oil & gas many issues fueling in this issue · pdf fileselling and/or trading oil &...

Keane Welcomes Pamela J. WentzBig 4 Consultant/Former State Unclaimed Property Audit Director joins Keane’s Unclaimed Property Consulting & Advisory Services group.

We are pleased to announce that state unclaimed property audit director, Pamela Wentz, has joined our team as senior manager

of our Unclaimed Property Consulting & Advisory Services group. Along with Valerie Jundt, Pamela will be serving this group from her office in Bismarck, North

Dakota. We’re overjoyed to have Pamela on board as her extensive experience as a former state unclaimed property auditor not only gives her a unique perspective from which our clients will benefit, but also adds to our team’s deep industry knowledge.

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in this issue:Oil & Gas ..................................Cover

Keane Welcomes Pamela J. Wentz ......................Cover

Legislative Updates.........................4

Navigating the Complexities of Unclaimed Property........................8

Unclaimed Property and theInternal Auditor.............................10

Unclaimed property. Uncompromising performance.

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The first unclaimed property compliance quarterly newsletter, published exclusively by Keane since 2003. Keane is the country’s leading provider of unclaimed property communication, compliance and consulting services.

OIL & GAS MANY ISSUES FUELING UNCLAIMED PROPERTY AUDITS

continued on page 6continued on page 2

By Pamela J. Wentz, Senior Manager – Keane Consulting & Advisory Services

In recent years the oil & gas industry has

seen a significant increase in the number

of unclaimed property audits conducted

by the states – or their contract auditors.

This increase is generally attributed to the

combination of higher oil prices and state

budget shortfalls but there are many factors

- such as filing history, failure to report

all property types, and recent mergers or

acquisitions - that can all affect the likelihood

of being selected for an audit.

Regardless of the reason, audit activity is

on the rise, and the option of proactively

implementing sufficient controls and ensuring

that fiscal accountability is intact, is no

longer an option for the “C Suite” Executive.

Companies need to take proactive measures

now. This article offers some suggestions

and best practices based on our extensive

experience assisting oil & gas clients as

they prepare for and navigate through the

unclaimed property audit process.

Where is the Problem?The most commonly recognized property types in the oil & gas industry are related to mineral proceeds. We will discuss several of the common problems in this area at length below. However, there are many other “common” types of unclaimed property that can get oil & gas companies in trouble because they have failed to develop appropriate policies and procedures. For instance, it is common for unclaimed property audits to expose significant liability in areas

such as: Accounts payable checksPayroll/commissionsAccounts receivable credit balancesSuspense accountsBranded credit card credit balancesGift cards/gift certificatesEquity related property, e.g., stock, dividends, etc.Debt related property, e.g., corporate bonds, debentures, etc.Benefit plansWorker’s compensation

Please note: This is not a comprehensive list, and not all property types on the list will apply to all oil & gas companies. Each company’s unique features and business operations need to be analyzed to determine which types of unclaimed property the company may generate. For instance, branded credit card credit balances and gift cards/gift certificates may apply to companies that have branded service stations. Also, equity related property is only an issue for publically traded companies. Even benefits plans can be an issue for companies that have self-insured medical plans or old pension plans that are not subject to ERISA.

Some of these commonly overlooked property types warrant discussion because they are always relevant in an audit.

Accounts Payable Checks – Any type of uncashed check can potentially become unclaimed property. This can include vendor checks, refund checks, lease payments, mineral proceeds payments, dividends and other types of disbursements. Companies need to review ALL disbursement accounts to

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ensure they are in compliance with applicable state unclaimed property laws.

Uncashed Royalty ChecksRoyalty checks can be a significant issue for oil & gas companies, especially given the potential high volume of low-dollar checks. Many companies have implemented a minimum threshold (e.g. $25 or $100) before they will cut a check to pay an owner. While this may reduce the volume of checks, there are still typically a large number that go uncashed each year. Companies must have a clear plan for handling these checks in order to remain compliant. It generally makes sense to void the checks and put them into a suspense account if the check is part of a revenue stream. It may make more sense, however, to void the checks and hold them in a liability account until they are reportable if they are one-time payments. Whatever the choice, a clear audit trail is crucial.

Accounts Receivable Credit Balances –The dormancy period for credit balances in most states ranges from 3 to 5 years. This does not mean that a credit balance must remain on the company’s

books and records for that period of time to be a potential liability. When states are

continued from cover page Oil & Gas: Many Issues Fueling Unclaimed Property Audits

