Report 2002-122 Summary - June 2003

State Controller's Office: Does Not Always Ensure the Safekeeping, Prompt Distribution, and Collection of Unclaimed Property

HIGHLIGHTS

Our review of the State Controller's Office (controller), Bureau of Unclaimed Property (bureau), revealed the following:

RESULTS IN BRIEF

The primary purpose of the Bureau of Unclaimed Property (bureau) is to reunite owners with their lost or forgotten property. Common types of unclaimed property include checking and savings accounts, contents of safe deposit boxes, and securities. Since 1959, the State has accumulated more than $3.4 billion in unclaimed property in approximately 5.2 million accounts. Since fiscal year 1997-98, the bureau's receipts of unclaimed property have exceeded its disbursements. The increase in receipts has been accompanied by a significant increase in the number of paid claims for property held by the bureau. Between fiscal years 1997-98 and 2001-02, the number of claims paid increased from 115,236 to 204,621.

The Unclaimed Property Law (law) requires business associations, banking and financial organizations, life insurance corporations, and others (holders) to review their records each year to determine whether they hold any unclaimed property. The amount of time that the holder can hold unclaimed property before reporting and remitting it to the bureau varies by type, ranging from six months to 15 years, with the majority of types reportable after three years. Further, the law requires both the holders and the bureau to attempt to notify the owners that the property will escheat, or has escheated, to the State.1 Additionally, the law authorizes the State Controller's Office (controller) to audit holders if there is reason to believe they failed to report property as required.

We found that the bureau's computerized Unclaimed Property System (property system), which it uses to track and disclose unclaimed property, is not sufficiently reliable. Because the controller discovered that staff could make unauthorized changes to the property system, the controller's Information Systems Division prepared programming changes to prevent unauthorized changes to the property system and the potential payment of fraudulent claims. However, because of a reprioritization of the workload, not all of these programming changes have been made and the bureau's staff could still make unauthorized modifications to data in the property system, such as owners' names and amounts remitted on their behalf, as recently as May 8, 2003. As a result, bureau staff could make unapproved changes that may go undiscovered, potentially resulting in the payment of fraudulent claims to themselves or others. The Information Systems Division installed programming changes, on May 16, 2003, that will prevent staff from making some unauthorized changes but not others.

In addition, until recently no effective controls existed to prevent the duplication of account data in the property system. Although in 2002 the controller implemented controls to prevent duplicate entries from occurring, the bureau has not eliminated all existing duplicate entries from the property system. We identified 16 holder reports totaling more than $535,000 that are duplicated in the property system, potentially resulting in the payment of duplicate claims and the provision of inaccurate information to the public. Although the controller states that it has taken action to prevent payments on the duplicate reports, at least some of the duplicate properties still appear on the bureau's Web site.

Furthermore, inaccuracies in the property system may result in the incorrect billing of holders for interest penalties from which they should be exempt under the controller's amnesty program. Beginning in 2000, holders were allowed amnesty for their past failures to report unclaimed property on or before November 1, 1999, and were exempted from paying an interest penalty. However, the bureau did not include an amnesty indicator in the property system for all qualifying holder reports, and the controller has not modified its program that calculates interest penalties to exclude holder reports that were granted amnesty.

The controller will have to correct both problems to avoid inappropriately billing the holders that it granted amnesty. Because the bureau cannot use the computerized property system to track changes in securities, it tracks these manually, increasing the probability of error and the number of staff needed to accommodate the workload. We found that the bureau's manual tracking of securities is unreliable and that the bureau is inconsistent in how quickly it sells securities. Moreover, because the bureau tracks securities by company name rather than by individual owner, when corporate actions such as stock splits result in the issuance of additional securities, the bureau does not consistently associate the new securities with the original securities. This results in securities for the same owner being sold on different dates for different prices, further complicating the bureau's reconciliation process, increasing both the potential for errors and the risk of allegations that the bureau has mismanaged owners' assets.

