Thu, Dec 6, 2012
In large part, due to the lobbying efforts of many corporations that are incorporated in Delaware, the State legislature and its Governor have created a meaningful opportunity for companies to voluntarily come forward and commence the reporting of unclaimed property without the fear of audit by the state or its third party contingent fee agents. Several questions have arisen from the initial legislation that was passed back on July 11, 2012 and in subsequent announcements. Below is a quick reference guide for those who are seeking clarification on the new developments in this area.
Why Delaware’s Unclaimed Property Rules Matter?
Virtually all companies that have transactions with third parties, including employees, vendors, agents and customers, have the potential to generate unclaimed property. Typically unclaimed property arises through un-cashed dividend, payroll or vendor checks; unapplied or un-reconciled credits; or rebates and unredeemed stored value and gift cards. Under the rules regulating the administration of unclaimed property remittances, the state of incorporation of the entity issuing the potentially reportable property stands second in line to receive unclaimed property if the owner’s address is unknown or if records do not exist to identify the owner. Since Delaware is the state of incorporation for the overwhelming majority of entities across the country (over 800,000 according to public records), the state stands to receive hundreds of millions in unclaimed property and has a rigorous audit program in place to ensure compliance with these rules. Many corporations, even those who genuinely believed they were in compliance with the existing laws, have had large multi-million settlements due to audits initiated by Delaware’s Department of Finance through third party contingent fee auditors engaged by the state.
What is the new Voluntary Disclosure Agreement Program?
The new Program includes several encouraging features, which any entity incorporated in Delaware that may not be in full compliance with the expansive unclaimed property provisions should take into consideration. These include:
What’s different from the previous VDA programs?
The most significant change from the old Program is a stated intention by the Secretary of State to encourage companies to come forward in an effort to create more certainty about the process and result in a “more friendly and collaborative manner” than companies may previously have experienced when administered by the Department of Finance. The Secretary of State has also hired a law firm to help administer the program on an hourly versus contingent fee arrangement.
The Delaware Secretary of State asserts that the ultimate goal in executing the new program is to incentivize Delaware registered businesses that are not in full compliance to voluntarily come forward and gain compliance by participating in the VDA Program. The benefits of the Program are:
In order to demonstrate this more friendly relationship, the Secretary of State has established a website, which includes among other information, answers to frequently asked questions as well as a four phased process with specific steps required to complete the VDA submission. The steps are:
What’s to be Done Now?
Every corporation that is incorporated in Delaware that is not under audit should review its potentially reportable unclaimed property and assess whether or not entering into a VDA under the new guidelines is to their advantage. This includes companies that have either:
As previously noted ALL companies have some form of unclaimed property, and the list of potentially reportable property is growing each year. Only by reviewing past practices and historical books can a company determine whether these new procedures will benefit their organization. Most importantly, many who in the past have hesitated to voluntarily come forward, for fear doing so will result is a long and costly audit should reconsider their decisions and review whether the new VDA will help to reduce potential audit risk, liability and interest/penalties.
At Duff & Phelps we assist companies to ensure they are “meeting, but not exceeding” their unclaimed property reporting obligations.
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