CEBC IN THE NEWS

If It's Not Yours, Don't Keep It

Published Monday, August 1, 2005 in the Star Tribune.

By Hank Shea

Does your business ever receive overpayments from customers, such as when an invoice is mistakenly paid on two occasions? How does your company handle the return of merchandise for credit? What do you do about uncashed checks sent to customers or suppliers, or stock certificates returned as undeliverable?

In each situation, your business or organization has legal obligations if this money or property remains in your possession as unclaimed or abandoned.

Unclaimed property comes in many shapes and sizes, but one rule fits all: It is not yours to keep!

In other words, in Minnesota, if your company or organization is unable or unwilling to refund or return unclaimed money or other property to its rightful owner, then it must be turned over to the state after three years. Failure to do so can result in stiff financial penalties and even criminal prosecution. For instance, in New York, a business executive was convicted of fraud and sentenced to 33 months in prison for his company's unlawful retention and use of unclaimed property.

Every state has laws that require businesses to "escheat," or turn over, unclaimed or abandoned property to the state after some period of time has elapsed. These laws provide that the state becomes the legal owner of abandoned property, based on the concept of state sovereignty. Unclaimed property involves huge dollars. In California, the state is holding more than $4.1 billion in such property.

In Minnesota, the Department of Commerce's unclaimed property division administers the Minnesota Uniform Disposition of Unclaimed Property Act. The law requires businesses and other organizations to report and turn over to the Commerce Commissioner many types of funds and other property that have remained unclaimed for three years. Details concerning these requirements can be found at the Commerce Department's website. Go to www.commerce.state.mn.us and click on "Unclaimed Property."

The law defines unclaimed property to include customer overpayments, credit balances and uncashed checks, including uncashed rebate checks. It also covers other property such as insurance refunds or claims, tax refunds, travelers checks, savings and checking accounts, stocks and bonds, dividends, wages and utility refunds or deposits. The law applies to many types of businesses and organizations, including financial institutions, hospitals, clinics, insurance companies and state and local governmental entities.

Under Minnesota law, as in other states, if you hold another person's property, your first obligation is to notify the owner of the property by mail that you possess it, how it may be claimed, and that you will turn it over to the Department of Commerce if not claimed. If it remains unclaimed, you must deliver the unclaimed property to the Commerce Department of Commerce or to the state of the owner's last known address. The state will attempt to locate owners through advertising and other means.

Minnesota has returned more than $158 million worth of unclaimed property to owners during the past 27 years. However, as of December 31, 2004, more than $229 million worth of such property remained unclaimed. Potential owners of unclaimed property can check to see if they are owed money by visiting the Commerce Department's website or via e-mail at unclaimed.property@state.mn.us. Those without access to e-mail can call the department's unclaimed property unit at (651)296-2568 or toll free at 1-800-925-5668.

Any failure to report or turn over unclaimed property to the state in a timely manner carries serious potential consequences. In Minnesota, the Department of Commerce will assess a 12 percent interest rate on the value of undelivered unclaimed property. Intentional failure to report or deliver such property is a criminal offense.

The improper handling of customer overpayments, credits or refunds raises not only unclaimed property concerns, but also the question of whether customers are being cheated. In particularly egregious cases, such conduct can lead to federal prosecution.

A Twin Cities-area company engaged in a scheme for many years that enabled it to steal more than $1 million in customer overpayments and other credits owed customers by writing off or deleting customer credit balances that remained unused after as little as three months. The company then took those customers' funds as profit by booking them as "other income" on its financial statements. The company even used some of these "profits" to pay annual bonuses.

The company never properly notified the customers involved or reported the existence of such funds to any state government agencies responsible for unclaimed property. As a result, the company was charged with and pleaded guilty to mail fraud in federal court last year.

At sentencing, the court ordered the company to repay $1,175,000 in restitution to all customer victims that could be located and to remit the balance to various state governments as unclaimed property. The court also ordered the Twin Cities company to pay a $5 million fine for its criminal offenses.

A key factor in the U.S. attorney's office's decision to prosecute the company was the firm's failure to heed the advice of its outside accountants. On several occasions, the company's accountants notified company personnel that keeping customer overpayments was a "hot button" with state auditors responsible for unclaimed property laws. The outside accountants also warned that the company faced high exposure to fines for its conduct and that no statute of limitations applied.

Several avenues are available to avoid unexpected problems with unclaimed property. Every Minnesota business regularly should review its customer accounts and bank reconciliations. Contacting customers about unused credits provides a potential tool for future sales. Uncashed checks should be monitored to determine if the amounts paid are really due. Chief financial officers, credit managers, accountants and attorneys must keep their companies or clients informed about changes in escheat laws.

Finally, when money or property remains unclaimed for three years, it must be reported and turned over to the state of Minnesota. In short, it's not yours to keep.

Hank Shea has served as an assistant U.S. attorney for the District of Minnesota for more than 16 years. He also is an executive fellow for the Center for Ethical Business Cultures at the University of St. Thomas. The contents of this article reflect the personal views of the author and do not represent the official position of the U.S. Department of Justice. He can be reached at hank.shea@usdoj.gov.

© Copyright 2005 Star Tribune. All rights reserved.

Center for Ethical Business Cultures

1000 LaSalle Avenue, TMH 331 ▪ Minneapolis, MN 55403-2005 ▪ USA

Phone: 651 962 4120 or 800 328 6819 Ext. 2-4120 ▪ Facsimile: 651 962 4042

Email: mail@cebcglobal.org

© 1978-2008 Center for Ethical Business Cultures. All Rights Reserved.

Business Partnering with the University of St. Thomas - Minnesota