Unclaimed Property by Cynthia D. Hardin About the Author Cynthia D. Hardin is the unclaimed property administrator for Apache Corporation in Houston, Texas. She received her undergraduate degree in business administration from San Diego State University in 1989. She has eight years of oil and gas experience as a landman, division order analyst, revenue supervisor and unclaimed property administrator. She has worked for Shell Western Exploration & Production Inc., Alfred Glassell Jr., and as an independent landman in south Texas. Hardin is also a licensed private investigator with six years of experience in product liability, civil litigation and family law. What is unclaimed property, also known as escheat, and how does it affect me as an oil and gas professional? The lack of an answer to this frequently asked question has cost companies penalties, interest and resulted in state audits. Although the concept may appear confusing, it can actually be a simple process with the advent of current technology. Hang with me for a little while, and I will take you on a brief tour of the history and purpose of unclaimed property. Along the way, we’ll discuss property identification, due diligence, reporting, state requirements, audits, the voluntary compliance program, holder reimbursement, state revenue recovery and the holders’ organization. So, without further ado, welcome to Unclaimed Property 101. History, Purpose and Reportable Property What is the concept of escheat? Escheat was actually created sometime between 800 and 1400 in feudal England. The king granted land, under tenure, and if the grantee died without heirs, the land reverted or escheated back to the king. During the reign of James I (1566-1625) the British laws concerning escheat were brought to the newly formed colonies of Virginia, Maryland and Nova Scotia. These laws have survived, in various forms, to our day, authorizing states to hold property for owners. Escheat can be further defined by Webster’s dictionary as the “lapse of a property to the state on the death of the tenant without proper heirs.” However, for our purposes today, escheat may be defined as unclaimed property because we report to state administrators when we are unable to locate an owner, whether dead or alive, with or without heirs. So, what qualifies as unclaimed property and what is the purpose of the law? Unclaimed property is any financial asset, whether tangible or intangible property, that has remained unclaimed/abandoned for a designated time period. Individual state statutes define this “dormancy period” and range from one year (Ohio) to seven years (various states). The general purpose of unclaimed property law is to protect the owner’s interest, relieve holders of liability and expense, and ensure that any potential economic windfall will benefit the public and be used for the common good. Reportable property types common to the oil and gas industry include royalties, rentals, stocks, dividends and vendor and payroll checks. State statutes require companies to review their records annually for unclaimed/ abandoned property and report and/or remit funds. Reportable owners include those without an address (and unlocatable) and unidentified interests (“owners unknown,” “unidentified royalty,” etc.). Be sure to verify that the owner does not have another active account within the company. Due Diligence Companies are required by law to perform due diligence prior to reporting unclaimed property. The degree and scope of this effort is, defined by individual state statutes as a reasonable attempt, to locate owners prior to reporting. Therefore, if Alabama has an aggregate limit of $10, then any owner with $10 or more in their account must be the subject of some form of due diligence. Due diligence must begin no more than 120 days and not less than 60 days prior to the deadline for reporting. Various methods include: (1) sending a letter to the last known address; (2) using a credit bureau (such as Trans Union TCI-Trace); (3) running social security numbers on the social security death index; and (4) searching for people on the Internet via people search databases. Credit bureaus provide a service whereby a company can search for current addresses by utilizing the owner’s social security number. Companies can register for this service and have software loaded on designated systems. Some credit bureaus now offer batch processing for further cost reduction. Reporting Under Federal law, a company must report to the state of the owner’s last known residence. If that is not known, the holder must report to its state of incorporation or domicile. Be aware that no amount is too small to report and can be combined in the aggregate. The report must also be in compliance with each state’s required medium. Some companies manufacture software that will comply with all state requirements such as Chesapeake System Solution’s UPCS (The Total Unclaimed Property Compliance System) and the Freedom Group. However, a smaller company may wish to comply with individual state requirements by providing the required data on a diskette, reel to reel tape, cartridge, CD, 9 track tape, e-mail, or Internet filing. So how does the Chesapeake System work? Well, it is a software-based program, designed for Windows NT and Windows 95, which receives data via other mediums. The data may be accessed from a mainframe or a client server system and downloaded into an ASCII format to windows. The format is set up according to the parameters defined by Chesapeake for importing data. The data is then downloaded into the UPCS software, which assigns owners by state