State Controller Refuses To Audit Company Accused Of Inaccurate Filing


Mutual Fund ExpertThis case involves an individual who had $500,000 remaining with an escrow company after the sale of her home. The escrow company agreed to wire transfer the net proceeds to the plaintiff’s bank account but instead sent a paper check. The check was mailed to the incorrect address and the plaintiff never received the net proceeds from the sale of the house. At this time, the plaintiff also received money from another source. Her financial advisor mistakenly conflated the two sums misinforming the plaintiff that she had received all the money to which she was entitled. The plaintiff later realized that she had never received the proceeds from the escrow company. She contacted the company but was told that they had not turned the funds over to the state controller as unclaimed property. The plaintiff contacted the state controller but was told that because the escrow company had not reported the sum, they would not compel the company to release the funds. The plaintiff sought to obtain possession of her unclaimed property and alleged that the state controller has a duty to audit entities when a filed report is inaccurate.

Question(s) For Expert Witness

  • 1. Could you discuss the proper role of the state Controller is in redressing situations such as this?

Expert Witness Response E-070729

I have been engaged in active research and analysis regarding unclaimed property-escheatment issues (within the Federal and State legislative, regulatory, and judicial arenas) on behalf of a firm that provides mortality audit and missing account holder locate services. The firm’s client base includes asset managers, banks, government, trust companies, pension plans, and life insurers. My focus has been within the financial services industry (brokerage, mutual fund, custodian banks, insurance companies.

In my opinion, the legislative intent underlying the Unclaimed Property Law (UPL) supports that the state controller office has a duty to audit the escrow company to assist in the return of the plaintiff’s property. The 1959 UPL differed from earlier escheat laws in that it focused on the State’s role and responsibilities as a proactive custodian of owner’s unclaimed property. Indeed, it expressly states the legislature’s intent that unclaimed property would not permanently escheat to the state, but rather the state would return to a custodial role, maintaining an indefinite obligation to reunite property owners with their property.

In 2007, the legislature amended the UPL to expand the State’s current notification program to provide: a formal pre-escheatment notice to all owners of unclaimed property, an expanded, post-escheatment policy to proactively identify owners of unclaimed property, and a minimum, 18-month, waiting period between the delivery of property to the state prior to disposal of any unclaimed property deemed to have no commercial value. These amendments reaffirmed the legislature’s intent that the state serve as a proactive custodian of unclaimed property by establishing processes to ensure owners would be reunited with their property.

All holders of escheatable property are required to review their records and file verified annual reports with the SCO, listing the property that has remained unclaimed or become dormant during the reporting period. They also must turn over any and all UP or the net proceeds from the sale of UP to the State. Prior to reporting the UP accounts to the SCO, holders must send notices to owners of UP with a value of $50 or more. Among other things, the notices must clearly state the property will escheat to the state if a timely response to the notification is not received.

The state notification process to find the rightful owners of UP and reunite them with their property (if possible) cannot be not triggered until the holder files its annual UP report with the SCO. Therefore, the rightful owner of UP cannot file a claim for the return of his/her property or to the net proceeds from its sale unless the holder files an annual report of UP and previously pays or delivers the property to the SCO. The holder?s noncompliance blocks the owner notification process unless the SCO knows of the holder’s noncompliance and initiates alternative measures to notify the owner.

In this case, the escrow company is the holder of plaintiff’s property ($500,000). However, in the years that the company held plaintiff’s escrow monies, the company has never: notified the plaintiff of the existence of the account and that it would escheat to the state if no response was received, listed plaintiff’s account in any annual UP report filed with the SCO, or escheated the account proceeds to the SCO. As a result, the SCO’s notification process to locate plaintiff cannot be triggered due to the escrow company’s failure to include plaintiff’s escrow account in its annual UP report to the SCO. At this point, it becomes a “Which came first, the chicken or the egg?” scenario: the plaintiff cannot file a claim for the return of its escrow account proceeds because the company has, and continues to omit, the escrow account on any of its annual UP reports filed with the SCO. Until now, the SCO could not deploy its resources to notify or reunite the plaintiff with his UP because it had no knowledge of the account’s existence.

However, the state controller’s office is authorized to perform holder audits if there is a reason to believe the holder failed to report property that should have been reported pursuant to state escheat laws. The SCO has previously relied on this authority and significantly increased its use of holder audits in response to the growing rate of potential holder under-compliance. In 2013, for instance, the SCO conducted an analysis of holder compliance. It estimated that about 900,000 businesses not currently reporting unclaimed property were potentially holders of unclaimed property. The SCO estimated that these potentially noncompliant businesses may be in possession of $12.5 billion in unclaimed property. The SCO has also established a holder compliance unit within its office which, among other things, conducts audits of potentially noncompliant businesses holding UP.

There is a precedent for the SCO to take the same action here. In this case, the plaintiff has provided sufficient information to the SCO to support the SCO independently ordering an audit on the escrow company. Moreover, by ordering an audit, the SCO (1) upholds the legislative intent of the UPL, i.e., to reunite the plaintiff with monies rightfully owed to her, and (2) sends a strong message to other holders that it will seek recourse on behalf of owners for holders’ noncompliance with the UPL. In all likelihood, a holder audit performed on the company will result in the imposition of penalties, fines and interest charges for the company’s violation of the state UPL.

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