Every year, companies find themselves on the hook for billions of dollars in unclaimed property liabilities, and states are cashing in.
Unclaimed property laws, which were first established in the 1930s, were some of the earliest consumer protection measures. In their original form, these laws meant that when a piece of property went unclaimed, it transferred to the state, which acted as a guardian or custodian of that property until it could be returned to its rightful owner. However, in the last several decades, it has become much more of a revenue generator for states with, on average, $7.5 billion in unclaimed property being collected annually. The states return approximately $3.5 billion of this property each year – and wind up keeping about $4 billion of it for themselves. At last estimation, there is more than $62 billion being held by various jurisdictions.
The Evolution of Unclaimed Property
The surprising thing, which companies, especially large corporations, need to be aware of, is that while “unclaimed property” may have originally meant literal property belonging to someone who died without heirs, its scope has greatly expanded over the years – and it now includes unclaimed payroll checks, vendor checks, employee expense checks, stocks and dividends, etc. Many corporations don’t realize that if their employees do not cash a paycheck, or if a vendor does not cash its payment of a bill, that “property” (which in this case, of course, really means money) may be required by law to be turned over to the state. For that reason, unclaimed property has morphed into an enormous revenue-making opportunity for states, and a whole industry has evolved to deal with it, including multiple layers of auditors, transfer agents, and lawyers whose job it is to either collect this property/money for the state or work on behalf of corporations to make sure they’re in compliance with ever-changing state laws. Obviously, when it comes to unclaimed property liabilities, corporations do not want to overpay, but nor do they want to underpay and run afoul of the law.
With so much money at stake, and given the complex and changeable nature of the laws in this area, companies need to take steps to educate and protect themselves, legally and as a matter of policy. With this in mind, Corporate Counsel Business Journal recently hosted a webinar on the topic, featuring John Buonomo, senior vice president of issuer and investor services at American Stock Transfer & Trust Company (AST), in which he discussed a variety of issues around unclaimed property laws.
Know the Relevant Laws
As Buonomo points out in his presentation, this is a particularly thorny issue because there is no statute of limitations on unclaimed property in most states, which means decades of accumulated unclaimed property liabilities can potentially be revealed by an audit – and states are not at all shy about making claims that include past-due penalties and interest that vastly exceed the original value of the unclaimed property itself.
“In California, for example,” Buonomo says, “we have seen the state levy potential penalties of hundreds of thousands of dollars in situations where the actual value of the property started out at $2,000.”
This may be an extreme example, but corporations would nevertheless be wise to educate themselves on the relevant laws in this area and avail themselves of all necessary legal resources and protections.
The webinar, which can be viewed in its entirety here, covers unclaimed property roles and responsibilities; background on state audits; an assessment of the current audit environment; possible audit triggers; risks and issues impacting audit outcomes; best practices for companies to follow; as well as what to expect in terms of penalties and assessments.
Published May 16, 2019.