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UNCLAIMED PROPERTY FOCUS is a blog written by and for UPPO members, featuring diverse perspectives and insights from unclaimed property practitioners across the U.S. and Canada. We welcome your submissions to Unclaimed Property Focus. Please contact Tim Dressen via tim@uppo.org with any questions about submitting a blog post for consideration and refer to our editorial guidelines when writing your blog post. Disclaimer: Information and/or comments to this blog is not intended as a substitute for legal advice on compliance or reporting requirements.

 

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Insights from the NAST Symposium, Part 4

Posted By Administration, Thursday, October 31, 2019
Updated: Thursday, October 31, 2019

The National Association of State Treasurers’ (NAST) Annual Treasury Management Training Symposium held during May 2019 in Providence, Rhode Island, was engaging and enlightening. The National Association of Unclaimed Property Administrators (NAUPA) is affiliated with NAST and led the well-attended unclaimed property track of educational workshops and sessions. This blog post is part four in a series about the topics discussed in the symposium sessions. Read part one hereRead part two hereRead part three here.

 

RUUPA

The session related to the 2016 Revised Uniform Unclaimed Property Act – RUUPA in the States – was insightful. Presenters, including state and Uniform Law Commission (ULC) representatives, said they had hoped for more adoptions. The ULC indicated there were three or four more good years of momentum, after which new adoptions of the Act could lose its legs.

 

Presenters also expressed frustration and disappointment about the American Bar Association (ABA) moving forward with its own version in the form of the ABA Model Unclaimed Property Act. The ULC disagrees with assertions that certain provisions in RUUPA are unconstitutional.

 

According to the ULC, states that adopt RUUPA, or a variant of the Act, must adopt certain provisions for them to consider it truly a RUUPA-inspired adoption. Examples of requirements include lookback limitations and holding periods before liquidation for securities.

 

There was debate on whether or not lookback limitations make sense. The argument was made that life insurance, property or other newly found areas of unclaimed property that were previously not being reported and remitted may never be enforceable with shortened lookbacks. Also, based on the dialogue, the life insurance industry and its associated trade organizations were not discussed in favorable terms during this discussion.

 

Presenters discussed different RUUPA versions, including those in Illinois and Tennessee, being proposed and enacted were examined. State representatives explained why they departed on certain provisions. Consideration was given to the states adding the provision related to estimation as a penalty that may be used by first priority states, rather than for estimation of a liability for second priority states (the classic reason given for why estimations are used). Based on the discussion, it seemed that a few people strongly advocated for this provision.

 

Mind the Noncompliance Gap

The Mind the Gap: Focusing a State’s Compliance Regime on Gaps in Reporting session focused on increasing annual compliance through making past due compliance meaningful. Questions this session intended to answer included: 

  • How do you increase compliance with limited resources? 
  • How do you increase compliance levels without creating a substantial burden on the holder community? 
  • How do you confirm that holders are reporting properly?

Panelists promoted the advantages of a multi-pronged approach, including offering meaningful and diverse voluntary compliance options for holders to catch up on past due unclaimed property liability, and maintaining a robust audit program. Further, annual report compliance reviews, traditional VDA program and voluntary self-examinations were included as a means to support this.

 

The benefits of maintaining a healthy audit program were highlighted. In short, the threat of enforcement drives compliance for both current and past due property. Panelists promoted a robust audit program indispensable to identify significant underreporting and to ensure that other voluntary and mandatory compliance initiatives are conducted efficiently and in good faith. They also discussed the value of creating a diverse package of compliance options, with some being voluntary and some being mandatory, both with varying degrees of rigor.

 

Using a compliance study results chart based on a sample analysis of holders with an annual revenue of greater than $100M, panelists noted that:

  • 44% of the companies in the sample had no prior reporting history. 
  • 37% of the sample companies reported less than $1,000 of general ledger property each year. 
  • 23% of public companies only report securities. 
  • 45% did not report securities at all.

In the last few years, there have been periods where patterns in compliance gaps emerged, relative to specific property types, such as accounts receivable credits, royalties and gift cards. A current area of concern where there seems to be common underreporting compliance gaps are in the mergers and acquisitions arena. Challenges with mergers and acquisitions include the availability of pre-M&A records and the timing in relation to closing of the deal. 

 

The session endorsed the prospect of devising efficient methods to capture the material past due unclaimed property before or even contemporaneously with deal closings. States continue to collect and analyze data from annual reporting, audits and compliance initiatives to target areas with known historic gaps while looking for new emerging patterns.

 

The session also covered audit candidate selection. This process begins with identifying candidates that are likely to have unreported unclaimed property. The next step is to identify and obtain broad available information from government, commercial and public sources and developing an understanding of the entities using company information obtained from different sources. Additionally, states are analyzing candidates’ previous reporting history and comparing it to others in the same industry with a similar size and year of incorporation. After this analytical process, final determinations depend on many factors, which differ based on each state or industry specifics.

