Posted By Administration,
Thursday, January 19, 2017
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Arguably the most controversial aspect of unclaimed property compliance, states’ audit practices are a constant source of frustration among property holders. The use of third-party auditors incentivized by contingency fees continues to shape the direction of holder litigation and advocacy efforts. Few argue against the importance of compliance, but many seek a fair playing field.
One way to help ensure a more reasonable environment for unclaimed property professionals is by offering holders a meaningful process for appealing audit assessments. Currently, laws in fewer than half of all states’ make administrative appeals an option.
Among the states that do offer administrative appeals, the process, reviewing entity and formality vary widely. This makes it essential for holders undergoing audit to closely examine how the process works when considering an appeal.
“You really need to know the forum you’re in because no two are alike,” says Marilyn Wethekam, partner at Horwood Marcus & Berk, Chartered. “Think about the rules that apply in that location and what you’re trying to accomplish under their specific set of rules.”
In some states, the appeals process is relatively informal, with the holder or holder’s representative submitting a document outlining the disputed aspects of the audit. Other states follow formal rules of evidence, rely on subpoenas and require legal counsel, much like the litigation process. Regardless of the level of formality, the reviewing body is rarely independent. It usually consists of, or includes, the administrator or administrator’s designee.
Despite the hodgepodge of practices and tactics currently used to complete administrative reviews, hope remains for greater standardization. Unlike past versions of the Uniform Unclaimed Property Act (UUPA), the 2016 version of the model law includes administrative appeal language.
Unlike current appeal processes, which typically require holders to hold any issues that arise during an audit until they’ve received a notice of determination at the end, Section 1008 of the 2016 UUPA provides for an interim audit conference. If the holder feels an auditor’s request is unreasonable or if the audit is not proceeding in a reasonable timeframe, for example, it may request a conference with the administrator. The administrator is required to issue a written report after the conference, addressing the concerns raised by the holder. Remedial actions could include such things as invalidating an auditor’s request, setting a timeframe for audit completion or reassigning the audit.
Article 11 of the 2016 UUPA formalizes the post-audit administrative appeals process. It creates a three-level process—informal conference, administrative review and judicial review. It also specifies that the process is elective and allows the holder to withdraw any time before the administrator issues a decision.
“Currently, in some states once you initiate the administrative appeals process, you have to follow it all the way through,” says Michelle Andre, managing member of Tre Towers Advisory Group, LLC. “Under
the 2016 UUPA, you could go through the informal conference, realize you’re not getting an impartial review, and then take your chances in court instead of going through all three levels of review.”
The 2016 UUPA also defines specific timelines for each level of review. The holder must request an informal conference within 30 days of receiving the notice of determination. The administrator then must issue a written decision within 20 days. The administrator is authorized to modify or withdraw the assessment. Interest and penalties continue to accrue during this process.
The administrative review process must begin within 90 days of the notice of determination or the informal conference decision. The final decision is subject to judicial review, which begins 90 days after the notice of determination or informal conference, or as specified by the state’s Administrative Procedures Act.
“Not only do you want to go to an impartial body, but you want them to review your facts and circumstances de novo—with a fresh set of eyes,” Andre says. “Under some states’ administrative procedures acts, the review is not de novo. It’s limited to information in the existing record. We’ll need to fight for that as legislation is introduced in the states, along with the right to have an independent reviewer where both the holder and state can have input into who is hearing the appeal.”
Deciding whether to pursue an administrative appeal or litigate is a business decision that may not always be obvious. Holders need to consider numerous factors and prepare accordingly:
- Strength of the challenge: What is the nature of the case, how good is it in the eyes of the party reviewing the issues, and what type of information is available to support the case?
- Burden of proof: Does the holder have to prove that determination handed down was incorrect or does the burden to prove the assessment was fair fall on the state?
- Evidentiary standard: Do rules of evidence apply? Can the holder bring in an expert to demonstrate that the sampling used to calculate an assessment wasn’t statistically accurate?
- Dollar impact: What does the holder consider a reasonable assessment range, above which they would pursue an administrative appeal?
- Preparation: Because the appeals timeframes under the 2016 UUPA are relatively short, Is the holder adequately prepared to make their case within relatively tight timeframes?
