Reciprocity in unclaimed property: why refrain from the practice of reciprocity when it seems so simple?
Reciprocity or reciprocal filing came about in 1954 to keep holders from duplicate reporting liability. In other words, if a holder reported unclaimed property to one state (state A for example) and another state (state B) had a better claim on that property then state A, through reciprocal agreements, would automatically forward the property to state B.
1954: the year of the corduroy sport coat and plastic raincoats, when the average cost of a new home was $10,250, the cost of a gallon of gas was 21 cents and the first version of FORTRAN was published by IBM. Obviously, the idea of reciprocity started during a time when we didn’t have state-of-the-art technology, personal computers and online functionality to streamline the unclaimed property reporting process. This was a state’s way of providing a convenience for holders and made it possible for those with small amounts of property to report to just one state, their state of incorporation. Paper filing back then was very time consuming and tedious work.
Historical Use of Reciprocal Filing
Let’s say you are a government entity in Georgia. Let’s also say you have numerous $100 outstanding checks, including 50 uncashed checks to owners in Pennsylvania, 50 uncashed checks to owners in Nevada and 50 uncashed checks to owners in your incorporated state, Georgia. The result is a total of $15K of unclaimed property due to 150 owners across 3 states. Georgia has a 5-year dormancy AND a November 1 reporting requirement for government entities.
It is important to know that not every state participates in reciprocity. So if you are this government entity and you do not know the rules, simply assuming you can report all these properties to Georgia may be problematic if Georgia and the other states do not have a reciprocity agreement in place. Over the years, reciprocity agreements have become less and less common.
It is also important to know that just because you decide to report ALL your unclaimed property to Georgia based upon Georgia statutes does NOT MEAN you are off the hook for understanding and complying with Pennsylvania and Nevada reporting and due diligence laws. Let’s say that you decide to report all your uncashed checks to Georgia and you base your calculations on Georgia’s 5-year dormancy period and report all properties to Georgia on November 1. At this point, you are not in compliance with Pennsylvania or Nevada. Wait, what? This is true because under Pennsylvania law, these uncashed checks should be reported on April 15 after 3 years. And Nevada legally required that property be reported on October 31 after 1 year.
Risks Associated with Reciprocal Filing
It might help to take a look at Nevada specifically. We know that in this example, the Nevada report is late. Considerably late – 5 years vs. 1 year. We also know that Nevada historically has been quick to penalize, and that means you are now at risk.
If Nevada determines that the situation here is a non-willful failure to report, meaning it was not on purpose, then the following could arise. The Nevada statute states that a holder who fails to report, pay or deliver property within the time prescribed shall pay to the administrator interest at the rate of 18%per annum on the property or value thereof from the date the property should have been reported, paid or delivered. I’ll let you do the math on risk of potential interest.
But that is not all! Additionally, a holder who fails to report, pay or deliver property within the time prescribed or fails to perform other duties imposed shall pay to the administrator, in addition to interest, a civil penalty of $200 for each day the report, payment or delivery is withheld or the duty is not performed, up to a maximum of $5K. At this point, you have now exceeded the value of the unclaimed property altogether between the civil penalty and the interest for Nevada, for this year alone.
If it determined that the failure was willful, then in addition to interest as provided above, a civil penalty of $1K for each day the report, payment or delivery is withheld or the duty is not performed, up to a maximum of $25K, plus 25% of the value of any property that should have been but was not reported.
Reciprocity is Not a Best Practice
Our historical stance has always been to let holders know that the practice of reciprocity in unclaimed property is not a best practice policy. Don’t file all records to your state of incorporation. Instead, use the power of technology to report accurately and work to safeguard yourself from risk. State statutes are changing and not all states participate in reciprocity agreements. Companies are increasing their risk for fines, interest and penalties. Each state has differing reporting due dates, dormancy periods and some properties are simply not eligible for reciprocity anyway. Finally, this process makes it difficult for owners to ultimately track down their unclaimed property if they attempt to try to locate and claim it.
It is time to move from 1954 and into 2021. Put away those plastic rain coasts, corduroy sport coats and eliminate the practice of reporting all properties to your state of incorporation.
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