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conducting unclaimed property audits, they will generally select credit balances that have remained outstanding for a predetermined period of time (e.g. 6 months, 1 year) for testing. They will require the company to determine the ultimate disposition of the aged credit balances in order to identify credit balances that may have been written off to income or another account. In some cases, once they identify the general ledger accounts that have been used to offset credit balances, they will test the activity/entries posted to those general ledger accounts, which can be problematic. For example, if a company has a small balance write-off policy, these write-offs are commonly posted to a general ledger account with legitimate adjustments. It can be difficult to separate the write-offs from the adjustments. It can also be difficult to prove that adjustments were legitimate accounting entries. We strongly recommend that companies analyze small balance write-off policies to identify any potential conflicts with state unclaimed property laws, as most states do not allow an unclaimed property exemption for small dollar amounts. If you do have a small balance write-off policy, consider segregating the activity so that it can be accurately quantified if it becomes an issue.Credit balances are a significant challenge for oil & gas companies because buying, selling and/or trading oil & gas can result in accounting adjustments or “true-ups” due to volume, timing or pricing issues. If these adjustments are not made in a timely manner, it can create the appearance that the company is simply writing-off aged outstanding credit balances. Additionally, even if the entries are made timely, the testing methodology described above can result in a large potential liability, even if the company is not writing-off credit balances.

Mineral Proceeds ChallengesMineral proceeds are the most prominent

property type for oil & gas companies. As, mentioned, there are many types of mineral proceeds payments that companies must be prepared to handle. They can include:

RoyaltiesORRI – overriding royalties interestShut-in royaltiesProduction paymentsLease bonusMinimum royaltiesDelay rentals

The payments of mineral proceeds provide very unique challenges as it relates to unclaimed property. As discussed above, the large volume and small dollar amounts for some royalty payments can make them hard to track and more likely to go unclaimed. Additionally, many states have special rules around reporting unclaimed royalties. For example, in excess of twenty states have some form of a “current pay” rule, which generally requires payment of certain mineral proceeds before the expiration of a complete dormancy period. This is also referred to as “pay to current”. Generally speaking, current pay rules require that once a royalty owner is identified as lost and the oldest payment has met the dormancy period, then the company must report subsequent payments as well. To complicate matters, current pay states generally do not provide a deadline, or cut-off for reporting the subsequent payments; instead they instruct companies to “pay to current”.

In addition, some states, such as Oklahoma, require different types of mineral proceeds to be reported on different forms. Oklahoma also requires mineral proceeds that emanate from “forced pooled” situations (which can arise when a small percentage of owners cannot be located or do not agree to the terms of the lease) be reported to the Oklahoma Corporation Commission instead of the Oklahoma State Treasurer’s office.

Of course, the best way to reduce amounts

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that fall into an “unclaimed status” (thus reducing the complications related to reporting properly) is to proactively locate and reunite the owners or their heirs. Working with a reputable owner location service is a great option; especially for the largerdollar amounts.

Suspense Accounts - Since mineral proceeds are commonly held in suspense accounts for a variety of reasons (e.g. deceased owner, litigation, bad address, no signed division order), they can be at risk when it comes to unclaimed property compliance. The challenge is to make sure that items do not fall into a

“black hole” when they are put into suspense. Items held in excess of statutory holding periods put companies at an increased risk of interest and penalty assessments.

Items held in suspense should be reviewed periodically to verify they are classified correctly. For example, litigation is generally a valid reason to hold items in suspense. However, if the litigation is no longer active, it may not be a sufficient reason to hold the property in excess of the statutory holding period. While common practice, holding items in suspense in excess of the statutory holding period for failure to execute a division order can complicate things when there are states that specifically prohibit the company from doing so. In order to ensure compliance and mitigate potential interest and penalties, companies should:

Periodically review the suspense codes used:

o Determine which codes are reportable

o Verify that all codes are being used correctly

o Eliminate codes that are too general (e.g. miscellaneous)

Spring 2011: Volume 9, Issue 2

”The challenge is to make sure

that items do not fall into a

‘black hole’ when they are put

into suspense.”

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Test the dates of last activity and the production dates:

o Determine if items held in suspense are being aged correctly

o Verify that items are not held in excess of the statutory holding period.

Mineral proceeds can be especially difficult to deal with during an unclaimed property audit conducted by a contract audit firm, primarily because it is an area that is not well understood outside of the industry. The audit methodologies typically employed by contract auditors for other property types do not tend to work well for mineral proceeds.

To illustrate, the general practice in an unclaimed property audit is to conduct a detailed test of the base period (i.e. the period where complete records are available). The testing results in an unclaimed factor or error rate which is used to calculate a liability for prior periods, where complete records are not available. This is based on the assumption that if there was non-compliance during the base period, then there was a proportionate amount of non-compliance in prior periods.That assumption can only be applied if the company was writing off unclaimed items and taking them into income (or offsetting an expense). Oil & gas companies will typically hold unpaid royalties in a suspense account until the owner can be paid or until the royalties are reported/remitted to the appropriate state as unclaimed property. If the company has never taken royalties into income (or otherwise diverted them for financial gain) then there is no basis to calculate an estimated liability for prior periods. The challenge becomes proving to the auditor that the company has never written-off royalties. It is in these types of situations that an experienced unclaimed property specialist with an emphasis and background in the oil & gas industry can prove instrumental. Collaborating with legal counsel to assist is always recommended as well.

