Due Diligence - A Story of Bureaucracy and Bronx Bombers

Today we're talking about unclaimed property "due diligence."  Most state unclaimed property laws require a holder to send written notice to the apparent owner of unclaimed property before it is reported and remitted to the state.  More often than not, these notices receive no response, and the property goes on to be remitted to (and then held by) the applicable state agency.  Is that because the owners of these items have truly disappeared?  As we discussed earlier in this blog, state unclaimed property laws derived from the ancient common law doctrine of bona vacantia ("ownerless goods"), which allowed the Crown to take custody of personal property belonging to, among others, persons who died without heirs.  As holders across the country finish sending their notices today, let's take a look at the recipients.  Have they truly disappeared?  Do they just not want their money?  Are they really impossible to find? 

In many (if not most) cases, the owner of an unclaimed item is not out of business and has not disappeared.  To give just a glimpse of how imperfect the unclaimed property system can be, a recent search of unclaimed property held by the California Controller's Unclaimed Property Division discloses that they are holding property for . . . (wait for it) the California Controller's Unclaimed Property Division.  Similarly, according to one recent article, a number of city and county agencies are on Illinois' unclaimed property list, notwithstanding the fact that most of these agencies are operating under extreme budget restraints.  On the other side of the economic ledger, the New York Yankees, perhaps because of their recent move (across the street), have about a dozen items waiting for them at the New York Office of Unclaimed Funds.  Suffice it to say, however, both the Cook County Clerk's Office and the New York Yankees continue to operate their businesses.  Why, then, does this money go unclaimed?  While there has not been a scientific study, some answers might be:

Disbelief -- Quite simply, most believe that there is no such thing as free money, and that things that sound too good to be true often are.  Of course, unclaimed property is not "free money" but often arises so long after the original transaction that it seems like it must be.  Most are rightfully skeptical upon getting a letter from a company (with which they had only passing familiarity in the first place) promising to send long forgotten funds. Accordingly, many holders simply discard due diligence letters or think that the mailing is a scam.  In light of today's ever present threats of identity theft, the idea of sending personal information in response to a form letter seems dubious.

Disagreement -- Especially among businesses, unclaimed property often arises from differences in calculations concerning who owes what to whom.  "Trade differences" among securities dealers, "goods received, not invoiced" among manufacturers, and "settlement errors" among financial institutions are among the "cost of doing business" errors or discrepancies that arise in most businesses and give rise to credit balances.  In such instances, the apparent owner of unclaimed property makes no effort to reclaim funds because his or her books do not show the money as owed.

Bureaucracy -- The most significant reason money goes unclaimed, however, is probably good, old-fashioned bureaucracy and procrastination.  Maybe a due diligence letter gets received today by corporate accounting.  Corporate accounting sees that customer XYZ says it is holding credits as a result of overpayment.  Someone in corporate accounting makes a mental note to find out who the customer relations rep is for XYZ.  Days go by, meetings are held, deadlines and daily emergencies come and go.  Finally, a few weeks later, the letter gets sent to XYZ's customer rep.  The customer rep is busy; he doesn't have time right now to go through all of XYZ's thousands of transactions to find out where this credit balance comes from.  He has a sticky issue with ABC Co to attend to, and is trying to close the deal with 123 Corp.  He gives the letter to someone from the sales staff to follow up.  Sales is swamped, they send the letter over to accounts receivable.  AR looks at the letter, sees the reference to unclaimed property laws, and sends the letter to legal.  Once lawyers are involved, forget it.  =)  And so on.

Ironically, many of the same companies who are dutifully sending out due diligence letters, will be receiving (and ignoring) those same letters sent to them.

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