“The holder has only 30 days to request an informal conference, so if they don’t have their documentation to support their position in order and their issues ready to present, 30 days isn’t a lot of time to pull all of that information together,” Andre says.
After evaluating their circumstances, holders who have the ability to pursue an administrative appeal may choose that option or litigate instead. Regardless of whether they ultimately use the appeals process, having the choice is important for holders seeking a fairer environment.
“As a general rule, I believe you are always better to avail yourself of the ability to sit down and try to talk to people, explain things and present documents and make a case for your position,” Wethekam says.
To learn more about unclaimed property fraud, join Andre and Wethekam, as they lead the Do You Know Your Administrative Appeals Process? session at the 2017 UPPO Annual Conference. They will
explore in greater detail how the process works in several states, costs compared to litigation and holder requirements.
Posted By David Knott, managing director, United Asset Recovery ,
Monday, January 16, 2017
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Compliance with unclaimed property regulations is a big enough project in and of itself. Holders don’t always have the time or resources to hunt down and recover their own company’s abandoned property. However, being able to show that unclaimed property isn’t just a compliance function but can also bring in “revenue” could help your pitch in getting that new software upgrade, hiring additional staff, etc. With time and resources low, outsourcing large-scale property recovery in which the vendor has the responsibility and your company’s authorization to pursue and recover as much unclaimed property that your company is rightfully entitled to as possible, may be a good option.
While many companies have the best of intentions when it comes to recovering their own unclaimed funds, more often than not, recovery is put on the backburner for years on end while higher priorities take precedence.
There are downsides to long delays in recovering unclaimed funds. One of the downsides is that as years pass, locating supporting documents to prove association with certain addresses, certain venders, and other relationships becomes increasingly difficult. The tougher it becomes to find those supporting documents, the more difficult approval and payment of those claims become. Most of our clients have over the years, undergone one or more major upgrades to their information technology systems. Former systems containing historical accounting or vendor information either become difficult and time consuming to access, or not accessible at all and so goes finding an old invoice or payment to a specific vendor. If a state is demanding proof of a specific relationship or address and it cannot be provided, the asset in question will remain with the state.
Another down side is the risk of loss by fraud. If you work for a large company, it is likely that from time to time large single assets will surface that your company is entitled to. These large assets are prime targets of fraudsters for obvious reasons. By consistently recovering your company’s unclaimed funds, you reduce the risk of loss by fraud.
Still another down side is the loss of knowledge specific to your company’s unclaimed property due to unexpected turnover of a key unclaimed property staff member. A staff member who has been with your company for many years will likely have deeper knowledge of your company’s history than a new employee and would therefore be more likely to have knowledge to locate, track, and recover less obvious assets that your company is entitled to.
Three immediate benefits of outsourcing recovery are:
- That the recovery project is put on the front burner and receives full attention now rather than later;
- Assets are located and removed from the universe of properties that could fall prey to fraud and;
- Continuity and continuation of your recovery program following turnover of key unclaimed property staff.
The benefits don’t end there, however.
An upside to outsourcing is that recovery vendors work on a contingency fee basis. This can be beneficial to your company because:
1) Your vendor is motivated to recover as much unclaimed property for your company as possible.
2) Your costs are proportional to the value of unclaimed property recovered during any given period. After a year of outsourcing, if the volume of available assets drops dramatically, your commission cost to the vendor drops in proportion. For example, if your vendor recovers a large number of assets totaling $250,000 during the first sweep of assets on a 10 percent commission, they would earn $25,000. If the following year, recoveries drop to $65,000, the vendors commission drops accordingly to $6,500.
Finally, you can use the time you save from outsourcing to focus on compliance and thus avoid errors that end up costing your company money or, you can use the time saved to focus on other matters of higher priority. With the time pressures we all seem to face in business today, the value of time savings may be the benefit that you value and appreciate most.
Posted By Administration,
Thursday, January 12, 2017
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One of the more interesting recent unclaimed property cases in recent years is Plains All American Pipeline L.P. v. Thomas Cook et al. In August 2016, the case was dismissed, but Plains has appealed the decision, sending the case to the Third Circuit Court of Appeals.
