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Due Diligence Basics

Posted By Administration, Thursday, February 1, 2018

With unclaimed property audits being an ongoing concern for holders, it is more important than ever to get on track with performing due diligence if your company is not already in compliance. 

 

Unclaimed property due diligence is a specific type of communication deemed legally necessary by most states and territories to make individuals aware of the impending transfer of their property to another holder.

 

The objective of due diligence is to return unclaimed property that has remained dormant on a holder’s books to the rightful owner. Due diligence mailings to last-known addresses that the holder has on record are considered the most effective and efficient method of achieving this goal. 

 

Holders should review all addresses for completeness prior to mailing. If an address is known to be inaccurate, or if the address is unknown, the holder may want to attempt to locate a current address for the owner.

 

Unlike other types of mailed communications to property owners, such as courtesy mailings, due diligence is a formal notice at the end of a property’s dormancy period. Holders are responsible for sending letters to an owner’s last-known address, stating that property will be turned over to the state if the owner fails to respond within a specified timeframe.

 

Most states require that a written notice be sent via first-class mail. However, New Jersey, New York and Ohio require letters to be sent by certified mail with return receipt for accounts equal to or greater than $1,000. Notices for lower amounts can be sent by first-class mail.  

 

While the Uniform Unclaimed Property Act states that properties with value of $50 or more require due diligence, some states have determined alternative values that require due diligence. For example, the more lenient Texas requires mailings only for values of $250 or more, while Connecticut requires holders to send notification to all owners with a valid address, regardless of the value of the property. A small number of states and territories do not require due diligence at all. Because property value thresholds vary, holders should refer to individual state statutes.

 

Even if a particular property is not of value to require due diligence, there are still aggregate minimums for reporting purposes. It is important to note that while some states use the same thresholds for aggregate and due diligence limits, they can be different. Don’t confuse the two. For example, California has an aggregate threshold of $25, but a due diligence threshold of $50. In Michigan, if a holder is reporting 25,000 or more properties of at least $50 in value, due diligence notices must be sent only for properties valued at $100 or more. Oklahoma, however, lowers the threshold to below $50 (including items of all values) for items from a set of recurring payments, such as royalties, annuities, dividends, distributions, etc.

 

Most states and territories require that the due diligence letter include the language, “The holder is in possession of property subject to this Act.” This wording is significant because the due diligence mailings cannot include qualifying language, or any words and phrases that may lead owners to believe they may not be the owner of, or entitled to, the property. 

 

California, in particular, has stringent guidelines covering what is required in due diligence mailings to owners living in the state. The letter must contain a heading at the top that reads: “THE STATE OF CALIFORNIA REQUIRES US TO NOTIFY YOU THAT YOUR UNCLAIMED PROPERTY MAY BE TRANSFERRED TO THE STATE IF YOU DO NOT CONTACT US,” or uses substantially similar language.

 

The notice must specify the time that the property will escheat, and the effects of escheat, including the necessity for filing a claim to California for the return of the property.

 

The notice must also, in boldface type or in a font a minimum of two points larger than the rest of the notice, exclusive of the heading:

  1. Specify that since the date of last activity, or for the last two years, there has been no owner activity on the deposit, account, shares, or other interest.
  2. Identify the deposit, account, shares, or other interest by number or identifier, which need not exceed four digits;
  3. Indicate that the deposit, account, shares, or other interest is in danger of escheating to the state.
  4. Specify that the unclaimed property law requires business associations to transfer funds of a deposit, account, shares, or other interest if it has been inactive for three years.

California requires that the owner has the option to maintain the property on their account to be collected or used later, or has the option to be issued payment promptly. Other options can be allowed depending on the nature of the property. For example, if the property is a credit on a customer account, the customer could also be given the option to apply the credit to a past due or upcoming bill.

 

This letter must also allow the owner to correct their address if necessary. The holder can also give the owner the option to return their response via fax or email.

 

California also sends its own due diligence letters based on the holder’s preliminary report. A sample of California’s due diligence letter can be found on the state’s website.

 

Ohio also has more specifications than most states when preparing due diligence mailings for its residents. Similar to California, the letter must list specifics of the property, notably its nature, ID number or description of the property, and amount. The notice must also inform the owner that the property will be transferred to the state within 30 days, unless the holder receives earlier contact. 

 

Unlike other states, Ohio requires the holder to provide owners with a self-addressed, stamped envelope for return communication. 

 

When mailing letters to owners in multiple states, the same body text may be used as long as content requirements of all states are met. Although Ohio and California are specific in what they require in a due diligence letter, most of these required elements can be considered best practices for all due diligence mailings.

 

A few jurisdictions currently have advertising or publication requirements, including New York and Puerto Rico. Each state varies but, in general, newspaper publication is are an acceptable form of advertisement. Refer to individual state statutes for specific requirements.  

 

As with other aspects of due diligence, little uniformity exists regarding the timing of mailings. Most states and territories follow the 1995 Uniform Unclaimed Property Act timing, which calls for sending the letters no more than 120 days before reporting the property to the state. Others states and territories have adopted their own timing standard. Holders need to confirm each state’s requirement when preparing their due diligence mailings.

 

When building your timeline for mailing due diligence letters, keep in mind that best practices recommend providing 30 to 60 days for the property owner’s response.

 

Providing a response deadline in due diligence letters lets owners know there is limited time to claim their property directly from the holder, so doing so is considered a best practice. Clearly state that after the property will no longer be in possession of the holder after the response deadline date. 

 

Finally, it is best to examine state statutes on a periodic basis before performing due diligence and reporting. This information is readily available through state websites. Laws are amended occasionally, and such changes can occur at any time. It is vital to be aware of any and all legislative changes to ensure that you and your company is fully compliant.

 

For additional information about due diligence, attend the Managing Your Due Diligence Program session at the UPPO Annual Conference, March 4-7, 2018, in Tampa, Florida, and see our previous blog post, “Due Diligence: Beyond the Minimum.” 

Tags:  due diligence 

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