Top unclaimed property reporting risks for financial institutions 

Unclaimed property reporting has taken on increased significance for companies in recent years, due in part to growing interest in the topic from states in the form of increased enforcement and audits. Compliance with unclaimed property, or property held or owed in the ordinary course of business that has not been returned to or claimed by its rightful owner, is especially complicated for heavily regulated financial institutions like banks, credit unions, and broker-dealers due to varying and unclear rules across different account types and states. This lack of uniformity means the risk of noncompliance for your organization is at an all-time high. 

Here is an overview of some of the most prominent challenges financial institutions face with escheatment and considerations for overcoming them. 

Unclaimed property audit and compliance challenges 

States are cracking down on unclaimed property compliance.  

All 50 states, the District of Columbia, U.S. territories, and several foreign countries maintain escheat laws requiring companies to turn over lost property. Because reporting requirements are based on where your customers live, not the state in which you are located or have branches, your organization is likely subject to unclaimed property laws in multiple jurisdictions. The rise in online banking hasn’t helped in this regard, with expanded geographical footprint for most financial institutions resulting in far more complex unclaimed property filing profiles and considerations. 

States have made unclaimed property, and therefore compliance, a priority in recent years, recognizing it as an alternative revenue source to raising taxes. Examples of ways they are detecting such noncompliance include comparing the materiality of your tax filings to your unclaimed property amounts, benchmarking your filed amounts against peers, and detecting yearly fluctuations in amounts filed and/or types of property you are not filing that they customarily see from you or others. Furthermore, an increasing number of states are automatically assessing penalties and interest for unclaimed property noncompliance or late filings. 

Unclaimed property audits are becoming prolonged and aggressive.  

When it comes to unclaimed property audits, it truly seems like a matter of if not when a state audits a business. This is partially due to the proliferation of outside audit firms the states contract with to perform these audits and the increased state interest in unclaimed property as a revenue source. What’s more, those external firms are paid a contingency fee by the states, based on the eventual findings in the audit. The financial incentive for these auditors has resulted in more aggressive, drawn-out examinations that explore all parts of your business. 

Your reputation is at stake.  

As a financial institution, your customers trust in your ability to keep their assets safe. Reporting accounts can result in tax implications and liquidation of assets held in those accounts, which makes early reporting especially harmful to your customers’ financial positions. Also, with the rise of online banking resulting in a very competitive environment to gain and retain customers, you can’t afford to lose business due to unnecessary and avoidable escheatment. After all, it is less expensive to maintain an existing customer than it is to gain a new one. 

Operational complexities = additional risks 

Compliance with unclaimed property reporting rules can be downright challenging as well as tedious for financial institutions. This is largely due to the many conditions that must be true before certain account types become reportable as unclaimed property.  

Some of the most common challenges and key considerations include: 

• Auto-renewable CDs. Financial institutions often have different, more customer-centric policies regarding the escheatment of certificates of deposit than state unclaimed property laws or guidance provides. It’s crucial that you recognize these differences and strategically align your organization’s policies and procedures to your desired result. For instance, many states do not allow for renewals into perpetuity whereas others require the escheatment of such products only upon returned mail, such as statements or tax forms. 
• Escheatment of traditional and Roth IRAs. Variations in state-by-state reporting requirements can make proper escheatment of these accounts particularly challenging. Many states’ statutes do not specifically address such account types, leaving financial institutions to decide if and when such accounts are reportable. For the states that do address them, many factors apply, such as returned mail and age-based restrictions, to determine if an account actually qualifies for escheatment. 
• Returned mail tracking. Many types of accounts do not qualify for escheatment until the financial institution receives returned mail from the customer. Furthermore, some states allow the lack of returned mail to constitute the customer’s awareness and/or interest in the account. It is important to know the rules in every state, otherwise you could escheat your customer’s accounts early and/or expose yourself to increasing amounts of consumer complaints and litigation. 
• Handling of deceased accounts. Some states have alternative handling and/or accelerated dormancy periods for deceased accounts. These can conflict with other requirements outside of unclaimed property laws, such as the longer period beneficiaries have to distribute under IRS rules. It is important to know the full landscape and how the varying unclaimed property rules align (or don’t align) with other requirements to which you are subject. 
• Expansion of online banking. With customers living across the nation, financial institutions must follow unclaimed property laws by state and comply with each jurisdiction. Further, it is paramount that you track all the ways you interact with customers (online logins, text, chat, etc.) and know what might not be, at least in the eyes of states, considered valid owner-generated activity, e.g., recurring transactions and activity in like-titled accounts.  
• Customer reengagement strategies. When it comes to unclaimed property compliance, re-engaging with your customers takes on even greater importance. Implementing a strategic plan to more quickly identify and re-engage inactive customers not only protects assets under management and creates customer goodwill but also helps limit the accounts for which you must know and apply complex, nuanced unclaimed property reporting rules. 

Kodiak is your trusted unclaimed property compliance and reporting partner. 

As a trusted compliance adviser and unclaimed property outsourcing provider to nearly 2,000 companies, Kodiak can help financial institutions like yours cut through the complexity of unclaimed property regulations, mitigate compliance challenges and audit risks, and make sure your business processes align with the rules and your peers. 

Our team of experienced industry experts use escheatment reporting solutions to help banks and other financial institutions identify reportable accounts and help you locate better addresses and re-engage with individuals who have inactive accounts. Contact us today to find out how we can help you meet your unclaimed property compliance needs so you can get back to your most valuable asset: your customers.