General Counsel, In-House Counsel, Money

Inside Straight: Be An In-House Hero: Escheat Audits!

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It’s not just the federal government that’s desperate for money. The states are, too.

One way that states are looking to fill their coffers is by auditing unclaimed property on companies’ books — so-called “escheat audits.” This isn’t the world’s sexiest topic, but an in-house lawyer might serve a valuable purpose by double-checking corporate escheat policies.

In the financial services industry, many companies must deal with unclaimed deposits and securities. But even outside that sector, most companies find themselves holding unclaimed property, in the form of uncashed vendor or payroll checks, undistributed benefits payments, or the like. Complying with escheat laws may pose a challenge.

States are now doing two things related to escheat laws to increase their revenue. First, they’re shortening the amount of time that a holder can retain unclaimed funds before turning those funds over to the state. Second, states are accelerating their use of “escheat audits” — auditing corporate books to see whether companies have complied with the applicable laws.

This has recently become big business — with implications for in-house counsel….

Delaware is naturally a hotbed of escheat-audit activity, because so many companies are incorporated there. Escheat audits have become the third largest source of revenue for Delaware, after personal income taxes and franchise taxes. (States don’t actually acquire ownership of unclaimed funds. The states instead hold the funds until the funds are claimed by the rightful owners. But the funds remain in the state treasury until they’re claimed, and states will often set aside a small amount to pay claims actually made by owners and use the remaining funds for statutorily authorized purposes.)

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Escheat audits thus indirectly raise real money for cash-strapped states, but, as you might imagine, an audit can be quite a headache for the company being audited. A typical escheat audit might last from three to five years; the audit period can reach back 20 or 25 years; the company being audited generally must retain a forensic accounting firm to help dig through its records. If the company is missing old records, many states will extrapolate from amounts not paid in recent years to determine amounts due for decades past. Needless to say, the legal and accounting costs involved in undergoing an escheat audit can be quite high. And, at the end of the day, penalties and interest due to a state can quickly add up. In California, for example, there’s an automatic penalty of 12 percent per year for late reporting.

So what can you do to turn yourself into an in-house hero?

First, kick the tires on your company’s compliance with the laws governing escheat. If something needs fixing in that regard, fix it.

Second, many states have amnesty or voluntary compliance programs that permit companies to make late payments without being charged interest and penalties. If you learn that your company is out of compliance, you might check to see whether a program of that type is available in your state of incorporation.

I’m pleased to report that I’m no expert in state escheat laws; if you need advice on this subject, don’t come to me. But anyone who wants to poke around in this field can find a fair amount of information on the web. Keane (a company that apparently exists to advise about unclaimed property issues) hosts this Unclaimed Property Blog, and innumerable law firms have published brochures on this subject, including Skadden, Sidley, and Duff & Phelps.

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Mark Herrmann is the Vice President and Chief Counsel – Litigation at Aon, the world’s leading provider of risk management services, insurance and reinsurance brokerage, and human capital and management consulting. He is the author of The Curmudgeon’s Guide to Practicing Law (affiliate link).

You can reach him by email at inhouse@abovethelaw.com.

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