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Industry Letters

Letter Reminding Financial Institutions of the Importance of Strict Compliance with Escheatment Obligations


August 7, 2000

TO THE CHIEF EXECUTIVE OFFICER OF THE INSTITUTION ADDRESSED:

The purpose of this letter is to remind financial institutions of the importance of strict compliance with their escheatment obligations and related obligations to maintain accurate books and records.

An institution’s obligation to remit abandoned property to the appropriate state authority is governed by abandoned and dormant property laws of the various states. In New York State, the body of law is contained in New York’s Abandoned Property Law and the appropriate state authority is the New York State Comptroller’s Office of Unclaimed Funds. The specific business activities which give rise to these obligations are widespread and cut across all major business lines. Obvious instances occur during the course of rendering retail or private banking services, such as abandoned bank accounts or safe deposit boxes or uncashed bank checks. In other instances, the obligations arise in the context of performing personal trust or corporate trust and agency activities such as when a financial institution serves as a corporation’s paying agent, distribution agent or stock transfer agent. Other, less obvious circumstances include situations where, for example a financial institution receives overpayments while acting as agent in securities transactions; where bank vendors do not cash checks issued by the bank; or where escrow deposits are abandoned. These circumstances do not constitute an exhaustive list and are merely offered as examples of the many situations which may give rise to potential escheatment obligations. Moreover, escheatable property is not limited to cash, but may also consist of other assets such as securities or other property.

It is incumbent upon all financial institutions to remain vigilant in their efforts to fully understand and comply with the relevant state laws and accounting practices governing abandoned property.

The mishandling of escheatable property is often the result of poor bookkeeping and recordkeeping practices which have been compounded over the years. Institutions whose books and records do not accurately reflect the ownership of property (as well as its age), expose themselves to regulatory, legal, operational and reputational risks and may also find themselves facing the prospect of criminal charges where the facts are particularly egregious.

Recently, there has been an increase in instances where financial institutions have found themselves in possession of property which is potentially escheatable, but due to poor recordkeeping, ownership cannot be definitively ascertained or where a question may exist as to whether the property belongs to the institution itself. Whether these recordkeeping problems were inherited through merger or acquisition or negligently created, in the absence of definitive evidence that such property belongs to the institution, it may not be taken in as income, used to offset expenses or used in any other fashion which is inconsistent with the true owners’ rights. Recent history has provided some dramatic evidence of the potential adverse consequences of such conduct.

To avoid the negative consequences of non-compliance, institutions are to maintain systems, controls, policies and procedures that adequately and effectively identify, age and separately account for escheatable and potentially escheatable property. Property so identified must then be reported in a timely fashion to management personnel charged with responsibility for escheatment compliance.

It is incumbent upon institutions with unreconciled books to take immediate steps to correct them, irrespective of the cost involved. If extensive reconciliation efforts fail to bring the books into balance, an institution with unattributable cash or other escheatable property is advised to consult counsel to avoid taking any action with respect to the property that could be viewed as being inconsistent with the rights of the unascertained or unidentifiable owners. Property that is received or held in trust, or otherwise held solely for others should never be taken into income or used to reduce expenses unless, on the basis of adequate documentation, the institution can clearly establish itself as the rightful owner of the property. Thus, for example, a paying agent may not take unattributed cash into income unless it can clearly establish that the obligation it assumed upon receipt of the funds has already been discharged with the paying agent’s own funds. Absent such proof, unattributed property should be separately accounted for in trust accounts and counsel should be consulted to determine whether additional obligations exist with respect to such property. Applying a "rough justice" standard to resolve difficult ownership issues is entirely inappropriate and contrary to safe, sound banking practices. Additionally, institutions must also be mindful of the fact that the failure of a state abandoned property administrator to claim certain property, does not, in and of itself, justify a conclusion that the property belongs to the financial institution. In the absence of evidence establishing actual ownership by the financial institution, that property may not be claimed by the institution or used in any fashion which is inconsistent with the unidentified owner’s rights.

Finally, in those situations where institutions outsource certain escheatment related matters to vendors (commonly referred to as "bounty hunters"), it is imperative that they be mindful of potential conflicts of interest which may arise, particularly where the vendor’s fee is a function of the value of identified property deemed by the vendor to be "non-escheatable."

Your institution’s escheatment systems, controls and practices will be reviewed by New York State Banking Department examiners as part of their overall supervisory examination. Should you have any questions regarding this topic, please contact Deputy Superintendent and Counsel Sara Kelsey at (212) 618-6580 or by e-mail at sara.kelsey@banking.state.ny.us.

Very truly yours,

Elizabeth McCaul
Superintendent of Banks

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