Best Practices: Bringing Rationality to the Unclaimed Property Quagmire

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April 15, 2014

by Harold Kim
Executive Vice President, U.S. Chamber Institute for Legal Reform

As millions of Americans rush to meet today's deadline to file their taxes, most are unaware of state governments' newly discovered alternative revenue source-unclaimed property. That long-forgotten insurance policy, inactive bank account with left over funds, unclaimed dividend, or gift card from Uncle Joe that never got used, is becoming increasingly attractive to state officials looking to fill holes in government budgets.

This interest can be largely attributed to private audit firms hired by the state to audit and assess whether businesses are properly reporting unclaimed property under state law. These firms are usually hired by the state under a contingency fee contract and they stand to gain financially for every dollar collected. As such, it is not surprising that some of these auditors have resorted to aggressive tactics against the business community.

Some have gone so far as to de facto legislate on behalf of the state by requiring life insurance companies to cross-reference their policy records against the Social Security Administration's Death Master File-a costly, labor-intensive practice that is not required under most state laws. Indeed, a handful of courts have explicitly rejected these tactics.

Moreover, there is limited transparency surrounding the selection and contracting of these private auditing firms. As we have seen in other scenarios, when government contracting lacks transparency, "pay-to-play" schemes often arise in which lucrative contracts are awarded in exchange for campaign contributions.

Secret no-bid state contracts by state officials to those who contribute to their political campaigns is well established among some state attorneys general. Mississippi State Attorney General Jim Hood is notorious for these schemes, often awarding the most lucrative contracts to sue on behalf of the state pension fund to his largest campaign donors.

The potential for this practice to develop among state financial officers and the current abuses surrounding contingency-fee private audit firms is documented in the new white paper, Unclaimed Property: Best Practices for State Administrators and the Use of Private Audit Firms, by the U.S. Chamber Institute for Legal Reform. The paper examines how private auditors acting under the authority of state officials, appear to be rewriting the rules of public confiscation of unclaimed property.

The paper identifies a series of "best practices" for unclaimed property administrators to use when hiring private audit firms, including a transparent and open bidding process, prohibition on contingency fee arrangements, and more state control over privately conducted audits. States that adopt these recommendations ensure unclaimed property laws are fairly enforced and that the hiring of private audit firms is done rationally and with proper safeguards.

The concept of unclaimed property is not new. But new tricks by private profit-motivated auditors are troubling and unclaimed property should not be taken by states for pet projects or to fill budget holes. Instead, states should take proactive steps and adopt best practices that ensure the fair and transparent enforcement of state unclaimed property laws.