June 12, 2014

California Latest State to be Dogged by Cash-For-Contracts Questions in State Unclaimed Property Program

By Harold Kim
Executive Vice President, US Chamber Institute For Legal Reform

During the past year, ILR has been ringing the bell about the increasingly aggressive tactics of private auditing firms, hired by states, to collect purportedly unclaimed property on behalf of the state in exchange for a contingency fee.

In Delaware, for example, the Wilmington News Journal’s Jonathan Starkey has been reporting on the hundreds of millions of dollars paid to politically-connected private auditors and law firms, “hired to help shore up the state’s budget with cash from out-of-state businesses incorporated here.”

“The big-money contracts are part of the state’s growing reliance on hundreds of millions of dollars from Delaware’s unclaimed property program,” wrote Starkey in a recent report.

This week, LegalNewsline reported on the significant amount of campaign contributions California Controller John Chiang, who is running for re-election as state treasurer, has raised from a law firm hired on a contingency-fee basis to assist the state in collecting unclaimed property.

“In the span of a single day,” reports LegalNewsline, Chiang received three donations from two, “law firm attorneys the controller had hired prior to his bid for treasurer.”

This includes more than $11,000 total from attorneys who had been hired by Chiang’s office as part of the unclaimed property program.

In recent years, these attorneys and their law firm have represented the state in audits that resulted in more than $360 million worth of unclaimed property resolutions for the state.

Citing “litigation privilege concerns,” Chiang’s office, “would not to disclose the amount of attorneys fees paid out so far for the firm’s role in retrieving the unclaimed claims.” LegalNewsline has reportedly submitted Freedom of Information Act requests to obtain this information.

But we do know that these contingency fee arrangements can be lucrative. In Delaware, for example, private audit firm Kelmar collected $116 million over the past six years, with the firm raking in $53.4 million in 2013 alone.

As I told Starkey, “NFL football players don’t get those types of contracts.”

It’s not just about the amount of money paid to these firms. Or about the appearance of impropriety of these firms contributing large sums of money to the campaign accounts of state officials who have provided them with these potentially lucrative contracts.

It’s also about the increasingly aggressive tactics these private auditors take when interpreting and enforcing unclaimed property laws, including requiring insurers to cross-reference company records with the Social Security Administration’s Death Master File, a requirement that in most states is not supported by law.

For this reason, ILR recently released a white paper, “Unclaimed Property: Best Practices for State Administrators and the Use of Private Audit Firms,” which includes suggested best practices designed to preserve the appropriate collection of unclaimed property while protecting and balancing the legitimate interests of consumers, companies and the state.

This is a growing problem that has, until now, flown under the radar of the public and state legislators.

Rest assured, however, that ILR will continue to raise the profile of this vital issue, which directly impacts states, businesses and taxpayers across the country.

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