Unclaimed property reporting, abandoned property reporting, or more commonly referred to as escheatment are all terms associated with remitting unclaimed or dormant assets to the various states/jurisdictions. Escheatment is an unfortunate fact of life for financial institutions and one that comes with many pitfalls if not managed correctly.
When not correctly managed and reported, there can be financial liabilities that can be imposed, coupled with the risk of state audits. These fines and penalties can be material to your annual reviews, findings, and negatively affect your organization not only materially but reputationally. As you may or may not be aware, given the economic situation in many states, unclaimed property accounting audits are occurring more frequently than ever before. It is imperative, now more than ever, to be vigilant and to conduct proper escheatment for all aspects of your organization.
The responsibility for unclaimed property compliance and escheatment for your registered shareholders is generally managed by your transfer agent but be mindful that within your organization there should be a person or persons to manage your other escheatment needs such as general ledger, etc. Because many organizations have multiple business units and may not necessarily have a centralized escheatment compliance unit, it is imperative to understand and address the details necessary for accurate and timely compliance of the escheatment process.
If you have concerns as to whether your organization is compliant there are many firms that can review and assist you in reviewing your escheatment compliance and assist in developing processes and procedures. Firms such as SOVOS, Laurel Hill, Ryan to name a few. Thankfully, on the registered shareholder side life is simpler for our corporate partners when it comes to managing abandoned property, Continental Stock Transfer as your transfer agent monitors, tracks and performs escheatment compliance for all reporting jurisdictions for your registered shareholders on the transfer agent side.
There are some states such as California that impose heavy penalties to entities that are out of compliance with their reporting requirements. These mandatory interest assessments against assets can be a deterrent for companies trying to get themselves into compliance.
Relief is Coming
Relief is coming to filers with delinquent assets due to the state of California in the form of a long-awaited unclaimed property voluntary compliance program (VDA). On February 16, 2022, California introduced AB 2280, allowing the California Controller to establish a VDA Program.
On Tuesday, September 13, California Assembly Bill 2280 (“CA AB 2280”) was signed into law by Governor Gavin Newsom. Prior to the approval of this bill California had long declined to provide a formal or informal unclaimed property VDA program despite its practice of automatically assessing 12% interest on late reported property. The state acknowledges that the 12% interest assessment has been a deterrent to first-time filers and to holders who consistently report but have past due property, from coming into compliance. For holders who find themselves in this category, the establishment of a VDA program is welcomed news.
What is an Unclaimed Property VDA Program?
A VDA provides holders the ability to come into voluntary compliance with a state’s unclaimed property law without incurring interest or incurring a reduced interest assessment. VDA’s, provide businesses a way to recognize their state’s unclaimed property exposure and willingly pay any outstanding liabilities and potentially reduce the risk of a state audit. Typically, only companies that have not received an audit notice from the states or one of its proxies can enter into the VDA program. The ability to voluntarily enter into a VDA is removed once a notice of audit is received. There are a fair number of states that offer VDA programs.
These VDA programs vary from state to state but there are some common requirements including:
- Enrollment process
- Scoping and analysis of property
- Quantification of unclaimed property
- Submission and validation
- Closing process and documentation
Voluntary Compliance Programs
Companies that have never reported unclaimed property, as well as companies that are currently out of compliance with respect to one or more property types, should consider voluntary compliance programs offered by the states to take advantage of program benefits. Benefits of VDA’s include reduction or waiver of interest on past due property and a reduced risk of audit, additionally most VDA programs offer more favorable review criteria and lookback periods than those used in traditional audits and generally take less time to complete than traditional audits. Although most states will not waive the right to audit a holder that completes their VDA program, states do look more favorably upon those holders resulting in a reduced risk for audit.
If you have questions about your corporate compliance firms such as SOVOS and Laurel Hill have teams of regulatory and compliance professionals that can provide further guidance and options to assist you through the VDA process.