May 22, Webcast: Unclaimed Property Reporting: Best Practices for Managing Compliance with State Escheat Laws

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1 May 22, 2018 Webcast: Unclaimed Property Reporting: Best Practices for Managing Compliance with State Escheat Laws

2 DUFF & PHELPS Duff & Phelps is the global advisor that protects, restores and maximizes value for clients in the areas of valuation, corporate finance, disputes and investigations, compliance and regulatory matters, and other governance-related issues. M O R E T H A N 1 3, E N G A G E M E N T S P E R F O R M E D I N , C L I E N T S I N C L U D I N G O V E R 40% O F T H E S & P ,500+ T O T A L P R O F E S S I O N A L S G L O B A L L Y T H E A M E R I C A S 1, P R O F E S S I O N A L S E U R O P E A N D M I D D L E E A S T 750+ P R O F E S S I O N A L S A S I A P A C I F I C 250+ P R O F E S S I O N A L S Duff & Phelps 2

3 ONE COMPANY with more than 70 offices O F F I C E S W O R L D W I D E T H E A M E R I C A S E U R O P E A N D M I D D L E E A S T A S I A PA C I F I C Addison Atlanta Austin Boston Cayman Islands Chicago Dallas Denver Detroit Houston Los Angeles Mexico City Miami Milwaukee Minneapolis Morristown New York Philadelphia Princeton St. Louis San Francisco São Paulo Seattle Silicon Valley Stamford Toronto Washington, DC Abu Dhabi Agrate Brianza Amsterdam Athens Barcelona Berlin Bilbao Birmingham Channel Islands Dublin Frankfurt Lisbon London Longford Luxembourg Madrid Manchester Milan Munich Padua Paris Pesaro Porto Rome Turin Warsaw Bangalore Beijing Guangzhou Hanoi Ho Chi Minh City Hong Kong Mumbai New Delhi Shanghai Shenzhen Singapore Sydney Taipei Tokyo Duff & Phelps 3

4 ENHANCING VALUE Across a Range of Expertise V A L U A T I O N A D V I S O R Y C O R P O R A T E F I N A N C E D I S P U T E S A N D I N V E S T I G A T I O N S A N D L E G A L MA N A G E ME N T C O N S U L T I N G C O M P L I A N C E A N D R E G U L A T O R Y C O N S U L T I N G Valuation and consulting for financial reporting, tax, investment and risk management purposes Objective guidance to management teams and stakeholders throughout restructuring, financing and M&A transactions, including independent transaction opinions Investigative support, forensic and valuation analysis and expert testimony in the context of commercial, cyber security, white collar or regulatory disputes and restructuring situations. Expert guidance in data risk and legal management. Helping financial services firms navigate the compliance and regulatory landscape, mitigating risk throughout the business lifecycle Duff & Phelps 4

5 Today s Presenters Scott Regan Keela Ross Duff & Phelps 5

6 Agenda Foundations of Unclaimed Property Compliance Building and managing a compliance program What to do if past due property is identified Best Practices to ensure success Choosing a process manual, software or outsourcer? Asset Recovery Questions Duff & Phelps 6

7 1 Foundations of Unclaimed Property Compliance

8 The Foundation Roots of modern unclaimed property law is based on English common law: Bona vacantia Taking versus custodial All fifty states plus Washington D.C., the four U.S. territories and three Canadian Provinces have laws (Alberta, British Columbia, Quebec) Though not a tax per se, most states consider dollars collected or escheated from companies as a major source of revenue. States stand in the shoes of the rightful owner but have beneficial use of the property Purpose of the laws is safekeeping and to reunite owners hidden purpose Raising revenue without raising taxes In FY 2015 the States collected $7.7 BB while returning only $3.2BB Over $60 BB is held by the States. Duff & Phelps 8

9 The Foundation Property that has not been claimed by an Owner for a specified period of time (dormancy period) is considered abandoned or unclaimed After the statutorily defined holding periods the Holder of the property has an obligation to file annual reports and remit the cash equivalent of property to the appropriate states Must be a fixed and certain legal obligation of the Holder to the Owner and must be intangible property Rules of jurisdiction established in 1965 in US Supreme Court case Texas v. New Jersey 379 U.S. 674 First priority rule: report to the State of the owners last known address on a companies books and records Second priority rule: report to the Holders State of Incorporation if address is unknown or is a foreign address Duff & Phelps 9

