How to Prepare for the Pending California Voluntary Compliance Program

In our recent blog, “California – One Step Closer to a Voluntary Disclosure Program,” Freda Pepper outlined everything we currently know about the program, including who will be eligible to participate, a requirement to complete an education program, timeline requirements and, most importantly, the benefits related to completing the program. While there’s a lot that we already know, the requirements needed to fulfill the obligations of the program remain a mystery.

Whether your company has never reported unclaimed property to the state of California or has a known population of out of compliance properties due to the state, now is the time to prepare. While California continues to develop the details of the program and has not released any specifics regarding how the program will work or who will oversee its administration, there are certain key factors that are included in every voluntary compliance program. Now’s the time to prepare so your organization can take full advantage of the program while having ample time to identify, research and remediate properties considered to be at risk of being reportable to California.

Per AB 2280, we know that companies will be required to review their books and records for at least the previous 10 years. To accomplish this review companies should follow the steps outlined below:

• Review the company organization chart to identify lines of business and subsidiaries that could generate potential unclaimed property exposure. Companies often concentrate their review efforts on the primary operating entity of the organization, overlooking smaller lines of business that could house potential dormant property in addition to the main source of records.
• Review M&A activity that occurred over the last 10 years to identify inherited unclaimed property. If your organization has a history of acquiring other companies via stock acquisitions, you may have inherited more than expected since any unreported unclaimed property that sat with the acquired company is now your responsibility to report.
• Identify the property types and accounts that could generate potential exposure. Unclaimed property takes many forms including, but not limited to, outstanding checks of all types, credit balances sitting in accounts receivable, unidentified remittances, unapplied pre-paid balances, security deposits, and customer account balances that have remained inactive for three years.
• Review disbursement accounts and aging reports for specific transactions that have remained outstanding or remain due to payees. It’s also important to review policies governing voids and write-offs to ensure that checks and/or credit balances were not voided/written-off after remaining outstanding for an extended period. If your company engaged in either of these practices, you may need to expand research efforts to include the transactions impacted in the initial population of potentially escheatable properties.
• Research and remediate identified populations to verify if it remains due to the payee or if it was fulfilled in another manner. Often, outstanding obligations are combined with other balances due to the same payee while the original transaction remains on the books. Credit balances may also be used to offset a current balance owed from the same customer, but it’s important to make the customer aware of the offset to prevent future overpayments. To prevent duplicate payments, it’s important to research every transaction fully that appears to meet the definition of unclaimed property to validate that it’s truly due and payable to the intended parties.
• Policies and procedures documenting the steps employed to identify unclaimed property should be reviewed or drafted to ensure that the procedures continue to be followed in future years. An annual review should be performed to ensure continued compliance with California’s unclaimed property requirements. Many state voluntary compliance programs necessitate submission of company unclaimed property policies and procedures to meet the voluntary compliance program requirements.

Completing the steps outlined above will help to ensure that your organization is able to take full advantage of the pending California voluntary compliance program (VCP) as soon as it becomes available. The efforts invested in preparing for the California VCP can also provide assurance that your company is in full compliance with other state unclaimed property programs by including transactions with last known addresses located in all states in your review, rather than limiting them to California only.

Conducting an annual review of potentially escheatable properties, coupled with strong policies and procedures, go a long way to maintaining ongoing compliance for years to come. If you need assistance conducting your initial review and drafting policies and procedures, the Sovos Unclaimed Property Consulting practice is here to help.