Mitigation Pays DividendsFinding and paying owners can reduce the amount paid to the states, thus making the reporting process more manageable. If you are able to locate and pay owners that would be considered “past due” you can save on the potential imposition of interest and penalties.

If your company is publicly traded, owner location services can help to ensure that you are making every effort to stay in contact with your shareholders as well. Don’t rely solely on your transfer agent and assume this requirement is being met. We have seen many clients receive interest assessments for securities that were past due when reported/paid to the state by the transfer agent. It is critical that you also make sure to request and secure all reports filed on your behalf. There have also been instances where the transfer agent reported property belonging to their client’s shareholders during the course of an audit and their client was never made aware of the audit much less the assessment! To add fuel to the fire, the auditor was demanding the property prior to the appropriate dormancy period. If the transfer agent would have transferred the shares to the state and the state had liquidated property prematurely, additional financial consequences (including reputational risk) would have been eminent!

For all of the above reasons, preparing for an unclaimed property audit can be a daunting task. We have seen assessments issued that exceed millions of dollars in liability, fines and penalties. However, with diligent and proactive preparation and establishing the right accounting, legal and mitigation processes, you can ensure that you are prepared. If you do face an audit, it’s not too late to protect yourself. To make the audit process more manageable, it’s important to apply the right mix of company resources and seek assistance (both internally and externally) when it is needed. The companies that do can save inestimable time and resources and reduce potential assessments that can exceed millions of dollars.

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Legislative & Regulatory UpdatesUpdate Key Spring 2011 - current through 3/16/2011

Introduced – used for LegislationPassed – used for LegislationProposed – used for RegulationsAdopted – used for RegulationsPrefiled – drafted bills and resolutions to be numbered, printed, made available for public review, and scheduled for hearing before the actual start of session.

ALASKAHB 75Introduced 1/14/2011

An Act relating to gift certificates, stored gift cards, and general use prepaid cards, and to unclaimed property, which makes certain violations concerning gift certificates, stored gift cards, and general use cards an unlawful trade practice. Such violations include: gift card expiration dates less than five years, failure to clearly display expiration dates on the card, and imposition of dormancy fees unless three years of inactivity have passed and the fee was properly disclosed.

ARIZONAHB 2500Introduced 1/18/2011, Died in committee 2/15/2011

This bill provided for technical corrections to the Unclaimed Property Act. Specifically, the bill replaces the term “effective date” with “January 1, 2001” throughout the unclaimed property laws.

SB 1103Introduced 1/11/2011, Passed Senate 1/27/2011

This bill exempts child support funds that are collected pursuant to the child support clearinghouse.

CONNECTICUTHB 5003Introduced 1/5/2011, Referred to committee 1/5/2011, Failed 3/17/11

This bill amends section 3-65 to require banks to notify a holder of an inactive account

by certified mail, within one year before a presumption of abandonment of such account is to take effect, that evidence of interest must be indicated or any funds remaining in such account will be transferred to the Treasurer and subject to escheat to the state.

HB 5200Introduced 1/11/2011, Referred to committee 1/13/2011, Failed 3/25/11

This legislation would create a bottle refund deposit of $0.15 for wine and liquor containers. The objective of the bill is to increase the amount of unclaimed bottle deposit funds that escheat to the state.

IDAHOHB 174Introduced 2/17/2011, Enacted 3/25/11

HB 174 changes securities reporting requirements in Idaho from a pure inactivity trigger basis to a combination inactivity and RPO trigger. Under the new law, any stock, shareholding or other intangible ownership interest in a business association is “considered” abandoned if the owner of such interest (1) fails to either claim a dividend, distribution, or other sum payable or communicate with the association regarding the interest or a dividend, distribution; and (2) the location of the owner is unknown at the end of the five (5) year dormancy period.

The legislation also implements new requirements for dividend reinvestment accounts to be considered abandoned. Ownership interest enrolled in a plan that

provides for the automatic reinvestment of dividends, distributions, or other sums payable as a result of the interest are not considered abandoned unless: (1) that the owner has not within five (5) years communicated or (2) that five (5) years have elapsed since the location of the owner became unknown to the association and the owner has not within those five (5) years communicated in any manner described in this chapter.

ILLINOISHB 19Introduced 1/12/2011, Amended and referred to committee 2/17/2011

This bill amends the Uniform Disposition of Unclaimed Property Act. It provides that before filing the annual report, the holder of property that is presumed abandoned under the Act shall send a letter to the owner by certified (instead of first class) mail about the steps necessary to prevent abandonment of the property from being presumed. This bill would become effective immediately upon enactment. House amendment makes the requirement for certified mailing only applicable to properties worth $1,000.00 or more.

HB 1560Introduced 2/15/2011, Passed House 3/30/2011

This bill amends the Uniform Disposition of Unclaimed Property Act. Provides that unclaimed wages, payroll, and salary in any form, held or owing by a banking or financial organization, is presumed abandoned after


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one year (instead of 5 years). The bill also provides that unclaimed wages, payroll, and salary in any form shall be reported after remaining unclaimed for one year. The changes would be effective immediately.

