The Due Diligence Process
June 15, 2012 Blog Post by Kathleen Moyer, Managing Partner – Compliance
When I hear Holders complain about state unclaimed property due diligence process, I cringe. I’ll tell you why in a minute but first let’s take a look at what due diligence is and what it’s meant to do.
Due diligence is the degree of effort required by law that a Holder must perform to locate the owner before reporting and remitting the unclaimed property to the states. Generally speaking, the required activity involves the Holder sending some form of written notice to the owner. Typically a first class letter must be sent to the last known address, according to the company’s books and records, no more than 120 days or less than 60 days prior to turning the funds over to the state. Some states require certified letters, while others require a second mailing for items over a certain dollar amount.
The state requiring due diligence is intended to give the owner a last chance to claim the funds from the Holder before the funds are reported to the state. As such, the due diligence letter must be specific and include such information as amount, date, property type, check number or other identifiers, and contact information of the claimant (i.e. vendor, customer, employee or shareholder). After the funds are remitted to the state, the Holder is indemnified and the states are required to handle inquiries and claims.
Why do I cringe when I hear Holders complain about performing due diligence? It is in the Holder’s best interest to understand and perform the due diligence process, especially early during the accounting cycle. Here’s how:
- The Holder has a good opportunity to reconnect with a former customer. Chances are the customer will apply the credit towards a future purchase.
- The Holder has an opportunity to return funds to a current customer or vendor. It is very embarrassing to report funds belonging to an existing customer or vendor as unclaimed.
- The Holder has an opportunity to determine whether the funds are still payable. If the payee confirms in writing that the funds are not due, the Holder does not have to report the funds as unclaimed property to the states.
- The Holder has an opportunity to correct accounting or bookkeeping errors. Researching the outstanding transactions early in the accounting cycle will enable the Holder to more easily determine whether the transactions were accounting errors or truly unclaimed property.
- The Holder has an opportunity to reduce late reporting interest. For example, California has a two part filing process. The reports filed in October list items due to be reported in June of the following year, while the reports filed in June reflect the balance of those items not resolved. California will assess late reporting interest on any past due items listed on the preliminary report (i.e. report filed in October). Even though an item is resolved and paid to a claimant before the June report, California will assess interest on all past due items listed on the preliminary report. Let me say that again. Even though the Holder has paid the claimant, California will assess 12% interest on items reported late.
Don’t wait until the items are ready to be turned over to the state before performing your due diligence process. Researching outstanding transactions early has proven to reduce a Holder’s unclaimed property. The Holder will still need to perform the state required due diligence process, but the amount of letters mailed and responses received back from claimants will be reduced.