The Top Ten Things Financial Professionals Should Know Unclaimed Property - The Top Ten Things Financial Professionals Should Know September 20, 2018 Jim Sadik, Managing Director True Partners Consulting LLC

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Agenda Why Unclaimed Property Matters Everyone Has It Who Gets the Property? Audit Lifecycle Auditors Estimate Liabilities Companies Buy Liabilities You Can Fix It Best Practices Keeping In Compliance Unclaimed Property is Constantly Changing

Why It Matters A majority of Fortune 100 companies have undergone or are undergoing an unclaimed property (UP) audit(s) UP remittances are a significant source of revenue for the State of Delaware, a state that historically initiated most audits Vast majority of audits are conducted by third-party contingent fee audit firms Financial auditors are beginning to closely review corporations’ UP liabilities UP liabilities can materially impact a corporation’s financial statements Litigation and legislation impacting UP has significantly increased

Everyone Has It UP is defined as intangible property that is held, issued, or owed in the course of a holder’s business that has gone unclaimed for a specific period of time by the rightful owner All industries and companies generate items that a can become unclaimed property (UP) if they remain unclaimed: Outstanding payroll and accounts payable checks Dividends/stock/other securities property Benefit payments (non-ERISA) Accounts receivable (A/R) credit balances Industry specific property types Additional UP obligations may result from either accounting errors or a company’s lack of understanding as to what represents unclaimed property Credit balances written-off as a result of an A/R tolerance policy Checks voided due to age and/or closure of a disbursement account

Who Gets It & When Do They Get It? UP is NOT a tax so nexus standards do not apply First Priority Rule (Texas v. New Jersey, 379 U.S. 674 (1965)) Unclaimed property is reportable to the state of owner’s last known address as indicated on holder’s books and records Second Priority Rule Whenever owner address information can’t be located, property is reportable to the state of corporate domicile (e.g., state of incorporation) Reporting UP Varies by state Dormancy periods (3/5 years for most property) Exemptions (very state specific) Due diligence (near universal requirement, not uniform) 54 jurisdictions with annual reporting requirements Annual reporting requirement (3 reporting cycles) Fall States – Oct 31st / Nov 1st Spring States – March / April / May Due Dates Summer States – June 15th / July 1st

Audits Cover Years If your company receives a notice that it’s been identified for an UP audit, set your expectations: Examinations can be contentious and last for several years What may appear to be a single state action often turns into a multi-state process. Third-party audit firms are generally paid on contingent fee basis Historically, assessments were often in the millions of dollars Audit assessments may include interest and penalty assessments (but then often waived in the spirit of cooperation or as a result of a formal agreement) The look-back period for audits for many jurisdictions, including Delaware, is now 10 report years (plus 5 year dormancy period) For an audit, that would mean that the audit would cover a period of 15 years (dormancy plus 10 report years) from the date the audit notice was received In practice, the availability of records limited an audit scope for MOST states. Large companies were historically targeted for UP audits Now even mid-sized to smaller companies are routinely receiving audit notices from multiple jurisdictions / multiple audit firms

Auditors Estimate (Some) Liabilities State of domicile may have the right to estimate liabilities for periods where records are missing or are incomplete Approach to calculating UP exposure is similar across audit firms: Determine base years for testing – complete and researchable records Identify property presumed abandoned in base years Compute error rate as a percentage of a benchmark (e.g., revenue) Apply error rate to surrogate of earlier periods to estimate exposure Repeat for each property type subject to review Impact of extrapolation can be material Have seen multipliers in excess of 40X Validate auditor’s calculations In-scope vs. out-of-scope entities, bank accounts, etc. Complete and researchable periods Reported items should be netted against calculated exposure Over-extending reach back (state and date of incorporation) Outliers (anomaly in base years, transactions, etc.)

Companies Buy Liabilities An acquiring company can inherit UP liabilities from a company it acquires in both stock and asset purchases UP is often overlooked during due diligence Critical to determine the existence, and amount, of potential UP exposure before a transaction closes Acquiring companies can be liable for all pre-acquisition UP liabilities Common issues that arise during/after corporate actions Buyer didn’t know to ask about UP Belief that asset purchases can’t generate successor liability Target has poor record retention/accessibility of records UP history/knowledge lost from personnel elimination Prior assumption of UP liability by target in earlier acquisitions Ignorance of potential impact of UP on deal purchase price

You Can Fix It Voluntary disclosure agreement (VDAs) and voluntary remittance letters (VRLs) Some jurisdictions will allow companies with potential UP liabilities to enter into VDAs, typically waiving interest and penalties Encourages UP compliance prior to holder receiving an audit notice Written agreement between the holder and the jurisdiction with specific terms and conditions VDAs allow a holder to reach an agreement with a jurisdiction to settle prior UP liabilities and bring the holder into compliance Due date is generally 6 months after the initial VDA request Generally holders can request extensions Under the terms of a VDA, most jurisdictions will reduce or waive penalties and/or interest and reduce the look-back period VRL may be used if a jurisdiction does not offer a VDA, or if the amount due to the jurisdiction does not warrant a VDA With a VRL, company can inform the jurisdiction(s) of its intent to voluntarily come forward and remit past due UP Requests the abatement of any applicable interest and/or penalties given a holder’s willingness to report voluntarily

Best Practices Key steps that every company should follow to ensure ongoing UP compliance: Assign responsibility for overseeing the annual UP reporting process Education about the company’s UP obligations and responsibilities Review all departments to identify all sources of UP Develop time tables for reviewing and reporting UP Set materiality limits and thresholds for account level research Research potential UP for errors – not all property identified is actually UP Retain documentation if you determine an item is not reportable as UP Perform owner outreach / due diligence (statutory requirement) Retain documentation if you reunite an owner with their property Establish process to file annual reports, record entries, and reconcile accounts When possible use technology / software to streamline UP reporting process Ensure that record retention is specifically addressed in your UP procedures General rule for audit is 10 Report Years + dormancy period = 15 years +

Keeping In Compliance Stay aware of what’s happening in your company and in the unclaimed property industry. Internal and external changes that may impact compliance: Acquisitions, mergers and divestitures New property types or programs being created in the company Payroll cards Discounts / credits given to customers Marketing efforts Gift cards & rebates (especially when administered by a TPA) Bankruptcy filings Audit notices and state questionnaires regarding UP Existing and new VDA programs (DE/CA/other) B2B Exemption changes

It’s Changing DE, IL, TN, UT have adopted some form of the Revised Uniform Unclaimed Property Act (RUUPA) in 2017 Adds contractual anti-limitations provisions Dormancy changes for several property types from 5 years to 3 years Retroactive repeal of B2B in IL RUPPA style legislation being proposed in DC, KY, ME, MN, ME, VT and WA in 2018 The American Bar Association has also finalized the ABA Model Unclaimed Property Act in 2018 in response to disagreements with RUUPA Recent litigation impacting UP has included Challenge to Delaware’s use of contingent-fee auditor violated due process and state’s estimation methodologies - Plains All American Pipeline v. Cook Primary jurisdiction associated with the reporting of “Official Checks” -Delaware v. Pennsylvania; Wisconsin & Arkansas, et al v. Delaware (U.S. Supreme Court) Companies challenging Delaware’s right to audit address unknown property held by non-Delaware entity - Office Depot/Marathon Petroleum

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