10 The Foundation No two states are alike almost no uniformity The Uniform Law Commission ( ULC ) first established a uniform state unclaimed property act in 1954, and promulgated revisions in 1981 and In July 2016, during its annual meeting, the ULC approved its Revised Uniform Unclaimed Property Act or RUUPA. To date, only five states have enacted laws aligned with RUUPA and only six others have introduced legislation to adopt conforming statutes. Different reporting dates from across the entire year Different treatments: Dormancy periods differ by property type and by state Due diligence requirements differ Filing deadlines differ Reporting and remitting protocols differ Over 100 property types Duff & Phelps 10

11 The Foundation Dormancy Period period of time that must pass from the issue date or creation of Property before Property is presumed unclaimed or abandoned. Due Diligence requirement imposed on Holders to attempt to contact Apparent Owners and return Property before remittance to the State. Aggregate Amount value of Property that triggers the Holder s Due Diligence and detailed reporting requirements. Cut off date date by which property must have achieved dormancy, as of and typically June 30 and December 31. Trigger event that starts the dormancy clock ticking, i.e.) issuance of check, posting of a credit, last owner generated activity on a bank account, return mail date for securities No de minimis even a one cent check must be reported! Duff & Phelps 11

12 The Foundation Dormancy Periods Dormancy periods little uniformity Eleven jurisdictions: October 31 Twenty-nine jurisdictions: November 1 Three jurisdictions : May 1 One jurisdiction each: March 1, 10 or 31 One jurisdiction: July 1 One jurisdiction each: December 10, April 30, and April 15 California: multiple dates preliminary report due on October 31, final reports due between June 1 and June 15 depending on certain variables. Duff & Phelps 12

13 The Foundation - Common Property Types Trade payable Vendor checks Payroll Refunds Money Unapplied cash Deposits Dividends Credit memos Workers compensation checks Un-cashed flexible spending checks Commissions and bonuses Expense checks Mineral proceeds and royalties Stocks and bonds Retirement assets Demand deposit accounts and CD s Unexchanged shares Safe deposit boxes Rebates Gift instruments Accounts receivable credits Duff & Phelps 13

14 2 Building and Managing a Compliance Program

15 Managing Compliance Why is this necessary!? You company has a legal obligation An area many companies have overlooked 70-90% of property goes unreported according to estimates from many states Area of focus by the states Reputational risk In certain cases Sarbanes-Oxley Section 302 & 404 impacts Material P&L impacts Duff & Phelps 15

16 Managing Compliance Getting Started Review organizational chart and chart of accounts Review M&A Activity cover all areas Consider third party administrators Consider systems conversions Identify all accounts on your general ledger Include open and closed accounts Identify periods for which detailed records are available Gather data regarding aged property types from the ERP systems. Build a template to push out to finance colleagues. An Excel or CSV file with unique fields for each data point is a good choice. Set internal timelines for response Choose aging strata 6 months recommended, no more than 1 year Build a database or subledger to maintain records of aged items Duff & Phelps 16

17 Managing Compliance Build Tools Build a platform for compliance Develop a matrix: property types dormancy periods due diligence requirements cut off dates filing deadlines by state. Consider situations unique to your industry Locate, review and interpret each jurisdiction s statutes. No one source of information Laws change constantly as do regulatory pronouncements Build a rules engine that can age each property type against each state s dormancy period, allowable exemptions and due diligence requirements. Duff & Phelps 17

18 Managing Compliance Identify the Population and Calculate Liability Run the data against the rules engine to calculate which items are ripe for escheatment. Be sure to consider the cutoff date for each state Review each state s laws and regulations to determine if allowable exemptions exist in your population Apply these rules to your population. Further test dormant items to ensure they represent actual fixed and certain obligations. Accounting errors commonly cause firms to unnecessarily remit funds to states. Debit & Credit offsetting Determine remaining population that are dormant, not exempt and nor accounting errors Duff & Phelps 18

19 Managing Compliance Due Diligence Run against due diligence rules engine. Mail due diligence letters to all. Scan and store due diligence responses at the transactional level in the ERP as evidence of due diligence and of cause for re-issuance Void and reissue checks to those owners who respond After the due diligence window closes, determine final population Make policy decision about late respondents Duff & Phelps 19

20 Managing Compliance - Reporting Prepare a filing for the particular jurisdiction(s). Negative reports? File the report with payment in accordance with each state s requirement. Some states require uploading a report and paying electronically Many require an encrypted diskette Others still require a paper report Notarize? Authorized signer? Retain records for 10 years Finally begin this process again! As stated earlier, there is not much uniformity. Duff & Phelps 20

21 3 What to do if past due property is found?