KANSASHB 2157Introduced 2/4/2011, Passed House 2/23/2011

This bill grants the Treasurer access to tax return information of persons who may have information concerning the location of an unclaimed property owner. Such information shall be limited to current and previous addresses of taxpayers, or the taxpayer’s spouse and dependents.

MAINEHP 200Introduced 2/1/2011, Referred to committee 2/1/2011

This bill changes from 2 years to 5 years the time after which a gift obligation or stored value card is deemed abandoned. It also removes the requirement that a merchant must remit 60% of the unclaimed amount to the Treasurer of State.

MISSISSIPPIHB 495Introduced 1/10/2011, Died in Committee 2/1/2011

This bill enacts the Mississippi uniform unclaimed property act; provides that the state treasurer shall be the administrator of unclaimed property in Mississippi; sets forth definitions; provides presumptions of abandonment; provides rules for taking custody of abandoned property; establishes the burden of proof as to property evidenced by record of check or draft; provides for the reporting of abandoned property; provides for the payment or delivery of abandoned property.

MISSOURIHB 64Introduced 1/5/2011

This bill reduces the dormancy period for payroll checks from 5 years to 1 year.

HB 401Introduced 2/2/2011, Referred to committee 2/15/2011

This bill would create a business-to-business

exemption in Missouri. The proposed law exempts any “intangible property due or owed by a business association to, or for the benefit of, another business association resulting from a transaction occurring in the normal and ordinary course of business” from escheatment.

In addition to this stipulation, a statute of limitations is proposed. If enacted, this bill will prevent the state treasurer from enforcing the Unclaimed Property Act for a given reportable period more than three years after 1) the holder filed a report, or 2) the holder gave notice of a dispute under the Act. If no report is filed, there is no limitation on the Treasurer. In the case of fraudulent reports, the Treasurer may enforce the Act for up to 6 years following the false report. If no report is filed, there is no limitation on the Treasurer.

NEW JERSEYAB 3250Introduced 1/5/2011

This bill seeks to reverse the changes made by NJ A3002, the stored value card law passed in 2010. A3002 also adjusted dormancy periods.

NEW YORKAB 1057Introduced 1/5/2011, Referred to committee 1/5/2011

Provides that gift certificates and store credits shall not contain expiration dates, except in limited circumstances where they are issued for promotional purposes without value being given by the consumer; makes certificates or credit with an expiration date redeemable in cash or replaceable by a certificate or credit without an expiration date.

AB 1604Introduced in 1/11/2011, Referred to committee 1/11/2011

This bill seeks to require that gift certificates, gift cards, or store credits have no expiration or diminution in value over time.

AB 4011 (S2811)Introduced 2/1/2011, Referred to committee 2/1/2011, Signed by Governor 3/31/2011

New York S2811 lowered the dormancy periods from 5 years to 3 years for the following property types:

Money or securities held in escrow, but excluding escrow accounts for which the duty or obligation for which such amount

was deposited has not been performed and such performance is still required.Amounts due on deposits or any amount to which a shareholder of a savings and loan or a credit union is entitled.Accumulations of interest or other increments held by a bank for payment of an interest in a bond and mortgage apportioned or transferred by it.

In addition to adjusting dormancy periods, S2811 also amended New York’s reporting provisions. There are three major changes to keep in mind for your next report to New York:

(1) Publication requirements: Every banking organization must publish on or before September 1st of each year a notice naming potential owners of unclaimed property being held by the banking organization. This provision provides a little more flexibility in that the previous requirement mandated that the banking organization had to publish the notice within 30 days of filing their report.

(2) Preliminary reports no longer required: Certain industries (mainly in the financial services industry) were required to file a preliminary report and conduct a publication prior to remitting a final report/remittance. This bill removes the preliminary report requirement. The bill further confirms the reporting deadlines and cut-off dates. Once the statutory due diligence and publication requirements have been satisfied, the report and remittance would be due (for banking institutions) by November 10th.

(3) Miscellaneous: NY State law still mandates that all unclaimed funds valued at $20 and higher follow the statutory due diligence requirements. The State Controller’s Office posts all owners entitled to property valued at $20 and higher on their website for at least one year. Gift cards remain at a 5 year dormancy period.

OKLAHOMAOK 16647 2011Proposed 2/15/2011

The proposed regulations amend the State Treasurer’s reporting guidelines in the Oklahoma Administrative Code in two ways:

(1) makes it mandatory for reporters reporting 15 or more properties to do so electronically, and

(2) corrects the dormancy periods for property held by business associations from 7 to 3 years so it properly reflects the statute.

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SB 571Introduced 1/19/2011, Passed Senate 3/7/2011

This bill relates to the disposition of unclaimed property by the State Treasurer; authorizing certain abandoned property from safe deposit boxes to be sold by State Treasurer without notice by publication; limiting claims for appreciation or depreciation of certain property sold by State Treasurer; and providing an effective date.

