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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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New Tennessee Administrative Rules go into Effect

Posted By Administration, Thursday, March 7, 2019

On March 4, 2019, new administrative rules regarding unclaimed property went into effect. The rules are the latest in a series of updates to the state’s unclaimed property laws and practices, which also include the passage of H.B. 420, the state’s version of the Revised Uniform Unclaimed Property Act, and H.B. 2278, which changed the state’s unclaimed property reporting date from May 1 to Nov. 1. 

 

Noteworthy sections of the rules for holders include:

 

Reporting

  • Electronic reporting is required.
  • Negative reports may be filed. 
  • Reported cashier’s checks must include the name and address of the payee and purchaser, if known.
  • When filing initial safe deposit box reports, property should continue to be held for an additional year before filing a final report and turning over the property to the state.

 

Property Delivery

  • Most property should be remitted electronically via ACH or other method approved by the treasurer. 

 

Securities

  • Remitted securities shall include all dividends, interest, warrants or other rights, or associated cash payable by check or electronically.
  • Holders shall remit securities in such a form that future earnings will be delivered in cash rather than an increase in the number of shares. 
  • Holders shall remit securities in a form that allows the treasurer to sell them. 

 

Examinations

  • Holders will receive a notice of examination at least 30 days before an examination begins.
  • An examination will begin with an entrance conference at which time the examiner will identify other states participating; a tentative timeline and duration; a description of responsibilities; the potential types of records subject to examination; the lookback period; and an explanation of methods and estimation techniques that may be used.
  • An examination may include records of current accounts, dormant accounts and accounts that may have been closed and archived; agreements regarding the deduction of service charges; increases or decreases in account value; and interest payments; and policies and procedures.
  • If records are unavailable, estimation of liability may be used. The examiner will provide written notice of the estimation methodology and for which years. The examination subject may object to the estimation methodology by following the process defined by state law. 

 

Due Diligence

  • Holders are expected to conduct due diligence.
  • The return of first-class or superior mailing sent to the owner’s last-known address is considered evidence that the owner’s location cannot be ascertained. 
  • First-class or superior mailings that are not returned as “undeliverable” are considered owner contact and an indication of interest in the property. Examples include computerized account  or interest earning statements. 

 

Holders with unclaimed property reportable to Tennessee can access the new rules, related Tennessee laws and regulations, and additional compliance information on the state’s Treasury Department website.  

Tags:  audits  due diligence  examinations  reporting  securities  spring reporting  Tennessee 

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Delaware’s proposed audit regulations raise many questions

Posted By Administration, Thursday, May 4, 2017

Earlier this spring, the Delaware secretary of finance, in consultation with the secretary of state, published a proposed Department of Finance Abandoned or Unclaimed Property Reporting Examination Manual, as required by S.B. 13. The proposed regulations provide some clarity regarding the finance department’s approach to administration and enforcement of the law. However, they also raise noteworthy questions regarding language that may contradict S.B. 13, exceed the department’s authority and fail to clarify murky language in the statute.

 

Noteworthy issues include:

 

Foreign property: S.B. 13 indicates that Delaware has jurisdiction over unclaimed property if the jurisdiction with primary authority has no unclaimed property law. The proposed regulations, however, addresses only states, but not other countries that have the authority to escheat.

 

Stored value and gift card maximum cost: The proposed regulation would dramatically increase the amount reportable with respect to unredeemed gift cards and other stored value cards to the issuer’s “cost of goods sold [reflected on its federal income tax return for the year] plus total deductions less charitable contributions, depreciation and depletion.” This interpretation expands the amount reportable by an issuer far beyond the cost to the issuer of the merchandise, goods or services represented by the card, in violation of the statutory language.

 

Record retention: Language in the proposed regulations requires holders to retain records not only for property reported to Delaware, but also for property not reported. This requirement exceeds the record retention requirements set forth in the Delaware Code.

 

Examination scope: The scope of examination in the proposed regulations allows the state to begin an examination without having identified the specific entities under audit and provided notice to those entities. The Fourth Amendment prohibits such “fishing expeditions” for the purpose of identifying whether or not a company may be a proper target for audit.