22 Retrospective Review Potential Out of Compliance Liability In light of the rise of third party audit activity, Delaware s recent developments, ongoing legislative changes and litigation in all states, and the steady adoption of provisions of RUUPA, consider an enterprise wide risk assessment to determine your company s level of compliance Pay close attention to invitations and to join state VDA programs do not disregard! Seek guidance from an attorney and advisor in scoping the entities, years, and property types and systems to be included in the review Consider whether a comprehensive data review is required or whether a statistical sampling/modeling is sufficient Large and decentralized organizations may benefit from sampling effort Look for instances of over and under reporting as well as system errors that create false positives Employ remediation tactics including applying exemptions, owner outreach and voided check testing to minimize over reporting Duff & Phelps 22

23 Retrospective Review Potential Out of Compliance Liability Consider voluntary disclosure and amnesty programs if under reporting is found and holder reimbursement opportunities if over reporting has occurred in previous years Retain records and work papers to establish an audit trail as a defense against a future audit Establish robust procedures and controls to ensure accurate identification of unclaimed property prospectively Once you have completed the retroactive review, consider adopting prospective reporting best practices to ensure continue compliance Ensure multiple employees understand and work on the process Provides a hedge against losing knowledge due to turnover and helps prevent possible fraud issues Duff & Phelps 23

24 4 Best Practices

25 Best Practices Remediation Have sales people contact customers to entice them to apply a credit to a new purchase Offset debits and credits Look for best or new addresses when contacting customers or conducting state mandated due diligence Consider early outreach well before dormancy much more likely to resolve an account Consider a review to determine if you have over reported in the past and consider holder reimbursement options Consider structuring & planning opportunities Changing legislation and litigation that impacts your industry Keep in mind changing requirement for electronic report submission payments. Many states discontinue accepting paper reports with little notice. Dormancy period changes Ensure you know what states issue automatic penalties for late filing before remitting past due property. Adopt policy for dealing with owners to respond immediately before a filing deadline In many instances it is easier to make the owner whole and then apply for a reimbursement from the state than to redo a report Strongly consider a partner to which to outsource this process do what you do best! Duff & Phelps 25

26 Common Filing Errors Using incorrect NAUPA codes and thus the wrong dormancy period Incorrect formatting of names Failing to submit complete owner information Placing data in the wrong fields Double payments for single report Payments without reports Reports without payments Incorrect use of aggregation Failing to identify joint owners Reporting only to the state of incorporation Duff & Phelps 26

27 5 Choosing a Process Manual, Software or Outsourcer?

28 Choose a Process Manual vs. Software Reporting options: Manual Software Outsource provider Manual reporting is not a realistic option for most corporations too complex Numerous software solutions exist» Will act as a database, age data against dormancy and due diligence rules, and produce due diligence letters and preliminary and final state unclaimed property reports.» Some will identify exemptions» Software may be a good choice for some firms who like to maintain internal processes» Frequent legislative changes make it difficult for vendors to release updates fast enough for Holders to ensure proper compliance» Engine only as good as data put in often required rigid formats and parsed data» Generally few state relationships in event of issues» You still must do all the work Duff & Phelps 28

29 Choose a Process - Outsourcing Many outsource solutions exist» Some vendors more flexible than others» Good ones are scalable will take on as much or as little of the process as needed» Choose between adhering file format requirements or submitting raw data» Strong exemption and remediation ability» Typically maintain active state relations» Experience with VDA s and audit defense is a must» Firm should have a portal to allow you to view work in progress and be able to sign and transmit reports and pay the states on your behalf.» Better firms can advise on best practices and policies and procedures» Data at rest and data security protocols very from firm to firm» Allows you to focus on what you do best Duff & Phelps 29

30 6 Asset Recovery

31 Asset Recovery Entity and Property Identification Over $60BB sits with the states Consider a review to determine if unclaimed property can be recovered by your company Create a complete company history review 851 entity pages and the list of companies listed (if publicly traded) on their filed SEC documents Perform a deep dive to create the history of the acquisitions, to obtain a clear picture of all obtainable assets Identify properties in the United States and Canada escheated funds, funds being held by vendors, local municipalities and treasury departments Not an easy process must manually run permutations of entities names against state websites Duff & Phelps 31

32 Asset Recovery Recovery, Claims and Accounting Determine if items found actually belong to the company Fulfill recovery application requirements of the states Require significant documentation and executive signature Design best practice internal controls for managing the data, tracking the process and obtaining the checks Provide preventative planning and future mitigation strategies Review statutory and administrative limitations to overcome in regards getting funds released for acquisitions Manage receivables and where required review proactively tax return modification Duff & Phelps 32

