The Softer Side of Delaware in its Pursuit of Unclaimed Property

The state of Delaware, which has established itself as among the most aggressive states in the country in pursuit of the over 500,000 legal entities that call Delaware their home, has recently issued regulations intended to expedite completion of the many unclaimed property audits conducted by third party contingent fee agents on behalf of the state. 
These audit guidelines come on the heels of a new and streamlined process for companies to voluntarily come into compliance with the unclaimed property provisions if they are not already under audit.

Audit Guidelines
The new audit regulations (initially proposed on July 1, 2012) provide for a shortened look back period to January 1, 1986 provided:

1. The Company (“Holder”) is currently under audit or audit commences before December 1, 2012 AND the examination is completed by June 30, 2015.
2. For holders who become subject to an audit after December 1, 2012 and all other holders whose exams are not completed before June 30, 2015, the state will continue the existing policy of examining records created on or after January 1, 1981.

An examination is deemed to be complete for any category of property as of the date on which the Audit Manager mails the statement of findings and request for payment as described in 12 Del.C. § 1156(a) for that category of property.  Much still rests with the Audit Director, Mark Udinski’s, handling of an audit in terms of whether the reduced look-back would apply

The new regulation becomes effective on December 1, 2012

VDA Guidelines
For all Holders that are not subject to audit, new procedures were established in the 2012 legislation passed this summer.  This legislation modified the existing requirements in order to avert penalties and possibly interest from being imposed if the Holder comes forward and enters into a Voluntary Disclosure Agreement (“VDA”) with the state.

Previously, corporate officers wishing to comply with Delaware’s unclaimed property guidelines had limited options. They could either enter into a Voluntary Disclosure Agreement (“VDA”) with the state through its Department of Finance, the same department that administers its audit program,  or run the “audit lottery” choosing to wait it out to see whether or not the State or its third party auditors came knocking.  Oftentimes, the VDA route brought upon the same level of scrutiny as did an audit and more than a few unsuspecting larger corporations faced multimillion settlements that extended 5-10 years. For example, the major retailer Staples earlier this year settled years of litigation with Delaware that commenced as a voluntary disclosure for $8.9 million. For a further discussion of this settlement click here.

For companies that wish to come forward voluntarily,  new guidelines (effective June 30, 2012) provide  them with the option of  entering into a-VDA directly with  the Secretary of State’s office without risk of audit by the Department of Finance unless there are extenuating circumstances. In such circumstances the VDA has to be entered into before June 30, 2013 and completed before June 30, 2014.  Or alternatively entered into by June 30, 2014 and completed before June 30, 2015.  In the first instance the look back period is reduced by 5 years from 1986 to 1991, and in the second by 3 years from 1986 to 1989.