1. © 2011 Financial Operations Networks LLC Unclaimed Property: Avoid Escheatment Hassles & Headaches! Carla T. McGlynn Unclaimed Property Consulting & Reporting LLC Tuesday, April 12, 2011

2. www.TheAPNetwork.com Page 2 Objectives Brief overview of unclaimed property fundamentals & compliance responsibilities Case studies —Accounting decision —Successor liability Practical suggestions for policy, procedure, and process establishment and improvement Takeaway – current state audit and legislative trends

3. www.TheAPNetwork.com Page 3 UP Fundamentals Unclaimed property is property that is held, issued or owing in the ordinary course of business and has remained unclaimed by the apparent owner for a specified period of time. Common Property Types

4. www.TheAPNetwork.com Page 4 Commonly Used Terminology Holder – An individual or legal entity (public or private) in possession of property belonging to another Owner – An individual or legal entity (public or private), government or governmental subdivision who has a legal or equitable interest in property Dormancy Date/Date of Last Activity – The date of last contact by the owner as evidenced by the records of the holder. Dormancy Period – The number of years (generally 1,3, or 5) from the date of last contact with the owner property must be unclaimed before it is considered abandoned Reporting Deadline – Date report and property due to state. A very few states have different dates to report and deliver property Indemnification – Refers to the protection from subsequent claims (whether made by an owner or by another state) that may be provided by a state to a holder that remits property to a state UP Fundamentals (Cont’d.)

5. www.TheAPNetwork.com Page 5 Holder obligations & responsibilities Records review —Internal review & research —Determining eligibility for reporting —Applying the applicable state law —Determining the dormancy period Due diligence Reporting and remitting Retaining supporting records UP Fundamentals (Cont’d.)

6. www.TheAPNetwork.com Page 6 Internal review & research Conduct a review of the appropriate financial accounts and ledgers to identify accounts holding items subject to escheat Accounts to review: —AP disbursement: (ie. vendor, customer refund, travel & expense, and TPA checks) —Payroll disbursement —AR aged trial balance UP Fundamentals (Cont’d.)

7. www.TheAPNetwork.com Page 7 Determining eligibility for reporting Records review —Identifying unclaimed property Is the owner really lost? Is the property really unclaimed? Is the property exempt from reporting? UP Fundamentals (Cont’d.)

8. www.TheAPNetwork.com Page 8 Be Proactive!!! Internal review – suggested best practices Gain support from CFO & high level management Identify a primary contact within each department and form a team Set up an unclaimed property liability account on your GL Establish a process whereby you conduct periodic reviews to identify, research and mitigate the unclaimed items Establish dollar threshold to prioritize research Resolve any accounting errors and retain supporting documentation Retain detailed documentation supporting any mitigation efforts Maintain written procedures for record review and make them a part of your company’s policy or manual

9. www.TheAPNetwork.com Page 9 Applying the applicable state law U.S. Supreme Court decision: Texas v. New Jersey (1965) —This landmark case settled the question of the superiority of conflicting state claims to the same abandoned property —Three priority rules: State of last known address on debtor’s books has priority If no address is available, then state of incorporation has priority When the state does not have a law pertaining to the property, the state of incorporation of the holder controls UP Fundamentals (Cont’d.)

10. www.TheAPNetwork.com Page 10 State AP – Vendor Checks (CK13/ MS08) Payroll Checks (MS01) Credit Balances (MS09) Annual Reporting Deadline As of/ End Date Illinois 3 years1 year3 years5/0112/31 California3 years1 year3 years11/0106/30 Delaware5 years 03/0112/31 Florida5 years1 year5 years04/3012/31 New York 3 years (2G) 3 years (8A) 3 years (5E) 3/1012/31 Michigan **3 years1 year3 years7/0103/31 Texas3 years1 year3 years11/0106/30 ** Recent Legislative Change for 2011 and forward State dormancy periods & reporting deadlines UP Fundamentals (Cont’d.)

