UNCLAIMED PROPERTYUNCLAIMED PROPERTY NIGHTMARES · counsel, UP consultants, and in‐house IT department • AFTER: If you are concerned about the qqyuality of implementation, conduct

2011 UPPO ANNUAL CONFERENCE MARCH 6-9, 2011

© 2011 UPPO. All rights reserved. 1

UNCLAIMED PROPERTYUNCLAIMED PROPERTY NIGHTMARES

Kendall L HoughtonKendall L. Houghton, Baker & McKenzie LLP

Robert M. Tucci, True Partners Consulting LLCTrue Partners Consulting LLC

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WHATAUDIT

LAW CHANGES

WHAT KEEPS YOU

EXTRAPOLATION

LAWSUITCLEAN UP

UP AT NIGHT?

VDA

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A “Grimm” Roster ofA Grimm Roster of UP “Hairy‐Tales”

• UP is not for the faint of heart –therefore we offer these tales of terrortherefore, we offer these tales of terror for your consideration

• Each highlights a UP boogeyman but weEach highlights a UP boogeyman, but we also suggest ways to ward them off

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h dNightmare: VDA Rejected by the State

• Company is incorporated in DE and has filed incomplete unclaimed property reports

• Sales are in excess of $1 Billion• VDA submission was for five (5) payroll checks totaling $1,500

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What went wrong?

• VDA did not cover all applicable property types for Company’s industry

• VDA did not cover the required number of reporting years for past due property

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Wh t h ld d ?What you should do?– Research all potential property types for your industryyour industry

– Confirm if third party administrators are filing on your behalf

– Confirm what years are to be reviewed and includedP f i t d dili

The moral of the story: VDAs should be a thorough & complete review of

– Perform appropriate due diligence

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be a thorough & complete review of the company



h f d lNightmare: Gift Card Planning Gone Awry

• Company establishes a new entity to issue gift cards, redeemable at the retail operations p

• GC issuing entity is incorporated in an exemption state, does not itself collect data on purchasers of gift cardson purchasers of gift cards

• Retail affiliate collects data on purchasers for marketing purposes at POS and merges that data to GC database

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data to GC database



What went wrong?• Reorganizing the gift card function is a process that requires scrupulous attention to details, especially in implementation

• If affiliates permit purchaser data to be merged• If affiliates permit purchaser data to be merged with specific gift card accounts, then the first priority rule may be asserted!

• States will review the IT systems of audit targets to test whether a company can, in fact, report gift cards as owner‐known property

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gift cards as owner‐known property



What should you do?What should you do?• BEFORE: Understand the structure, discuss your specific implementation requirements with legal counsel, UP consultants, and in‐house IT department

• AFTER: If you are concerned about the quality of y q yimplementation, conduct a “forensic” review of your databases and IT systems associated with gift card operations g pThe moral of the story: You MUST get your planning right, or deal with any “slippage” you find in your planning – states will attack such

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find in your planning states will attack such planning on any and all available grounds



Nightmare: Estimation Techniques

• Company has been regularly filing unclaimed property reports for 10+ years

• Company is under an audit being conducted by a third party auditor

• Auditor has calculated an extrapolation back• Auditor has calculated an extrapolation back for a number of years, which includes the years of which Company was filing unclaimed

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property reports



What went wrong?

h h i i l li l h 2% f• Through statistical sampling, less than 2% of items were identified as unclaimed property

• In addition to the 2%, the third party auditorIn addition to the 2%, the third party auditor included all items previously reported as unclaimed property into the extrapolation

• Also included in the extrapolation were items that were returned to the owner in the normal course of business through due

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gdiligence efforts



Wh t h ld d ?What you should do?– Retain all appropriate documentation on prior reporting historyprior reporting history

– Perform appropriate due diligence– Be prepared to challenge the estimation p p gmethodology of the auditors

Th l f th t Wh iThe moral of the story: When is an error an error for estimation purposes?

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purposes?



h hNightmare: The “Surprise” Multistate Audit

• Company was notified of audit by State X, scheduled an opening conference and prepared to address State X’s questions

h d b h l• On that date, State X brought along 8 other states’ audit representatives!

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What went wrong?

