© 2012 Financial Operations Networks LLC

The New Age of Unclaimed Property/Escheatment –

A Practitioner’s Perspective

Your Presenter

Frederick C. Litow, CTP, APM Head of Financial Administration, ING

Fred has 29 years experience in Financial Management, Treasury and Procurement, and has been with ING for 14 years. Currently as Head of Financial Administration, Fred is responsible for managing the centralized Accounts Payable, Procurement Operations and Technology, Global Travel, Travel and Expense Reporting, and the Meeting Management/Group Travel. Fred works closely with the US Business Units, Global ING Insurance Business Units, and suppliers in executing these shared services for ING. Prior to his current role, Fred was Head of Treasury Operations for ING.

Prior to ING, Fred worked for the FDIC for 8 years with their Financial Service Center overseeing the accounting and operations of assets from failed banks. Previous to that, Fred was Vice President and Treasurer for Financial Security Savings and Loan in Florida.

Fred is a Certified Treasury Professional, Accredited Payables Manager, and Fellow, Life Management Institute.

Agenda

• General Overview• Potential Types of Unclaimed Property • U.S. Supreme Court Rulings • Where to Report • Myth vs. Reality• Holder Responsibilities Under the Unclaimed Property Laws • When Does Property Become Unclaimed?• State Enforcement Efforts • Are You Ready for the Auditor? • Suggested Best Practices • Statutory Updates • Special Insurance Industry Issues• Case Law• Unclaimed Property Websites and Resources

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General Overview

• What is Unclaimed Property?

Intangible personal property that has gone unclaimed by the rightful owner after a specified period of time.

• Origins in British Common Law

• Escheat• Traditional

• Custodial

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Potential Types of Unclaimed Property - General

• Payroll • Accounts payable • Securities related property• Royalties, mineral rights and items in suspense• Customer credit balances • Successor liability (merger/acquisition)• Gift cards/gift certificates• Rebates

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Potential Types of Unclaimed Property - Insurance

• Individual and Group Policy Benefits and Claims Paid• Agent Credit Balances • Proceeds from Matured Policies and Endowments • Proceeds Due Beneficiaries• Annuities• Retained Asset Accounts• Demutualization Cash/Securities• Death Claims• Limiting Age (Superannuated)• Amounts due under policies of insurance other than Life

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Where to file Reports and Transfer Property

U.S. Supreme Court Rulings

• Supreme Court Case Law – priority rules for reporting• Texas v. New Jersey (1965)

• Pennsylvania v. New York (1972)

• Delaware v. New York (1993)

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Where to Report

• State of owner’s last known address

• State of holder’s incorporation or domicile if address of apparent owner is not known

• State of holder’s incorporation or domicile if address of apparent owner is in a foreign country*

*Provision language added in the 1981 Uniform Act

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Myth vs. Reality

Myth vs. Reality

Myth:

• Our company has been filing reports for years; we are in compliance

• Our company should focus on ensuring that we are in compliance with the state where our corporate headquarters is located

• Based on our records retention policy, our company’s records wouldn’t disclose any unclaimed property not previously reported

• Our Company is not a likely audit target for unclaimed property purposes

Reality:

• Many holders may have unclaimed property not previously reported

• Unclaimed property compliance is mandatory. Fifty-four reporting jurisdictions have unclaimed property laws which require holders to remit relevant unclaimed funds

• In the absence of records, auditors are generally permitted to use estimation techniques to determine a holder’s past due unclaimed property. Not surprisingly, estimation techniques can result in large assessments

• Insurance Companies are audit targets for contract auditors.

Holder Awareness and Duties Under the Law

Holder Responsibilities Under The Unclaimed Property Laws

• Duty to file a report timely and to the appropriate state

• Duty to perform due diligence timely

• Duty to remit the property timely

• Duty to maintain copies of the reports and supporting documentation

• Duty to protect the funds until reported and transferred to the state

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When Does Property Become Unclaimed?

• Dormancy Period (Abandonment) Period: The continuous period of time that must elapse without any activity being taken by the owner before property will be considered “presumed abandoned” and, thus, reportable in accordance with state unclaimed property laws

• Dormancy Date/Date of Last Contact: The date of last contact by the owner as evidenced by the records of the holder

• Activity: Action taken on property by the owner which has the effect of tolling or restarting the running of the applicable dormancy period under the law of the relevant jurisdiction. Examples:

• Owner making a change to the beneficiary

• Owner making a premium payment

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State Enforcement Efforts

State Enforcement Efforts

• Outreach letters (attempt to encourage filing or voluntary disclosure)• State Audits• Third-Party Audits

• Multi-state

• State of incorporation

• Long process and potentially significant assessments

• Potential imposition of penalties and interest

• Increase in new third-party auditors

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Are You Ready for the Auditor?