We also found that the bureau excludes a large amount of unclaimed property reported to it for federal and state departments, local governments, schools and school districts, other states, and some private entities from its Web site. As of April 30, 2003, the bureau held more than $7.1 million in unclaimed property for various entities that it had not posted on its Web site. As a result, even if the entities check the bureau's Web site to see if the State has some of their property, they would erroneously conclude that it did not.

The bureau does not consistently approve or deny claims within 90 days after it receives them. We found that claims for securities require more research than claims for most other types of property and generally are not approved within 90 days. In addition, the bureau often takes an unreasonable amount of time to pay claims once they are approved. We found that only 30, or 68.2 percent, of 44 claims we examined were distributed within 30 days of approval. Only two of the 10 claims for securities were distributed within 30 days of approval—a further indication of problems caused by the bureau's cumbersome system for tracking securities.

Also, the bureau does not ensure that it receives all of the reported contents of abandoned safe deposit boxes. Although the holders prepare an inventory of the contents of safe deposit boxes they remit, the bureau disregards this inventory and prepares its own, creating unnecessary work. In addition, the bureau does not compare the contents it receives to those reported by the holders. Such a comparison would reduce the bureau's liability for items not remitted by the holder.

In addition, the bureau has not sold the contents of safe deposit boxes on a frequent basis. Although it is not required to sell the contents, failure to do so results in higher costs to the State to store and safeguard those contents and the overcrowding of its safe deposit box vault. Further, the bureau does not consistently take measures to ensure that it receives all of the proceeds from the sale of these assets. Instead, it relies on what the auctioneer reports as sale prices.

Lastly, the controller's audit bureau does not always fully pursue unclaimed property that its auditors have a reasonable basis for believing should be remitted to the State. Specifically, we found that even though its auditors estimated in January 2002 that one holder failed to remit $6.7 million beginning as far back as 1978, the audit bureau did not move forward to substantiate or invalidate the estimated findings. After we brought this to the controller's attention, the audit bureau reopened the examination of the holder. Assuming that the audit bureau substantiates the $6.7 million and the holder remits the funds on June 30, 2003, the estimated interest penalty would be nearly $8.2 million, resulting in the potential collection of more than $14.9 million. By not exercising due diligence in pursuing the collection of unclaimed property that there is a reasonable basis to believe should have been remitted, the controller is not fulfilling its responsibility to reunite owners with their lost or forgotten property.

RECOMMENDATIONS

To increase the reliability of the data in the property system, the bureau should do the following:

To eliminate the bureau's manual tracking of securities and dispel any impressions that it exercises judgment in deciding the best time to sell securities, the controller should seek legislation to require it to sell securities immediately upon receipt. Additionally, the bureau should immediately sell all securities already in its custody.

To fully inform all entities that it has their unclaimed property in its possession, the bureau should discontinue excluding any properties from its Web site.

To ensure that it distributes assets to bona fide claimants in a timely manner, the bureau should do the following:

To ensure that it has properly accounted for all of the owners' properties, the bureau should develop a standard inventory form for holders to report the contents of safe deposit boxes and for the bureau to verify that it has received all of the reported contents from the holders. To reduce the cost of storing the contents of abandoned safe deposit boxes, the bureau should hold auctions at least monthly. It should also take measures to independently verify that it is receiving all of the proceeds from the auctions.

To ensure that it collects all unclaimed property, the controller should complete its examination of estimated unclaimed property that its auditors have a reasonable basis for believing should be remitted to the State. Further, the bureau should ensure that it bills and collects the applicable interest penalties based upon the results of the audit bureau's examination.

AGENCY COMMENTS

The controller generally agreed with our recommendations and plans to take specific actions to address areas of concern identified in the report. The controller also states that it has begun to implement some of our recommendations. However, the controller believes that we have in some cases overstated the significance of our findings. For example, the controller contends that its failure to pursue $6.7 million of estimated escheatable property was an isolated incident. We provide comments to clarify and add perspective to the controller's response to the audit in the final pages of this report.

1 As used here, escheat is the transfer of unclaimed property from the holder to the bureau for safekeeping until claimed by the owner or the owner's heir.