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Solving the Maze of Foreign Unclaimed Property

By Heather Steffans

Complicated and stressful. That is how it feels when payroll professionals are suddenly given  Solving_1456502152_81703  responsibility for reporting abandoned and unclaimed property. It’s even more challenging for corporations that process thousands of payroll transactions each year. When an associated mass of unclaimed property must be managed and escheated (remitted) according to varied, ever-changing laws in multiple jurisdictions, plus varying payee locations—some of them in other countries—that’s when the stress really begins. Concerns about foreign unclaimed property are growing as increasing numbers of companies expand globally.

Even if a company understands compliance issues in their domestic reporting, it sometimes overlooks unclaimed property resulting from foreign transactions.

Often, payroll personnel don’t realize they might have a responsibility to report and escheat to foreign jurisdictions. One reason is that payroll staff is not always privy to information about offshore mergers and acquisitions, new expat hires, and overseas expansions resulting in foreign payments and receipts, both of which can turn into foreign unclaimed property.

Statutory Foreign Unclaimed Property 

When the payroll department becomes aware of a foreign expansion, it might not realize that the move will result in statutory foreign unclaimed property until payments are returned. If payments are never returned or reconciled—and no system is in place to identify them—the responsibility to report could go completely unnoticed until an audit, which could trigger penalties and interest. To make matters more complicated, foreign unclaimed property reporting can be an area of uncertainty, and international law sometimes must be invoked. 

The key, as with any type of unclaimed property, is the following:

  • Know when foreign unclaimed property is being generated
  • Understand the laws
  • Keep up with legislative and case law changes
  • Control due diligence and reporting
  • Report on time
  • Get help if it gets complicated 

 

Step-by-step recommendations for administering foreign unclaimed property are included at the end of this article, but first it’s important to understand how foreign unclaimed property is generated in payroll and what the law says about the responsibilities of foreign unclaimed property holders.

Where to Find Foreign Unclaimed Property

Intangible unclaimed property involves a payment or account value for which there has been no contact with the owner for a period of time as defined by laws of the proper state, territory, or foreign jurisdiction. Where there are laws, the property usually enters a dormancy period during which the company, also referred to as the holder of the property or account, must perform due diligence to find the owner. If the owner still isn’t found, the unclaimed property must be reported and remitted to the proper jurisdiction.

Uncashed paychecks are one of the most common types of unclaimed property, so payroll personnel often are asked to participate in unclaimed property compliance efforts. Other payroll transactions potentially producing unclaimed property include:

  • Bonuses
  • Cost-Of-Living Adjustment (COLA) payments
  • Educational reimbursements
  • Share distributions
  • Commission checks

 

Virtually any monetary transaction or obligation could result in unclaimed property if it remains uncashed or unreconciled. When a foreign holder or property owner is involved, the result could be foreign unclaimed property.

Unclaimed Property in the United States

Many foreign countries are using unclaimed property rules of the United States as a model. Therefore, it’s important to first understand U.S. laws to manage foreign unclaimed property. The power behind U.S. unclaimed property law lies in state legislation. 

There is no overriding federal law, but the national Uniform Law Commission (ULC) has passed several recommended acts to encourage uniformity among states. More than 40 states have enacted pieces of the ULC acts. Others have passed unique laws or none at all. Many states continually adjust their laws. The ULC is working to further revise the acts by 2017, with specific points addressing foreign unclaimed property. 

The ULC acts, combined with U.S. Supreme Court case Texas v. New Jersey, provide guidelines for U.S. holders designating where to report unclaimed property if the property owner is located within the United States. Here is a summary:

  • First Priority Rule—A company must remit unclaimed property to the state of the last known address of the rightful property owner and follow that state’s rules and regulations. 
  • Second Priority Rule—When the owner’s address is unknown, the holder must remit property to its state of incorporation or, if not incorporated, the state of the holder’s principal place of business. If the address is simply a bad address, the first priority rule applies.

Three Types of Foreign Unclaimed Property

The way an unclaimed property holder handles foreign unclaimed property depends on where the holderSolving_1456502156_53322  (payer) is located and where the unclaimed property owner (payee) lives or accepts payment. 

Most foreign unclaimed property situations are basically the same as domestic unclaimed property, except the holder, or the payee, or both, reside in a foreign country. There are three different types of foreign unclaimed property:

  1. Domestic-to-foreign—Holder is located anywhere in the United States and payee or his/her bank is located in a foreign country. 

 

This is the most common type of foreign unclaimed property. The holder must understand unclaimed property laws in each country where its employees and vendors reside.

Sections of the Uniform Unclaimed Property Act of 1981 and 1995 provide that “when the last known address of the apparent owner is in a foreign nation, the state in which the holder is domiciled may claim the property.” Many states have enacted similar provisions, but some states have no foreign unclaimed property laws at all.

There is very little case law to guide holders in managing foreign unclaimed property. Two cases often cited for domestic-to-foreign cases are:

  • Screen Actors Guild, Inc. v. Cory. The court found that unclaimed residuals of SAG’s members being held in a Canadian bank were not exempt from California’s unclaimed property laws.
  • Vondjidis v. Hewlett Packard Corporation. An employee who received share mailings at the company’s office in Greece moved to Canada. The company transferred the shares to California as unclaimed property. The court found in favor of the shareholder because Hewlett Packard hadn’t followed proper due diligence.

 

In a recent case brought against Delaware, JLI Invest S.A. et al. v. Cook et al., the plaintiffs allege that shares in a company were wrongfully abandoned and that Delaware sold the shares three days later without completing proper due diligence. 

2. Foreign-to-domestic—Holder is located outside of the United States and pays a person living in the United States.

There is disagreement about whether a U.S. state legislature can compel a foreign organization to escheat money to a U.S. state. Some U.S. legal opinions say it’s possible if the foreign company has enough contacts in the state. 

3. Foreign-to-foreign—Both holder and payee are located in a foreign country. 

If the country or countries involved lack unclaimed property laws, no action is usually necessary. If any country involved has unclaimed property laws, the company should consult attorneys or unclaimed property consultants to determine which jurisdiction to report to. Links to information about the laws of some countries are listed at right.

What Your Company Should Do About Foreign Unclaimed Property

Complying with unclaimed property laws of any kind can be challenging. Statutes must be tracked, and stale-dated records must be identified and managed. Legal cases and legislation continually change the rules. The ULC’s push for uniform laws will lead to further modification. Payroll personnel and others with responsibility for processing unclaimed property must continually monitor the changes and learn ways to minimize liabilities and exposure to noncompliance issues. 

At the very least, payroll personnel should gain a better understanding of the company’s data management system and become familiar with rules in the countries involved. Consultation with attorneys might be needed to ensure proper reporting and escheatment, especially if international law is activated.

Five Steps for Foreign Unclaimed Property Reporting

  1. Determine how far you want to go with due diligence to find missing owners. Some companies go beyond the law because extra efforts create goodwill.
  2. Search for owners online and consider hiring a locator service. Limit your search to a planned dollar threshold.
  3. Obtain alternative addresses during employee onboarding and exit interviews. 
  4. Regularly reach out to property owners shortly after a check has been uncashed for 30, 60, or 90 days. The sooner you do so, the better to avoid creating unclaimed property.
  5. Build relationships with legal and professional unclaimed property advisors to guide you, including deciding types of documentation to keep.

Foreign unclaimed property reporting is even more complex than domestic reporting due to varied circumstances and the complexity of international law.

In the past, foreign unclaimed property laws were few, but many more companies now have an international presence, and more foreign countries are establishing escheat laws. It’s important to keep an eye on this important business concern and stay on top of the changes.