and prepares a customized report and format for that particular state. Next, the reports are placed on diskette or printed and mailed or sent via e-mail. Don’t get scared, it’s easy! State Requirements State statutes require that holders report and/or remit annually, except Wisconsin, which requires even year reporting and Mississippi, which requires every third year reporting, all property held within the abandonment period. Failure to do so can incur penalties and interest as high as 18 percent per annum. Currently Texas has a 10 percent per annum penalty while California’s is 12 percent. Texas is a “pay direct” state which means that once you remit, you must set up your owners to pay directly to the State of Texas. This is critical for royalty owners in receipt of production revenues. Each state has a defined due date for reports and/or remittance with the majority reporting by November 1. You may access a complete list of state unclaimed property offices at the NAUPA (National Association of Unclaimed Property Administrators) website, www.unclaimed.org. Be sure to retain the owner detail of your report for five to 10 years past the dormancy period, as required by individual state statutes, in case audit red flags fly. Audits and the Cooperative Voluntary Compliance Program AUDIT! Did you say AUDIT? I’m out of here! There are several instances that may provide a red flag to state auditors. They include non-reporting, errors on reporting forms, omission of property types, gaps in reporting history, insufficient due diligence, noncompliance within the industry, lump-sum aggregate total, unlawful deductions, information provided by employees, the public and state, newsworthy events, mergers, acquisitions, re-organizations, liquidations and re-incorporations. Just when you thought it was all over for you, don’t worry, I have great news! For holders who have never reported, 37 states through NAUPA have formed the Cooperative Voluntary Compliance Program effective until October 31, 1999. These states, which are listed at the NAUPA webpage, will waive penalties and interest on holders who come forward and remit. Holder Reimbursement “I think I may have reported incorrectly last year. Is there hope?” Yes! A holder may request a reimbursement from the state. This may be due to erroneous reporting, overpayment or duplicate remittance/funds paid to an owner. NAUPA has a standardized form that may be used for this request. They may be contacted through the Internet. However, a holder may send a letter together with proof of payment and a copy of the state report to retrieve the reported property. State Revenue Recovery You mean the states may have money for us? Holders may wish to request a search for funds remitted to the various states. Although a holder may request a search in writing, many of the states now have their databases available online. There are various Internet addresses where the databases may be found at search.com. However, NAUPA provides this service at their online site. Currently in the works is a combined national database called SCOUT (States Clearinghouse of Unclaimed Treasurer) which will provide a one-stop search. Be aware that there are sites out there that do provide free searches but the information may be out-of-date, or there may be a fee. The state of Texas online database is one that I particularly like. When you locate property on this site, you can request a claim form online, and they do respond to you via e-mail. Once you file your claim, handling fees may be assessed. Texas charges 1 percent for claims from $50 to $5000 and 1.5 percent for claims of $5000 and over. Another source for locating funds is a finder or locator. However, their fees may be steep and are usually based on a percentage of the total amount found. Be aware that finders may be required to be licensed by the State Board of Private Investigators or registered with the state and that some state laws cap the amount of their fee. Also, some states will not honor finder agreements for up to the first 24 months from the property report date. A finder may also be required to have a power of attorney to claim funds on your behalf. With the advent of the Internet and online databases it seems unnecessary to pay a finder to locate unclaimed property. Holders’ Organization There is still hope for beginners. Would you like to further raise your consciousness about unclaimed property law and how it affects the oil and gas industry? Receive updates on the Uniform Unclaimed Property Act together with individual state updates, regulatory changes and pending legislation? Build a relationship with NAUPA members? Then the UPHLC (Unclaimed Property Holders Liaison Council) is the organization for you. For further information contact: Jackie Cote, membership committee chair at (617) 954-5145, or check out their website at www.uphlc.org. UPHLC also has two search engines available at their site located under “search engines” and “related links.” One search engine is for people and the other is for businesses. This site is worth a look. In conclusion, unclaimed property reporting does not have to be a nightmare. With a little organization, the help of new tools to facilitate due diligence, and electronic filing, your reporting can be streamlined into an efficient cost effective method. As we progress technically, a future industry network to recover suspense funds prior to state remittance would be ideal. I look forward to hearing your suggestions, comments and answering your questions. Please feel free to e-mail me at: email@example.com. I’m looking forward to hearing from you.