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JP Morgan Whistleblower Case Tests Unclaimed Property Compliance

02/09/2020 | FinOps Report
How hard is it to calculate past interest due?

Unclaimed property operations and compliance managers at US financial firms will soon find out that the task is more difficult than they thought should JP Morgan Chase lose its appeal of a New York civil court judge’s ruling about the bank’s required interest payment on unclaimed accounts reported late to New York State. Before they even sharpen their arithmetic skills, escheatment operations and compliance managers  will need to hone in on their recordkeeping and IT capabilities. Reducing the number of unclaimed accounts also wouldn’t be a bad idea.

In October 2019 JP Morgan Chase said it would ask the Appellate Division of New York’s Supreme Court to overturn a lower court decision in August 2019 that the bank should self-assess and pay New York State interest for not having reported unclaimed accounts on time. The financial giant has yet to file its brief on the appeal.

At the heart of the whistleblower case filed against the financial giant back in 2015 by whistleblower Raw Data Analytics is whether under New York’s unclaimed property law financial firms must always calculate and pay interest on the value of unclaimed accounts reported late to New York State. JP Morgan Chase says no, but the New York trial court judge disagreed.

Acting on behalf of New York’s Attorney General, whistleblower Raw Data Analytics initially filed suit under New York’s False Claims Act alleging that from January 1, 2005 until February 19, 2015 JP Morgan Chase failed to calculate and pay required interest on past due unclaimed property reporting to New York’s Office of the State Comptroller. The following year Raw Data amended its complaint to add an allegation that JP Morgan Chase had fraudulently represented the last contact data for account holders which ultimately determines when the property should have been transferred to New York and interest calculated for past due unclaimed accounts. Presumably, JP Morgan did so to reduce its financial liability. New York’s interest is 10 percent annually.

In seeking a dismissal of the case, JP Morgan Chase insisted it did not have a legal obligation to pay New York’s interest for late reporting on unclaimed accounts. That is because under the financial giant’s interpretation of the New York State OSC’s rulebook and state’s unclaimed property law its duty to pay interest was “contingent”on what the OSC decided. Therefore, New York’s False Claims Act doesn’t apply. JP Morgan Chase also said that the failure to report or pay interest was “not material,” and tried to prove its stance citing a 2017 letter written by the OSC. In that letter the OSC said that it waived late filing interest after JP Morgan Chase remitted US$32,160,127.22 in unclaimed accounts following the state’s audit of the bank’s 2008 to 2012 records.

In court, New York’s OSC appeared to back JP Morgan Chase’s stance by saying that its annual interest of about 10 percent could be imposed as the OSC’s discretion. Earlier this week, New York’s OSC declined to answer FinOps Report’s question about its position regarding JP Morgan Chase during the legal proceedings, but was eager to promote what it insisted was a longstanding policy of encouraging “voluntary compliance” with New York’s Abandoned Property Law. “Holders of past due property are given an incentive to participate in the voluntary compliance program or submit a voluntary compliance agreement,” says a spokesman for the New York’s OSC responding to FinOps Report’s emailed questions.”Educating companies and offering a waiver incentive to encourage compliance has provided New York with a revenue stream we would not otherwise have seen without such a program.” He adds that since 2001 more than 3,200 companies have participated in the voluntary compliance program or submitted VCAs (voluntary compliance agreements), totaling US$311 million.

However, New York’s voluntary compliance program appears to be limited to firms which have never previously submitted an unclaimed property report. It is unclear whether JP Morgan Chase and other large financial firms can even avail themselves of the program. Therefore, why did the OSC give JP Morgan Chase a waiver of late interest payment for 2008 to 2012, as JP Morgan Chase contends? The New York OSC’s spokesman declined to comment on the reason and also would not say whether it was standard policy for the OSC to let large financial firms off the hook in paying interest even if they couldn’t technically participate in its voluntary compliance program.

In agreeing with Raw Data Analytics and New York’s Attorney General who sided with Raw Data Analytics, New York civil court Judge James d’Auguste rejected JP Morgan Chase’s request for dismissal in 2016 and summary judgment in  August 2019. He ruled that New York’s unclaimed property statute left no wiggle room for interpretation. JP Morgan Chase can’t resort to using the OSC’s letter, the OSC’s handbook or the OSC’s website to argue it didn’t have to pay interest beause New York’s Abandoned Property Law is “abundantly clear,” that any person who fails to deliver property to the state “shall pay” interest for the period of the delay. Judge d’Auguste also decided that JP Morgan Chase can’t use the the OSC’s letter of a waiver of interest payment to prove that its failure to report or pay interest wasn’t material.

If JP Morgan Chase loses its appeal, it could easily end up forking out tens of millions of dollars in unpaid interest and penalties. New York’s False Claims Act allows for three times the value of the damages and civil fines which could come to anywhere from as little as US$11,181 to US$22,363 for each false statement or record. In his ruling, Judge d’Auguste said that the entire period of 2008 to 2012 for which JP Morgan Chase apparently paid no interest is “still actionable” and highlighted several accounts where the dates of last contact were in dispute. The total number of JP Morgan Chase’s false statements or records as well as the timeframe to be covered will likely be a matter of heated debate between Raw Data Analytics and the financial giant in the next discovery phase of the litigation so the final calculation of the unpaid interest and penalties could be imposed.

A limited liability company, Raw Data Analytics was incorporated in Florida in February 2015 right before it filed suit against JP Morgan Chase. A search of records through the website of the Division of Corporations at the Florida Department of State shows that Raw Data Analytics’ officers include attorneys specializing in tax whistleblower cases for the Ferraro Law Firm in Miami. At press time, it could not be determined how the attorneys at the Ferraro Law Firm caught wind of JP Morgan Chase’s reporting practices for unclaimed accounts, but their sleuthing skills will likely further unveiled during the next discovery phase of the lawsuit.

