Unclaimed property operations and compliance managers at banks and broker-dealers are quickly reviewing their procedures for “lost accounts” in a wake of a recent recommendation by a legal expert appointed by the US Supreme Court that Delaware must return millions of dollars worth of uncashed “official checks” issued by MoneyGram to over 20 other states.
Although the case before the Supreme Court is limited to the disposition of uncashed “official checks” issued by MoneyGram, it could easily broadly apply to other uncashed checks and money orders or even other financial instruments that meet the definition of “similar instruments” under a 1974 federal statute called the Disposition of Abandoned Money Orders and Traveler’s Checks Act (FDA). Senior US Circuit Judge Pierre Leval, the special master, in late May reported that the unclaimed checks were either “money orders” or “similar instruments” so the other states, not Delaware, are entitled to the monies. In his 100 page report he called Delaware’s argument in support of it claims it is entitled to the uncashed MoneyGram official checks as being flawed, insubstantial and unpersuasive. If the Supreme Court’s justices agree with the special master, Delaware will have to figure out how much money it must return to the other states; by state estimates it is over US$150 million. According to an amicus brief that MoneyGram filed at an earlier stage in the case MoneyGram is not on the hook to make any payments to the other states, because it is indemnified under Delaware law for making payments to Delaware in “good faith.” Among the other states are Arkansas, Pennsylvania, Wisconsin, and South Carolina. (New York and California are not, but a spokesman for the New York State Comptroller’s office acknowledges the potential benefit to New York should the Supreme Court follow Judge Leval’s opinion. Disputed instruments that were purchased in New York would be reportable as unclaimed property to New York State).
Two dozen operations and compliance directors at several banks and broker-dealers contacted by FinOps Report say they are discussing the special master’s decision with their legal counsels to determine whether their policies comply with Judge Levals’s recommendation and what changes they have to make if the Supreme Court backs the special master’s opinion. “Compliance and legal departments need to start thinking about how their past and current policies differ from the special master’s report and whether they will be indemnified for escheatment of past similar instruments if necessary,” says Michael Lurie, an attorney with Reed Smith in Philadelphia specializing in state tax laws and unclaimed property. “States differ in their interpretation of indemnification for financial firms escheating funds in good faith, so financial firms need to closely analyze their facts and circumstances to determine if they could end up on the hook to pay penalties if they didn’t transfer the funds to the right state.”
At issue is how financial institutions have been interpreting the 1974 federal statute in terms of what happens with unclaimed checks and money orders or “similar” instruments. Legal departments typically interpret each state’s statute for unclaimed property and compliance departments determine how to adapt that interpretation into operational workflow and IT systems. Based on what their legal counsels recommended, financial firms could have been escheating or transferring unclaimed checks and money orders to either Delaware, or their state of headquarters, or the state in which the checks and money orders were issued or purchased. Depending on the outcome of their analysis and current practices, banks and broker-dealers might have to recode their back office systems to report and escheat unclaimed checks, money orders or “similar” instruments to a state other than the ones they have been using now. In a recent blog, the law firm of Alston & Bird says that financial firms need to evaluate whether the instruments they issue fall under the 1974 federal statute. “If so, and such instruments remain unclaimed for a statutory period, they would henceforth be escheatable to the state of purchase rather than the state of last known address of the owner, if known or the holder’s domicile state,” write attorneys in the law firm’s unclaimed property practice.
So far, predict some unclaimed property compliance experts, it is unlikely there will be any severe ramifications to bank and brokerage operations managers. “Accounts are typically registered in either the name of an individual with an address or a financial institution. ‘The case involving MoneyGram confirms that the FDA’s definitions cover the property at issue with address unknown assets reportable to the state of purchases. The provisions for money order and travelers checks differ significantly from state abandoned property rules for securities and other bank property which require the report of address unknown accounts to the state of incorporation of the issuer or financial institution,” explains Carol Irvine, president of Abandoned Property Advisors, an Englewood Cliffs, New Jersey-based unclaimed property compliance firm. “In actuality, the FDA’s rules align more closely with the intent of unclaimed property law which is to provide benefit to the state of the owner’s last known domicile.”