PENNSYLVANIASB 445Introduced 2/7/2011, Referred to committee 2/7/2011

The bill’s title is the “Title to Dormant Rights Act.” The bill provides a legal mechanism for real property owners to settle title to abandoned subsurface mineral rights for the area below their property. The claim may be filed within three years of the effective date of this bill or within 21 years from the nonuse, whichever is later.

HB 375Introduced 2/1/2011

This bill provides for oil and gas estate abandonment and for the preservation of interests in oil and gas. Oil and gas interests in land, which are not owned by the surface land owner, which have not been sold, leased, mortgaged, or transferred for 20 years shall be deemed abandoned.

RHODE ISLANDSB 90Introduced 1/27/2011, Referred to committee 1/27/2011

This bill would require that gift certificates remain redeemable at their full value for three (3) years, after which the value of the gift certificate may be decreased by no more than 10% per year.

SOUTH DAKOTASB 76Introduced 1/21/2011, Referred to committee 1/21/2011

An Act to exempt certain gift certificates and closed-loop prepaid cards from the unclaimed property provisions.

TENNESSEEHB 1542Introduced 2/16/2011

Previously, holders could report items worth

$50 or less in the aggregate. Under this bill, aggregate reporting would be at the discretion of the Treasurer where a holder demonstrates, in writing, that it would be too “costly or oppressive” to include specific identifying information in the report. Also in this bill, the language for the reporting deadline was amended to give the Treasurer the authority to alter the due date for reporting.


As introduced, requires any gift card or prepaid card issued as payment of a rebate to contain an expiration date conspicuously printed on the card.

TEXASHB 1764, HB 257Introduced 2/24/2011, 3/2/2011

This bill designates utility deposits as a property to be reported as unclaimed with a dormancy period of 1 year. It also reduces the dormancy period for money orders from 7 to 3 years. Finally, the bill reduces the dormancy period from 5 to 3 years for checking accounts, savings accounts, or matured certificates of deposit.

SB 362Introduced 1/18/2011, Referred to committee 2/2/2011

This bill relates to the presumed abandonment date for stored value cards. A card is now presumed abandoned five years after the date of purchase, if the card is not used. If the card was used, it shall be presumed abandoned five years after its last use. The previous dormancy period was three years.


This bill provides for the creation of an unclaimed property type as original land grant mineral proceeds. Original land grant mineral proceeds are mineral rights derived from real property transferred to a holder, or ancestor of a holder, from Mexico, Spain, the Republic of Texas, or the current State of Texas.

SB 1535Introduced 3/10/2011

This bill defines unclaimed “class action proceeds” as property to be reported to Texas 90 days after it had become payable. The bill also amends Texas unclaimed property

law concerning who may act on behalf of a corporation attempting to claim property from the state.

VIRGINIAHB 1614Introduced 1/12/2011

This bill requires issuers of general-use prepaid cards to disclose information regarding all fees associated with the cards. The disclosures are required to be presented in the form of a table that is consistent with the tabular format required for credit card disclosures under § 122(c) of the federal Truth in Lending Act and Regulation Z.

HB 2479Introduced 1/21/2011, Referred to committee 1/21/2011

This bill creates the Office of Intergovernmental Affairs to act as a liaison between the Virginia government and other governmental entities such as other States and the Federal Government. The bill specifically excludes holder records collected due to audit as materials to which this new department will have access.

In addition to Keanotes, Keane’s blog provides in-depth news and analysis concerning all of the latest unclaimed property

legislation and compliance issues. www.KeaneUP.com/blog

Pamela brings over 15 years of diverse unclaimed property experience to Keane in the areas of audit assistance, state voluntary disclosure assistance, risk assessments, and policies and procedures. She also brings specific technical experience in a broad range of industries to the table – including oil and gas, manufacturing, retail, and financial services. Pamela spent the last eight years with Thomson Reuters (formerly Deloitte & Touche), where she specialized in quality review and staff development and training.

continued from cover page Keane Welcomes Pamela J. Wentz

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THE INSURANCE INDUSTRY UNDER AUDIT AGAIN The insurance industry is likely the most audited industry in the area of abandoned and unclaimed property (“unclaimed property”). As one of the most regulated industries, the insurance industry has one of the longest compliance histories as well as involvement in some of the earliest unclaimed property litigation. Now, the Insurance Industry is under audit AGAIN, by a relative newcomer to the Unclaimed Property world – Verus Financial LLC (“Verus”).

Verus, a third-party auditor, hails from Waterbury, Connecticut and is authorized by as many as 25 states, and counting, to serve as their authorized agent to determine the insurance companies’ compliance with the respective states’ unclaimed property laws. Verus initially set its sights on life and annuity companies. Along with the traditional focus on service offering, the apparent primary focus of these audits includes retained assets, a relatively new property type, which has received quite a bit of press in the past year. Within the past few months, Verus’ target appears to have broadened to also include property and casualty companies.

