Many U.S. businesses will face the threat of increased exposure to unclaimed property in 2021 as states and private parties step up audits, litigation, and legislative changes aimed at increasing payments to states. While states already view foreclosure as a major revenue source, fiscal pressures from the pandemic will increase pressure to generate revenue by enforcing the Unclaimed Property Law. State lawmakers will again focus on the real estate legislation this year, which could eliminate significant exemptions and shorten suspension periods. Additionally, private plaintiffs can continue to use bogus state complaints to challenge past business processes. We also expect holders to take a step back in litigation against inadequate enforcement and control methods.
These are the main trends to watch in 2021.
Increase in "demands" for compliance by states in response to state budget deficits
Many states are facing serious budget deficits as a result of the pandemic. In response to these shortfalls, we expect states to take aggressive action to increase revenues by enforcing the unclaimed property law.
In recent years, states and external auditors have started using new tools to analyze internal state data to identify companies that may be implicit and identify gaps in document history and records and types of declared properties. Pressure on the state budget can accelerate these trends, leading to more third-party audits and greater opportunities to encourage companies to enroll in voluntary state disclosure programs. It may also lead to more quickly resolved audits and voluntary disclosure programs that are already underway.
Some states remain active in complying with its verified property laws and voluntary disclosure agreement (VDA) program, with Delaware being one of the states. In particular, some companies that completed a compliance process in Delaware in early 2010 have received new invitations, suggesting that even cardholders who have already made efforts to demonstrate compliance should periodically enroll in the state's voluntary disclosure agreement (VDA) or be subject to audit.
Companies should not wait for an audit notice or an opinion on the voluntary disclosure program to review and understand potential exposures with increased compliance expectations. Additionally, companies should consider unclaimed ownership obligations in mergers and acquisitions and examine their relationships with vendors, for example, transfer agents and third-party administrators, to understand whether the reporting obligations and responsibilities of unclaimed properties are clearly and correctly attributed. Deficiencies in the pursuit of unclaimed property obligations can lead to substantial exposure to waivers, especially in jurisdictions that typically value interest on late returns (e.g., California, Nevada, Texas, and Washington).
State legislators revert to unclaimed property law.
Due to the pandemic, state lawmakers were less active in resolving claimed property issues in 2020. Still, there is already some evidence that state lawmakers may revert to claimed real estate legislation in 2021 on unclaimed property. Nine states have enacted wholesale replacements to their unclaimed property statutes since the new model unclaimed property law was adopted in 2016 (2016 Uniform Act).
While most of its basic provisions are in line with previous model laws and existing state statutes, the 2016 Uniform Law contains important updates on several topics, including property types, downtime, priority rules, and auditing standards. Some states have used the law as an opportunity to remove material reporting exemptions, in some cases retroactively. Illinois eliminated its exemption for business-to-business transactions a few years ago. New Indiana law in 2021 proposed moving the business-to-business exemption and the long-term gift card exemption. In addition to states adopting wholesale replacements for their unclaimed property laws, states have also passed laws and/or regulations that focus on specific issues, such as gift cards, life insurance, and consolidated reporting.
Holders should be aware of pending state laws and regulations and be prepared for future changes in unclaimed state property standards.
False claims act litigation raises the stakes for compliance.
Recently, misrepresentation lawsuits, also known as qui tam cases involving unclaimed property, have become another area of concern for holders. State false claims act lawsuits usually assert that a company has knowingly and willfully declared in sufficient amounts to the State. Since inaccuracies are almost fraudulent and cause three times the damage, the possibility of misappropriation inaccuracy raises the stakes for risk management and unclaimed property compliance.
Conclusion
Holders must be prepared for an ever-changing scenario of unclaimed property compliance expectations, litigation, and legal requirements. We expect to see several developments related to the trends described above and other topics in 2021 and beyond.
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