The New Unclaimed Property Paradigm: How to Meet the

Challenge

Carla McGlynn

Partner

Unclaimed Property Consulting & Reporting LLC

Paradigm – to show, to point out

• What are your obligations as a holder of unclaimed property? – Know your company’s products and services

• Ask questions? – Complete a checklist • Prepare the company for an audit – Be Proactive! • Perform a Internal Risk Assessment • Initiate VDA’s • Mitigate Risk – Develop a Easy-to-Follow procedure –

From Research to Retention • Stay tuned into all that is changing in the world of

Unclaimed Property Compliance

Basic Terms

Holder: An individual or legal entity (public or private) in possession of property belonging to another.

Owner: An individual or legal entity (public or private), government or

governmental subdivision who has a legal or equitable interest in property.

Dormancy Date/Date of Last Activity: The date of last contact by the owner as evidenced by the records of the holder.

Dormancy Period: The number of years (generally 1,3, or 5) from the date of last contact with the Owner property must be unclaimed before it is considered abandoned.

Reporting Deadline: Date report and property due to state. A very few states have different dates to report and deliver property.

• Indemnification: Refers to the protection from subsequent claims (whether made by an owner or by another state) that may be provided by a state to a holder that remits property to a state.

Unclaimed Property Fundamentals: Common Property Types Unclaimed property is property that is held, issued or owing in the ordinary course of business and has remained unclaimed by the apparent owner for a specified period of time.

Refer to NAUPA Property Type List

Wages, Payroll, Salary & Commissions

Disbursement Checks (Including Voids & Stop-Pays) Vendor Checks & Customer Refund Employee Travel & Expense Employee Benefit & Health

Suspense Accounts

Unapplied Cash Unidentified Receipts

Rebates

Accounts Receivable Credit Balances Credit Memos Pre-pay Accounts Deposits

Third Party Administrated Accounts

Equity Related Items Stocks Bonds Dividends

Successor Liability - Acquisitions

Unclaimed Property Fundamentals: Holder Obligations & Responsibilities

1. Reviewing Records Internal Review & Research

Determining Eligibility for Reporting

Applying the applicable state law

Determining the Dormancy Period

2. Performing Due Diligence

3. Reporting and Remitting

4. Retaining Supporting Documentation

Unclaimed Property Fundamentals: Internal Review & Research

• Conduct a review of the appropriate financial accounts and ledgers to identify accounts holding items subject to escheat

• Accounts to review: – AP Disbursement – (ie. vendor, customer refund, travel

& expense, and TPA payments)

– Payroll Disbursement

– AR Aged Trial Balance

Compliance Checklist

Unclaimed Property Fundamentals: Determining Eligibility for Reporting

• Records Review

– Identifying Unclaimed Property

1. Is the owner really lost?

2. Is the property really unclaimed?

3. Is the property exempt from reporting?

» Most exemptions applicable to credit related transactions

» De minimus property exemption – Not Automatic

» Business to Business Exemption

» Gift Certificate /Card Exemption

ASK QUESTIONS

Unclaimed Property Fundamentals: Applying the Applicable State Law

US Supreme Court Decision:

• Texas v. New Jersey (1965) – This landmark case settled the question

of the superiority of conflicting state claims

to the same abandoned property

– Three Priority Rules:

• State of last known address on debtor’s books has priority

• If no address is available, then state of incorporation has priority

• When the state does not have a law pertaining to the property, the state of incorporation of the holder controls

Unclaimed Property Fundamentals: Determining the Dormancy Period

• What is the dormancy period?

• What is the state’s period “end date” or “as of” date?

• When are the reporting deadlines?

Unclaimed Property Fundamentals: State Dormancy Periods & Reporting Deadlines

State

AP - Vendor

Checks

(CK13/ MS08)

Payroll

Checks

(MS01)

Credit

Balances

(MS09)

Annual

Reporting

Deadline

As of /

End Date

Illinois 3 years 1 year 3 years 5/01 12/31

California 3 years 1 year 3 years 11/01 06/30

Delaware 5 years 5 years 5 years 03/01 12/31

Florida 5 years 1 year 5 years 04/30 12/31

New York 3 years

(2G)

3 years

(8A)

3 years

(5E)

3/10 12/31

Michigan ** 3 years 1 year 3 years 7/01 03/31

Massachusetts 3 years 3 years 3 years 11/01 06/30

** Recent Legislative Change for 2011 and forward

Unclaimed Property Fundamentals: Determining Dormancy – Quick Case Study

Facts: • Sunshine Industries, a manufacturer issued a check for $250

to Box-Anything Inc on March 17, 2008

• Sunshine’s records show that this check to Box-Anything is stale dated and outstanding as of June 30, 2011

• Box-Anything’s is located in Massachusetts, as indicated on Sunshine’s records

Is this check reportable to Massachusetts? And, when?