11. www.TheAPNetwork.com Page 11 Due diligence Final effort to contact and reunite the owner/payee with its property prior to reporting and remitting the unclaimed property to the applicable state Compliance requirement in all jurisdictions, except DE & PA Benefits: —Opportunity to reestablish relationship with lost vendors & customers —Create goodwill —Reduce escheatable property to states UP Fundamentals (Cont’d.)

12. www.TheAPNetwork.com Page 12 Due diligence (Cont’d.) Important considerations Method of notification – generally, a notification letter is mailed to the owner at the last known address on the holder’s records —First Class mail, Certified mail and/or publication Letter content – generally, the letter should include enough information to enable the recipient to verify the status of the property —check number, check amount, and check date —description of property —communicate to owner that it appears he/she is entitled to the property & that it is at risk of being escheated to the state —owner response instructions (preferably in writing) UP Fundamentals (Cont’d.)

13. www.TheAPNetwork.com Page 13 Sample Due Diligence Letter UP Fundamentals (Cont’d.)

14. www.TheAPNetwork.com Page 14 UP Fundamentals (Cont’d.) Due diligence (Cont’d.) Important considerations Timing – For many states, not more than 120 days nor less than 60 days prior to reporting deadline —CA: 180-365 days —DE & PA: not required —IA, MS, SD & WA: no timing specified Form of delivery – generally, most states require or strongly suggest First Class mail. —Notable exceptions: IA, NJ, NY & OH

15. www.TheAPNetwork.com Page 15 UP Fundamentals (Cont’d.) Due diligence (Cont’d.) Important considerations Thresholds: —Minimums: by Item Amount/Value $50: most States Notable other states: $10 – IL; $25 – NE; $75 – WA; $100 – AK, KS, KY, MA, MD, MN, OR, VA; $250 – TX No minimum: AL, CT, IA, MS, NE, NY, PR Allowable deductions: —CA: banks and financial organizations may impose a service charge for the notice in an amount not to exceed $2.00 on items over $50 —DE & PR: may deduct expenses incurred for advertising —IL, IA, OH: may deduct first class mailing costs (i.e. postage, stationary, and envelopes) —NV: limit $2.00 may be deducted on items over $50 and must be itemized on report —NY: may deduct cost of certified mail and return receipt as a service charge. Also, may deduct costs of publication on a pro rata basis (using a specified formula.) —OH: deductions are allowed up to $20.00 for certified mail

16. www.TheAPNetwork.com Page 16 UP Fundamentals (Cont’d.) Reporting and remitting Important processing considerations Type of report – most states accept diskette or CD, online internet reporting (mandatory – IN) Report format – most states accept NAUPA II standard electronic format. NY does not use NAUPA II format, but will accept. CA now accepts only NAUPA II format Negative reporting – required by many states (29). IN and OH allow online negative reporting

17. www.TheAPNetwork.com Page 17 UP Fundamentals (Cont’d.) Reporting and remitting (Cont’d.) Important processing considerations Report Aggregate Limits – most states allow holders to report items in aggregate if value is below a certain dollar amount —$25, $50, & $100 are typical limits —Most states do not permit aggregate reporting of dividends or mineral interests Form of Remittance – checks or EFT —Most states accept checks. Some states require EFT if sum of reportable property is greater than a specific dollar amount (i.e. CA, TX)

18. www.TheAPNetwork.com Page 18 UP Fundamentals (Cont’d.) Reporting and remitting (Cont’d.) Important processing considerations Report and Remittance Delivery —Timing: on or before the deadline specified Fall reporting cycle: by November 1 st Spring cycle: from March 1 st – DE to July 1 st – MI —Confirmation of delivery and receipt —Data security: must safeguard confidential information (i.e., social security numbers, etc.). Some states have FTP capability or accept encrypted files