 

In addition, Delaware law allows the state to examine the records of a purported holder “upon reasonable notice.” Once notice is given, the statute authorizes examination of the holder’s own records, and may even extend to certain records in the possession of a third party or an affiliate. However, the proposed regulations attempt to expand that authority by deeming all entities “related” to the holder as under examination themselves, without the required, reasonable notice.

 

Certification/record availability: The proposed regulation assumes fraudulent intent on behalf of holders and fails to account for the realities of corporate life. The proposed requirement that holders “certify” to the “availability” of “records,” on a strict liability standard of fraud appears to be based on the inaccurate assumption that companies operate through a single software system, which houses all information for all years and all operating divisions. As a result, failure to provide information must be based on malicious intent. This is simply not accurate for most holders.

 

Without any limitation on the terms “availability” and “records,” personnel involved with the audit will have difficulty convincing any officer to certify to such a vague and ambiguous statement under the threat of strict liability for fraud, creating unnecessary conflicts within the audit process. In addition, deeming even inadvertent errors to be “willful misrepresentation” on the part of the holder undermines any purported desire of the State to work collaboratively with holders.

 

Sampling: The Temple-Inland decision and order specifically required that, in the department’s estimates, the sample must be a surrogate of the property that was being estimated. To that end, if Delaware intends to estimate what was due to the state for years in which records are not complete, the sample must include only property that would be due to Delaware. Unfortunately, the proposed regulations simply memorialize the process the judge rejected in Temple-Inland.

 

Complete and researchable records: The proposed minimum standard for what constitutes “complete and researchable” records is unclear. It suggests that a complete and researchable record shall include items that contain a last known address of the property owner. However, this standard has not always been an accurate test to determine researchability. An address alone does not make a transaction researchable.

 

Remediation: The proposed regulations dictating the terms of what can be considered remediated extend far beyond any authority granted to the department or its auditors by S.B. 13. While it may be appropriate to indicate certain elements that are required or desirable in correspondence to Delaware owners, it is beyond the department’s jurisdiction to require the language proposed in the proposed regulations.

 

Omitted issues: The proposed regulations fail to clarify or include issues including the expedited audit examination created under § 1172 (c); the 10-year statute of limitations set forth in § 1156 (b); and interest and penalty provisions in § 1183 and § 1184.

 

On behalf of its members, UPPO has raised questions related to these and other sections of Delaware’s proposed regulations via a letter to State Escheator David Gregor , submitted this week. UPPO will continue to monitor implementation of S.B. 13 and Delaware’s proposed regulations, and will report on additional developments.

 

 

Tags:  audits  compliance  Delaware  examinations  S.B. 13  unclaimed property 

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Delaware publishes proposed examination regulations

Posted By Administration, Wednesday, April 12, 2017

As required by the recently passed Delaware S.B. 13, the secretary of finance, in consultation with the secretary of state, developed new unclaimed property examination regulations in the form of the proposed Department of Finance Abandoned or Unclaimed Property Reporting and Examination Manual. Following is an overview of the proposed regulations.

 

The guiding principles for the proposed regulations include a goal that every examination be predictable, fair and consistent. The state escheator is prohibited from establishing collection goals or quotes related to unclaimed property assessments, and contracts with third-party auditors are available by request.

 

Upon assignment of a third-party auditor to examine a holder’s books and records, both parties will enter into a confidentiality agreement before any confidential information is produced, if requested by the holder. The proposed regulations include an example of an approved confidentiality agreement.

 

Examination Process

The state is permitted to examine a holder for any reason. Examinations begin with an official examination letter from the abandoned property audit manager, notifying the holder that its books and records are subject to examination, identifying the assigned auditor and providing auditor contact information. The proposed regulations include an example of a notification letter.

 

The state is permitted to initiate an examination only on holders who previously have been notified by the secretary of state of their right to enter into a voluntary disclosure agreement (VDA) or who have failed to comply with section 1172 of the state’s unclaimed property law. The examination notice terminates the holder’s ability to enter into a VDA.

 

Holders are responsible for complying with all information requests. If a holder retains a third-party advocate to assist with the examination, the state will communicate with both the holder and the advocate.

