U.S. unclaimed or abandoned property laws have focused on banks since states first began asserting jurisdiction over presumed abandoned intangible property more than 100 years ago. Increased complexity in the banking business--as a result of significant merger and acquisition activity and class action lawsuits and other litigation--make it prudent for banks to re-evaluate their current practices with unclaimed and abandoned property. Depleted state treasuries and intensified regulatory scrutiny both underscore the timeliness of this review.
1. Be prepared for a state audit. A number of states view enforcement of unclaimed and abandoned property (AUP) laws as a revenue generator. In fact, AUP receipts add hundreds of millions of dollars to the bottom line for some states every year. Audit activity has increased significantly in the past few years, and many states contract third-party firms to audit AUP. These firms typically receive a percentage of amounts assessed in an audit, creating an incentive for auditors to find large amounts of AUP.
2. Understand that AUP can take many forms. Unclaimed and abandoned property concerns much more than customer deposit accounts and safe deposit boxes. Instruments or items that can also be covered include: official bank checks; money orders; travelers checks; vendor payments and other disbursements; payroll and commissions; escrow and trust moneys; and securities-related property.
And banks can unintentionally acquire AUP liabilities (which are sometimes undisclosed) when they acquire an institution with a poor history of compliance or incomplete records.
3. Know the priority rules for state reporting.
||Understanding unclaimed property
Unclaimed, or abandoned, property is property held or owing in the ordinary course of business that the owner has not claimed for a certain period of time (the dormancy period).
All 50 states and the District of Columbia (as well as Puerto Rico, the U.S. Virgin Islands, and Guam) have enacted unclaimed property laws. For banks, unclaimed property can include demand deposit; savings and club accounts; official bank checks; money orders and traveler’s checks; individual retirement accounts and other retirement plan funds; matured certificates of deposit; loan credit balances; vendor payments and other disbursements; payroll and commissions; escrow and trust moneys; the contents of safe deposit boxes; and securities-related property.
Aggressive compliance enforcement by states has increased significantly. The majority of unclaimed property is never claimed by owners, but is instead kept (and spent) by states. And because unclaimed property is not a tax, states are able to raise revenue without increasing taxes.
The U.S. Supreme Court--or in the case of money orders and traveler’s checks, Congress--has established rules for determining which state may claim AUP. Generally, AUP is reported to the owner’s state of last known address, not the state in which the bank branch is located.
And if the owner’s address is unknown, AUP usually is reported to the state of incorporation of the holder (the bank). However, special rules apply to certificates of deposit, individual retirement accounts, money orders, traveler’s checks, and safe deposit boxes.
4. Recognize that safe deposit boxes require special handling. For safe deposit boxes, the general “last known address” rule does not apply. Instead, the contents of a presumed abandoned safe deposit box are escheated to the state where the branch is located.
“Drill outs” to open abandoned boxes are expensive but the cost can be reduced by being proactive as soon as a box rental becomes delinquent. In addition, a policy of only renting boxes to customers with accounts at the institution and auto-debiting rental payments can help reduce the number of boxes that become AUP.
Banks also should adopt a dual-control policy for opening and inventorying boxes. Adopt as well specific procedures for handling weapons and other illicit property found in presumed abandoned boxes.
5. Be proactive with due diligence. Due diligence here is the process of attempting to contact property owners prior to reporting abandoned or unclaimed property to states. Property becomes AUP when there is little or no customer (owner) activity or contact.
Understandably, customers--especially current customers--can become incensed when their accounts appear to have been indiscriminately escheated to the state. The sooner potential AUP is addressed, the better. A best practice is to initiate contact with depositors and other property owners well in advance of the time periods specified by state due-diligence rules.
6. Follow carefully each state’s specific rules for due diligence. Most states require due diligence; very few don’t. A number of states have detailed due diligence procedures for banks related to timing and processes to follow. These may include mailing due diligence letters in a specific manner and advertising certain types of AUP. Stiff penalties can apply if the rules aren’t correctly followed.
7. Use technology to minimize AUP. Tech-savvy banks use customers’ online activities to reduce AUP and the costs related to due diligence and compliance. Online activity can serve as evidence of customer contact. Technology-based techniques for reducing AUP include linking all of a customer’s accounts to the customer’s login screen, making tax records (Forms 1098 and 1099) available online, and requiring that customer address information be updated online annually.
8. Realize state AUP laws are dynamic. An ongoing trend is for states to shorten dormancy periods (the period of inactivity)--sometimes significantly--for various types of AUP. States allege that truncating dormancy periods increases the likelihood that property will be reunited with owners. (It also accelerates money being deposited into state coffers.) AUP reporting rules--timing of due diligence, report due dates, electronic reporting requirements--also change frequently.
9. Exercise care when applying dormancy charges. Subject to certain restrictions, some states allow banks to keep a portion of AUP to cover the costs of compliance. Other states prohibit the imposition of such fees. For example, in Maryland, a bank may charge a maximum of $10 per year for accounts of $50 or less, or $20 per year for accounts in excess of $50. Alaska, on the other hand, has a statutory provision that expressly prohibits the imposition of dormancy charges against money in financial organizations. The rules of most states lack clarity, however. Banks should carefully review each state’s rules concerning dormancy charges, and consider the imposition of such charges from a customer relations perspective.
10. Adopt written policies and procedures, and follow them.
Increased state scrutiny, expanded bank products and services, and divergent state rules have made AUP compliance more challenging and complex. As a starting point, responsibility for unclaimed property compliance should be assigned to a specific group of the bank. Banks should also review and update existing AUP policies and procedures.
At a minimum, AUP policies and procedures should:
• Identify all property types that the bank and its affiliates may hold.
• Define and communicate roles and responsibilities for all functions and business units within the organization.
• Consider financial reporting (such as Sarbanes-Oxley), regulatory, privacy, and security implications.
• Document proactive preliminary due diligence procedures.
• Establish due diligence processes.
• Set timelines and deadlines.
• Establish record-retention parameters.
• Document the bank’s approach to state reporting and compliance.
Chris Hopkins is a partner with Crowe Horwath LLP in the New York office. He can be reached at 212.572.5592 or [email protected]