A limited partnership incorporated in Delaware, Plains All American Pipeline, received notification in 2014 that Kelmar would be conducting an audit of the company on behalf of Delaware. Plains objected to the initial information request, claiming, in part, that the company was being audited not because of any suspicion of wrongdoing, but rather because of its profitability. When Delaware dismissed the company’s objections, Plains filed suit.
Among the complaint’s allegations, Plains argues that Kelmar’s request for information about subsidiaries organized outside of Delaware constitutes illegal search and seizure under the Fourth Amendment. The company argued that the state and its agent have no right to that information and, if they did, they would need to have reasonable grounds to search for it. The complaint also directly challenged Delaware’s right to use estimation.
On Aug. 16, 2016, the U.S. District Court for the District of Delaware granted the defendants’ motion to dismiss. In part, the court said the plaintiffs brought their suit based on potential threats and not actual threats. For example, Plains challenged the state’s right to use estimation before it had done so, as the lawsuit was brought immediately following Kelmar’s initial information request. Regarding the Fourth Amendment claim, the court said the state’s decision to examine businesses based on their profitability was legitimate, as those companies are logically more likely than others to hold large amounts of unclaimed property.
“Plains was worried about going through this long audit and then getting an estimated liability,” says Diane Green-Kelly, partner with Reed Smith LLP. “They didn’t think estimation was appropriate. The way the court read the complaint was that Plains was unhappy about how the audit might unfold and what the assessment might be. The court said you can’t complain about something that might happen. You have to wait until you’ve suffered an injury. The court didn’t consider the case ‘ripe.’”
As with any case a court dismisses with prejudice, parties involved in the case may appeal the decision. Plains All American did just that on Sept. 16, 2016, sending the case to the Third Circuit Court of Appeals.
The appealed Plains case is developing at a time when Delaware’s unclaimed property practices face several significant challenges. These challenges may affect how the appeals court views the case.
“It’s hard to know what the Third Circuit will do, especially in light of other things,” Green-Kelly says. “You can’t look at the Plains case in a vacuum. The court will see that 21 states are suing Delaware for overreaching its unclaimed property authority. Temple-Inland won because of overreaching and ignoring federal law. Marathon and Office Depot sued Delaware. Everyone is suing Delaware. The Third Circuit will see this case in the context of a lot of things happening out there challenging Delaware’s conduct. So, the court could decide this case actually was ripe in light of the context in which it was filed.”
Another case, Delaware Department of Finance v. Blackhawk Engagement Solutions, could also influence the outcome of Plains. In 2015, Delaware’s escheator issued a subpoena to Blackhawk requesting documents related to an audit that had been in progress for several years. Blackhawk refused. Delaware filed an action in court to enforce the subpoena, and Blackhawk resisted, claiming the escheator was not authorized to take these actions, among other things. The state filed a motion for judgment on the pleading, at which point Plains All American and Marathon filed a joint amicus brief.
The brief cites several areas of the Delaware Code where state agencies are authorized to conduct examinations to determine with a set of laws and expressly authorized to issue a summons for testimony and a subpoena for documents. The unclaimed property statute authorizes the escheator to issue a summons for testimony, but not a subpoena for documents. The amicus brief points out that the code actually included such authorization until it was repealed and revised in 1990.
“If the Blackhawk court says the escheator has the authority to issue a subpoena and enforce it, Plains sort of goes away,” says Green-Kelly. “If the escheator actually has subpoena power and can enforce it in court, the resisting company can claim it doesn’t have authority to so and let the court decide. It happens during the audit, so the court can stop it while it’s happening. Because the statute lacks the authority to issue a subpoena, right now there’s no way to stop it other than to file the type of lawsuit Plains filed.”
Impact on Holders
In light of the important issues at play in Plains and other current cases, Green-Kelly offers some advice for holders undergoing an audit or considering entering into a voluntary disclosure agreement (VDA).
“If you’re a company already under audit and close to the end, you shouldn’t just accept a result that is not supported by documents or anything that is close to an estimate like Temple-Inland,” she says. “If you’re not under audit and are thinking about a VDA, don’t do anything. See what happens with these cases. Under the new audit program, it might be better to be audited than to go through a VDA. Wait and see what the audit program is going to be. I can’t imagine telling any company to go into the VDA program right now unless they get the letter and have to make a decision.”
