The U.S. Chamber Institute for Legal Reform has released a report detailing current problems with states using private companies for unclaimed property audits and paying those auditors based on the amount recovered.  The report begins with an example of what can go wrong when private auditors are paid on a contingent basis.  The nightmare story of what many life insurance companies recently experienced is well worth the read by anyone who thinks that because their company has been diligently complying with unclaimed property laws, there can’t be any risk from an audit.

After reviewing the issues, the U.S. Chamber suggests several, eminently achievable, reforms.  These reforms include:

• Prohibiting contingency fees;
• Requiring all state contracts for private audit services to be subject to an open, competitive bidding process;
• Requiring all such contracts to be posted on the unclaimed property administrator’s website; and
• No delegation of state authority to private contractor on substantive decision-making, such as legal theories.

The report also offers suggestions that states provide voluntary disclosure programs with certain protections for participating holders.

Practice Note: Over a decade ago, several attorneys with McDermott’s SALT practice, while working at the Counsel On State Taxation (COST), drafted a Holder’s Bill of Rights.  While Delaware was one of the main proponents of the concept, it did not get any traction in other states.  The current negative impression many holders have regarding third-party contingency fee unclaimed property auditors could have been limited, and perhaps prevented, if states had embraced this idea.  It is probably time to consider this concept.  If third-party auditors offered such a pledge to holders, audits would be far less adversarial and be completed much faster.