Sangamon Sun

Delaware sparked attention recently when its Finance Secretary, Tom Cook, declared that the state’s unclaimed-property auditing practices and procedures are under review.

This comes in the wake of a recent lawsuit by packaging company Temple-Inland against the state over its auditing practices. Harold Kim, Executive Vice President of the U.S. Chamber Institute for Legal Reform, said Delaware’s situation is a nationwide concern, and he hopes that Illinois carefully examines the case, as legislation sitting on the governor's desk may lead the state down Delaware's path.

“These unclaimed-property audits are nationwide,” Kim told the Sangamon Sun. “You see them in California, you see them in Massachusetts, and you see them down in Florida. Basically, what happened here is that you have these private audit firms (that) have been driving these auditing investigations over the course of the last five years. It has been a serious source of revenue for states like Delaware.”

Illinois faces a similar situation regarding audits on unclaimed property. Currently on Gov. Bruce Rauner’s desk is House Bill 4633, also known as the Unclaimed Life Insurance Benefits Act. The bill proposes a major mandate that requires that insurance companies search for beneficiaries of unclaimed life insurance, annuities and asset accounts when the policyholder dies. Currently, this process falls upon the beneficiary. This bill requires the insurance companies to conduct their own searches, either by searching the U.S. Social Security Administration's Death Master File or using other means. It also mandates that all funds must be turned over to the state if no beneficiaries are located.

Kim, in an open letter to Rauner, said the bill changes existing life insurance policies and may violate contract clauses in the state and federal Constitutions.

“The legislation on Gov. Rauner’s desk is a mandate which rewrites existing contractual obligations that have been around for decades,” Kim said. “The means by which you are doing it…if it’s unconstitutional, it’s unconstitutional. The means by which you are doing it could potentially expand more abusive audits.”

As Kim said, many states have aggressively pursued unclaimed property as a serious source of revenue. Many states use private firms to conduct the audits, and this aspect puts everything into question, Kim said.

“For example, Kelmar, which is one of the big audit firms, from 2004 to 2014 -- over a 10-year period of time – (had) collected over $200 million in fees. That is a big chunk of change. It doesn’t really take a rocket scientist to figure out what is kind of behind this: There is a lot of money that is being driven by these unclaimed property auditors, and it is being done nationally, and I think that when you look at Delaware, there are legislators in the state, as well as the court, who are saying ‘Wait a second. This is getting too much out of control.’”

Kim said this is why Delaware has enacted some recent laws to put limits on how and what the state can audit. As he told Rauner in his letter, some of these auditing practices by the private auditors and by the state are unconstitutional. Kim said the state cannot unilaterally, under the federal and state Constitutions, rewrite contracts or rewrite obligations. Kim hopes Illinois looks at Delaware’s recent troubles and learns.

“I think that in Delaware, they are looking at ways of trying to bring some more safeguards in the auditing process,” Kim said. “But in Illinois, they are going a different way. They are trying to expand the audits by expanding the obligations of the holder to use the death master file as part of contractual obligation. Hopefully, Illinois will look at what Delaware is doing and look at some good legislative options to limit the abuse.”

Kim concludes that further scrutiny of House Bill 4633 is required because of the potential for abusive audits and that the surge in audits of unclaimed property merits reflection.

“I think it is something that policy makers, as well as the governor, ought to consider before approving or doing any further action on the legislation,” Kim said. “I think that focus on the auditors is particularly important because this has been a national effort on their part to encourage states to really try and look at unclaimed property audits as a source of revenue for that state. It’s been growing significantly and something that warrants a lot of public attention to see what is really behind it.”