Compliance Reporting and Escheatment

Why This Topic Matters
Treasury is the function that touches almost every dollar flowing into and out of an organization. That position of control also makes treasury a primary point of regulatory exposure. Governments, states, lenders, investors and auditors all require evidence that cash, accounts and obligations are being handled lawfully. Two areas sit squarely in the treasury professional's lap: compliance reporting (telling regulators, lenders and boards what you are required to tell them, when you are required to tell them) and escheatment (turning over property that belongs to someone else but has gone unclaimed). Failures in either area produce fines, interest, penalties, restated financials, reputational damage and, in the case of unclaimed property audits, assessments that can reach back decades. On the CTP exam these concepts fall under Financial Regulatory and Operational Risk, and the exam expects you to know not only the definitions but how treasury operationalizes them.

Part 1: What Is Compliance Reporting?
Compliance reporting is the structured, periodic communication of information that an organization is legally or contractually obligated to provide. In the treasury context it falls into three broad categories.

1. Regulatory (government-mandated) reporting. Examples that commonly appear on the CTP exam include:
- Sarbanes-Oxley Act (SOX): Section 302 requires the CEO and CFO to personally certify the accuracy of financial statements and the effectiveness of disclosure controls. Section 404 requires management to assess and report on internal control over financial reporting, with auditor attestation for larger filers. Treasury processes (cash, debt, investments, bank reconciliations) are typically in scope.
- Bank Secrecy Act / Anti-Money Laundering (BSA/AML): Banks file Currency Transaction Reports (CTRs) for cash transactions over $10,000 and Suspicious Activity Reports (SARs). Companies file IRS Form 8300 when they receive more than $10,000 in cash in a single or related transaction. Structuring transactions to avoid these thresholds is itself a crime.
- FBAR (FinCEN Form 114): A U.S. person with a financial interest in, or signature authority over, foreign financial accounts whose aggregate value exceeds $10,000 at any point in the year must file. This directly affects treasury staff who are signers on foreign bank accounts; both the company and the individual may have filing obligations. Due April 15 with an automatic extension to October 15.
- OFAC (Office of Foreign Assets Control): Organizations must screen payments and counterparties against sanctions lists and block or reject prohibited transactions, then report blocked property to OFAC.
- FATCA: Reporting on foreign accounts and withholding on certain payments to non-compliant foreign financial institutions.
- Dodd-Frank Act: Derivatives reporting to swap data repositories, clearing requirements and end-user exemptions; treasury must document hedging activity and exemption elections.
- SEC periodic filings (10-K, 10-Q, 8-K) for public companies, including liquidity disclosures, debt covenants and off-balance-sheet arrangements that treasury supplies.

2. Contractual (covenant) reporting. Loan agreements and indentures require periodic compliance certificates confirming that financial covenants (leverage ratio, interest coverage, minimum liquidity, etc.) are met. Treasury usually prepares these, along with required financial statements, borrowing base certificates and notices of default or material events. Missing a reporting deadline can itself trigger a technical default even when the ratios are fine.

3. Internal governance reporting. Treasury policies set limits on counterparty exposure, investment types, hedge ratios and signing authority. Treasury reports compliance with those policies, and any exceptions, to senior management, the treasury committee, the audit committee or the board. This is also where internal control documentation and segregation-of-duties evidence lives.

How Compliance Reporting Works in Practice
Effective programs share a common architecture:
- Inventory of obligations: a compliance calendar listing every filing, who owns it, the due date, the data source and the approver.
- Data capture at the source: treasury management systems, ERP and bank reporting feed the data so that reports are not hand-built at the deadline.
- Review and certification: preparer/reviewer segregation, sub-certifications that roll up to the CFO's SOX certification.
- Record retention: regulators typically require five to seven years, sometimes longer; unclaimed property audits may look back further.
- Monitoring and testing: internal audit tests controls; exceptions are logged and remediated.
- Training: staff with signature authority on foreign accounts, for example, must know they have personal FBAR exposure.