19. www.TheAPNetwork.com Page 19 UP Fundamentals (Cont’d.) Reporting and remitting (Cont’d.) Important processing considerations Filing extensions —Notification/request of state administrator Request made via holder letterhead State provided forms – some states forms available on state websites —Provide reason for request —Estimated payment may be required (i.e. NY, NJ, TX)

20. www.TheAPNetwork.com Page 20 Reporting Red Flags! Prevention tips: Report All Property Types when it is reportable! Prepare and complete all forms correctly and accurately! Sign and date the reports! Have them notarized, if required! Confirm report totals and payment match! File negative reports—only if required! Don’t wait to the last minute to request a filing extension (best to allow 15 to 30 days prior to the filing deadline)! Confirm receipt with states, maintain document in one location and create a calendar File reports by the new granted report due date Complete all state unique report forms (i.e. holders information forms)!

21. www.TheAPNetwork.com Page 21 Retaining supporting records & documentation States require retention of unclaimed property report(s) and supporting documentation for a period of years —Time period differs by state—usually 7 to 10 years Provides indemnification for property remitted and proof of claim Critically important in the event of audit Records retained should include, but not limited to: —Copies of the annual state unclaimed property reports —Supporting detail of property reported by legal entity —Copies of all due diligence letter responses and actions taken as a result of the responses —Primary source documentation, including: GL reports, bank statements, bank reconciliations, outstanding check lists, void/stop pay lists, aged trial balance reports and reconciliation reports UP Fundamentals (Cont’d.)

22. www.TheAPNetwork.com Page 22 Statute of limitations Statute of limitations does not apply if report is not filed or missing year If report is filed, statute of limitations applies and varies by state —Typically 7 to 10 years Holder is only protected for property type and amount reported —An incomplete report may still be at risk for specific property not reported UP Fundamentals (Cont’d.)

23. www.TheAPNetwork.com Page 23 Case Study: Accounting Decision Scenario: Cash Management (CM) is responsible for reconciling monthly bank reconciliations for accounts payable disbursements CM identifies numerous stale-dated checks each month CM maintains stale-dated check listing on bank account for several years back to 2002, totaling more than $150,000 CM advises upper management of the accumulation of checks Manufacturer has never reported unclaimed property to states What does management decide to do? Let’s find out…

24. www.TheAPNetwork.com Page 24 Case Study: Accounting Decision (Cont’d.) Management decides to: Instruct CM to capture all AP disbursement stale-dated checks issued from 2002 through 2009, and write the checks off to miscellaneous expense account on the GL CM advises the controller’s group (CG) to make the entry GC creates the journal entry below: Debit – Cash disbursement account$150,000 Credit – misc. expenses ($150,000) ―No additional information detail attached to the entry Was this a good decision? Or a bad decision? Why?

25. www.TheAPNetwork.com Page 25 Capture the detail and have a journal entry made to reclass the property to an unclaimed liability account Retain all of the check detail for future research and due diligence efforts Research checks for name and address Conduct research of all state dormant checks for ultimate disposition Process statutory due diligence Report all unclaimed property to appropriate states when due The better decision… Case Study: Accounting Decision (Cont’d.)

26. www.TheAPNetwork.com Page 26 Case Study: Successor Liability Scenario: Retailer acquires the stock of a distribution business (Distributor) that has been doing business for over 15 years nationwide Distributor has never reported unclaimed property to states Retailer rolls in the distributor’s AP processing into its accounting process, including disbursements Retailer identifies a significant population of outstanding checks on the distributor’s old bank statement Retailer closes the bank account and writes-off checks for the entire outstanding bank balance to misc. income Does the retailer have Successor Liability? YES!!

27. www.TheAPNetwork.com Page 27 How should the retailer handle this matter? Meets its reporting responsibilities ―Review and research ―Due diligence ―Report ―Retain records If the liability is significant, consider filing a voluntary disclosure (VDA) effort with applicable states Conduct a review of the retailer’s financial operations to determine if there are any additional potential underreported liabilities on its accounts Case Study: Successor Liability (Cont’d.)

