Financial institutions are aware of and have been consistently reporting certain unclaimed property for some time since this industry, among others, has historically been subject to compliance enforcement in many states. The following considerations take into account sometimes overlooked issues specifically relevant to the financial institutions industry.
Preventing Account Escheatment and Maintaining Customer Goodwill
The primary goal for financial institutions wanting to avoid escheatment should be preventing their customers’ accounts from reaching the reporting stage of dormancy. The key to achieving this goal is putting policies and procedures in place that will accurately track and document owner-generated activities that can, in turn, be used to effectively reset the dormancy clock, consequently keeping the accounts active and in a nonreportable state. Toward this effort, and for traditional deposit accounts, the issue of owner-generated activity becomes primary. For an account to remain active, activity initiated by the owner must take place in the account within a certain amount of time (typically three to five years). How does an institution qualify and track owner-generated activity? Many states are attempting to catch up on this issue, and unfortunately, there is often a lack of clear guidance.
While an institution’s objectives should include the reunification of properties with the true owner of such property, another incentive for proactively keeping the unclaimed property function current and limiting the amounts and types of property from reaching dormancy is the maintenance of customer and client goodwill. Most customers would not be too pleased to find out their institution turned their funds over to the state, which in many cases requires the expenditure of additional time and effort to recover, when certain institution actions could have prevented the properties from reaching their dormancy in the first place.
A few measures can prevent many accounts from reaching dormancy:
- Do not wait until an account has reached, or is close to reaching, its dormancy period before sending out the due diligence letters. Nothing prevents a financial institution from sending out letters to customers well in advance of the dormancy period or sending out letters more than once a year. Also, update customer accounts promptly when mail is returned to the institution.
- Many institutions have an email address for their customers, so sending an email notice is a cost-effective and efficient way to contact those customers and can provide support evidence that they are aware of the property and wish for such accounts to remain open and in an active state. For other property types, a customer response could lead to the reunification of the property with its true owner.
- Does the institution archive customer online banking account logins and link them to the unclaimed property compliance function? If so, this data can be used as another way to substantiate an active account status for unclaimed property dormancy tracking purposes.
Note: For purposes of resetting the dormancy clock and maintaining active account statuses, many states are still working through what activities qualify as “owner-generated” and may or may not recognize a specific type of activity as qualified. However, the more effort put forth by financial institutions to document activity by tangible or electronic support, the better they will be able to establish an account is still active.
Another issue currently being evaluated by states that is specific to financial institutions is “account linking.” Does owner-generated activity in one account (e.g., checking) demonstrate an interest in a separate account (e.g., money market, savings) held by the same institution for purposes of qualifying an active account status for the separate and additional accounts?
When Necessary to Escheat
While there are many underlying reasons an account may ultimately reach dormancy through customer inactivity, when it does become necessary to escheat, it is important to account for any and all properties required to be reported and remitted. Outside of the traditional deposit account types of properties, is the institution, on an annual basis, tracking, reporting, and remitting all the existing types of unclaimed property it is holding and liable for? In an audit scenario, a state or one of the state’s contract auditors, when applicable, will request relevant records (historical reports, policies and procedures, tracking schedules, support of customer activities and contact, etc.) going back ten plus years, in search of all unclaimed property types a holder may be in possession of. Any properties not properly escheated when found due, owing, and dormant will likely be subject to considerable interest and penalty assessments.
Below are additional types of unclaimed property financial institutions may be currently holding:
- Vendor checks/accounts payable
- Wages, salaries, bonuses, and commissions
- Employee expense reimbursements
- Escrow or trust accounts
- Individual Retirement Accounts (IRAs)
- Health Savings Accounts (HSAs)
- Educational savings accounts
- Unclaimed loan collateral
- Early payoff imbalances
- Property acquired by way of mergers and acquisitions
Note: In certain states, financial institutions are now required to track 30 or more different types of unclaimed properties. While attempting full compliance can initially be quite burdensome on institutions, there are policies and procedures that, when properly implemented, can lessen these burdens, reduce the amount of properties that must be reported to states on an annual basis, and limit potential audit exposure.