The COVID-19 pandemic is prompting a shakeup in the mundane world of unclaimed property reporting operations and compliance.
Instead of simply focusing only on escheating accounts of lost investors and customers to state coffers, US banks and broker-dealers are now trying to recover funds and accounts belonging to their institutions, say unclaimed property operations managers. The recovery of the unclaimed funds represents a refund of sorts. States get their hands on the unclaimed assets after a dormancy period of typically three to five years after the funds or securities are determined to be unclaimed when the owners have lost touch with their banks, broker-dealers, or corporate transfer agents. The unclaimed accounts are reported and sent to the state of either the last known address of the investor, the state of incorporation of the issuer of the securities, or the state of incorporation of the bank or brokerage. Uncashed reimbursements from vendors, checks from property title companies, class actions settlements, bankruptcies and corporate restructurings can fall within the pot of unclaimed assets for institutions.
A quick search of the New York State’s unclaimed property within the Office of the State Comptroller Thomas DiNapoli showed a total of 574 items reported as belonging to JP Morgan Chase, which don’t include all of the items from firms which were acquired or merged with JP Morgan and are now part of the JP Morgan Chase family. Many such items appeared to be held by JP Morgan for the benefit of customers; however, there were some listings for funds for “undelivered goods and services” reported by numerous vendors including the law firm of Holland & Knight and S&P Global. ING Financial Services, Northern Trust, Goldman Sachs, and Deutsche Bank were among those which had reported JP Morgan Chase’s unclaimed cash dividends, bond interest and credit balances. Over 1300 items are listed as being reported for Citigroup with Automatic Data Processing and T-Mobile reporting amounts due for undelivered services; Goldman Sachs reported credit balances and Credit Suisse reported bond interest and stock dividends. JP Morgan Chase and Citi did not respond to emails seeking comment. New York State does not include the value of the unclaimed assets remitted to the state on its website while other states, such as Texas and California, do so it could not be determined just how the banks could potentially recover. (In 2015 JP Morgan Chase was also sued by whistleblower Raw Data Analytics for failing to pay interest on unclaimed property reported late to New York State and in 2019 a NY civil court judge ordered JP Morgan to pay interest. However, the case has yet to be resolved).
There is no official figure as to what percentage of the total value of unclaimed assets held in state coffers is owned by banks and broker-dealers and no one contacted by FinOps Report wanted to provide an estimate. However, based on just one asset recovery specialist’s experience. big bucks could be involved. Robert Farley, president of asset recovery firm Global 21st Century Group in New York, says his firm recently helped one bank reclaim US$7 million in assets lost between 1929 and 1940 and another bank reclaim US$2.5 million in assets lost in 1998. Farley’s firm and others specializing in asset recovery are hired as agents of banks and brokerage firms to do the legwork that would otherwise have to be completed by internal unclaimed property managers or operations managers in proving to a state their financial firms are entitled to the escheated funds as they are the rightful owners.
Despite the sizeable amounts of funds that could be reclaimed, Farley and others say they often have a hard time convincing financial firms to reclaim assets held at state coffers because of the lack of willpower and manpower. “Financial institutions believe their priority is to address federal and state unclaimed property regulations,” says Farley, who previously worked as a managing director of BNP Paribas Securities Services in New York. “They don’t believe it is their fiduciary responsibility to reclaim funds belonging to the bank or brokerage post-escheatment. The SEC and state unclaimed property regulations do not require financial institution to reclaim its escheated assets. Financial firms might even be worried about triggering what they don’t want– an audit. “In some instances, states which receive numerous claims from an institution might question whether the financial firm is appropriately reporting and remitting unclaimed property. If it appears deficient, the state might launch an audit,” says Christa DeOliveira, chief compliance officer for asset recovery firm Linking Asset in New York. “Such an audit could result in financial penalties for not reporting unclaimed accounts on time. ”
Financial firms are quickly beginning to see the merits of reclaiming what is rightfully theirs. “The COVID-19 pandemic has caused banks and brokers cutting expenses and some are looking to recover assets which were actually written off as losses,” says Mike Ryan a former senior vice president of unclaimed property services at Georgeson in New York who now works as a consultant in central Florida. Out of the ten unclaimed property operations managers who spoke with FinOps Report on the condition of anonymity, four say they have been asked by their chief financial officers to reclaim escheated assets belonging to their firms. None wanted to disclose the specific amounts involved, but one unclaimed property manager of a small financial institution guesstimates it could come to over US$1 million from New York and Delaware alone. Larger financial institutions could have multiples of that amount depending on how well they have managed their asset recovery process.