Officials at the Ferraro Law Firm referred questions to Randall Fox, a partner with the law firm of Kirby McInerney representing Raw Data Analytics, who was eager to criticize JP Morgan Chase’s reporting practices for unclaimed accounts.  “What JP Morgan Chase has shown so far in the case is that it is often late in turning over unclaimed property. On average, it appears to be about 3.5 years late in turning over about US$7.2 million each year,” Fox tells FinOps Report. “Using New York State’s annual 10 percent rate means that JP Morgan Chase is saying that the government must want to make an annual gift to JP Morgan Chase of about US$2.5 million of interest even while the State of New York faces a US$6.1 billion budget deficit.” Representing JP Morgan Chase, the law firm of Morgan Lewis & Bockius, declined to comment for this article.

Unclaimed property consultants warn that financial firms should prepare for the likelihood that Judge d’Auguste’s ruling will stand and they could be faced for the first time with self-assessing their interest payments for unclaimed accounts reported late to the State of New York. Even worse, other states could follow suit. So far, New York and many other states typically waive or at least reduce interest payments for late reporting or unclaimed accounts. California and Texas are the notable exceptions, but they do calculate the interest.

“If Raw Data Analytics ultimately prevails and the trial court’s decision is upheld on appeal, the decision could create confusion for holders and cause the miscalculation of interest,” writes global financial services consultancy BDO in a September 2019 blog on the case. “As a result, the NY OSC may need to issue refunds to holders or audit holders’ self-assessment of interest.” The spokesman for New York’s OSC declined to comment on whether it would offer financial firms any guidance on how to self-assess any interest due.

Managing unclaimed accounts is fraught with potential errors. Financial firms must report and remit unclaimed property, including securities accounts, checking accounts and other bank accounts, to the state of either the last known address of the customer or investor or the state of incorporation of the issuer of the securities or other accounts involved. States will return the unclaimed assets to their rightful owners, if and when they show up, but until that happens the states can use the funds to close their budget deficits. The National Association of Unclaimed Property Administrators says that in 2015 alone states collected US$7.76 billion in unclaimed property.

To fulfill their unclaimed property reporting obligations, financial firms must first keep track of the last communication or business activity with a customer. State statutes differ about just what triggers an account being tagged as unclaimed allowing a dormancy period to apply before the account must be reported and transferreed to a state. That period is typically between three to five years depending on the type of unclaimed property involved and the particular state’s statute.

The Unclaimed Property Professionals Organization, the Golden Valley, Minnesota-based trade group for holders of unclaimed property, has publicly expressed concern about the operational challenges financial firms will face in self-assessing interest payments for late reported unclaimed property accounts. Unclaimed property specialists are equally worried. “Doing the arithmetic to calculate past due interest on unclaimed accounts reported late isn’t the problem” explains Christa DeOliveira, chief compliance officer in Salt Lake City for Linking Assets, a firm specializing in reuniting owners with unclaimed property. “Difficulties can arise when collecting all of the information needed for complete and accurate unclaimed property reports.”

In the case of a merger or acquisition it is uncertain whether all of the needed records and data elements within the records are available and mapped correctly to calculate interest due from the last transaction date. “The result can become murkier when there are multiple system conversions or an acquisition of a financial institution with prior acquisitions,” says DeOliveira. The acquiror can only hope that all of the records are accurate and IT systems are integrated correctly.

“Financial firms need to check all investor and customer records to make certain they have correctly tagged an account unclaimed,” says DeOliveira. Reviewing uncashed checks for income and dividend paymens is the first order of business. Looking into savings, checking and brokerage accounts with no activity is also important.

Ideally all of the necessary data on unclaimed accounts should flow into unclaimed property reporting, regardless of the number of source systems or origins of the data. Miss a few accounts or one of the source systems because of data integration or other problems and the interest calculation will be wrong. Therefore, an entire data management project involving data quality staffers, business line managers, IT managers and compliance managers might be in order to ensure the right data capture occurs.

DeOliveira also advocates reducing the number of unclaimed accounts to lower the total value and number of accounts that must be reported and remitted to a state. The result: potential lower interest payments. “Proactive outreach programs to reconnect, reactivate and reunify owners with their property can change the status of accounts from inactive to active,” says DeOliveira.

Kimberly DeCarrera, an unclaimed property attorney in Atlanta, urges financial firms to protect themselves from whistleblowers filing lawsuits seeking big payoffs on unreported unclaimed accounts by negotiating agreements with states. Her reasoning: if whisteblowers can’t succeed, they likely won’t try to litigate. “There are firms that look for cases such as this one [involving JP Morgan Chase] to file whistleblower lawsuits for the triple damages available under qui tam [whistleblower] statutes,” she says. “Should firms find unreported unclaimed accounts in internal audits they can take advantage of voluntary disclosure agreements (VDAs) which often waive or significantly reduce penalties and interest rate for late reported unclaimed property.”

Under New York’s False Claims Act, any whistleblower whose case results in a recovery is entitled to a share of the recovery. When the government takes over the case the whistleblower’s award comes to between 15 percent to 25 percent of the value of the government’s recovery. In the case involving JP Morgan Chase, Raw Data Analytics could earn even more– between 25 percent to 30 percent– because the state didn’t take over the case.

“In a worse case scenario, if a VDA either doesn’t make sense or is not available, it’s time to man up and review potential liability,” says DeCarrera. “Being proactive rather than reactive is the best way to mitigate interest payments.”