Guest Post by Cathleen Bucholtz and Matthew B. Chenowth

Public officials from California to Florida struggling to close budget gaps have discovered a new method of generating revenue — unclaimed property audits — that should put all executives on high alert.

The insurance sector has been the headline-making target of these investigations lately but this is likely to continue to blossom into broader scrutiny of all industries, even those with established unclaimed property reporting histories.

Unclaimed property laws require a company to report and remit any abandoned property to the state after a defined period of time so the property can be reunited with the owner. Financial and insurance industries have complied — or tried to comply — with these laws for decades, but they apply to all industries.

California’s settlement with John Hancock Financial Service Inc. over the company’s noncompliance with the state’s unclaimed property laws revealed undelivered death benefits and matured annuities owed to the insurer’s clients in excess of $20 million.

Government officials have made it clear that, as they see it, John Hancock was just the first domino. The state’s controller, John Chiang, was quoted as saying “while John Hancock is the first to be held accountable, it will not be the last. I am prepared to pursue all actions necessary — including litigation — to bring the rest of the industry into compliance.”

California’s government watchdogs have now investigated 21 life insurance companies. The audits allegedly revealed the insurers often failed to pay death benefits to the beneficiary or report the unclaimed property to the state. Instead, the funds were often used to continue premium payments until the amounts in the account were fully depleted.

California isn’t alone in its investigation of life insurance companies. Some 35 states have now signed on to work with the same third-party contract auditor that conducted the John Hancock audit for California.

Third-party audit firms typically receive a 10 percent or more cut of the sum of the audit findings it identifies for the states as unclaimed property. Although the audit firm that conducted the John Hancock examination was only formed in 2007, it has already shaken the insurance industry with just the threat of potential unclaimed property examinations. However, companies should keep in mind there are a handful of other contract auditor firms that have also been stirring up the unclaimed property world, some for more than a decade.

For state governments now facing the pressure of large fiscal burdens, enforcing unclaimed property laws is becoming an important source of revenue. Seeing life insurance firms — companies that are well versed in unclaimed property reporting rules and requirements — shocked by multi-million dollar settlements should cause all industries to stand at attention.

Not only are other insurers likely to undergo similar examinations, but we expect increased scrutiny across other industries. That includes those that have historically reported unclaimed property as well as industries that have not fully complied with states’ unclaimed property laws across the U.S. It is impossible to predict what industries the states will focus on now that they have seen how much money remained unreported by the insurance industry. However, one fact remains clear: Unclaimed property is an issue that impacts all industries, including health care, retail, hospitality, financial services, manufacturing, distribution, entertainment, transportation, energy, utilities, etc. While a particular industry may not be under review by the states today, the key thing to remember is that it’s not under scrutiny…yet.

We encourage all corporate finance departments to review their unclaimed property compliance function immediately as these recent developments will be a major concern.

Cathleen Bucholtz is a Managing Director and the National Practice Leader for True Partners Unclaimed Property Management Solutions Team.

Matthew Chenowth is a Senior Manager in the Unclaimed Property Practice of True Partners Consulting LLC.