Plains All American
Posted By Administration,
Thursday, January 5, 2017
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Whenever large amounts of money change hands, the likelihood of fraud exists. Thus, unclaimed property presents a variety of opportunities for potential fraud. Property owners, state unclaimed property departments and property holders can all be targets of dishonest attempts to profit from unclaimed property.
Scams directed at individual property owners have sprung up often enough to warrant consumer warnings from several states in recent years. This form of fraud usually entails someone offering to help locate property for a fee or promising a substantial (and completely fictional) windfall. Eager consumers either pay for bogus services or provide personal information that gives scammers access to bank accounts.
Claims fraud is another common problem. Inspired by published lists of unclaimed property owner names, people misrepresent themselves to the state in an attempt to claim property that doesn’t actually belong to them.
Property holders must also be on guard against potential fraud, which often comes from internal sources—employees who identify opportunities to use unclaimed property for their own gain.
“One reason we see fraud related to unclaimed property at the holder level is because the money has been forgotten by the owner,” says Laurie Andrews, unclaimed property reporting technical director for Keane. “It may be sitting in a GL account that nobody touches or on an uncashed check list where the check has been floating out there for an extended period of time. The apparent owner may not know about the money or doesn’t seem to care about the funds.”
There are multiple methods dishonest employees use to access property not belonging to them. If a single person controls the assets, and prepares and submits unclaimed property reports, they may simply replace a legitimate property owner’s personal information on the report with their own details. They then go to the state to claim the funds.
In some instances, they may act before the property is escheated. Just before the end of the dormancy period, rather than doing due diligence and reporting an uncashed check to the state, for example, they may void and reissue it. To reduce the chances of detection, they cut the check to their credit card or utility company—perhaps the same one used by their company—instead of making it out to themselves.
“According to criminologist Donald Cressey’s hypothesis, with every fraud there are three components: opportunity, rationalization and pressure,” Andrews says. “The only one of those within the holder’s control is opportunity. Rationalization and pressure are self-imposed by a person committing the act. So, holders should take steps to reduce opportunity.”
Internal controls to safeguard held assets include:
- Establishing a fraud policy.
- Segregating duties.
- Putting checks and balances in place for movement of funds between general ledger accounts.
- Setting up software alerts to notify managers of unusual data changes for high-balance accounts.
- Maintaining an ethical culture from the CEO down.
- Conducting annual or periodic unannounced internal audits.
- Holding annual fraud training throughout the organization and ensuring internal auditors have a thorough understanding of unclaimed property.
- Keeping fraud procedures and unclaimed property procedures current with practices and requirements.
- Maintaining an anonymous employee fraud tip line, and responding to allegations quickly and thoroughly.
“Internal controls will vary across an organization depending on property type,” says Ryan Hagerty, manager for KPMG. “It starts by having an in-depth system of checks and balances.”
Fraud threats against holders may also come from external sources. As with internal controls, policies, procedures and processes for handling and responding to claims should be thorough.
“While training of claims processors is important, multiple levels of management oversight should exist to ensure true segregation of duties,” Hagerty says. “The higher the value of the claim, the more layers of approval that should be required to reduce the financial impact of fraud at each occurrence.”
When dealing with property that has multiple owners—funds held in trust, multiple business owners and married couples, for example—extreme care should be taken when a claim attempt is made but all of the owners are not included. Business disputes, divorces and battles between heirs can lead to one party attempting to parties attempting to get more than their fair share.
“Issues can arise when payments are owed to small businesses with multiple owners, individuals whose names have changed due to marriage, joint property owners or estate heirs,” Hagerty says. “When claimants request a refund check be issued in the name of their business or to the exact name and address the holder has on record, there is less of a concern of external fraud. However, caution should be taken if an individual attempts to claim property that is jointly owned or held in the name of a business entity. It’s important to require documentation to support the validity of these claims.”
Scammers seeking to claim another entity’s property may use fraudulent power of attorney documents they created and had unethically notarized. Unlike estate administrators and executors that can be easily verified, powers of attorney are not commonly registered by a government entity. This puts holders in a difficult position when faced with a claim from someone presenting power of attorney documents.