• Company did not ask State X to confirm it was not representing other states (per a multistate auditstates (per a multistate audit agreement) or “inviting” others along – even for training purposes

• Company X had to ask other state representatives to leave – AWKWARD! and can cause offense

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and can cause offense



What should you do?• Ask auditing state to execute a confidentiality g yagreement with you prior to setting an opening conference

• Inquire whether state is auditing solely on itsInquire whether state is auditing solely on its own behalf or on behalf of others

• Establish ground rule with state auditor that they tell you who will attend meetings/bethey tell you who will attend meetings/be involved in audit processThe moral of the story: Control the audit

f d l

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process from Day 1 to avoid unpleasant surprises!



h d l &Nightmare: Inadequate Policies & Procedures

• Company has never filed unclaimed property reports

• Company does not have enterprise wide unclaimed property policies & procedures in place

• Company wants to come into l

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compliance



What went wrong?What went wrong?• Company had history of leaving credit balances on the customers accounton the customers account – In a one year timeframe, Company performed multiple “clean‐ups” to take customer credit balances as an offset against bad debtbalances as an offset against bad debt

– No due diligence was performed at that time– Current due diligence efforts have been unfavorable

d bl b h d das records are not able to be researched and Company has an almost 100% due diligence response that money is owed to the owner

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Wh t h ld d• What you should do:– Conduct a thorough review of your books & records to identify any outstandingrecords to identify any outstanding unclaimed property liability

– Develop adequate policies & procedures• Implement detailed procedures for identifying, tracking & reporting unclaimed property

• Determine appropriate record retention

The moral of the story: Don’t just look at the current it is the past that

guidelines

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at the current, it is the past that matters most!



hNightmare: Retroactive Property Grab

• State that formerly exempted gift cards from UP jurisdiction enacts law claiming if d h ld b f hgift cards that were sold on or before the date of enactment of the law

• Due to your gift card planning holder• Due to your gift card planning, holder had already taken gift card breakage into revenue

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revenue



What went wrong?• This is the current situation in NewThis is the current situation in New Jersey: state needs to find revenues, identifies gift cards “issued or sold in NJ” as the target

• Unlimited retroactive effect of the statute would cause significant impact on established practices, and commercial contracts between gift card issuers and

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contracts between gift card issuers and purchasers



What should you do?• Challenge the law – trade associations sued NJ over this issue (and others), and have won temporary injunctive relief against the retroactive operation of theagainst the retroactive operation of the new law to cards sold before the date of enactment (Contracts Clause)( )

The moral of the story: Understand and defend your constitutional rights as

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holders



h f llNightmare: Front Page of Wall Street Journal for Non‐Compliance

• 2008 article in Wall Street Journal, “States Scooping Up Assets From Million of Americans”– Waste Management, Inc. is included in the article as having paid $19 million in 2006 to the State ofas having paid $19 million in 2006 to the State of Delaware in an audit settlement

• Recent lawsuits

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– Staples, Computer Associates, McKesson



Wh t t ?What went wrong?• Depends on one’s perspective, but these disputes were not susceptible of resolution prior to undertaking the expense to litigateexpense to litigate

The moral of the story: Know your riskThe moral of the story: Know your risk tolerance and when the fight is worth (1) the potential bad PR and (2) the cost that ill b i d

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will be incurred



h f hNightmare: Dawn of the Owner Lawsuits

• Company’s due diligence efforts were less than complete or effectiveN t t d ith lt• No contact made with royalty owners concerning uncashed checks

• Unhappy royalty owners initiated a lawUnhappy royalty owners initiated a law suit asserting RICO claims (Racketeering Influenced Corrupt O i ti A t i M fi l !)

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Organizations Act – i.e., Mafia law!)



What went wrong?

• Due diligence is a key aspect of holder compliance with the UP laws – holder was too sloppytoo sloppy

• Failure to conduct due diligence may anger owners as well as statesowners as well as states

• State UP laws are informed by the public policy to reunite property with the true

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policy to reunite property with the true owner



What should you do?

• Ensure that your due diligence policies• Ensure that your due diligence policies and procedures are effective

• Review periodically to ensure that no p yexposures exist (no DD function, sending DD letter to wrong address, format/timing of DD letters)of DD letters)The moral of the story: Danger comes from two sides in this area of law – states

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AND owners



Th l f h b d i iThe moral of these bedtime stories:

G t ’ h i d ith tGet one’s house in order with respect to unclaimed property –you will sleep better!you will sleep better!

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Questions?Questions?

Kendall HoughtonKendall HoughtonBaker & McKenzie LLP

(202) 835‐6154K d ll H ht @B k k [email protected]

Robert TucciTrue Partners Consulting LLC

(972) 618‐[email protected]

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[email protected]

Documents

UNCLAIMED PROPERTYUNCLAIMED PROPERTY NIGHTMARES · counsel, UP consultants, and in‐house IT department • AFTER: If you are concerned about the qqyuality of implementation, conduct