• What Holders Can Do:

• Prior to the audit commencing, develop an understanding of your unclaimed property compliance history and potential exposure

• It is better to be proactive than reactive

• Outside accountant/legal counsel can assist

• Set the “ground rules” during the opening conference• Insist on one point of contact for the auditor

• Make sure the scope of the audit is clearly defined; including look back period, property types and entities

• Do not unnecessarily delay the audit process• Can result in a more difficult audit process

• May ultimately result in the imposition of interest and penalties

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Are You Ready for the Auditor?

• What Holders Can Do• Stay actively engaged in the audit process: stay involved, including the

scheduling of regular briefings• Outside legal counsel/accountant may provide guidance

• Be prepared to negotiate: settlements can sometimes be the best solution for holders and the states

• Request an exit interview

• Carefully review and correct the audit report

• Do not allow a contingent fee audit firm to disburse funds to the state before the audit firm has provided the state’s release document to the holder

• Secure a formal, executed closing agreement – although not all states will agree to provide a closing agreement

• Learn from the audit

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Best Practices

Suggested Best Practices

• Conduct an independent review to confirm compliance with applicable state requirements

• Conduct a systems review to ensure that potential unclaimed property is tracked and an adequate audit trail is maintained

• Develop and maintain detailed processes and procedures for tracking and reporting unclaimed property

• M&A Transactions-due diligence is important!

• Form an unclaimed property committee that is responsible for compliance• Include key personnel, including, but not limited to, internal audit, IT Manager,

corporate risk officer, human resources manager, legal counsel, upper management, treasurer, comptroller and tax director.

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Suggested Best Practices (Continued)

• Until the property is transferred, assess that adequate internal controls are in place!

• Consider establishing an unclaimed property liability account on the company’s general ledger if one is not already in place

• Set up specific procedures for claims processing

• Set up specific procedures for due diligence and reporting timeframes and responsibilities or consider outsourcing

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Statutory Updates andSpecial Industry Issues

Statutory Updates

• Specific State Updates• Arizona: S.B. 1003-signed by Governor on 11/23/2009-lowering of dormancy

periods for most types of property held by financial institutions and insurance companies-change in report due dates

• Indiana-H.B. 1083 shortens dormancy period, effective July 1, 2010, for “property payable as a result of a demutualization, rehabilitation or related reorganization of a mutual insurance company” from 5 to 3 years

• Texas: adds new statutory due diligence procedure

• Oklahoma: changes report due date

• Ohio and California require special wording on the due diligence letters. Also, for letters greater than $50.00, California now allows holders to deduct $2.00 for each due diligence letter sent. Retain proof of mailing in the event of an audit.

• Illinois: Pending legislation will shorten require due diligence letters to be sent by certified mail.

• Oregon: Pending legislation will require insurance companies to report amount of amount retained assets submitted as unclaimed property.

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Special Insurance Industry Issues

• Annuities• This is another common property type. However, annuities paid as part of an ERISA-covered

employee benefit plan may be subject to Federal preemption overriding state law. Legal counsel should be consulted to provide guidance in this area

• State auditors are focusing more attention on annuities

• Proceeds from Matured Policies and Endowments• Commonly referred to as “due and unpaid.” These funds may include amounts not reduced to

a check

• Death claim interest

• Anti-forfeiture

• Demutualization Cash/Securities• Many states have amended their unclaimed property laws in the last five to ten years to provide

for category-specific dormancy periods for unclaimed demutualized funds. A good discussion of unclaimed demutualization funds is set forth in the BNA treatise of unclaimed property. See Michael Houghton et al., Unclaimed Property, 74-2nd C.P.S. (BNA Rev. 2009)

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Case Law

• Litigation - Insurance

• Manufacturer’s Life Ins. Co. v. East Bay Rest. & Tavern Retirement Plan (Cal. 1999)

• Allstate Ins. Co. v. Eagerton (Ala. 1981)

• Blue Cross of N. Cal. v. Cory (Cal. 1981)

• Treasurer & Receiver General v. John Hancock Mutual Life Ins. Co. (Mass. 1983)

• Conn. Mutual Life Ins. Co. v. Moore (U.S. Sup. Crt. 1948)

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Unclaimed Property Websites and Resources

• www.uppo.org

• www.unclaimed.org

• www.missingmoney.com

• Bureau of National Affairs Corporate Practice Series Unclaimed Property Portfolio 74-2nd (Rev. 2009) www.bna.com

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