“Sometimes holders have to depend on the ‘sniff test,’” Andrews says. “If something doesn’t feel right, it probably isn’t, so you need to look into it further.”
To learn more about unclaimed property fraud, join Andrews and Hagerty, as they lead the Don’t Make a Fraudian Slip session at the 2017 UPPO Annual Conference. They will discuss how holders can tighten internal controls, safeguard assets, develop procedures for validating due diligence claims, and protect themselves against other potential scams.
powers of attorney
Posted By Administration,
Thursday, December 22, 2016
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With 2016 coming to an end, the approaching new year offers a good opportunity to look at some of the major trends shaping the unclaimed property landscape. Over the past year, we’ve seen some significant litigation, a slowdown in new legislation and the Uniform Law Commission’s (ULC) release of the 2016 Uniform Unclaimed Property Act (UUPA). All of these noteworthy trends set the stage for what is sure to be an interesting and action-packed 2017 for unclaimed property professionals.
Unclaimed property professionals have become accustom to a high volume of legislation affecting state unclaimed property statutes. While 2016 wasn’t completely absent of noteworthy bills working their way through the nation’s statehouses, there was a significant slowdown in legislative activity compared to the previous few years.
“Looking back at the year, I was struck by the low level of legislative activity,” says Michelle Andre, managing member of Tre Towers Advisory Group LLC. “This may have resulted from 2016 being an election year combined with states knowing the Uniform Law Commission was finalizing the 2016 Uniform Unclaimed Property Act.”
Some of the bills that did arise this year added to trends that have been building over the past several years. For example, states continue to modify their gift card rules. Some states that have exemptions from reporting unredeemed balance on gift cards are requiring issuers to provide cash refunds to card owners if the value of the card meets certain dollar amount thresholds. New York recently revised its gift card rules, effective on Dec. 25, delaying the trigger for when issuers can assess a service fee from after the 12th month of dormancy to after the 24th month. Another state, Wyoming removed a sunset provision allowing its gift card exemption to become permanent.
States are also continuing to enact provisions requiring life insurance companies to perform routine Death Master File searches. Five states passed such legislation in 2016. Although modeled loosely after the National Conference of Insurance Legislators’ Unclaimed Life Insurance Benefits Act, each of the laws are different. Florida’s law, for example, has a longer reach-back period than most states.
Technology has also played a role in some statute revisions as states account for increasing surge in electronic transactions and communication. California, for example revised its unclaimed property law to include electronic transactions as official contacts that prevent accounts from becoming dormant.
“State laws are finally recognizing that people are communicating electronically rather than by snail mail or phone calls,” Andre says. “Increasingly, people stay in touch with investments via the internet rather than by making a call or waiting for a statement in the mail.”
Pennsylvania also included electronic communications provisions within unclaimed property statute revisions that were tucked into a budget bill. However, its treatment of owners who receive electronic communication is inconsistent with owners who receive communication through traditional means.
“Pennsylvania’s new statute pertaining to fiduciary accounts and IRAs states that if a holder doesn’t communicate with an owner through U.S. mail but rather electronic mail, then the holder is required to send an email notice to the owner,” says Karen Anderson, senior manager at KPMG. “If the email bounces back or there is no response, then the holder must send a due diligence letter via the U.S. Postal Service (USPS). If that mailing is returned as undelivered, the property would be reportable three years after the last owner activity. On the other hand, if the holder communicates with the owner of such accounts via US mail the account isn’t reportable until three years after the second returned USPS mailing. So, depending upon the holder’s method of communication with owners of these accounts, the Pennsylvania statute requires different due diligence treatment and a different dormancy trigger.”
Despite the recent decline in legislative activity, 2017 is likely to bring an immediate surge in new bills as a result of the ULC’s adoption of the 2016 UUPA.
“You could tell from recent activity that some states are aware of the language in the new UUPA,” Andre says. “Because the revised act addresses so many new areas addressed and is a true modernization of the act, I expect to see a flurry of activity resulting from it. States have been reviewing the act and planning what they’ll do, so there will likely be a lot of activity in early 2017.”
