By the time you receive notice of an audit, it is often too late to prevent costs related to non-compliance. Auditors are entitled by statute to examine your books in a process that may take up to two to four years, or more to complete. In many states, the existence of an escheatment audit is public record, potentially resulting in negative press. If you receive a notice of audit, you will receive numerous auditor requests, the response to which is both burdensome and costly. All you can do is activate your reputation management strategy and comply.
Your only real defense in this anxiety-inducing arena is to form a solid offense. This brief guide highlights the major pitfalls of escheatment that companies need to know, and the 8 best ways to avoid them.
UNDERSTAND THE PITFALLS
The first real danger to acknowledge and overcome is simply a state of inertia. Instead, actively and routinely research your unclaimed property obligations and act accordingly. Otherwise, your company could be caught off-guard at the worst possible time.
Many states have the right to instantly liquidate unclaimed securities once they are reported and remitted. While the states will pay out the cash value to the rightful owner, it may be too late. The damage is done in terms of lost growth opportunities from invested assets.
In addition to shareholder losses, an audited company can expect to face steep interest and penalty assessments for late reporting, failure to report, and/or fraudulent reporting. For example, Nevada currently charges 18 percent interest per year.1
8 Ways You Can Minimize Risk
Generally, states argue that there is no statute of limitations for conducting audits and assessments for unclaimed property. Some ask companies to perform a “self-audit” by looking back 10 years or more to identify and report any unpaid remittances to the state. Companies without proper policies and procedures in place may also fall victim to harsh extrapolation and estimation techniques while under audit. The consequence: significant financial loss.
Internal and external fraudsters pose another often-overlooked challenge. Companies often fail to protect their unclaimed property programs. Forgotten balances, especially when small, are easily ignored but become significant once added up. A newsworthy case of internal fraud at Vanguard recently saw over $2 million in unclaimed property vanish beneath the company’s radar in just two years.2 These eight actions can help ensure you don’t play with fire.
1. UNDERSTAND YOUR LEGAL RIGHTS
When states audit, they can review your books and records. The use of third party, contingency fee auditors often results in overbroad and burdensome audit requests including requests for personal information. However, you have rights as well. Understanding what you are legally required to provide protects both your customers and your shareholders and can prevent unnecessary internal costs associated with responding to unlawful requests.
Some tactics used by auditors may not be proper under the law. For example, auditors request personal information to run your data through external databases including the Social Security Administration’s Death Master File. This practice can implicate significant privacy issues and false positive risks too. This, and other tactics used by auditors, can put your company at risk for wrongful escheat liability. Balance privacy law against UP audit requests.
Each state also has a dynamic and different set of compliance laws. State by state tracking and analysis is extremely challenging. However, the more you understand the differences, the better off you will be.
2. UNDERSTAND THE DIFFERENCE BETWEEN LEGAL AND ADMINISTRATIVE GUIDANCE
Some states also do not have a firm grasp of their own laws. As a result, your company risks being misled by administrative guidance learned through state websites or communications with state unclaimed property representatives. For example, a state could administratively provide a reporting exemption not found in the state’s law. However, the next administration may not provide the same exemption, which could result in interest and penalty assessment for “late” reporting of that previously “exempt” item.
Be sure to check all administrative guidance for contradictions and inconsistencies against the statute and regulations in each reporting jurisdiction.
3. STAY ON TOP OF LEGISLATIVE CHANGES AND LEGAL DEVELOPMENTS
With abandoned property triggers and timeframes constantly changing, it’s not easy to keep track of every update or adjustment. Smart companies employ experts to monitor legislative activity in all jurisdictions and territories daily. It allows them to stay on top of eligibility criteria, reporting requirements, exemptions, deductions and other jurisdictional changes.
Revised Uniform Unclaimed Property Act
In 2016, the Uniform Law Commission (“ULC”) completed its 5th update to the Uniform Unclaimed Property Act since its initial draft in 1954, entitled the 2016 Revised Uniform Unclaimed Property Act (“RUUPA”). Each state aiming to adopt this model act has to pass new laws. Monitor these changes closely.
4. STAY UP-TO-DATE ON INDUSTRY TRENDS
Keep abreast of industry trends, state amnesty and voluntary compliance programs.
- Embrace education and training by building a one-on-one relationship with a vendor with expertise.
- Participate in industry groups, such as the Unclaimed Property Professional Organization, a national nonprofit at the forefront of unclaimed property education, compliance, advocacy and reform.
- Seek out relevant conferences, articles and other up-to-the-minute content.
- Learn which states have voluntary compliance programs. Some are formal, some are not. Others, like California, simply impose a statutorily mandated automatic interest assessment.
5. EMBRACE ONGOING SHAREHOLDER OUTREACH AND COMMUNICATION PROGRAMS
Help prevent an escheatment audit by actively engaging shareholders.
- Install corporate-wide mechanisms, processes and relations to improve every shareholder-initiated touchpoint.
- Implement creative upstream efforts to prevent accounts from entering the escheatment pipeline.
- Increase your focus on documentation of efforts taken to locate and maintain contact with members of pension plans (DOL) and other qualified plans.
- Use technology to digitally maintain and record shareholder generated contact and life status indications.
6. CREATE A CONTACT DATA WAREHOUSE
Previously, return mail was arguably the sole criteria used by holders for escheatment in the equities space. However, the law in most states generally provides that any break in communication or lack of contact from the owner triggers the clock to start, which will ultimately render a property abandoned. Companies need to implement robust tracking mechanisms to protect themselves and their shareholders.
- Log all contact points, including cashed checks, address updates, voted proxies and other owner generated correspondence.
- Amalgamate all those mechanisms into a single, easily searchable Contact Data Warehouse to create an impenetrable line of defense.
- Keep a permanent precautionary record of every document and touchpoint stored in your Contact Data Warehouse.
7. REVIEW YOUR PRE-ESCHEAT FILE FOR PAST, PRESENT AND FUTURE LIABILITIES
Minimize risk by self-auditing regularly. Build mechanisms to regularly identify, track and quantify your unclaimed property risk. Review all the records that you have for current, past and future liabilities. Develop a parallel process to prevent accounts from ever entering the unclaimed property pipeline. It’s also important to work closely with your third party vendor retained to report your unclaimed property. Request a review of your pre-escheat file in order to identify anomalies.
8. IMPLEMENT CONTINUED TRAINING AND EDUCATION
Do not designate just one employee as your company’s go-to unclaimed property expert. Rather, implement company-wide awareness of this important topic.
- Make sure your policies and procedures are reviewed, updated and documented annually.
- Get buy-in from every employee, from the C-level to the receptionist. Encourage everyone to identify abandoned property.
- Don’t risk delegating unclaimed property to the admin level only. There, it is easily overlooked.
STAY AHEAD OF THE CURVE
Working with Broadridge, you can gain insight into the pitfalls of escheatment and how to avoid them. We encourage you to implement enterprise-wide policies and procedures to protect your company’s hard-earned reputation and bottom line.