The Importance of Strict Compliance with Due Diligence Requirements

Snow covered mailboxesUnclaimed property compliance is an ongoing process which includes reviewing company data, notifying owners, and submitting reports to states. In order to be in strict compliance, each step must be carefully completed, according to the rules of each state. One of the important steps in this includes attempting to contact the owners by sending due diligence letters. Like other steps in the unclaimed property compliance process, due diligence rules have many commonalities, but significant differences, between the reporting jurisdictions. Due diligence is also impacted by federal law, particularly as it applies to securities.

Remember, unclaimed property is governed by each individual state or reporting jurisdiction's laws. Strict compliance requires adherence to each state's rules individually and collectively. As states continue to enhance enforcement measures, strict compliance is necessary to reduce your corporation's exposure to risk from interest, penalties, and audit assessments.

Contents of Letters

Common among them are the requirements that the letters contain the owner's name, address, amount and type of the property, and the date of last contact or check date. The letters should also contain contact information of the holder company, so that owners may contact the company to claim the property before it is escheated to the appropriate state.

Beyond these basic requirements, the states have varying requirements on what must be included in the letter. Most notably, California has many requirements that are specific to that state. For example, California requires a disclaimer to be placed across the top of the letter, in a size larger than the rest of the letter, that states "The State of California requires us to notify you that your property may be transferred to the state if you do not contact us." California also has statutory language on what is an acceptable response by owners attempting to claim the property prior to escheat.

Certain types of property may require additional information on the letter. For example, mineral interests may require location information, while safety deposit boxes may require an inventory of the items contained inside the box. In some circumstances, like with safety deposit boxes, holders are allowed to charge fees for the claims and such information should be included on the due diligence letter.

Which Properties Need Letters

Of the states that require due diligence, most recognize that not all properties require letters to be sent, usually based on the dollar value of the property to be reported. In most cases, states require letters only on properties over $50. Texas has raised that threshold the highest, to $250. Meanwhile, other states have lowered the threshold to smaller amounts - Illinois requires letters be sent to owners of properties valued over $10. California is currently considering a bill that would require letters to be sent on all properties, regardless of value, like Connecticut and New York currently do. A holder cannot set a standard $50 threshold for all properties and still be in compliance with all state due diligence requirements.

Most states allow holders to exclude letters to owners where the holder knows the address to be a bad address. For example, if a bank sends a bank statement to a customer and receives it back as returned mail, address unknown, then the bank will not need to send a due diligence letter on the account before it escheats the property to the appropriate state. Similarly, if a company has an incomplete address and knows that it will be returned by the post office as undeliverable, the company is not required to send the letter.

Holders of stocks are required to send additional letters under SEC rules for locating lost shareholders. Unfortunately, this is an example of a federal law, outside the individual state unclaimed property laws, that will affect how a company performs due diligence to be in compliance with all applicable laws.

Date of Letters

States also differ on when the letters must be sent. The majority of "fall" states (states whose reports are due on October 31 or November 1) require due diligence to be sent out between 60 and 120 days before the report is due to the state. This means most due diligence letters are sent in July and August. The remaining "spring" (states with reports due between March 1 and May 1) and "summer" (states with reports due July 1) states are sent in January or early February.

Like with the content of letters, some states differ on when the due diligence letters must be mailed. Washington state, for example, statutorily requires that due diligence be sent between May 1 and August 1, for property reportable before November 1. So a company that delays sending due diligence letters for fall reports until August will be out of strict compliance with the state of Washington. Illinois requires communication with the property owner within 60-120 days of filing the report, due April 30. Thus, letters must be sent in January or February to be in strict compliance with Illinois law.

Some companies attempt to send out all the letters during one time period, say June or July, which comply with the majority of the states. However, this means that the companies are not in strict compliance with some states, most likely the spring or summer reporting states.

Why Strict Compliance is Necessary

The multitudes of state and federal laws that require owner notification must be followed or there could be serious consequences. First, it is necessary as a business practice, to keep customers, vendors, and employees satisfied that as a company, you are keeping their interests in mind. Insurance companies have recently come under fire for not meeting minimum standards of owner notification, leading to lawsuits.

Second, most states indemnify companies, to the extent of the reported value of the property, if all procedures have been properly followed. Colorado, for example, relieves a person from all liability to the extent of the value reported after delivering the property in good faith to the state. This could relieve holders from issues relating to future dividend checks, tax issues, and potentially even liability relating to lost items in safety deposit boxes. When the proceeds of a life insurance policy are reported to the state because the insurance company cannot find a beneficiary, the company can point any future claimant to the state, without fear of claims for interest or other additional payments.

Third, and probably of the most immediate concern to holders, strict adherence to due diligence requirements shows a robust compliance program, reducing the risk of an audit or a high assessment relating to penalties and interest resulting from an audit. Strict compliance is about managing risk, and at the moment, an audit poses a large risk to many companies not in compliance. Delaware is currently sending out new audit notices to corporations across the country.

Barganier and Associates sends out letters almost every month in order to maximize clients' compliance with the various unclaimed property laws. Our team will not send our clients reports for filing before the due diligence period has even begun for a particular state. While this may require additional work on our part, this is a necessary step to reduce our clients' exposure for non-compliance, both to state auditors and to other interested parties. It is our belief that a strong compliance program results in better internal processes for dealing with customers, vendors and employees, leading to increased sales and profits and lower costs.

See Also:
Who is the Owner? And Why It Matters to Holders
Nexus Not Required
ULC Considers Changes to Uniform Unclaimed Property Act