State unclaimed property laws apply to a variety of intangible assets and complex financial products, such as uncashed checks, shares of stock, dividends, and life insurance proceeds. Unclaimed property laws require companies to transfer (or “escheat”) to state treasuries any money or property deemed abandoned after a certain period of inactivity by the property’s last-known owner. Once deemed abandoned, the unclaimed property is held by the state, and as a result, states often incorrectly view unclaimed property as a revenue source. read more...
When fairly and appropriately enforced, state unclaimed property laws serve several important functions, such as reuniting rightful owners with their property and helping ensure that companies are incentivized to protect consumer property. However, over the past several years, companies have been overwhelmed by a storm of regulatory inquiries, audits, settlements and civil litigation concerning the enforcement of state unclaimed property laws and the escheatment of property to the state.
State unclaimed property administrators have increased their reliance on private audit firms to collect purportedly unclaimed property on behalf of the state in exchange for a percentage of the proceeds. The use of contingency-fee firms injects a private profit motive into enforcement of state laws and carries a significant risk of abuse as audits have become increasingly aggressive and overreaching. While life insurance companies were the initial target, private audit firms are now expanding their aggressive enforcement tactics to other industries and financial products, including the mutual fund industry, property and casualty insurers, broker-dealers, and retailers and restaurants that issue gift cards.
State officials should re-evaluate their relationship with private contingency-fee auditors and ensure a rational enforcement structure is in place. It is critical that private audit firms purporting to act on behalf of unclaimed property administrators are subject to appropriate oversight and accountability to ensure that they act with the highest ethical standards and within the boundaries of the law. It is likewise critical that the processes for selecting private auditors and the terms of contracts with private auditors are publicly disclosed to avoid conflicts of interest and ensure accountability of the use of taxpayer dollars.
ILR published Unclaimed Property: Best Practices for State Administrators and the Use of Private Audit Firms, which identifies a series of best practices for unclaimed property administrators to use in the engagement of private audit firms, including a transparent and open bidding process, a prohibition on contingency-fee arrangements, increased state control over privately conducted audits of unclaimed property holders, and the issuance of formal audit findings. The paper also recommends states adopt voluntary disclosure programs that appropriately incentivize companies to come forward with unclaimed property without the fear of triggering an audit or penalties associated with past due property.