Some of the provisions that could gain traction address jurisdictional standards and triggers for property types not previously included in the act, such as health savings accounts and 529 college savings plans. The popularity among states of other areas remain less certain.
“It’s difficult to say whether state legislatures will adopt the transparency measures pertaining to audits that were built into the 2016 Uniform Unclaimed Property Act,” Anderson says. “Some of these provisions include reporting certain statistics regarding use of auditors. I’m not sure whether states will adopt those provisions as they may consider them too intrusive to their process.”
While legislation slowed in 2016, noteworthy litigation didn’t show any signs of decreasing. Some of the most noteworthy areas being reviewed by ongoing and recently decided cases include:
- Foreign property: JLI Invest S.A. et al. v. Cook et al. tackles the interplay between federal securities law, international law and Delaware state law.
- Derivative rights: “The Bed Bath and Beyond case will give some renewed emphasis to holders that they can assert derivative rights concepts in demonstrating that items states think are unclaimed property are actually not,” says Diann Smith, state and local tax attorney at McDermott Will & Emery. “So we could see similar types of litigation in other states, and derivative rights asserted in other property types beyond merchandise credits.”
- Gift cards: Delaware ex rel. French v. Card Compliant LLC raises the question whether property holders can shift their liability via a contractual arrangement with another company.
- Jurisdictional issues: Multiple cases involving MoneyGram consider whether certain unclaimed funds are governed by the general priority rules or by the specific rules of the Federal Disposition Act.
- Benefit plans: “States frequently take the position that while the Employee Retirement Security Act of 1974 (ERISA) may preempt them from claiming property in ERISA-covered plans, they still have the authority to audit them,” Smith says. “So ERISA continues to be a problem that will likely play out via litigation.”
- Savings bonds: States are increasingly looking to the U.S. government for unclaimed property funds in the form of unredeemed savings bonds. Especially noteworthy is Florida’s use of estimation to claim the United States owes the state $1 billion from unredeemed savings bonds.
As expected going into 2016, Temple-Inland Inc. v. Cook proved to be the most intriguing case of the year. On June 28, 2016, the U.S. District Court for the District of Delaware issued an opinion granting Temple-Inland’s request for summary judgment. The court called several aspects of Delaware’s audit practices “troubling.” On Aug. 5, 2016, Temple-Inland and the defendants filed a joint motion to dismiss the case, signaling a settlement and ending the dispute.
The full ripple effect from Temple-Inland on audits and estimation practices remains to be seen, but the settlement immediately triggered changes to Delaware’s voluntary disclosure agreement (VDA) program. Delaware reduced the look-back period for VDAs to 10 years plus dormancy, rather than the previous static date of 1996. The Delaware Department of Finance also is recommending changes to the state’s record revision provision for unclaimed property.
“There is more uncertainty now in terms of where things are going with both Delaware audits and the VDA program than I’ve seen before,” says Susan Han, principal, abandoned and unclaimed property consulting for Ryan. “This comes on the heels of the Temple-Inland decision and subsequent settlement, as well as changes we anticipate when the new legislative session begins in January.”
In the meantime, audit activity involving estimations in Delaware has essentially come to a halt, according to Troy Wangen, director of unclaimed property for True Partners Consulting LLC.
“I think Temple-Inland is going to be game-changing for years to come,” he says. “Will other states look to benefit from this? Do holders look to benefit from it? Is there a potential for refunds? This all depends on what happens with estimation in that state in 2017. It could significantly change things.”
Another noteworthy audit trend is an increase in the number of audit firms in the unclaimed property marketplace. Particularly in Delaware, where a large percentage of audits have traditionally been handled by a single company, multiple firms are now auditing holders.
“Litigation shined a light on Delaware’s practice of giving most of its audit business to one firm,” Han says. “So the state enacted S.B. 11, which provides that no audit firm can be assigned more than 50 percent of all examinations commenced after Jan. 1, 2015. As a result, we are seeing both established and newer third-party auditors becoming much more active in unclaimed property.”
As 2017 unfolds, UPPO will continue to track and report on these and other developing trends. Watch this blog for updates and attend UPPO educational events to help you adapt to the ever-evolving unclaimed property environment.