Unclaimed Property Fundamentals: Determining Dormancy – Case Study

Calculating Dormancy: • Massachusetts’ 2011 Fall Reporting period end date = 6/30/11

• Check Issue Date = 3/17/08

• MA Dormancy for Vendor Checks (MS08 or CK13) = 3 years

• Box-Anything Check Dormancy = 3 yrs, 3 mths, 13 days

Answer: • This check would be eligible for reporting to MA on this Fall

reporting period on 11/1/11

Internal Review Suggested Best Practices Be Proactive – • Gain support from CFO & high level management • Identify a primary contact within each department • Form a Compliance Team • Set up an Unclaimed Property Liability Account on your GL • Establish a process whereby you conduct periodic reviews to

identify, research and mitigate the unclaimed items • Establish dollar threshold to prioritize research • Resolve any accounting errors and retain supporting

documentation • Retain detailed documentation supporting any mitigation efforts • Maintain written procedures for record review and make them a

part of your company’s policy or manual.

Unclaimed Property Fundamentals: Due Diligence

• Final effort to contact and re-unite the owner/ payee with its property prior to reporting and remitting the unclaimed property to the applicable state

• Compliance requirement in all jurisdictions, except DE & PA

• Benefits: – Reestablishes relationship with lost

Customers and vendors

– Creates Goodwill

– Reduce Escheatable Property to States

Unclaimed Property Fundamentals: Due Diligence (Cont’d.)

Important Considerations: • Methods – Generally, a notification letter is mailed to

the owner at the last known address on the holder’s records – First class mail, Certified Mail and/or Publication

• Letter Content - Generally, the letter should include enough information to enable the recipient to verify the status of the property (Refer to Sample Letter)

• Timing – For many states, not more than 120 days nor less than 60 days prior to reporting deadline

• Form of Delivery - Generally, most states require or strongly suggest first class mail.

• Limitations/Exceptions: Most States – greater than $50

Unclaimed Property Fundamentals: Reporting and Remitting

• Important Processing Considerations

– Type of Report – Most States accept diskette or CD, Online Internet Reporting (Mandatory – IN)

– Report Format – Most States accept NAUPA II Standard Electronic Format. NY does not use NAUPA II Format, but will accept. CA now accepts only NAUPA II Format.

– Negative Reporting – Required by many states (29). IN and OH allow on-line negative reporting.

Unclaimed Property Fundamentals: Reporting and Remitting

• Important Processing Considerations – Report Aggregate Limits – Most states allow

holders to report items in aggregate if value is below a certain dollar amount

• $25, $50, & $100 are typical limits.

• Most states do not permit aggregate reporting of dividends or mineral interests.

– Form of Remittance – Checks or EFT. • Most states accept checks. Some states require EFT if

sum of reportable property is greater than a specific dollar amount (i.e. CA, TX)

Unclaimed Property Fundamentals: Reporting and Remitting(Cont’d.)

• Important Processing Considerations

– Report and Remittance Delivery

• Timing – on or before the deadline specified. » Fall Reporting Cycle: By Nov. 1st

» Spring Cycle: From Mar. 1st – DE to Jul. 1st – MI

• Confirmation of delivery and receipt

• Data Security – Must safeguard confidential information (i.e., social security numbers, etc.). Some states have FTP capability or accept encrypted files.

Unclaimed Property Fundamentals: Reporting and Remitting(Cont’d.)

• Important Processing Considerations

– Filing Extensions

• Notification/Request of state administrator

– Request made via Holder letterhead

– State provided forms – some states forms available on state websites

• Provide reason for request

• Estimated payment may be required (i.e. NY, NJ, TX)

Unclaimed Property Fundamentals: Reporting Red Flags! – Prevention Tips

– Report All Property Types when it is reportable!

– Prepare and complete all forms correctly, accurately

– Sign and Date the Reports

– Have notarized, if required!

– Confirm report totals and payment match

– File negative reports, only if required

– Don’t wait to the last minute to request a filing extensions (best to allow 15 to 30 days prior to the filing deadline)

• Confirm receipt with states, maintain document in one location, and create a calendar

• File reports by the new granted report due date

– Complete all state unique report forms (i.e. Holders Information Forms)

Unclaimed Property Fundamentals: Retaining Supporting Records & Documentation

• States require retention of unclaimed property report(s) and supporting documentation for a period of years

– Time period differs by state, usually 7 to 10 years

• Critically important in the event of audit

• Provides indemnification for property remitted and proof of claim

Unclaimed Property Fundamentals: Retaining Supporting Records & Documentation

• Records retained should include, but not limited to: – Copies of the annual state unclaimed property

reports

– Supporting detail of property reported by legal entity

– Copies of all due diligence letter responses and actions taken as a result of the responses