Given early audits by the states themselves dating back to the 1960s, the late 1980s and the 1990s saw an onslaught of audits of just about every major insurance company by the then National Abandoned Property Processing Company (“NAPPCO”). In 2003, NAPPCO was acquired by ACS Unclaimed Property Clearinghouse (“ACS”), which concluded several of the NAPPCO audits and commenced several audits of its own.

Prior audits were consistent with one’s expectation of Unclaimed Property examinations and generally included a vetting of the books and records to identify lost

owners and quantify the reportable exposure. The Verus audits appear to be different in their approach in that much of the focus is on “contractual terms” and “process.” For an example, Verus may question if proof of death of an annuitant is pursued as aggressively as the company’s confirmation of death for a life policy holder whose contract terminates upon death. There have been no findings or assessments to date, so the impact of these audits is yet to be seen.

Consequently, if you are an insurance company (whether or not you have been audited in the past and/or you enjoy a full compliance history), and you have not yet received notice of audit, your company very well may receive such a notice in the near future. If you are currently defending an audit or your company receives a notice of audit from Verus in the future, below are some relevant issues to consider:

Review the participating states to determine if you were previously audited by any of the states, either directly or through a third party auditor. If yes, limit the scope of the audit to the period subsequent to the prior audit(s). This may narrow the scope of the Verus audit significantly, especially if one of those states is your state of legal incorporation;

Determine whether you filed any Voluntary Disclosure Agreements or amnesty filings with any of the participating states. If yes, the closed years will be removed from the Verus audit;

Confirm that distributions/payments are made consistently with the underlying contracts and review adherence to guarantee periods for annuity contracts;

Confirm that interest on death claims, currently and historically, are/were paid consistent with applicable state law;

Oil & Gas Pending Legislation Snapshot

As can be seen in the Legislative Updates found in this issue of Keanotes, three states have already proposed bills for their 2011 sessions regarding oil and gas mineral rights as unclaimed property. Texas has proposed a bill to expand its definition of reportable mineral rights to include mineral rights attached to lands initially conveyed as government land grants from Texas and its territorial ancestors. Pennsylvania has proposed two bills: one bill creates the statutory language to provide for the abandonment of mineral rights, and the second bill creates a legal mechanism for surface landowners to settle title to abandoned rights. Finally, Wyoming has also proposed a bill to provide the statutory language to make mineral rights reportable as unclaimed property. States are clearly beginning to see mineral rights, particularly oil and gas, as lucrative property types to begin collecting as unclaimed property. These bills, as will likely be true of bills to come, provide states with straightforward ways to begin aggressively pursuing unclaimed mineral rights.

New Jersey Gift Card Litigation Update: Court Expands InjunctionIn the last issue of Keanotes, we provided a detailed account of the litigation surrounding New Jersey’s controversial 2010 gift card legislation in the case of American Express Travel Related Services Co. v. Sidamon-Eristoff. That article reported that holders should be aware the preliminary injunction did not stop New Jersey from enforcing the data collection provisions of its new law. After an appeal to the Federal Third Circuit Court of Appeals in Philadelphia, the plaintiffs obtained their preliminary injunction against the data collection provisions as well. The timetable for the remainder of the litigation is uncertain because the Third Circuit’s order dictates the motion for the injunction must be reviewed by a full panel of that court. No date has been set for that full-panel review.

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Navigating the Complexities of Unclaimed Property ComplianceWhat Corporate Secretaries Need to Know to Ensure Enterprise-Wide Compliance

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By: Debbie L. Zumoff – Keane’s Chief Compliance Officer and Valerie M. Jundt – Managing Director; Keane Consulting & Advisory Services

From ensuring the board has the proper advice and resources for fulfilling its fiduciary duty under federal and state law, to providing advice on corporate governance issues, the corporate secretary plays an active role in monitoring an organization’s reporting processes and procedures. Among the many compliance processes corporate secretaries monitor is the unclaimed property reporting process. Traditionally, corporate secretaries have held the responsibility of keeping a watchful eye over the registered shareholder population of their organization and managing the transfer agent relationship. The main unclaimed property focus has been monitoring those shareholders whose addresses have changed but who may not have notified their transfer agent. With today’s audit landscape coupled with

federal guidelines that require confirmation of adequate internal controls, corporate secretaries should look beyond lost shareholders and stay aware of a broader range of issues.

Increased Audit Activity, Increased RiskIn tough economic times, unclaimed property serves as an additional source for state revenues, boosting budgets without imposing a tax increase on residents. With an increase in audit activity, comes an increase in the use of third-party auditors by the states. Although most companies report some property, there’s a widely held belief by the states that an overwhelming majority of unclaimed property is not reported. In fact, most state

estimates suggest that only 15 to 35 percent of companies are in full compliance with the laws. Because of this, states will continue to audit companies that may not appear to be fully compliant with unclaimed property laws. Therefore, it’s important for corporate secretaries to understand the current landscape and know what’s required of their organizations from a compliance standpoint.

Based on our experience, we’ve seen a trend emerging where companies appear to be in compliance on the securities side of their

”…most state estimates

suggest that only 15 to 35

percent of companies are in

full compliance with the laws.”