 

There were reports on Delaware noting $800M has been taken in through Drinker Biddle & Reath’s administration of the secretary of state’s voluntary disclosure agreement process. DBR reported that over 580 total VDAs had been concluded in the prior years, with around 60% of collections being related to securities. This has resulted in increased compliance. Also, it was reported that very few VDA seekers had been transferred to the Delaware escheator for audit.

 

Legal Issues in Unclaimed Property Audits

On the final day, a session titled Committee of Legal Practices Deep Dive into the Recurring Legal Issues in Unclaimed Property Audits was scheduled. According to the description, it was intended to discuss strategies for addressing recurring issues and legal arguments raised by holder advocates. Participants were to include state unclaimed property officials and third-party auditor representatives. 

 

This session was intended to have restricted attendance. Unfortunately, it had not been published or otherwise publicly known in advance that attendance was restricted. Therefore, the session was changed into an open forum, and the slide deck for the session was not presented. 

 

Discourse in the open forum session included:

  • Various “gamesmanship” seen from holders, attorneys and holder advocates.
  • Attorneys allegedly slowing down the process for fees, such as protracting the NDA process.
  • States considering the use of audit fees and subpoena power in reaction to slowed audits.
  • Gamesmanship around GDPR, HIPAA, and other data security concerns; exceptions and ways to skirt such arguments.
  • Increased use of “come on site” tactic.
  • Concept of record availability and completeness.
  • Due process nexus, derivative rights and “ripeness” rebuttals.
  • What constitutes a “reason to believe” for an audit to be initiated.

The educational workshops and sessions at the unclaimed property track of the recent NAST Symposium covered important insights on RUUPA and audits. While the topics covered may not directly or indirectly impact all property type holders, it is worthwhile to remain aware of NAUPA developments. It is also important to be informed of opportunities to work together with states, where our expertise and needs are aligned, and we can share our respective unique expertise and insights, and related unclaimed property challenges or issues.  

 

Christa DeOliveira is chief compliance officer with Linking Assets Inc. Michael Unger is a senior manager with Crowe LLP’s unclaimed property practice. 

 

 

Tags:  audits  NAST  RUUPA 

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UPPO Advocacy Update: October 2019

Posted By Administration, Thursday, October 24, 2019

To help members remain aware of UPPO’s advocacy activities, the Unclaimed Property Focus blog presents the recurring Advocacy Update when legislatures are active or significant advocacy activity has occurred. Following are recent activities and trends from UPPO’s Government Relations and Advocacy Committee (GRAC).

 

Texas H.B. 3598 Update

Earlier this year, the Texas legislature passed H.B. 3598, which the governor subsequently signed into law. Among other things, the legislation outlines requirements for combined reporting of unclaimed property for affiliated companies. The new law raises many questions for holders and service providers.

 

On Oct. 15, 2019, UPPO sent a letter to Texas Director of Unclaimed Property Joani Bishop and Assistant Director of Unclaimed Property Bryant Clayton, requesting clarification from the state regarding issues related to controlling interest, third-party vendors and combined reporting implementation. 

 

UPPO received a prompt response. Texas unclaimed property officials are currently drafting guidance regarding the new law and welcomed a call to discuss our questions. We look forward to our discussion, scheduled for Oct. 30, and will provide additional member updates when more information is available.     

 

As more and more legislatures and regulatory agencies take on issues affecting unclaimed property compliance, advocacy has become an increasingly important role for UPPO.

Please take a few minutes to complete our 
Government Relations and Advocacy Survey to help us build our grassroots network. Responses will give us the ability to mobilize UPPO members when we are faced with legislative and regulatory challenges and opportunities.

 

 

Tags:  consolidated reporting  Texas 

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Unclaimed Property Best Practices for Accounts Receivable

Posted By Administration, Thursday, October 17, 2019

Unclaimed property compliance often begins with the accounts receivable department. Regardless of a company’s industry, AR is a common source of potential unclaimed property via credit memos, overpayments, duplicate payments, customer account adjustments, unidentified remittances, accounting errors, promotional credits and discounts, product returns and write-offs. 

 

AR departments can reduce their unclaimed property risk by implementing several best practices.

 

Establish written policies and procedures to ensure that unclaimed credit balances are addressed on a regular basis.

 

Ensure that account receivable duties are segregated to discourage fraudulent activity. No single individual should have control over adding a customer plus the ability to generate credit memos. This reduces opportunities for an employee to create a fictitious customer and issue a credit to that person. 

