Why Banks Should Not Overlook Unclaimed Property During the M&A Process

By Kristine Butterbaugh

Bank mergers and acquisitions were down more than 50 percent in 2020 compared to the previous year, and more than 3,000 branches closed in that year, many of which were small banks that couldn’t keep up with the demand for digital banking services, while others were located in economically struggling communities. However, 2021 has brought about a major reversal for these financial institutions.

In 2021, we saw a whopping $5.1 trillion in global M&A deals, up 134 percent from 2020. The US accounted for roughly 60 percent of global deals and bank acquisitions are solidly represented in this mix. The 150-plus financial services mergers announced in 2021 quickly surpassed the 119 in all of 2020. As credit unions gobble up community banks, and megadeals face increased scrutiny in today’s tougher regulatory climate, there is a component of due diligence that often goes unknown and overlooked—unclaimed property. Though this risk is lurking in the shadows, it can present significant financial exposure for the buyer.

Unclaimed property audits on the rise

Adding to the challenges that community banks are facing is an uptick in regulatory activity, specifically unclaimed property audits, the scope of which can vary greatly and many smaller financial institutions are not prepared for. Struggling to stay afloat, community banks haven’t been focusing enough on property codes, dormancy periods and reporting deadlines.

In the excitement of a new acquisition, buyers are focused on integration for customers and employees, but may discover later that they have a multimillion-dollar unclaimed property exposure to contend with. If that new acquisition was not in compliance with unclaimed property law, excitement can quickly turn into a mad scramble to gather resources, hire outside experts and work with regulators to bring the bank into compliance. The act of the purchase transaction alone could draw attention of state regulators, or even third-party contingency fee auditors.

Unclaimed property laws vary wildly from state to state, but each makes clear that assets or property on a holder’s books, or records that belong to someone else, must be returned to their rightful owner. If the rightful owner is not able to be located, the holder must follow a series of state requirements and ultimately report and turn over the property to the state. In the case of banks, this can include safe deposit boxes, official bank checks and all accounts—no matter how old.

Unclaimed property can have expensive consequences if banks do not follow the rules of the individual states. For instance, the 2021 Minnesota holder reporting guide points out: “Anyone who willfully fails to report is guilty of a misdemeanor. Anyone who refuses to pay or deliver abandoned property is guilty of a gross misdemeanor. Anyone failing to pay or deliver property by the reporting due date may be charged interest at the rate of 12 percent per year on the value of the unclaimed property.”

And in Nevada, if the treasurer’s office initiates an examination of books and records and learns that the target bank did not retain sufficient records, the Nevada administrator may require the institution to report and pay the amount estimated by the administrator, on the basis of any available records, which is essentially an educated guess on what is owed.

Due diligence considerations for unclaimed property

In the case of M&A activity, to help determine risk, it is important to understand the unclaimed property compliance history of the target bank. If the acquiring bank does not have a resident unclaimed property expert, it may be in its best interest to hire one internally, or work with an outside consultant or company, who can perform a risk assessment on the bank’s behalf.

Here is a list of eight unclaimed property matters to think about during the M&A due-diligence process in the target bank investigation:

1. Request and review copies of the target bank’s unclaimed property policies and procedures.
2. Review the bank’s process for unclaimed property due diligence.
3. Review the bank’s process for, and frequency of, state reporting.
4. Request sample copies of due diligence letters and state reports to support adherence to policies and procedures.
5. Inquire about any historical unclaimed property audits or voluntary disclosure agreements with states.
6. Review the bank’s record retention policies to ascertain whether they could defend the expansive scope of an unclaimed property audit.
7. Evaluate previous M&A activity by the target bank to determine whether there has been an inheritance of previous liabilities.
8. Review relationships with third parties (such as payroll) and understand where the unclaimed property legal responsibilities lie.

With a little up-front due diligence, banks can avoid the surprises lurking in the shadows of unclaimed property compliance. Unclaimed property should be included in your review efforts and become a standard practice as part of the M&A checklist.

Kristine Butterbaugh is a solution principal at Sovos Compliance, LLC.