Marc Musyl, a partner with the law firm of Greenberg Traurig in Denver, says that financial firms are belatedly starting to realize they won’t get their monies back from the states simply because they are large well-known institutions and have to do the work on their own. “The states have no incentive to contact the owners of the money as they can use the funds to close budget deficits,” he explains. “It is up to the individual firm to do the necessary legwork.” Financial institutions can designate a specific asset recovery specialist to do an annual search of state unclaimed property websites or hire an external expert. Rather than search through the records of fifty states at once, Musyl recommends that financial firms first look their states of incorporation, principal offices, and branch offices. “Banks and brokerages should also ensure they are in compliance with reporting unclaimed property before starting a recovery process, because states will want to know if the bank or brokerage is compliant before making out any payments,” suggests Ryan. “If they are in compliance they should then list all of their subsidiaries and their locations of business and do a quick search of the unclaimed property websites. New York and California’s websites are the easiest to navigate as they also identify the asset in question.”
Reclaiming funds isn’t easy. States don’t like parting with the money since they can use the funds to close their budget deficits. “As long as the bank or brokerage firm can claim a legal or equitable right to the property it should be returned by the state,” says Sara Lima, a partner with the law firm of Reed Smith in Philadelphia. “However, state administrators may be reluctant to return property to an entity in whose name it was not reported originally. In some complex cases, litigation might be required to recover the amounts and banks and brokerages may decide to forgo the property to avoid a public dispute.” Of the estimated US$3 billion in unclaimed property received by states each year, only between nine percent and 50 percent of that amount is ever reclaimed depending on the state. A spokesperson for New York State Comptroller DiNapoli says that since 1943 when New York’ unclaimed property law took effect over US$16.5 billion in assets remains unclaimed which belongs to 42 million records– individuals and business entities. The US$16.5 billion only takes into account cash assets and does not include the value of securities which could easily be more than three times the cash figure, estimate some unclaimed property experts.
As a rule of thumb, the larger the amount of potential reclaimable funds and the more convoluted the history of the financial institution in question, the more difficult the recovery process. As claimants, financial institutions have to validate the identities of the staff completing the documentation on their behalf and prove their firms have a “relationship” with the unclaimed assets. That proof might not be too hard to show in the case of an uncashed check from a vendor, but could be difficult to show if the firm cannot validate it did business at the address where the check was sent if a merger, takeover, or bankruptcy has occurred. Financial firms which have undergone multiple mergers and acquisitions over several years will likely have the most trouble proving ownership of unclaimed assets. “In some cases we need proof of ownership or entitlement to the item based on the type of property being claimed such as an account statement or proof of outstanding debt,” says the spokesperson for New York State’s Comptroller. “Additional documentation may be required if the entity has undergone a name change, merger or acquisition, or the business was dissolved.”
Ryan recommends that larger financial firms which have a designated unclaimed property unit designate a point person to reclaim escheated assets. Alternatively, the point person could be a executive in the operations or finance department for smaller firms which handle unclaimed property compliance in those departments. Asset recovery firms maintain they are more cost-effective than internal staffers as the reclamation process can be stressful and time-consuming. “We already have relationships with state unclaimed property administrators to streamline the reclaim process and we are familiar with the varied and sometimes nuanced requirements for reclaiming property,” says DeOliveira. The four operations managers who spoke with FinOps Report saying their chief financial officers want them to reclaim escheated assets belonging to their banks, acknowledge they are worried about how they will complete the process given they have done no experience with asset recovery.
After signing a contract with a financial firm to serve as its agent, an asset recovery firms specializing in corporate accounts as a forensic investigator to figure out how the money or accounts ended up in a state’s jurisdiction in the first place and whether the money actually belongs to the financial firm rather than an individual investor or customer. Once that occurs, says Farley, his firm will track down which subsidiary or business line of the financial firm is entitled to the monies or securities. “It will be up to the institution to decide how to book the recovered assets and they must be allocated to the right legal entity or unit,” he says. Ryan says that in some cases a financial firm could book the funds as recovered revenues in its unclaimed property unit.
If financial gain isn’t a good enough reason to make the effort to reclaim escheated funds, then corporate goodwill might be an even better one. “Financial firms can always use the money for the greater good through their corporate responsibility efforts by helping various corporate philanthropic/charity programs,” says Farley. “Given that we are in the midst of a global pandemic, it might not be a bad idea to generate goodwill and bolster one’s reputation so there is no reason to leave the assets at state jurisdictions.”