“It is important to monitor employees’ roles, understand what each role has the ability and access to do, and make sure that there is not crossover that might lead to bad actions,” said Colleen D’Eramo, corporate service specialist with Owens Corning, during a recent UPPO webinar.

 

Update last activity dates to accurately reflect current activity. Maintaining an ongoing relationship with a customer reduces the likelihood of an account becoming dormant. Recording accurate last activity dates is necessary to flag accounts at risk of generating unclaimed property and demonstrates proof of ongoing relationships with customers in the event of an audit. 

 

Follow up on credit balances as they are created. Contact customers to ask whether they want the credit offset against the next billing cycle or refunded via a check. 

“Customers are busy with their day-to-day operations, and credits can be easily forgotten,” said D’Eramo. “If you’re waiting for them to contact you about the credit, it may not happen. The longer credits linger, the more challenging it can be to take care of them because of changing roles and difficulty tracking down the transaction history.”

Include credit balances on all invoices. This practice reminds customers of credits they may otherwise forget and helps demonstrate you are making customers aware of their credit balances in the event of an audit. 

 

Establish a procedure to automatically generate correspondence with customers with outstanding credit balances. Routinely generating a report that flags customers with credit balances of two years or longer, for example, can help you reach out before accounts have to be reported as unclaimed.

 

Include outstanding credit balances in standard due diligence communications. Much like including balances on invoices, this procedure reminds customers of their credits so they can be applied or refunded rather than reported as unclaimed.

 

Implementing these procedures, AR departments have less liability to worry about as accounts age. The goal is to reduce the amount of time credits remain on the books and, ultimately, eliminating the need to consider them for unclaimed property reporting. 

 

 

Tags:  accounts receivable  best practices 

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Whistleblower Trend Raises Concerns for Unclaimed Property Holders

Posted By Administration, Thursday, October 10, 2019
Updated: Saturday, October 5, 2019

Government politics aren’t the only place whistleblowers are making news these days. Several recent whistleblower lawsuits aimed at unclaimed property practices signal a concerning trend for holders. 

 

Typically, whistleblower, or qui tam, cases under the False Claims Act come about when a company’s employee or former employee (referred to as the “relator”) alleges the company defrauded the government by intentionally paying the government less than what is owed. Allegations usually involve falsifying documents to mislead the government into thinking less money is due. 

 

“Unclaimed property cases don’t fit into the usual False Claims Act mold,” said Ethan Millar, partner with Alson & Bird LLP. “False claims statutes were not intended to apply to regulatory disputes between a state and a holder about when states’ unclaimed property laws apply. They were designed to be quasi-criminal anti-fraud statutes, which is why they impose severe penalties, including treble damages and attorneys’ fees.”

 

Unfortunately, recent qui tam cases have been based on mere regulatory disputes. Given the direction such cases have taken, it’s possible that any noncompliance with unclaimed property statutes could result in accusations of False Claims Act violations. 

 

Decided last September, The State of Delaware ex. rel. William Sean French v. Overstock.com Inc. represents a turning point for False Claims Act cases related to unclaimed property compliance. At issue in the lawsuit was Overstock’s relationship with CardFact (later acquired by Card Compliant LLC), a third-party company used to issue gift cards and assume certain gift card responsibilities. 

 

The case came about when a former CardFact employee filed a qui tam lawsuit, alleging that CardFact and dozens of its retail clients (including Overstock) had violated the Delaware False Claims and Reporting Act by failing to escheat unredeemed gift cards to the State of Delaware. 

 

Among the various allegations, the plaintiffs claimed that the contracts between CardFact and its clients were shams and that the retailers rather than CardFact were the true issuers of the cards, and were required to report them to Delaware, as their states of incorporation. All of the defendants in the case other than Overstock were dismissed or settled. 

 

“I don’t think anybody in the holder community believes that Overstock acted with knowledge or reckless disregard for the law,” Millar said. “Overstock’s actions were perfectly reasonable and consistent with what dozens of other retailers were doing in terms of structuring their operations to reduce unclaimed property risks. These structures were not hidden from Delaware. They were openly discussed at conferences, in Delaware audits and in Delaware voluntary disclosures, and nobody ever said you can’t do this kind of thing or have to do it a particular way. To the contrary, Delaware approved very similar structures for well over a decade prior to this case.” 

 

However, a jury decided the third-party “cardco” structure in this case was improper and that Overstock knowingly or recklessly disregarded the law and should have reported its unredeemed gift card balance, less related profits, to Delaware. Along with the decision came a hefty judgment for $7.2 million, including civil penalties, treble damages and other costs. In addition, the state is entitled to attorneys’ fees, though the amount of such fees is still in dispute. Overstock has appealed the decision.