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business, but not on the general ledger side (i.e. vendor checks, customer credits, refunds, uncashed payroll, etc.). Further complicating matters, we’re seeing that as a result of the increase in state audit activity, states aren’t just looking at the general ledger, but are also making extremely broad demands for shareholder records. And, because there’s virtually no statute of limitations for unclaimed property in most states, the timeframe for compliance may be expanded, creating the need to estimate liability for historical years.This can result in an increase in the known liability by three to eight times, translating into millions of dollars potentially owed to states in fines and penalties. Further, there is an increased focus on the reporting of property based on owner activity. Unclaimed property laws in 48 states and Washington D.C. have dormancy periods that are triggered by inactivity – 16 of which have stand-alone statutes where inactivity is the sole trigger.

Implications of a Merger or Acquisition on ShareholdersMergers and acquisitions can also have a significant impact on shareholders. Many times we work with clients who need help conducting a post-merger clean-up to help reconcile unexchanged accounts where shareholders are at risk of losing their property. Here at Keane, we have found that after a merger or acquisition, as many as 20 percent of shareholders will not complete the necessary exchange because they require additional assistance of some kind. This can be for many reasons, including:

They may no longer reside at the address to which communications were mailed

They may be confused by the legality of the documentation

They may be unaware of the fact that they own the shares

They may have lost track of their stock certificates and don’t want to pay out

of pocket for lost certificate replacement bonding

They may have passed away and family members are left unaware of the entitlement

For instance, approximately 2.5 million people die each year, and on average, 60 percent of these people failed to ever execute a last will and testament, thus leaving their estates and beneficiaries with no knowledge of their investments. At Keane, we work closely with clients to help reconcile these accounts, and locate heirs and beneficiaries to reunite them with the funds that are rightfully theirs.

Other Considerations for Corporate Secretaries As part of the Restoring American Financial Stability Act of 2010, – also known as Dodd-Frank – federal requirements for Rule 17Ad-17 on unclaimed property are being expanded. The regulations require all issuers, transfer agents, broker dealers, investment advisers – or any other person that accepts payments from the issuer of a security and distributes the payments to the owners of the security – to send notice to a security holder when a check over $25 due to that security holder goes uncashed. Previously, this rule applied only to returned mail. Notice must be sent if the person does not cash the check in six months or before the issuance of the next regularly scheduled check the new rules have been proposed by the SEC and must be finalized by July 21, 2011. This amendment will have serious implications for stock transfer agents, mutual funds, broker dealers and the overall investment world. Complying with

the rule will be time consuming, operationally costly and challenging for some companies to initially embrace – especially for the corporate secretaries within those companies. Dodd-Frank rule compliance will be yet another process for the corporate secretary to oversee and manage internally and another process to oversee and manage externally with the transfer agents.

ConclusionIt may sound daunting, but just by staying on top of the evolving laws and regulations, corporate secretaries can gain a better understanding of the complex compliance landscape organizations are faced with today. It’s important to reinforce compliance responsibilities beyond securities in the general ledger. In addition, remember that unclaimed property has a cumulative effect. Instead of having an impact for one year, it could have an impact 25 years back, for example, or maybe even back to the date of the company’s formation. While in the context of an annual review of the books unclaimed property might not appear to be material, it could be material when reviewed over the course of several years – especially with potential interest and penalties factored in.

In order to better navigate the complexities of unclaimed property compliance, consider hiring a specialist like Keane to assist, advise and manage the process for you. Regardless of whether or not you decide to outsource support, it’s imperative to reinforce a culture of compliance across the enterprise. By encouraging colleagues to ensure compliance across the organization, you’ll be closer to ensuring compliance is correct and complete.

> 9


“Complying with the rule

will be time consuming,

operationally costly, and

challenging for some companies

to initially embrace.“

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The normal everyday functions of a company’s operations result in the generation of obligations that can become “abandoned and unclaimed property” (unclaimed property). As a result, the role and duties of the Internal Auditor must include an audit plan to review the company’s unclaimed property compliance process on a regular and consistent basis.

This task requires the internal auditor to first become knowledgeable regarding the following: (1) the unclaimed property rules and reporting requirements; (2) the areas within the company that can generate unclaimed property; (3) the reasons why existing processes may result in a need for reporting; and, (4) the realization that non-compliance in this area can materially impact the financial statements.

What is Unclaimed Property?Each of the 50 states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, Guam and some foreign countries, including three provinces in Canada, have unclaimed property laws. Within the United States, unclaimed property laws require companies, both public and private, including not-for-profit entities, to annually report and remit all unpaid/unfulfilled liabilities owed to third parties – such as patients, vendors, employees, customers, clients, shareholders, bondholders and policyholders –once the prescribed statutory number of years, known as the “dormancy period” has expired. Obligations that remain outstanding once the dormancy period has expired are required to be reported and remitted to the applicable state(s). Generally speaking, three to five years is the dormancy period, with the exception of payroll, which is generally one year. However, it is important to note that dormancy periods vary by state and by property type.