33 Duff & Phelps Can Help Risk assessments Remediation Statistical sampling and extrapolation Voluntary disclosure agreements Audit defense Policy and procedure development Education and training Litigation and legislation updates and interpretation Outsourced annual compliance Outsourced asset recovery Duff & Phelps 33

34 Questions? Duff & Phelps 34

35 Scott Regan Director Scott Regan is a director in Duff & Phelps' Unclaimed Property and Tax Risk Advisory practice in Philadelphia. He has over 10 years of experience advising large public and private companies on developing unclaimed property compliance programs. Scott's clients have included the country's largest banks, brokerages, mutual funds, manufacturers, pharmaceutical companies, healthcare providers, insurance carriers, retailers, utility providers, social media companies and FINTEC. Prior to joining Duff & Phelps, Scott spent 11 years at Keane as an Executive Vice President. During his career, he has helped hundreds of companies address their unclaimed property compliance obligations by building custom programs that include risk assessments, remediation strategies, voluntary disclosure programs, asset recovery and outsourced annual compliance and reporting. He is particularly experienced in providing guidance with regards to single and multi-state unclaimed property audit and voluntary disclosure programs. Scott is an experienced unclaimed property subject matter expert, conference and webinar speaker and digital content creator. Duff & Phelps, LLC Philadelphia Scott.Regan@duffandphelps.com Scott holds a Bachelor of Arts in History from Hamilton College and is a member of the Unclaimed Property Professionals Organization (UPPO). Duff & Phelps 35

36 Keela Ross Director Keela Ross is a Director in the Addison, Texas office of Duff & Phelps and part of the tax services group with specific oversight and responsibility for managing the Unclaimed Property and Sales and Use Tax practices. She has over 12 years of tax compliance and advisory services experience.throughout her career, Keela has supported a series of client service teams in the management of both unclaimed property and other transaction tax audits and voluntary disclosure submissions. She has extensive experience with a number of different accounting and ERP reporting systems to gather, document and organize large volumes of information in support of a clients position. She is intimately familiar with a number of unclaimed property and sales tax software packages, and routinely conducts in-house audit and compliance training in the areas of unclaimed property, property tax and sales and use tax. She has a broad range of experience integrating client information and data systems and is a subject matter expert with key responsibility managing the Duff & Phelps web portal. This portal is used to streamline the various components of data gathering and reporting responsibilities for our clients. She was among the chief architects of this proprietary data base management system utilizing actual client experiences to design its functionality. Duff & Phelps, LLC Addison Keela.Ross@duffandphelps.com Keela has supported client personnel in the collection, review and analysis of information, and currently manages a team of professionals to gather and review information to support tax audits, voluntary disclosures and compliance matters. She also has directly participated in several negotiations with auditors and state representatives. She serves clients in a number of industries including industrial manufacturing, consumer products, media, retail, information services and financial services. Keela began her career in personal property compliance and real estate valuation managing large volumes of data and developing customized client specific solutions and quickly expanded her expertise to include the areas of unclaimed property compliance and sales and use tax consulting. Keela received her M.B.A. from Texas Womans University and is a licensed Property Tax Consultant in the State of Texas. Keela is a member of the Institute for Professionals in Taxation (IPT), Association for Computers & Taxation (ACT) and the Unclaimed Property Professional Organizations (UPPO). Duff & Phelps 36

37 For more information about our global locations and services, please visit: About Duff & Phelps Duff & Phelps is the global advisor that protects, restores and maximizes value for clients in the areas of valuation, corporate finance, investigations, disputes, cyber security, compliance and regulatory matters, and other governance-related issues. We work with clients across diverse sectors, mitigating risk to assets, operations and people. With Kroll, a division of Duff & Phelps since 2018, our firm has nearly 3,500 professionals in 28 countries around the world Duff & Phelps, LLC. All rights reserved. DP M&A advisory, capital raising and secondary market advisory services in the United States are provided by Duff & Phelps Securities, LLC. Member FINRA/SIPC. Pagemill Partners is a Division of Duff & Phelps Securities, LLC. M&A advisory, capital raising and secondary market advisory services in the United Kingdom are provided by Duff & Phelps Securities Ltd. (DPSL), which is authorized and regulated by the Financial Conduct Authority. M&A advisory and capital raising services in Germany are provided by Duff & Phelps GmbH, which is a Tied Agent of DPSL. Valuation Advisory Services in India are provided by Duff & Phelps India Private Limited under a category 1 merchant banker license issued by the Securities and Exchange Board of India.