 

This decision leaves the unclaimed property community wondering, if a company can be held liable under the False Claims Act under those circumstances, what other circumstances could be used to hold businesses liable.

 

Relators are motivated by the prospects of a huge financial windfall of 15-25% of any judgment or settlement resulting from their lawsuits. Unfortunately, their self-interests are advancing aggressive enforcement positions regarding unclaimed property laws that not even state administrators are promoting.

 

In another recent case, New York ex. rel. Raw Data Analytics LLC v. JPMorgan Chase & Co., the relator alleges that JPMorgan is liable under New York’s False Claims Act for failing to self-assess interest on late reported unclaimed property. Although the New York Office of Unclaimed Funds does not require holders to self-assess interest, the court ruled that, under New York’s Abandoned Property Law, such self-assessment is mandatory. JPMorgan takes the position that nobody in the industry self-assesses interest and that the states don’t expect or ask holders to do so.

 

“We’re now seeing these sorts of cases where relators are making novel legal arguments about what is required under state unclaimed property laws, and then trying to use this alleged violation of the escheat statutes as the basis for False Claims Act liability,” Millar said. “False Claims Act complaints are no longer confined to scenarios when a company is committing what looks like fraud.”

 

Relief for the unclaimed property community from False Claims Act lawsuits that exceed the law’s intent requires a court to address one big question: Should False Claims Act statutes even apply to unclaimed property? The False Claims Act is intended to apply when money is owed to the government. However, unclaimed property is owed to the property owner. The government acts merely as a custodian of the property. 

 

“I suspect any major False Claims Act case in the future will raise this issue,” Millar said. “There is strong authority in the False Claims Act that a custodial interest alone is not sufficient to trigger the False Claims Act. After all, the False Claims Act statutes were intended to apply to government funds, not to money owed to individuals.”

 

Until such a decision, unclaimed property holders can take steps to protect themselves. First, they should ensure their unclaimed property compliance policies, procedures and practices are current, well documented and thoroughly followed. Next, address “gray areas” where holders and states have differing perspectives. 

 

“There will always be gray areas because no unclaimed property law directly deals with every specific situation,” Millar said. “These gray areas may be exploited by relators. However, holders can protect themselves by obtaining legal opinions to support their positions. Even if a court later disagrees with the holder’s position, the fact that the holder reasonably relied on legal counsel can demonstrate that the holder did not act with the knowledge or recklessness for False Claims Act liability.”

 

Finally, respond to issues raised by employees. Companies should have policies and procedures in place for addressing employee complaints. Don’t retaliate against employees who raise potential issues, and always investigate credible complaints. Giving employees a meaningful complaint process and remediating problems early may reduce the likelihood of issues rising to the level of a full-blown qui tam lawsuit. 

Tags:  JPMorgan  litigation  Overstock  qui tam  trends  unclaimed property  whistleblower 

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Litigation Update: Judge Puts Univar Case on Hold

Posted By Administration, Wednesday, October 2, 2019
Updated: Wednesday, October 2, 2019

Univar Inc. v. Geisenberger, et al.

 

In the ongoing dispute between Univar Inc. and the state of Delaware, U.S. District Court Judge Maryellen Noreika ruled on Sept. 17, 2019, that many of the plaintiff’s claims lack “ripeness.” As such, she dismissed the majority of claims, keeping just two alive, pending a decision from the Chancery Court whether to enforce a Delaware subpoena.  

 

Although the plaintiff in Univar argued that, because Delaware subpoenaed Univar to provide records, the complaint’s claims were ripe. The subpoena and formal enforcement action filing set the case apart from the similar Plains All American case, which was brought before the state had formally taken steps to request records or force Plains to comply with an audit.  

 

The judge, however, disagreed. “While the state has subpoenaed documents from Plaintiff under the 2017 amendment to the UPL and has filed suit in state court to compel compliance, Univar cannot meet the adversity prong of the ripeness test until it is actually compelled to participate in the audit,” she wrote in her ruling. 

 

The court declined to dismiss two of Univar’s claims. The complaint argues that the state’s contingent fee arrangement with its third-party auditor violates Univar’s right to due process. It also asserts that audit subjects are selected based on their likelihood to produce large amounts of money for the state, constituting an equal protection violation. 

 

While the court agreed that two of the claims are ripe for consideration, it put the case on hold, pending a Chancery Court decision whether to enforce the state’s subpoena. 

 

“If the Chancery Court does not enforce the Subpoena, this action may no longer be necessary,” the judge wrote. “On the other hand, if the Subpoena is enforced, certain issues may become ripe and an amended complaint may be appropriate.” 

 

UPPO will continue to monitor and report on the progress of the Univar case as noteworthy developments occur.  

 

 

 

Tags:  audits  Delaware  estimation  litigation  Plains All American  Univar 

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