28. www.TheAPNetwork.com Page 28 Consider a VDA Ability to perform self-review of financial issues and methodologies to employ Limited “look-back” period Waiver/reduction of interest and/or penalty Obtain closing/release agreement Understand and address areas of risk & weakness in compliance process VDA Benefits:

29. www.TheAPNetwork.com Page 29 Initiating Voluntary Compliance Efforts Formal vs. informal ―Formal VDA terms provide: Limited look-back, completion time (6 months), penalty and/or interest abatement/reduction and indemnification Holders eligible to participate, if: —Not under audit or contacted by state or a third-party auditor —Not previously reported or omitted/underreported property VDA look-back period —Generally between 5 to 10 report years (plus dormancy period), varies by state vs. audit look-back period —Generally between 10 to 20+ report years (plus dormancy period); date of incorporation; varies by state; audits are lengthy, time consuming, burdensome and intrusive

30. www.TheAPNetwork.com Page 30 Unclaimed Property Audits Current trends: On the rise – numerous called every month Increasing number of audits conducted by third party contingency fee audit firms Extended audit “reach-back” periods (30 years) Use of sampling and extrapolation methods to calculate audit assessments Most audits last more than 3 years Multi-million dollar assessments Holders charged for audit costs (i.e. IN)

31. www.TheAPNetwork.com Page 31 Mitigate Risk Establish Effective Escheat Processes

32. www.TheAPNetwork.com Page 32 Establish effective escheat processes Understand your business operations to better identify risk areas Form a team of key personnel from various departments Clearly define the roles and responsibilities of each contributing department Develop comprehensive procedures for each financial accounting area (i.e. Payroll, AP, AR) to track and report unclaimed property Mitigate Risk (Cont’d.)

33. www.TheAPNetwork.com Page 33 Establish effective escheat processes (Cont’d.) Set up an unclaimed liability account ―Work with key personnel to gather relevant data on a set schedule ―Establish timelines for reconciling the account Conduct a risk self-assessment Retain relevant records to support filings and resolutions Perform internal due diligence routinely Perform statutory due diligence according to state statutory requirements Mitigate Risk (Cont’d.)

34. www.TheAPNetwork.com Page 34 Establish effective escheat processes (Cont’d.) Test your procedures annually to ensure continued effectiveness Perform a high level liability risk assessment of acquisitions (successor liability – it’s your headache now!) If underreported property is identified to state(s), consider voluntary compliance Encourage the direct deposit, EFT’s, wires and alternative forms of payments Mitigate Risk (Cont’d.)

35. www.TheAPNetwork.com Page 35 Establish effective escheat processes (Cont’d.) Review and revise contractual language on invoices and POs that may support positions of no liability due Retain documentation relating to settlement agreements with customers Invest more time and resources in researching unidentified payments and suspense accounts State UP laws change frequently – check state websites for updates, join educational trade associations, reach out to an expert, etc. Mitigate Risk (Cont’d.)

36. www.TheAPNetwork.com Page 36 Recent Legislative Developments

37. www.TheAPNetwork.com Page 37 State Legislative Developments Delaware – law changes Michigan – spring filing state & dormancy period reductions Indiana – dormancy period reduction New York – dormancy period reduction New Jersey – gift card & other changes

38. www.TheAPNetwork.com Page 38 Delaware – Legislative Changes in 2010 Administrative Review Process: Provide for an administrative review process at the conclusion of an unclaimed property examination. This review process may be invoked at the option of the holder Limited Uninvoiced Payables (UIP) Exemption: Create a limited exemption from the definition of abandoned property for transactions between merchants covered by the Uniform Commercial Code where, for whatever reason, a merchant holder receives and accepts goods in the ordinary course of business for which the holder was never invoiced by the seller Estimation Techniques Authorized: Clarify that in accordance with established accounting and industry practice, the State may employ estimation techniques when records do not exist or are insufficient to determine a holder’s liability for abandoned or unclaimed property Reporting Date & Due Diligence Changes: Changed the reporting date for banking organizations to 11/10 from 8/1 (negative reports were 8/10) and for life insurance corporations to 12/20 from 5/1. Organizations that are required to publish notice are no longer required to publish a statement that the entity holds such reports for public inspection in their headquarters. Banking organizations are required to publish at least 60 days prior to reporting and remitting property State Legislative Developments (Cont’d.)

