Banks, insurers, retailers and any businesses with a backlog of uncashed checks or balances in escrow accounts are bracing for harsher penalties and heightened regulatory burdens regarding the billions of dollars in assets they hold each year as unclaimed property.
Mounting fears over the enforcement of state unclaimed property laws already on the books stem from an unprecedented court ruling that could sting JPMorgan Chase & Co. with substantial penalties for fraudulently sitting on millions of dollars in abandoned assets that should have been transferred to the New York State Comptroller. While the ruling relates to a single bank and a single state, it could have dramatic implications for thousands of “holders” of unclaimed property in all 50 states.
The Unclaimed Property Professionals Organization (UPPO), a trade group representing the interests of unclaimed property holders, said it would be difficult for companies to comply with the court decision, which would impose “new operational burdens.” State treasurers and comptrollers, speaking through the National Association of Unclaimed Property Administrators (NAUPA), warned the ruling could pose “unintended consequences” across all 50 states.
Unclaimed or abandoned property is any financial obligation due to another party including customers, vendors, employees and investors. Unclaimed property comes in the form of uncashed checks, dormant savings accounts, escrow balances, credits, and insurance benefits. Billions of dollars in unclaimed assets revert to the states each year, serving as a significant source of revenue and an offset for tax collections.
State unclaimed property laws generally require businesses to transfer to the state, or “escheat,” any unclaimed financial obligations. Most laws require banks, investment companies, retailers and other holders to transfer such assets to the state in which the owner was last known to live after a specified amount of time.
“Unclaimed property is rapidly assuming a new role as a state revenue generator. States are taking aggressive measures to capture unclaimed property by legislating shorter dormancy periods, engaging contingent auditors as bounty hunters to examine reporting and noncompliant holders of unclaimed property, and offering amnesty programs,” the Chicago-based accounting and tax compliance firm Baker Tilly Virchow Krause LLP said in a recent research report.
$7.76 Billion in Unclaimed Property
While the total amount of unclaimed property sitting on holders’ balance sheets is unclear, NAUPA reported that states collected $7.76 billion in unclaimed property in fiscal year 2015. Out of that, $3.23 billion was returned to the owners, leaving more than $4.5 billion for states’ coffers.
The unclaimed property trade group and its nearly 2,000 members believe the ruling—which could leave JPMorgan Chase on the hook for millions in penalties and interest—conflicts with the practical realities of the unclaimed property process. UPPO views the court’s decision as overly restrictive, adhering to statutory penalties that don’t mesh with the way most state treasurers and comptrollers handle it.
“Many states offer voluntary compliance programs that waive penalties and interest for holders that self-report and come into compliance,” Toni Nuernberg, the group’s executive director, told Bloomberg Tax. “New York’s unclaimed property administration has an exceptional reputation for educating holders and offering a waiver incentive to encourage compliance. The results of this case may disrupt the state’s efforts by eliminating the incentive to voluntarily comply.”
Treasurers Call Ruling ‘Very Concerning’
Treasurers and comptrollers said any limitations on their ability to bring recalcitrant holders into compliance would be “very concerning.”
“The National Association of Unclaimed Property Administrators is closely monitoring the Raw Data v JPMorgan Chase case as it may have unintended consequences for state unclaimed property programs,” the association said in a statement provided to Bloomberg Tax. “Penalties and interest are a necessary component of a state’s compliance program, but the ability to waive those fees is an important tool in a system that relies on self-reporting.”
The unclaimed property dispute relates to a whistleblower action originally filed in 2015 by Raw Data Analytics LLC. Raw Data sued JPMorgan Chase on behalf of the New York attorney general under the state’s False Claims Act. The complaint said JPMorgan Chase illegally waited years to return abandoned property to the state, made false statements about its obligations, and then failed to make required interest payments to the state at a rate of 10 percent annually. The whistleblower’s lead attorney has called the financial giant’s scheme an illegal “multi-million dollar interest-free loan.”
No Wiggle Room for JPMorgan
Judge James E. d’Auguste’s Aug. 30 ruling forces JPMorgan Chase to defend its conduct.
JPMorgan Chase characterized any duty to self-calculate and pay interest to the state as a flexible obligation subject to interpretation by the comptroller.
But the court found no wiggle room in New York’s Abandoned Property Law. Judge d’Auguste wrote the statute is “abundantly clear” that any person who fails to pay or deliver property to the state “shall” pay interest for the period of the delay.
The decision conflicts with the practice in most jurisdictions, according to consultants and practitioners advising holders of unclaimed property.
“It does not reflect the reality, practice, or policies of New York or any state over the last thirty years,” said Jennifer C. Borden, who represents holders in unclaimed property audits through Borden Consulting Group LLC in Boston. “To my knowledge, no state has ever required or even asked a holder to self-assess interest. This runs completely contra to the states’ goal of increasing compliance.”
Since the 1990s, states have encouraged voluntary disclosure to encourage compliance and waived penalties and interest to participating businesses, Borden said. In many cases, she said states decline to assess penalties and interest following audits. California and Texas stray from the pack, assessing interest on late monetary transfers, but the two states also administer procedures for waiving the assessments.
To the extent d’Auguste’s ruling collides with this regulatory landscape, Borden said “I hope that New York and other states issue some guidance, as this could have a chilling effect on compliance.”
‘Look to the Rule of Law’
The JPMorgan Chase ruling has left big money handlers in a quandary, having to figure out if their current practices of transferring unclaimed assets meet statutory requirements or guidance statements from a particular state’s treasurer, said Freda Pepper, an attorney with Reed Smith LLP in Philadelphia who specializes in unclaimed property.
“Often the states will provide information that is contrary to what their statute says,” Pepper said. “I often counsel clients that what they must look to is the rule of law, because that is what controls.”
Longer term, Pepper said holders and perhaps state treasurers will seek legislative reforms that reflect current administrative practices.
“You have a court saying you must self-calculate and pay interest to a state that administratively doesn’t require it,” she said. “If the holding stands, I wouldn’t be surprised if we see the law change.”
The case is New York ex. rel. Raw Data Analytics LLC v. JPMorgan Chase & Co., N.Y. Sup. Ct., No. 100271/2015, 8/30/19, N.Y. Sup. Ct., No. 100271/2015, decision and order 8/30/19.