Millions of "forgotten" dollars in payroll checks, utility deposits, bank accounts, money orders, unredeemed gift cards, and stock dividends are sitting in company coffers as unclaimed property. Make sure your organization follows all regulations, remits property to the state, and installs stringent internal controls.
"Central Bank" had a problem: thousands of dollars in bad debt that it needed to offset. It soon found an easy solution by pilfering money from a customer's dormant account.
The customer had dutifully socked cash into a Christmas Club account but hadn't made a deposit or withdrawal in more than three years. When the bank discovered that account holder had passed away, it promptly wrote off the balance (more than $27,000) into "miscellaneous income" and closed the account. Another bad debt problem solved.
In another case, "Sunshine Bank" realized that there was a significant number of official bank checks that hadn't cleared its system for many years. The bank thought it could avoid the "escheat" laws (see sidebar on page 34), so its president decided to convert these bank checks into cash and place the money into a new checking account. It then began to apply service charges from an account that didn't exist.
Millions of dollars in payroll checks, utility deposits, bank accounts, money orders, unredeemed gift cards, stock dividends, and many other sources are sitting in company coffers as unclaimed property. "Every state has an unclaimed property law," said Valerie M. Jundt, senior manager and the national manager of state relations for the Unclaimed Property Services Group at Deloitte & Touche LLP. "Every company has an obligation by law to find the individuals who are owed property and give it back to the rightful owners or report those funds to the state."
However, many companies, which have never filed reports, are not only breaking state law but could be violating other laws that govern financial accounting standards. Delinquent public companies also could be infringing on Sarbanes-Oxley Sections 302 and 404.
INTERNAL TEMPTATIONS
Unmanaged dormant accounts and unclaimed funds are ripe temptations for internal thieves.
In October of 2006, Verlina Odeh, a bank accountant, admitted that she had claimed nearly $1.3 million for herself, friends, and family from credit card accounts that had been dormant for at least five years and were considered abandoned.1 Earlier this year, Anthony J. Lofink, who worked for the Delaware Division of Revenue, admitted that he stole more than $1.2 million from the state's unclaimed property fund for cosmetic surgery, expensive cars, clothing, jewelry, and start-up money for a tanning business.2 Prosecutors said Lofink took advantage of an apparently lax system in which he was responsible for both processing claims and issuing checks.
"Problems with unclaimed property cross all industries," Jundt said. "We performed an internal-risk assessment for a retailer to ensure it had implemented adequate internal controls and found that it was filing its unclaimed property reports to the states correctly. However, we also discovered what appeared to be an overpayment on its gift card items. It was later discovered that an employee was embezzling gift cards and the amounts were substantial."
UNCLAIMED PROPERTY PROCEDURES
All but six U.S. states have adopted a version of one of the uniform unclaimed property acts. These uniform laws were drafted in 1954, 1966, 1981, and 1995, but most states are patterned after the 1981 act.
The purpose of the state laws is to: 1) protect the interests and property rights of the lost owner, 2) relieve the holders from the expense and liability associated with the property, and 3) ensure that any economic windfalls benefit the public, not an individual holder.
Under the state laws, the holder of the unclaimed property has a duty to: 1) file a report 2) perform due diligence 3) remit the property to the state 4) maintain copies of the reports and supporting documentation for a certain length of time, and 5) protect the funds until reported and transferred to the state.3
IMPLEMENT INTERNAL CONTROLS OR YOU'RE IN TROUBLE!
"When there hasn't been activity on any particular account, it's no secret that your employees will know that certain individuals (or companies) are not aware that they are entitled to credit balances or other refunds," Jundt said. "That's why the funds are generally transferred into a stale-dated account. That in itself creates the opportunity to breed potential fraud. So you want to make sure you have internal controls to oversee that account. Obviously, the same person who has access to the account shouldn't also have the authority to process or approve the claims."
Jundt said companies must determine all potential liabilities, get into compliance with applicable state requirements, develop and maintain detailed processes and procedures for tracking and reporting unclaimed property, and test them internally as well as independently through an outside specialist. Then they also must conduct internal audits of unclaimed property processes and procedures and form an unclaimed property committee that's responsible for compliance.