39. www.TheAPNetwork.com Page 39 Michigan – spring filing state & dormancy reductions In 2011, property reaching dormancy as of March 31, 2011 must be remitted to Treasury by July 1, 2011 Dormancy periods for most property types, including money orders, uncashed checks, and accounts receivable credit balances reduced to three years Michigan now requires negative reporting attestation form State Legislative Developments (Cont’d.)

40. www.TheAPNetwork.com Page 40 Indiana – dormancy period reductions Savings, checking & timed deposits – 5 to 3 years AP and AR – 5 to 3 years Any other property types not specifically mentioned in the IN unclaimed property law – 5 to 3 years Effective – Fall 2011 report deadlines State Legislative Developments (Cont’d.)

41. www.TheAPNetwork.com Page 41 Effective August 11, 2010, reduced the dormancy period from 7 to 5 years for non-bank money orders and from 5 to 3 years for refunds and undelivered goods or services not rendered Holders of refunds or undelivered goods and/or services must perform required due diligence and remit any abandoned accounts that have been dormant for three, four or five years New York – dormancy period reduction State Legislative Developments (Cont’d.)

42. www.TheAPNetwork.com Page 42 AB 3002 has several impacts, primarily to traveler’s checks and stored-value cards (SVC) Key section relating to gift cards: now NJSA 46:30B-42.1, includes: ―New 2-year dormancy period ―Card issuers are required to maintain record of the owner/purchaser zip code ―SVC’s issued in NJ would presume address is NJ (“place of purchase presumption” or “deemed owner address”) 42 New Jersey – legislative changes in 2010 (Effective 7/1/2010) State Legislative Developments (Cont’d.)

43. www.TheAPNetwork.com Page 43 New Jersey – SVC legal progress continues into 2011 During Sept. to Oct 2010 various groups/retail associations sued NJ in U.S. District Court seeking enjoinment of law Nov. 13, 2010 – Judicial Decision ―NJ enjoined from enforcing the “place of purchase” presumption, which violates Priority Rules in Texas line of U.S. Supreme Court cases ―NJ enjoined from escheating cards that were sold before enactment of AB 3002, but only if those cards are redeemable solely for merchandise/services (contract was for merchandise/services, and “lost profit” argument applies) Jan. 14, 2011 – the judge issues judicial opinion that clarifies Nov. 13, 2010 opinion—New Jersey can require card issuer to collect zip code of card owner/purchaser Jan. 19, 2011 – the Nov. 13, 2010 decision is on appeal to Third Circuit Jan. 31, 2011 – Third Circuit Enjoins Enforcement of NJ zip code collection requirement State Legislative Developments (Cont’d.)

44. www.TheAPNetwork.com Page 44 Unclaimed Property Resources – Websites and Links Unclaimed Property Professionals Organization (UPPO): www.uppo.orgwww.uppo.org National Association of Unclaimed Property Administrators (NAUPA): www.unclaimed.orgwww.unclaimed.org NAUPA II Standard Reporting Format: http://www.nast.org/NAUPA/Electronicreportstand ard.htm (click on “new reporting standard”) http://www.nast.org/NAUPA/Electronicreportstand ard.htm Resources

45. © 2011 Financial Operations Networks LLC Thank You! If you have further questions: Carla McGlynn Partner Unclaimed Property Consulting & Reporting LLC (732) 241-4823 Carla.McGlynn@upcr-llc.com