– Primary source documentation used to develop the property listings, including: bank statements, outstanding check lists, void/stop pay lists, aged trial balance reports, reconciliation reports

Unclaimed Property Fundamentals: Statute of Limitations

• Statute of limitations does not apply if report is not filed or missing year

• If report is filed, statute of limitations applies and varies by state

– Typically 7 – 10 years

• Holder is only protected for property type and amount reported

– An incomplete report may still be at risk for specific property not reported

Unclaimed Property Audits – Current Trends

• On the Rise - Numerous called every month

• Increasing number of audits conducted by third party contingency fee audit firms

• Extended audit “reach back” periods (30 years)

• Use of sampling and extrapolation methods to calculate audit assessments

• Most audits last more than 3 years

• Multi-million dollar assessments

• Holders charged for audit costs (i.e. IN)

Avoid an Unclaimed Property Audit – Initiate Voluntary Compliance Efforts

• Formal v. Informal – Formal VDA Terms provide:

• Limited Look-back, Completion time (6 mth), Penalty and/or Interest Abatement/Reduction, and Indemnification

• Holders eligible to participate, if:

• Not under audit or contacted by state or a third-party auditor.

• Not previously reported or omitted/underreported property

• VDA Look-back Period

• Generally between 5 – 10 report years (plus dormancy period), vary by state

• vs. Audit Look-back Period • Generally between 10 – 20+ report years (plus dormancy period); Date of

incorporation; Vary by state; Audits are lengthy, time consuming, burdensome, and intrusive.

Avoid an Unclaimed Property Audit – VDA Benefits

• Ability to perform self-review of financial issues and methodologies to employ

• Limited “lookback” period

• Waiver/Reduction of interest and/or penalty;

• Obtain Closing/Release Agreement

• Understand and address areas of risk & weakness in compliance process

Mitigate Risk – Establish Effective Escheat Processes

• Understand your business operations to better identify risk areas

• Form a team of key personnel from various departments

• Clearly define the roles and responsibilities of each contributing department

• Development comprehensive procedures for each financial accounting area (i.e. Payroll, AP, AR) to track and report unclaimed property

Mitigate Risk – Establish Effective Escheat Processes • Set up an unclaimed liability account

– Work with key personnel to gather relevant data on a set schedule

– Establish timelines reconcile the account

• Conduct a risk self-assessment • Retain relevant records to support filings

and resolutions • Perform internal due diligence routinely • Perform statutory due diligence

according to state statutory requirements

Mitigate Risk – Establish Effective Escheat Processes

• Test your procedures annually to ensure continued effectiveness

• Perform a high level liability risk assessment of acquisitions (successor liability – it’s your headache now!)

• If underreported property is identified to state(s), consider voluntary compliance

• Encourage the direct deposit , EFT’s, wires and alternative forms of payments

Mitigate Risk – Establish Effective Escheat Processes

• Retain documentation relating to settlement agreements with customers

• Invest more time and resources in researching unidentified payments and suspense accounts

• State UP laws change frequently – check state websites for updates, join educational trade associations, reach out to an expert, etc.

Recent Legislative Developments

State Legislative Developments

• Delaware Law Changes

• Michigan Spring Filing State & Dormancy Period Reductions

• Indiana Dormancy Period Reductions

• New York Dormancy Period Reduction

• New Jersey Gift Card & Other Changes

• Other Notable Recently Enacted Legislation

Delaware – Legislative Changes in 2010

• Administrative Review Process: Provide for an administrative review process at the

conclusion of an unclaimed property examination. This review process may be invoked at the option of the holder.

• Limited Uninvoiced Payables (UIP) Exemption: Create a limited exemption from the definition of abandoned property for transactions between merchants covered by the Uniform Commercial Code where, for whatever reason, a merchant holder receives and accepts goods in the ordinary course of business for which the holder was never invoiced by the seller.

• Estimation Techniques Authorized: Clarify that in accordance with established accounting and industry practice, the State may employ estimation techniques in when records do not exist or are insufficient to determine a holder’s liability for abandoned or unclaimed property.

• Reporting Date & Due Diligence Changes: Changed the reporting date for banking organizations to 11/10 from 8/1 (negative reports were 8/10) and for life insurance corporations to 12/20 from 5/1. Organizations that are required to publish notice are no longer required to publish a statement that the entity holds such reports for public inspection in their headquarters. Banking organizations are required to publish at least 60 days prior to reporting and remitting property.

Michigan – Spring Filing State & Dormancy

Reductions

• In 2011, property reaching dormancy as of March 31, 2011 must be remitted to Treasury by July 1, 2011.

• Dormancy periods for most property types, including money orders, uncashed checks, and accounts receivable credit balances reduced to three years.

