What Senior Management "C" Level Executives Need To Know About Unclaimed Property

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What Senior Management "C" Level Executives Need
To Know About Unclaimed Property
James O. Santivanez President JMS Advisory
Group, LLC
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Table of contents
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Table of contents - continued
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Question

• Does your company file unclaimed property
  reports?
• Yes
• No
• Dont know/Not applicable

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Corporate Areas Impacted

• CEO
• CFO
• Office of General Counsel
• Government relations
• Financial reporting
• Accounting
• Information technology
• Internal audit
• Ethics compliance
• External contacts/outsource providers

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More About Unclaimed Property

• Holder Responsibilities
• Duty to file a report
• Duty to perform due diligence
• Duty to remit funds
• Duty to track and protect funds
• Duty to maintain copies of reports filed
• Duty to protect, and implement proper controls
  over owner property until transferred to the
  appropriate jurisdiction

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How Unclaimed Property Differs from a Tax

• Unclaimed Property is NOT a tax
• Derivative Rights Doctrine
• No nexus requirements
• No statute of limitations
• -The majority of states do not provide relief for
  reach-back based on a statute of limitations
  provision
• -Where statute of limitations provisions do
  exist, the limitations period is typically longer
  than that applicable in taxation

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How Unclaimed Property Differs from a Tax (Cont.)

• Failure to report, or filing a fraudulent report,
  generally eliminates reach-back relief afforded
  by limitations provision
• Willful non-compliance carries criminal penalties
  in some states
• Administrative remedies generally not available
• Record retention requirements

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Unclaimed Property Exemptions

• Certain exemptions NOT available in all
  jurisdictions
• EXAMPLES
• Gift cards/gift certificates
• Business-to-Business transactions
• Certain cooperatives
• Prepaid phone cards
• Certain property held by government agencies or
  courts
• Certain employee benefits property where trust or
  plan provides for disposition of property
• Gaming tokens and chips
• Certain tax-exempt IRC 501(c)(3) entities
• Entities subject to jurisdiction of U.S. Surface
  Transportation Board
• Certain de minimis property

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Unclaimed Property Exemptions (Cont.)

• EXAMPLES continued
• Unused airline tickets
• Frequent flier miles
• Merchandise points
• Wages of 50 or less (certain jurisdictions)
• Foreign property with no U.S. nexus or connection
• Certain deposits
• Museums and historical societies
• Layaway accounts
• Unliquidated contract claims
• (e.g., insurance co. offer of settlement drafts)
• Tangible property
• Property Exempted via operation of Federal Law
• (ERISA Covered Plans, IRS Refund Checks, US T
  Bonds)

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Corporate Concerns

• Failure to report and remit unclaimed property
  liability could result in a material misstatement
  under FAS 5
• Whistle blower statutes
• Litigation risks
• Anti-Money Laundering Laws (AML)

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Corporate Concerns (Cont.)

• Internal controls/fraud
• Third-party paying administrators (TPA)
• SEC Regulations
• Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley)

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FAS 5

• Concerns about material misstatements
• Public pronouncements of liability
• Revenue recognition from exempt property
• -Gift certificates
• -Business-to-business transactions

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Whistleblower Statutes

• Are internal controls sound?
• -Enough to ward off challenges of disgruntled
  employees/ex-employees?
• States the Federal Government make it a
  lucrative opportunity for whistleblowers
• Old Republic Title case CA
• Carnival Cruise Lines case FL

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Litigation Risks

• Can be viewed as a risk and opportunity in some
  cases
• Most matters arise from audits
• Lack of precedent can be favorable
• Unclaimed property is an under-developed area of
  law
• -Most cases hinge on critical and specific
  facts/records

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Anti-Money-Laundering (AML)

• USA Patriot ACT (2002) Landmark legislation that
  called for a major expansion of U.S.
  anti-money-laundering compliance obligations for
  all financial institutions
• -Enhanced the ability of law enforcement agencies
  to identify and attack the financial
  infrastructure of terrorists and other criminal
  organizations.
• -Facilitated cooperation and information exchange
  between the government and the financial services
  sector.

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AML (Cont.)