Unclaimed accounts are a cash cow for states which can use millions of dollars in funds to close budget gaps until their rightful owners reclaim them; assets without owner information in particular represent a significant windfall. However, for financial firms unclaimed accounts are a major administrative headache requiring dedicated staff. Each state has its own statute regarding when an account is considered unclaimed and how long before it must be considered unclaimed or dormant before it can be transferred or escheated to a state. Mistakes can cost financial firms millions of dollars in penalties and interest payments. Delaware has developed a reputation of being the most aggressive state in auditing financial institutions for underreporting of unclaimed property. Some corporations participate in a “voluntary disclosure program” which unclaimed property managers believe is essentially an invitation to audit.
The Supreme Court became involved in the case of the unclaimed “official checks” issued by Money Gram in 2016 because the matter ended up as a dispute between states –Delaware on one side and over twenty other states on the other side. Each side has a different interpretation of the 1974 FDA. Delaware insists that it is entitled to the uncashed MoneyGram checks because the 1974 statute doesn’t apply. The checks are not labeled as money orders, are not issued in fixed denominations such as travelers checks and do not require countersignatures like travelers checks. What should apply, says Delaware is common law– a previous Supreme Court ruling in 1965 that unclaimed accounts must be sent to the state of the last known address of the owner or if that is not known the state of incorporation of the issuer. Until 2016 MoneyGram has been sending its unclaimed checks to Delaware, the state in which it is incorporated under the premise that the checks do not include any addresses and are issued as cashiers checks or tellers checks. (During the pendency of the Supreme Court case the uncashed checks have been deposited in an escrow account). Over twenty states sued Delaware on the grounds that the 1974 FDA does apply, because the official MoneyGram checks fall into the category of “similar instruments.” Therefore, they must be returned to the state in which they were issued and that means the state where they were purchased.
In 2017 the Supreme Court picked Judge Leval to serve as special master to help it decide what to do. When rendering his report, Judge Leval said he disagreed with Delaware’s strict interpretation of the FDA as not applying to the MoneyGram checks because the checks are denominated as either agent checks or teller checks. He agreed with the states that MoneyGram’s uncashed official checks fall under the definition of a “money order” and seemed to accept the defendant states’ argument that a money order is a “prepaid draft issued by a post office, bank, or some other entity and used by a purchaser to safely transmit money to a payee” Judge Leval suggested that alternatively the official checks should qualify as a “similar instrument” in the 1974 federal statute because they met three conditions. The first is that the instrument must be similar to either a money order or traveler’s check; the second is that the instrument may not be a “third party check” and the third is that a banking or financial institution must be directly liable for the payment obligation associated with the instrument.
Judge Leval noted that MoneyGram is a financial institution with direct liability for payment. In addition, the checks are sold without the collection of data about the purchasers and the payees and the purchasers likely reside in the state in which they were purchased, “Like money orders [the instruments] are prepaid drafts issued by a financial institution or official entity providing for payment of an exact sum of money to a named individual (making them useful as a convenient, secure method for one person to transmit funds to another,” he wrote in his opinion. “The special master’s recommendation is that as long as the MoneyGram official checks acted like money orders Congress intended they should be treated as money orders,” explains Reed Smith’s Lurie. “He believed Congress wanted to overrule the 1965 common law premise that the funds would automatically go to the state of incorporation, which in this case is Delaware, if the address of the owner isn’t known.” Judge Leval also rejected Delaware’s argument that even if the official checks were “similar instruments” under the definition applied by the 1974 federal statute they could not be escheated to ten states because those states did not have any policies for their escheatment in their unclaimed property laws. Judge Leval said that the states which adopted the 1995 Uniform Unclaimed Property Act did reference “similar instruments” in their statutes, even if those statutes didn’t reference uncashed checks or money orders.