Part 2: What Is Escheatment?
Escheatment is the legal process by which unclaimed or abandoned property is transferred to the state after a statutory dormancy period. The state holds the property as custodian for the rightful owner, who can usually reclaim it indefinitely. The company that owes the property is called the holder; the person entitled to it is the owner.

Key point for the exam: unclaimed property law is state law, not federal law. Every U.S. state, the District of Columbia and several territories have their own statutes, dormancy periods, reporting deadlines and formats. Most are modeled on versions of the Uniform Unclaimed Property Act (1954, 1981, 1995 and the Revised Uniform Unclaimed Property Act of 2016), but variations are significant.

Types of property subject to escheatment
- Uncashed vendor checks and accounts payable credits
- Uncashed payroll checks and unclaimed wages
- Uncashed dividend, interest and principal payments
- Customer overpayments, credit balances, refunds and rebates
- Dormant checking, savings and brokerage accounts
- Stock, bonds and mutual fund shares where the owner cannot be located
- Gift cards and stored-value cards (treatment varies widely by state)
- Insurance proceeds, utility deposits, safe deposit box contents, royalties and mineral interests

Dormancy periods
The dormancy period is the length of time property must remain unclaimed, with no owner-generated activity, before it is presumed abandoned. Typical periods are three to five years, but payroll and wages are usually one year, and some property types are shorter or longer. The clock generally starts from the date the property became payable (for example, the check issue date), not from the date the company notices it is outstanding.

The priority rules: Texas v. New Jersey (1965)
Because a company may owe money to owners in many states, the U.S. Supreme Court established which state has the right to claim property:
1. First priority: the state of the owner's last known address as shown in the holder's books and records.
2. Second priority: if the owner's address is unknown, or the owner's state does not escheat that property type, the property goes to the holder's state of incorporation (state of domicile).
Later cases (Pennsylvania v. New York, 1972; Delaware v. New York, 1993) reaffirmed these rules. This is one of the most frequently tested escheatment concepts.

How the Escheatment Process Works
1. Identify: Review outstanding check lists, aged credit balances, dormant accounts and unapplied cash. Treasury's bank reconciliation process is the primary detection point.
2. Research and reconcile: Determine whether the item is genuinely owed (not a duplicate payment or posting error) and gather the owner's last known address.
3. Perform due diligence: Most states require the holder to send a written notice to the owner before reporting, typically 60 to 120 days before the report deadline, for items above a threshold (often $50). The letter invites the owner to claim the property or confirm the account is active.
4. Report and remit: File the state report (most states use the NAUPA electronic format) and remit the funds or securities by the deadline. Many states set a November 1 deadline for general holders, with a June 30 cutoff; life insurers often report in the spring. Deadlines vary, so the compliance calendar must track each state.
5. Record and retain: Keep copies of reports, due diligence letters and supporting detail. States audit many years back, and the absence of records allows auditors to estimate liabilities, which almost always works against the holder.
6. Handle reclaims: If an owner surfaces after remittance, direct the owner to the state, or if the holder pays the owner, file a reimbursement claim with the state.

Common mistakes and audit risk
- Taking unclaimed property into income: Writing off stale checks to miscellaneous income does not extinguish the liability. The obligation to the owner, and to the state, remains. This is the single most common finding in unclaimed property audits.
- Voiding and reissuing without tracking: Voiding a check does not stop the dormancy clock if the underlying debt is still owed.
- Assuming no obligation because the owner is a business or because the amount is small. Business-to-business exemptions exist in some states but not all.
- Ignoring gift card rules, which differ sharply among states.
- No records: many states use third-party, contingency-fee auditors who can extrapolate liabilities across all years without documentation.
States offer Voluntary Disclosure Agreements (VDAs) that typically waive penalties and reduce interest and the look-back period for holders who come forward before being selected for audit.

