States going after more unused assets
Friday, 11 June 2010

By John C. Buonomo

As consumers and businesses grapple with both an economy that continues to flounder, state budgets are anything but immune to the economic crisis. State governments continue to cut programs and eliminate jobs as drops in consumer spending have caused tax revenues to plummet. Many states are exploring ways to increase revenue, and one popularly emerging option is aggressively pursuing unclaimed property.

When an asset goes dormant, meaning its owner doesn't make use of it for a prescribed period of time, the holder is required to attempt to locate its owner or descendant. If the asset holder cannot do so, the asset must be escheated, or forfeited, to the state.

The requirement applies to any asset, though securities, savings accounts and gift cards are typical examples of the sort that goes unused for the period in question. While banks and retailers may thus be most vulnerable, any company that holds unused assets is subject to escheatment, a common law concept dating back to feudalism. Today escheated funds are an especially valuable source of revenue for a hard-pressed state, as they are like interest-free loans that may never come due.

To offer some perspective, in 2006, the National Association of Unclaimed Property Administrators (NAUPA) reported that state treasuries were collectively holding some $32.7 billion in unclaimed property. In Delaware, a tax friendly environment and thus the legal home to many of the country's largest corporations, unclaimed property has become that state's third largest source of revenue, generating $365 million at end of a recent fiscal year. California's unclaimed property collection program has added as much as $300 million in a single year to that state's general fund.

Each state has its own laws and regulations regarding the management and reporting of lost accounts. Dormancy periods - the amount of time before a holding company is required to escheat - also vary widely. Faced with yawning budget gaps, many states have begun to reduce dormancy periods and apply more reporting pressure on companies.

Corporations and the executives responsible for accounting, reporting and compliance are now handed an additional headache at a time when there are no shortage of challenges. Instead of focusing exclusively on their respective core businesses and generating shareholder value, executives are distracted by new and sometimes arduous state requirements pertaining to lost accounts.

Those who do not comply with tightening standards may face punitive action. For example, interest charges on past-due unclaimed property liabilities can range from 10 percent to 25 percent of the value of the asset, with up to an additional 50 percent assessment in penalties for non-compliance. In cases where companies are in violation of state law regarding unclaimed property, some governments are pursuing prosecution of the individuals charged with the responsibility for ensuring compliance. A handful of states have even introduced "whistleblower" statutes to not only protect but also reward employees who disclose their company's unclaimed property liability or non-compliance.

Among publicly traded companies, there are even greater implications for non-compliance. Section 404 of the Sarbanes-Oxley Act of 2002 requires that specific internal controls and compliance with various laws and regulations be met. Failure to comply with unclaimed property statutes could subject a listed company to additional penalties for failure to perform the duties required under the Act. Plus, publicly traded companies could be forced to re-state earnings should they be hit with unexpected penalties arising from fines.

So what is a CFO or compliance officer to do? The first step is recognizing that unclaimed assets exist on the books and ensuring that there is an understanding within your organization of the state laws - a task made difficult by the fact that these laws change frequently and vary from one state to the next. Ignorance will not spare you from punitive action.

The second step would be to conduct an internal audit of all accounts to determine which ones could be classified as dormant and therefore may be targets for escheatment. Though the task of sifting through records and accounts can be daunting and arduous, it's certainly favorable to do it on your own as opposed to under the watchful eye of a government auditor.

Thirdly, make the appropriate efforts to find the parties whose accounts have become dormant, using an outside resource if necessary. In addition to being an ethical obligation, it's a legal requirement as well. It's easier to return lost funds to their rightful owner than to continue having to report the accounts and ultimately enter the escheatment process.

Finally, institute a process of ongoing reviews of lost accounts. Make it a part of your standard business operating procedure to ensure that once you are in compliance, you remain in compliance.

We can always rely on the fact that the government will find a way to get its money, but that's especially true now that budgets have been hard hit. As a result, expect more and more state governments to follow the lead of California and Delaware and aggressively increase their pursuit of unclaimed property. Awareness and preparation can help you avoid the wrath of a state with a hunger for revenue and an appetite for escheated funds.

John C. Buonomo is president of Equisearch, a provider of lost account holder search and recovery services.

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