee (Employee fraud)
Fraud for the benefit of the company (Management fraud)
Fraud for the benefit of a third party (External fraud)
Approximately 30% of fraud involves collusion - with parties inside or outside the organization
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Integrity and Ability to Rationalize
The Fraud Triangle
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Financial Pressure
Living beyond available means
High debt load
Financial reversal
Greed
www.KeaneUP.com
Opportunity
Fraudster’s perception of opportunity
Controls/obstacles
Lack of responsibility
Lack of deterrence
Possibility of collusion
www.KeaneUP.com
Possible Rationalizations
Not criminal
I’m just borrowing
I deserve it
I’m not hurting anyone
Others are doing it
For the company
No choice
www.KeaneUP.com
Typical Employee Fraudster – On the Surface
Long-time employee
Position of trust
Doesn’t want help
Doesn’t take vacations
Appears to be extremely dedicated
Possible behavioral changes
Unexplained cash or other wealth - usually assumed to be lottery winnings, inheritance or family money
www.KeaneUP.com
Minnesota – IDS Mutual Funds employee of the company responsible for filing unclaimed property reports. is found guilty of embezzlement – Sentenced to 11 years and $1M restitution
Delaware – state employee working in the abandoned property division (claims processing unit) found guilty of embezzlement. Over $1.25M in securities transferred to friends and acquaintances in a fraud scheme. Sentenced to 5 years and restitution.
RECENT Unclaimed Property Issues relating to Fraud
www.KeaneUP.com
Analyze corporate structure
Understand and document the current and historical policies and procedures
Document and review historical unclaimed property reporting history
Identify potential types of unclaimed property your company may generate
Quantify the potential liability for each property type
Research items to verify that they are unclaimed and pay owner where possible
Performing a Self Review
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Gathering Relevant Data
Corporate Structure
Merger & Acquisition History
General Ledger / Chart of Accounts
Bank Reconciliations / Outstanding Check Lists
Journal Entries
Accounts Receivable Aging Reports
De-Minimis / Automatic system write-offs
Contracts w/applicable service providers
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Identify periods where detailed records are available
Review records and schedule items that are potential unclaimed property. For example:
Stale dated outstanding checks
Voided checks that were not reissued
Stale dated credit balances
Research items to determine if they represent a fixed and certain obligation
Quantifying the Potential Liability
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Transaction Data not Properly Codified: Last Customer Initiated Activity
Property Type
At Risk Dormancy Date
Date Remitted to State
State of Remittance
Report ID
Lack of Seamless Integration between LOB systems and reporting system
Lack of Closed Loop Process
Typical System Related Issues
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Amnesty Broadly applied
Can be initiated by the agency or legislature
Not eligible if already selected for an audit
Voluntary Compliance Initiatives: Formal
Informal
Not eligible if already selected for an audit
Right to examine generally preserved
Amnesty vs. Voluntary Compliance Programs
www.KeaneUP.com
State Audits vs. Contract audits
Authority to estimate – when and how?
How and when are interest and penalties applied?
What options/recourse is available for a holder?
NOTEWORTHY: Many if not all states may have the right to conduct an audit. Most states also outsource enforcement to and through a third party.
Unclaimed Property Audits
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Audit Triggers
State registration and payment of other taxes with no unclaimed property compliance history
Filing only negative unclaimed property reports
Failing to file all property types
Claiming property without being compliant
Merger & acquisition history
Transient workforce
State of incorporation
Media event / publicity
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Benefits of Voluntary Compliance
Accurate financials (SOX)
Improved chance of penalty and interest abatement
Limited “look-back” period
Reduced assessments
Risk of Audit
Avoid laborious auditor requests
Set own timetable for compliance
Avoid whistleblowers
Avoid litigation
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Determine your company’s compliance status
Identify areas of potential exposure
Consider voluntary compliance programs in jurisdictions where
exposure exists
Implement policies, procedures and mechanisms through which to
report
TEST your current procedures
Begin your compliance program today!!
Best Practices and Next Steps
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KEANE
www.KeaneUP.com
Unclaimed Property Professional’s Organization
www.uppo.org
NAUPA
www.unclaimed.org
Additional Helpful Unclaimed Property Websites/Resources
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Pamela Wentz Senior Manager
701-222-0134
Questions
