Unclaimed funds in bank accounts, at least a minor headache for bankers all over the country, have begun causing acute political pain in Kentucky. State Treasurer John Kennedy Hamilton has hired an auditing firm to examine the records of hundreds of financial institutions, and the bankers are up in arms.
The auditors' mission is to find cash and property that the banks, under the escheat law, are supposed to turn over to the state after seven years of inactivity.
According to Mr. Hamilton, many banks routinely manipulate dormant accounts for their own gain instead of surrendering the money to the state, which is responsible for returning unclaimed property to owners or heirs. The auditing effort, which began in February, found some companies adding 1 cent to some accounts to classify them as active, and others diverting money from dormant accounts for income.
Audits completed on 14 institutions turned up about $2.3 million of unclaimed property, according to the treasurer's office.
"They're essentially taking other people's money," charged Mr. Hamilton.
The issue comes up everywhere but only occasionally turns into such a political football. All states and the District of Columbia have escheat laws applying to accounts that become inactive because of the death, disappearance, or forgetfulness of the account holder.
The Nationwide Unclaimed Property Association, an organization of state departments responsible for finding heirs, says unclaimed funds within U.S. corporations-not just banks-run into billions of dollars. Valerie Jundt, executive director of the association, said compliance varies from state to state but generally improves when state officials bring attention to the issue.
"Do all banks comply? No," she said. "But is there an attempt to comply? I think so. If they have nothing to hide, they should have no problem opening their books and records."
After some 260 banks in Kentucky were targeted for audits, the Kentucky Bankers Association and with two community banks filed a class action seeking an injunction against the audits and challenging the treasurer on several fronts. A circuit court judge granted a temporary injunction Oct. 2 against further audits, and a full hearing is slated for next Wednesday.
The bankers claim there is confusion about how to interpret the 1942 Kentucky law on handling abandoned property. Moreover, they allege that Mr. Hamilton is conducting a highly publicized witch hunt to improve his reelection chances in 1999.
"Our banks are more than willing to comply with the law, but they need to know what rules they're supposed to be following," said Debra Stamper, legal counsel to the Kentucky Bankers Association.
Mr. Hamilton "keeps trying to push this as a consumer protection issue," Ms. Stamper added. "He is playing this for all it's worth."
The lawsuit contends the treasurer's office does not have the authority to hire an outside auditing firm, since the law provides for state employees to conduct such examinations.
The bankers also take issue with the fairness of an auditing contract that grants the auditors 11% of the value of what they uncover. The suit further alleges a host of improper actions by the treasurer's office, including an attempt to regulate the fees banks and other financial institutions charge on dormant accounts.
In Kentucky, the financial institutions targeted for audits are mainly community banks, credit unions, and thrifts. The treasurer identified the companies after reviewing annual reports in which they routinely denied having any unclaimed accounts.
Two superregional banks in Kentucky, Banc One Corp. of Columbus, Ohio, and PNC Bank Corp. of Pittsburgh, both appear to be complying with the law and are not targeted for audits at this time, said Mr. Hamilton.
The $2.3 million from unclaimed accounts that turned up in the audits has mostly been returned to account holders. Of that total, $554,381 went to the state for handling, Mr. Hamilton said.
Audits on another 31 institutions resulted in more than $170,800 being remitted to the state for 1996. Mr. Hamilton said the same 31 institutions had reported less than $144,000 in unclaimed accounts from 1991 to 1995.
He acknowledged the bankers' anger with his actions and said he is determined to fight the legal accusations. He also plans to lobby for increased penalties against companies that don't comply with the law; he can fine banks no more than $500 for not turning over unclaimed property.
"I'm just enforcing the law," Mr. Hamilton said. "We're working hard to give the money back to the rightful owners. I can't say the banks have been doing that."