 

Examinations are not limited to a review of work papers, compilations or record summaries prepared by the holder or the holder’s advocate. They also include access to the holder’s original books and records.

 

Opening Conference

Once an examination is assigned, an opening conference will be scheduled with the auditor and representatives of the holder. Before the opening conference, the auditor will provide the holder with a list of documents the holder must produce before or at the opening conference. These documents may include tax returns, organization charts, charts of accounts, unclaimed property filing history in all states, prior completed and accepted VDAs and examinations, and policies and procedures related to record retention, accounting, unclaimed property, or any other practices the state deems relevant.

 

During the opening conference, the auditor will:

  • Advise the holder of Delaware’s reporting requirements
  • Provide an overview of the examination process, including state-approved methodologies, record availability, sampling and the potential for projection and estimation
  • Provide an examination work plan
  • Identify the maximum time period to be covered by the examination and discuss potential scoping issues
  •  Request additional records and materials necessary to proceed with the next steps of the examination, including tax returns, unclaimed filing history for all states, bank statements, bank reconciliations, outstanding check lists, detail general ledgers, aged accounts receivable reports, and if applicable, information surrounding gift certificate issuances and redemptions

Scoping

A typical examination will not exceed 24 months. If it lasts longer, the audit manager will meet with the holder to help complete the examination. Interest and penalties may be assessed on or abated at the discretion of the state escheator.

 

Examinations may include all of the holder’s subsidiaries and related entities. Once entity scoping has been determined by the state, no additional entities may be scoped into the examination without the holder's consent. At the holder's discretion and with the consent of the state, legal entities whose acquisition began after the conclusion of entity scoping can be added to the existing examination.

 

Record Review

During the examination, the auditor will review all necessary books and records, interview key personnel and review relevant policies and procedures related to abandoned property. The auditor may make subsequent requests to the holder for additional books and records.

 

The auditor will submit record requests to the holder in writing. The auditor will also provide a reasonable timeframe for the holder to respond, based on the type and extent of the information requested and other relevant circumstances. Upon receipt of submissions received from the holder, the auditor will provide confirmation with projected response times.

 

If “applicable and practicable,” the auditor will provide to the holder:

  • The process used to determine that items are unclaimed property
  • Why documentation provided by holder is not sufficient to remediate an item
  • Support for determining the proposed assessment
  • Steps the holder can take to remediate the assessment
  • The remediation timeline

Holders will have the opportunity to review, reconcile, remediate and, where applicable under Delaware law, perform due diligence on any items that have been identified as potential unclaimed property. The auditor will verify that the holder has mailed due diligence letters to the owner’s last known address. The auditor will also provide guidance regarding the due diligence process and ensure the holder is performing the outreach within the timelines established by the state. The holder will submit all due diligence letters to the auditor for review and approval before sending them.

 

The state may, at the holder’s request or with the holder’s agreement, divide the examination by property type and year. Thus, portions of examinations may be concluded while other portions remain ongoing. The auditors will keep the holder informed of any potential for such division to expedite the examination.

 

Status Reports

The holder will be kept informed of the progress of the examination and may contact the state directly to address issues or concerns. The holder has the right to contact the state directly to address issues arising from or related to the examination, including the right to report alleged misconduct, unethical behavior or lack of professionalism by the auditor.

 

At the end of any defined portion of the examination, the auditor will present the preliminary findings to the holder. The preliminary findings identify the work performed, property types reviewed, time period reviewed, estimation techniques employed, and a calculation showing the potential amount of unclaimed property due. The auditor will allow the holder reasonable time to complete required research and gather more records to address matters raised in the preliminary findings.

 

Estimation

Delaware requires that holders retain records for a minimum of 10 years plus dormancy (15 years total for most property types). If records are unavailable for the full 10-year period, holders are expected to possess several years of dormant records. The state may use any available dormant records to estimate an unclaimed property liability for the period of time for which the holder does not possess complete and researchable records.

 

If the holder fails to retain sufficient dormant years of records, the audit manager and holder will discuss which records will be used for the base period. In the absence of an agreement, the state escheator possesses the sole authority to make a reasonable determination of the base period in order to prepare an estimate.