• Section 352 of the Patriot Act required all
  financial institutions to develop and implement
  anti-money laundering compliance programs on or
  before April 24, 2002.
• Section 326 of the Patriot Act required the
  establishment of a customer identification
  program.
• Office of Foreign Asset Control (OFAC)
  Requirements -Compare customers and
  transactions against OFAC Specially
  Designated Nationals list
• Perform appropriate due diligence
• Block/Reject/Freeze if legitimate match
• Notify OFAC
• Advise customer of action

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Internal Controls/Fraud

• Until the property is transferred, ensure that
  proper internal controls are in place!
• Proper tracking of dormant accounts
• Designate a specific account for these funds
• Set up specific procedures for claims processing
• Establish materiality limits and thresholds for
  dual control
• Finders and fees

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Third-Party Administrators

• The role of the TPA
• Audit issues
• Who is the holder
• Who is the obligor
• -Contractual provisions
• -Duty to file
• -Records retention
• -Supporting documentation

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Role and Responsibility of the Agent, Fiduciary,
Third-party Agent

• Delaware v. New York revisited
• Issuers of securities cannot be considered
  "debtors" once they make distributions to
  intermediaries that are record owners since
  payment to a record owner discharges all of an
  issuer's obligations to the beneficial owner
  under Article 8 of the Uniform Commercial Code.
• As a result, an intermediary serving as the
  record owner is the "debtor" insofar as it has a
  contractual duty to transmit distributions to the
  beneficial owner.
• Unlike an issuer, an intermediary remains liable
  should a "lost" beneficial owner reappear to
  collect distributions due under such a contract.

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Role and Responsibility of the Agent, Fiduciary,
Third-party Agent

• Delaware v. New York revisited (cont)
• After Delaware v. New York, many states amended
  their laws to clarify that an original obligor
  may be able to satisfy its obligation to report
  and remit unclaimed property by transmitting
  payment to an intermediary.
• As a result, issuers may be able to contract away
  unclaimed property liability and intermediaries
  must be aware of their potential liability.
• -Young America Lawsuit

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SEC Regulations

• Rule 17 Ad-17 defines a lost shareholder as a
  shareholder to whom
• Correspondence sent to the address on file is
  returned as undeliverable. Account is lost after
  second return item.
• If Transfer Agent receives a new address for a
  shareholder then the shareholder will no longer
  be classified as lost.

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SEC Regulations (Cont.)

• Rule 17 Ad-17 states that Transfer Agents, as
  custodians of shareholder records, are
  responsible for disseminating shareholder
  communications and dividend and interest
  payments. and obligates them to exercise
  reasonable care in finding shareholders and
  establishes minimum requirements
• -Two database searches are required.
• -Databases must
• - contain addresses from the entire U.S.
  geographic area
• - contain at least 50 of the U.S. adult
  population
• - be updated at least 4 times per year.
• -Database should be indexed by taxpayer
  identification number for TIN searches or name
  for name searches.
• -Database searches should yield at least a 60
  match rate.

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Sarbanes-Oxley

• Unclaimed Property meets Sarbanes-Oxley
• Section 302 requires the CEO and CFO of a public
  company to certify quarterly and annually that
  they
• Are responsible for disclosure controls
• Have designed controls to ensure that material
  information is known to them
• Have evaluated the effectiveness of controls
• Have disclosed to the audit committee and
  external auditors significant control
  deficiencies and acts of fraud
• Have indicated in the report significant changes
  to controls

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Sarbanes-Oxley (Cont.)

• Introduces the concept of disclosure controls
• Broadens the current emphasis of integrity and
  completeness of controls related to financial
  reporting

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Sarbanes Oxley (Cont.)

• Section 404 Requires the CEO and CFO of a public
  company to annually
• State their responsibility for establishing and
  maintaining an adequate internal control
  structure and procedures for financial reporting
• Conduct and provide an assessment of the
  effectiveness of the enterprises internal
  controls
• Requires the external auditor to
• Attest to managements assertion (requires
  framework such as COSO)

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Poll Question

• Has your company developed and implemented
  written policies procedures for unclaimed
  property compliance?
• Yes
• No
• Dont know/not applicable

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Options for going forward

• Wait for an audit notice
• Assess your potential liability
• Contact the state
• Amnesty/Voluntary Disclosure Agreements

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Leading Practices and Helpful Resources

• Determine potential unclaimed property liability
• Report and remit applicable unclaimed property to
  the correct jurisdiction
• Develop and maintain processes and procedures for
  tracking and reporting unclaimed property
• Conduct internal audits of unclaimed property
  processes and procedures
• Determine what part of the organization will
  assume responsibility for tracking the laws
  preparing and signing the reports.

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Leading Practices and Helpful Resources

• States due diligence requirements may be used to
  enhance internal controls
• Recover your companys funds from states
• Consider options to independently test procedures
  
• Form an unclaimed property committee (suggested
  personnel include but are not limited to
  representatives from tax, legal, accounting,
  internal audit, treasury, MIS, CEO/CFO, risk
  management)

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Helpful Resources

• http//www.unclaimed.org (NAUPA)
• http//www.uppo.org (Unclaimed Property
  Professionals Organization)
• Bureau of National Affairs Corporate Law
  Portfolio
• Unclaimed Property No. 74-2nd
• Released May 2006
• http//www.bna.com

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Questions?
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Contact information
James O. Santivanez, President JMS Advisory
Group, LLC [phone] james.santivanez_at_jmsadvi
sors.com