When Escheatment Becomes a Credit Manager’s Problem

Escheatment is a legal process by which unclaimed or abandoned assets, typically financial assets like bank accounts, uncashed checks, or securities, are transferred to the government. This occurs when the rightful owner of the property or funds cannot be located or identified after a specified period, known as the dormancy period. The account or property can be reclaimed if someone emerges with a legal claim, but reclamation is generally subject to a statute of limitations. Statutes not only vary by state, but by property type with costs that continue to increase.

When a customer overpays on an invoice, it can lead to an unclaimed property audit as part of escheatment, said Troy Wangen, principal at Baker Tilly US, LLP (Chicago, IL). “Maybe that customer has become inactive and you can no longer contact them,” he explained. “So, after a period of time, if you can’t contact them, that credit would need to be reported to the state of the last known address of that customer. If there’s no known address, it becomes an unknown or unidentified payment, which gets reported to your company’s state of incorporation.”

If you send a check for the overpayment to a vendor, employee or customer, there’s a chance they might not receive or remember it. As a result, they do not cash the check. The check then becomes escheated and the state must collect the funds. The payee who did not cash their check before it became escheated can apply to their state to claim it. “The escheatment process could affect vendor and employee payments for businesses, and if you’re a public company shareholder, depending on your industry, there could be multiple property types that could become an issue for you,” Wangen said.

The cost of escheatment can grow quickly because it’s tied to the number of possible properties rather than the value of them. It costs just as much to process an unclaimed payment of $5 as it does for $500 or $5,000. “And if the property is not escheated, significant fines and penalties can be levied by the state that date back several years,” according to U.S. Bank. “The time and effort spent on escheatment is work that creates no true value. After all, the money identified during the process is either returned to its rightful owner or turned over to the state. However, doing it more efficiently can at least cut down some of the costs. New technologies available because of improvements in smart devices and digitization of payments can help considerably.”

Annual escheatment compliance is important as states often engage third-party auditors for intense audits both in the sense of time and resources required. If unclaimed property goes unnoticed for years, then all records must be reviewed for those number of years. “Oftentimes, there may be an overpayment or credit on an account unnoticed for years that is not yet considered unclaimed but rather dormant and that property is potentially achievable,” said Jennifer Waryjas, Esq., counsel at Jones Day (Chicago, IL). “So, auditors will come in to review those records and ask why you didn’t achieve this dormant property in compliance with state law and do an audit for that entire five or more years of records. It’s incredibly complicated and it’s time intensive because you’re looking at customer balances, which include multiple write-offs you have to defend based on financial analysis.”

To prevent the intense escheatment process, trade creditors must keep constant communication with their finance and compliance departments to make sure that the entire company is reviewing unclaimed property. This includes accounts payable, benefits and payroll. Credit professionals must also work with the marketing and legal departments to set rebate program requirements in order to avoid escheatment compliance issues.

Credit managers should be making sure that they’re part of the process when it comes to terms and conditions and rebate programs. “If you’re saying that the rebate is only eligible for a new product, but not for cash, you have to follow that rule,” Wangen said. “So, you may have one or two customers that you don’t want to lose, and you agree to give them the cash instead of allowing them to use it just for the product. If you do that, you’ve kind of pierced the veil of then allowing the state to be able to get cash for that. Suddenly, those rebates that might not be unclaimed property have become unclaimed property.”

Be sure to join the upcoming Credit Congress Spotlight Session Escheatment Boot Camp on Tuesday, Sept. 26. The new Credit Congress Spotlight Sessions are the perfect opportunity to savor a slice of the exceptional education that Credit Congress delivers annually. Credit Congress Spotlight Sessions feature some of the most insightful presentations from this year’s Credit Congress event. You can register for the full series for $399 per person or join the Unlimited Webinar Program (BEST VALUE) for $1200 for your entire company to participate in all webinars for a full year.o like to build those personal relationships with our customers, so having instant access to all the information and direct contact with the customers helps with that.”