Jundt once served as the executive director for the National Association of Unclaimed Property Administrators and previously was the former administrator for the State of North Dakota Unclaimed Property Program.
"While I served as the administrator for the state, two of the first things we requested when we started an unclaimed property examination were a copy of their written policies and procedures and copies of the company's unclaimed property reports that had been filed to the state," she said. She wanted to check that the dollar amounts matched on all reports.
Jundt tells fraud examiners who might not be involved with unclaimed property matters (but see possible violations in this area) to be wary if they report problems to management. "Management might be part of the fraud! Possibly the legal department or, in some cases, the state agency responsible for unclaimed property compliance might be a good alternative," she said.
However, Jundt tells of one case in which a whistle-blower at a bank reported to management that he realized more than $187 million in unredeemed bonds hadn't been reported to the state. Management told him it wasn't his responsibility and to disregard the issue. The whistle-blower was uncomfortable with that directive and decided to seek guidance from the state controller's office. The state took action and notified the company it would be audited. The company fired the employee, but he received a sizeable reward for his efforts.
PROTECT YOUR COMPANY
Numerous states have estimated that less than 20 percent of U.S. companies are in compliance with their state unclaimed property laws, Jundt said. Make sure your company isn't one of them. Remove the threat of a tempting source of money by installing policies and procedures, internal controls, segregation of duties, an oversight committee, and an outside investigatory group. Management needs to work closely with the state agency handling unclaimed property to comply with regulations. Unclaimed property is often forgotten, frequently creates temptations, but it should never be gone.
COMMON UNCLAIMED PROPERTY TERMS
- Abandoned (unclaimed) property: Intangible property that has gone unclaimed by its rightful owner.
- Activity: Action taken on property by the owner, which might include making a deposit, a withdrawal, a written memorandum to the holder or any action that state statute deems adequate.
- Aggregate: The threshold dollar value of an individual owner's account, which will require owner detail and due diligence efforts. (Example: If the aggregate is $25, then all individual accounts equal to or greater than that amount must be identified on the report and due diligence performed.)
- Custodian: An individual or entity holding property until it's delivered to the rightful owner. Most states' laws make the unclaimed property division a "custodian" of the property remitted to the state.
- Due diligence: The degree of effort required by law that a holder must perform to find the rightful owner before remitting the property to the state.
- Dormant period: The period of inactivity after which property is considered "presumed abandoned."
- Dormancy date/date of last activity: The date of last contact by the owner as evidenced by the records of the holder.
- Escheat: A transfer of property that makes the state the legal owner of the transferred property. Few states operate under an escheat law as it relates to unclaimed property.
- Holder: The entity that's in possession of, or controls, the property until it's transferred to the state on behalf of the lost owner.
- Indemnification: An agreement that protects a party from loss by transferring the responsibilities to a third party.
- Intangible personal property: Property that has no intrinsic value but is merely representative or evidence of value. Examples include royalty payments, securities, accounts receivable, gift item, and deposit accounts.
Source: "Unclaimed Property 101 -- The Basics" ACFE Webinar, April 19, 2007.
EXAMPLES OF REPORTABLE PROPERTY
- Financial institutions, safe deposit boxes
- Money orders, travelers' checks
- Uncashed checks
- Insurance proceeds
- Utility deposits
- Securities and related property
- Payroll, commissions
- Accounts receivable credit balances and refunds
- Rebates
- Gift cards
Dick Carozza is editor-in-chief of Fraud Magazine
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1 O'Sullivan, Sean. "Ex-accountant Guilty in Check Fraud." Oct. 19, 2006. The News Journal. Wilmington, Del.
2 O'Sullivan, Sean. "Politician's Son Admits Stealing $1.2 Million from State." Feb. 6, 2008. The News Journal. Wilmington, Del.
3 "Unclaimed Property 101 -- The Basics" ACFE Webinar, April 19, 2007.
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