1. 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

2. ©2017 True Partners Consulting LLC. All rights reserved
©2017 True Partners Consulting LLC. All rights reserved. Printed in the U.S.A.

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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.)

9. 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

10. 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

11. 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 +

12. 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

13. 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

14. Q&A