 

Base periods consist of complete and researchable records. To draw a representative error rate, the base periods will consist of at least three years from the available complete and researchable records. Depending on the circumstances, the state may include nondormant periods in the base periods.

 

The holder must provide to the state escheator a representation of which records are available, for which property types and what years. A false statement will be considered willful misrepresentation made with intent to mislead the state escheator.

 

Items payable to a U.S. federal department or agency will be removed from the population before review. Funds returned in the normal course of business before issuance of the examination notice will not be included in the population of potential unclaimed items.

 

When transactions for a particular property type are deemed too large of a population to be reasonably tested on an actual basis, a statistical sampling methodology will be employed. If a holder prefers to research the entire population of a given property type, the holder is permitted to do so within a reasonable time.

 

Generally, the population will be divided into strata from which samples will be drawn. For each strata, a sample size will be determined using generally accepted statistical principles such that the sample mean will be within 10 percent of the population mean for that strata at a 90 percent confidence interval. In the instance of a lower-valued stratum, where the results are generally immaterial to the overall liability, a relaxed confidence and precision level intervals may be considered.

 

In some circumstances where the holder has not maintained records for the entire examination period, the state may sample a number of entities of a holder during an examination in lieu of testing all Delaware entities. The auditors will identify an appropriate sampling of entities based on factors including revenue, line of business, commercial activity and property types being held.

 

The results will be extrapolated, if applicable, to the other appropriate Delaware entities that have not been selected for detailed review to determine the liability. The holder will be given the option to use this sampling methodology or to test all entities that fall within the scope of the examination.

 

Delaware's sampling process for estimation includes the following steps:

  • Define the population, including base period and sampling unit (e.g. aged checks or customer net credit balances) and remove potential anomalies, such as duplicate records
  •  Determine appropriate stratification, if necessary, including number of strata and stratum boundaries
  • Calculate sample size, including desired confidence and precision
  •  Perform random computerized sample selection
  • Evaluate results

If the amount of reportable property cannot be ascertained from the holder’s records, projection techniques may be used to determine the reportable amounts for such periods. Such determination shall be made by first examining records during periods in which records exist to establish a base period of data from which statistical inferences can be made for periods in which records are incomplete. To the extent permitted by law, names and addresses identified in the base period will not be used to determine which state has the priority claim to the abandoned property estimated to be due over periods where records of owners’ addresses do not exist.

 

The state must approve all sampling, projection and estimation techniques before they are used by the auditor. The state will permit the holder to suggest an alternative technique. However, the ultimate decision to employ a particular technique is at the sole discretion of the state. The holder may challenge this decision after the examination ends.

 

Remediation

Holders have the opportunity to review, reconcile, remediate and perform remediation outreach on any items that have been identified as potential unclaimed property. The form of the outreach letter must be approved by the state, and all letters must be submitted to the auditors for review and approval before they are sent. The holder must provide confirmation of the date of the outreach mailing to the auditor. The proposed regulations include a sample approved outreach letter.

 

Bankruptcy

If filing for bankruptcy before or after an examination, the holder must provide bankruptcy notification to the auditor. Within seven days of receiving the holder’s notice or the discovery of the event, the auditor will notify the state and assist the escheator in filing a proof of claim in the bankruptcy action.

 

Statement of Findings

If the audit manager determines at the conclusion of the examination that the holder failed to report or underreported the amount of unclaimed property due to the state, the state will issue a statement of findings and request for payment to the holder.

 

This letter will outline the findings of the examination and make a formal demand for the property under question. The holder has 90 days to remit any abandoned property identified during the examination as owed to the state. The holder’s appeal rights to contest all or part of the findings as outlined are triggered by the statement of findings and request for payment.

 

Comment Period

Interested parties may submit comments regarding the proposed regulations to State Escheator David Gregor at david.gregor@state.de.us by May 3, 2017. The UPPO Government Relations and Advocacy Committee (GRAC) is currently drafting comments on behalf of UPPO for submission.

 

 

Tags:  audits  compliance  Delaware  examinations  unclaimed property  VDAs 

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