Treasury's Role
Treasury owns bank reconciliations, outstanding check management, positive pay exceptions and often accounts payable and payroll disbursement. That makes treasury the natural owner or key partner for escheatment compliance. Best practices include monthly review of outstanding items, early owner outreach (which is cheaper and better for customer and employee relations than escheating), a cross-functional policy with AP, payroll, legal and tax, use of tracking software, and accrual of an unclaimed property liability rather than income recognition. Treasury also feeds compliance reporting more broadly: SOX control evidence, covenant compliance certificates, FBAR account lists and OFAC screening results.

Part 3: Exam Tips: Answering Questions on Compliance Reporting and Escheatment
Tip 1: Know the jurisdiction. If a question asks who regulates unclaimed property, the answer is the states, not the federal government. If it asks about SOX, FBAR, OFAC or Form 8300, those are federal.

Tip 2: Master the Texas v. New Jersey priority rules. Expect a scenario: a company incorporated in Delaware with headquarters in Ohio has an uncashed check payable to a vendor whose last known address is in Texas. Where does it escheat? Texas (owner's last known address). If the address is unknown, Delaware (state of incorporation). Headquarters location is a distractor unless the state of incorporation is the same.

Tip 3: Remember what dormancy means and when it starts. The period runs from when the property became payable or the last owner-initiated activity, not from when the company discovers it. Payroll is typically shortest (one year); most other property is three to five years.

Tip 4: Income recognition is never the right answer. Any option suggesting the company can write stale checks off to income, keep the funds after a certain time, or treat voided checks as resolved is incorrect. The correct treatment is to carry the liability, perform due diligence and remit to the state.

Tip 5: Due diligence precedes reporting. If a question asks for the first step once an item is presumed abandoned, the answer is to attempt to contact the owner (due diligence letter), not to remit immediately.

Tip 6: Know the thresholds. $10,000 appears repeatedly: CTRs (bank cash transactions over $10,000), Form 8300 (company receiving more than $10,000 in cash), FBAR (aggregate foreign accounts exceeding $10,000 at any time during the year). Read carefully whether the question is about a bank filing or a company filing.

Tip 7: Distinguish SOX 302 from 404. Section 302 is executive certification of financial statements and disclosure controls; Section 404 is management's assessment of internal control over financial reporting, with auditor attestation. Treasury's cash and bank reconciliation controls are classic 404 controls.

Tip 8: Covenant compliance is reporting too. A question about a loan agreement requiring quarterly certificates is a compliance reporting question. Remember that failing to deliver the certificate on time can be a technical default even if ratios are satisfied.

Tip 9: Think like a risk manager. The CTP exam frames these topics under operational and regulatory risk. When asked for the best control or best practice, favor answers involving segregation of duties, documented policy, a compliance calendar, early owner outreach, complete record retention and proactive remediation (such as a VDA) over reactive or cosmetic fixes.

Tip 10: Eliminate distractors systematically. Options that mention federal escheatment, income recognition of unclaimed funds, headquarters state as the default jurisdiction, or ignoring small-dollar items are almost always wrong. Options that mention owner's last known address, state of incorporation as fallback, due diligence letters, NAUPA format, record retention and liability accrual are almost always right.

Quick Review Summary
- Compliance reporting: regulatory (SOX, BSA/AML, Form 8300, FBAR, OFAC, FATCA, Dodd-Frank, SEC), contractual (covenant certificates), internal (policy compliance to board).
- Escheatment: state-law transfer of unclaimed property to the state as custodian after a dormancy period.
- Holder = company owing the property; owner = person entitled to it.
- Priority: owner's last known address first, holder's state of incorporation second.
- Process: identify, reconcile, due diligence, report and remit, retain records, handle reclaims.
- Never take unclaimed property into income; accrue a liability.
- Penalties, interest and estimation in audits make proactive compliance and VDAs valuable.
- Treasury's bank reconciliation and disbursement control functions make it the natural owner of escheatment compliance and a key contributor to all other compliance reporting.