Unclaimed Property and the Internal Auditor

Can Unclaimed Property Impact the Financial Statements?

Unclaimed property has not generally been a priority on the audit plans of most internal audit groups, if included at all. This omission may be due to a lack of unclaimed property knowledge by the internal audit group or a failure to recognize unclaimed property’s potential impact on a company’s financial statements. Succinctly stated, if management is not in compliance with the unclaimed property rules, past due liabilities coupled with state penalty and interest assessments can quickly become material to the annual financial statements. The materiality is impacted by the fact that the company’s risks for assessment are not limited to the current year but can impact as far back as 25-30 years, given the general lack of a statute of limitations in most states.

Enhancing the Duties and Responsibilities of the Internal Auditors Here are some ways the internal audit group can help management achieve and maintain

compliance in the area of Unclaimed Property:

Define Liabilities Impacting the Company:

Assist management in identifying each area/department/function/group within the organization that has the potential to generate unclaimed property.

Understand Why Unclaimed Property is Being Generated:

Review the existing practices, policies or procedures specific to each property type to understand why liabilities exist once the dormancy period has expired. Is it a failure to communicate with the owner to resolve the obligation? Are there practices of miscellaneous income entries or reversal of the expenses merely to take liabilities to income?

Draft and Implement Written Policies and Procedures:

Create detailed written policies and procedures for each property type and each group/department that impacts the process. These procedures should not just outline the means to timely remit funds to the states but should ensure, through remediation efforts, amounts that are not truly owed by the company are retained and not remitted to the states in error.

It is important that these policies and procedures be implemented and that the

®

> 10

(Continued)


53640.indd 10 4/18/11 9:55 AM

internal audit group review management’s adherence thereto consistent with a written audit plan. It is also critical that all findings and/or observations inconsistent with the policies and procedures be raised within the management hierarchy to ensure corrective action is taken and taken in a timely manner.

The most important role of the internal auditor to any organization is that crucial first step to determine adherence with established polices and goals set by management and, as in the area of unclaimed property, specific requirements established by state statutes. Internal auditors are the keystone to compliance and have an essential role to play in the company’s timely and accurate unclaimed property compliance.


> 11

Document the use of the Social Security Death Master Index and the Pension Benefit Index for confirmation of death as applicable;

Confirm consistency with the company’s definition of the date-of-death i.e., the date the insured died or the date the company received notification and proof of death;

Identify whether retained asset accounts are held in the company’s bank account, or are merely supplemental products. This can affect the application of the unclaimed property laws;

Where necessary, perform searches to locate missing policy holders, annuitants or beneficiaries and reunite the owners with their property.

As the leader in the unclaimed property field, Keane stands out as an educational resource for our clients. In 2011, we will host a series of regional events that will provide attendees with up-to-date regulatory information and state reporting requirements. In addition, the events will cover:

Industry Updates

Audit Activity

Corporate Asset Recovery

Compliance Challenges and Solutions

Preparation for the Upcoming Reporting Season

These free, 2-hour breakfast forums are lead by Valerie M. Jundt, Managing Director of Keane’s National Consulting and Advisory Services and additional Keane team members. These sessions will help tax, accounting, finance, and internal audit professionals apply best practices, better prepare a company in the event of an unclaimed property audit and help reduce the potential for fines and penalties. CPE credits are available.

Details for our 2011 Regional Events in the following cities are posted on our website as they become available: logon to www.KeaneUP.com under News & Events.

Houston, TX - Thursday, April 28th

(Plus an extra one-hour session focusing on the Oil & Gas Industry)

Philadelphia, PA - Wednesday, May 11th

New York, NY - Thursday, May 12th(Plus an extra one-hour session focusing on the Financial Services Industry)

Chicago, IL - Tuesday, May 17th

Boston, MA - Tuesday, September 13th

continued from page 7

The Insurance Industry Under Audit Again

KEANE EDUCATIONAL EVENTS

continued from page 10

53640aa1.indd 11 4/19/11 5:46 PM

Corporate Offices1001 Avenue of the Americas • 14th FloorNew York, NY 10018P: 1.866.421.6800 • F: 212.764.1424

Operations Center1400 Liberty Ridge Drive • Suite 201Wayne, PA 19087P: 1.800.848.8896 • F: 610.232.0799 E: [email protected]

www.KeaneUP.com

Keane Operations Center1400 Liberty Ridge Drive • Suite 201Wayne, PA 19087


DISCLAIMER:

Visit our website at www.KeaneUP.comThe content presented in this newsletter represents Keane’s understanding of evolving legislation and caselaw governing unclaimed property law up to March 16, 2011. The content is provided for informational purposes and should not be considered legal advice or legal opinion. For more information, please contact Debbie L. Zumoff, Chief Compliance Officer at 1.610.232.0700 or via email at [email protected].

©Keane 2011

53640aa1.indd 12 4/19/11 5:47 PM

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