Building an unclaimed property compliance program tends to be a responsibility that is often passed from department to department. This transition of responsibilities is usually accompanied by an urgent plea along the lines of, "I’ve just been made responsible for unclaimed property. What is it, and what am I supposed to do now?"
While many individuals in this situation may choose to rush into filing annual escheat reports as soon as possible, that approach often creates more problems instead of solving them. Rushing to report, in the absence of well-defined processes, can lead to incorrect reports that may actually trigger an audit from multiple states and third-party contingent fee auditors.
In our experience, individuals tasked with bringing their organization into compliance for the first time, or evaluating an existing process, are best suited by implementing a comprehensive compliance program for unclaimed property.
In either scenario, below are several components critical to establishing (or evaluating) an unclaimed property compliance program.
Establish Your Scope and Address Your Potential Risks.
The foundation of your compliance program should start with a solid understanding of your current gaps in compliance. Without knowing your potential areas of exposure, how can you be sure your newly created compliance program will address all possible risks?
Conducting a Risk Assessment or Self-Audit is one of the most effective ways to establish a compliance baseline and uncover additional potential risks that need to be accounted for within your unclaimed property compliance program.
The risk assessment should include a thorough review of your financial books and records as well as existing systems used to track and monitor financial transactions including outstanding disbursements, unapplied cash, and aged credit balances.
Pay special attention to any historical or recent mergers or acquisitions, as your organization may have unknowingly acquired a population of unclaimed property liabilities resulting from that corporate action.
"Conducting a Risk Assessment or Self-Audit is one of the most effective ways to establish a compliance baseline"
Include All Lines of Business & Stakeholders
It is extremely important to verify that the risk assessment covers all subsidiaries and lines of business across your organization that could generate potential unclaimed property exposure. If your organization is highly decentralized, this is an extremely critical step.
In many cases, the tax, accounting, and finance departments tend to be the primary stakeholders tasked with unclaimed property compliance responsibilities. It is important to note, that while these departments may own the reporting responsibility associated with escheatment, the accuracy and completeness of the data used to determine what property is reported is contingent on the information provided by accounts payable, payroll, accounts receivable, etc.
If the various accounting departments provide inaccurate or incomplete information, the reports prepared for the states will be inaccurate or incomplete. As such, it’s important to confirm with each accounting department what constitutes potential unclaimed property including actions that can be taken with outstanding and voided checks and appropriate handling of unapplied cash and aged credit balances.
Evaluate Your Options and Internal Capabilities
Now that you’ve assessed the scope of your unclaimed property obligation – the next step in implementing a compliance program is defining the responsibilities and actions.
Who will track legislative or regulatory changes?
State escheat laws change frequently, and keeping up to date goes a long way towards keeping in compliance. You’ll also need to establish a protocol for communicating this information throughout the organization to ensure consistent interpretation and application of rule changes.
How will you determine property eligible for escheatment – or past due?
Companies choose to tackle this vital step in a variety of ways. Some companies calculate dormancy manually. Others leverage commercial software platforms or outsourced service providers to identify dormant property. Firms with sizable IT departments (and budgets) have actually built their own unclaimed property rules engines.
Who will be sending due diligence letters?
However you choose to perform these state-mandated mailings, either internally or through an outsourced mail house, be mindful that states are very particular about what needs to be included in the letters. In some cases, very specific language, in specific places, and in specific formats is required.
Are you able to perform unclaimed property remediation activities?
By remediation, we’re referring to a form of outreach to owners of property that is either past-due or coming due in upcoming reporting cycles. While state mandated due diligence may be considered the bare minimum form of remediation, many firms choose to put extra effort into locating and communicating with property owners before their property is actually eligible to be reported.
Document and Communicate – Often.
Document everything as part of your official policies and procedures. A formal set of escheat compliance policies is often one of the first things requested in the event of an audit. This living document should be frequently reviewed and updated as your business grows and evolves. It should serve as your reference manual, outlining what to do and how to do it.
You’ll also need to establish a Chain of Command and escalation path so that you can identify and mitigate any issues as soon as possible.
Establishing an unclaimed property compliance program is not an easy undertaking. It requires the significant investment of time, resources, and talent. It is not an initiative that can be rushed, as it takes a fair amount of research, internal analysis, and collaboration to do it right.
However, when done correctly, a comprehensive program for unclaimed property compliance will pay dividends in the form of reduced risk, greater assets protected, and increased customer retention.