• Michigan Now Requires Negative Reporting Attestation Form

Indiana – Dormancy Period Reductions

• Savings, Checking & Timed Deposits – 5 to 3 years

• A/P and A/R – 5 to 3 years

• Any other property types not specifically mentioned in the IN unclaimed property law – 5 to 3 years

• Effective – Fall 2011 Report Deadlines

• Effective August 11, 2010, reduced the dormancy period from 7 to 5 years for non-bank money orders and from 5 to 3 years for refunds and undelivered goods or services not rendered.

• Holders of refunds or undelivered goods and/or services must perform required due diligence and remit any abandoned accounts that have been dormant for three, four or five years.

New York – Dormancy Period Reduction

• AB 3002 has several impacts, primarily to traveler’s checks and stored-value cards (SVC)

• Key section relating to gift cards: now NJSA 46:30B-42.1, includes:

– New 2 year dormancy period

– Card issuers are required to maintain record of the owner /purchaser zip code

– SVC’s issued in NJ would be presumed address is NJ (“place of purchase presumption” or “deemed owner address”)

37

New Jersey – Legislative Changes in 2010 (Effective 7/1/2010)

New Jersey – SVC Legal Progress Continues into 2011

During Sept. to Oct 2010 various groups/retail associations sued NJ in U.S. District Court seeking enjoinment of law

• Nov. 13, 2010 – Judicial Decision – NJ enjoined from enforcing the “place of purchase” presumption, which violates Priority

Rules in Texas line of U.S. Supreme Court cases

– NJ enjoined from escheating cards that were sold before enactment of AB 3002, but only if those cards are redeemable solely for merchandise /services (contract was for merchandise/services, and “lost profit” argument applies)

• Jan. 14, 2011, the judge issues judicial opinion that clarifies Nov. 13, 2010 opinion—New Jersey can require card issuer to collect zip code of card owner/purchaser

• Jan. 19, 2011, the Nov. 13, 2010 decision is on appeal to Third Circuit

• Jan. 31, 2011 - Third Circuit Enjoins Enforcement of NJ Zip Code Collection Requirement

Other Notable Recently Enacted Legislation

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• Illinois House Bill 1560 – Reduces the dormancy period for unclaimed wages, payroll and salary to 1 year. Signed into law by the Illinois Governor on 8/8/11. Immediate effective date.

• North Carolina HB 692 - Requires UP reports to include for each item, the apparent owner's full name, last known address, social security number, or taxpayer identification number, date of birth, drivers license or state identification number, and email address. Further, any holder who has intangible property due to be reported with a cumulative value of $250.00 or less in a single reporting year is not required to report the property in that year but shall report the property in any year when the value or aggregate value of the property exceeds $250.00. Also, the dormancy period for wages and other compensation for personal services was reduced to 1 year. Signed into law by the North Carolina Governor on 6/23/11. Effective 10/1/11.

Other Notable Recently Enacted Legislation

40

• Texas House Bill 257 - Signed by TX Governor on 6/17/11 and effective on 9/1/11, reduces dormancy periods for utility deposits to 18 months and checking and savings accounts plus money orders to 3 years. Beginning in 2013, changes the reporting deadline to 7/1 and the end date to 3/1.

• Texas Senate Bill 1A - Reduced the utility deposit period to 1 year (among other things). The bill was signed by the TX Governor on 7/19/11 (effective 9/28/11).

• Texas Unclaimed Property Officials have interpreted the dormancy changes of these bills to be applicable with the 2012 reports.

Other Notable Recently Enacted Legislation

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• South Dakota SB 76 – Exempts from the UP law any gift certificate or closed-loop (single merchant) prepaid card that has no expiration date and that is not subject to a dormancy, inactivity, or service fee. Signed into law on 3/15/11. Effective Date: 7/1/11.

• Idaho HB 174 – Changes the standard for triggering abandonment for securities so that if there has been no contact with the shareholder and the shareholder’s whereabouts are unknown to the business holding the securities (i.e., 2 mailings returned as undeliverable), then the securities are presumed abandoned. Signed into law by Idaho Governor on 3/25/11. (Bill effective 60 days after adjournment.) 41

Unclaimed Property Resources – Websites and Links

• Unclaimed Property Professionals Organization (UPPO)

www.uppo.org (Annual Conference: March 11th – 14th, 2012

in Orlando, FL)

• National Association of Unclaimed Property Administrators

(NAUPA) www.unclaimed.org

• NAUPA II Standard Reporting Format:

http://www.nast.org/NAUPA/Electronicreportstandard.htm

(click on “new reporting standard”)

Questions?

Your Presenter Today:

Carla McGlynn

Partner

Unclaimed Property Consulting & Reporting LLC

(732) 241-4823

Carla.McGlynn@upcr-llc.com