Background
The Delaware Department of Finance (the Department), Office of Unclaimed Property sent out notices in November 2023 entitled “Notice Requiring Verified Report for Report Year 2022” (the Notice). The Notice is yet another outreach from Delaware regarding its unclaimed property requirements and raises new questions for companies about the various Delaware unclaimed property compliance programs and how best to comply.
To complete the verified report process, holders are required to provide the following information, often directly to a third-party contractor hired by the state:
- A completed verified report form (included with the Notice)
- A list of legal entities included in the verified report
- A copy of the holder’s unclaimed property policies and procedures, if any
To the extent the Department of Finance determines that the holder failed to respond or complete the verified report request, it can initiate an audit without inviting the holder to participate in the Secretary of State’s (SOS) Voluntary Disclosure Agreement (VDA) program. In this way, the verified report process could pull holders into audit without the opportunity to voluntarily comply. Holders should therefore consider opting in to the SOS’s program to the extent they have concerns about responding to the verified report request.
Further, the Department of Finance has assigned review of the verified report materials to its third-party contractors, the same firms that conduct unclaimed property audits. While such contractors are subject to the confidentiality requirements of Del. Code Ann. tit. 12, sec. 1189, holders should request that any contractor reviewing its verified report materials enter into a nondisclosure agreement to clarify the contractor’s specific obligations with respect to any sensitive data.
Mechanics of section 1170
The Department of Finance is authorized under Del. Code Ann. tit. 12, sec. 1170 to require holders to submit verified reports related to any unclaimed property they may hold. The State Escheator can require that a holder complete this filing even if the holder is in compliance with Delaware’s unclaimed property law.
The verified report is generally a self-directed process, pursuant to which the holder provides information to the Department concerning a particular unclaimed property report year. If the State Escheator finds a holder’s verified report filing to be unsatisfactory, the Department can then initiate a “compliance review.” The compliance review process is a higher level of inquiry, whereby the Department can request production of “all supporting documentation” relating to the report. If the State Escheator determines that there is a deficiency in reporting through the compliance review, the State Escheator must notify the holder of the deficiency, and the holder will have 90 days to make payment or run the risk of a full audit.
Importantly, a holder retains the ability to enter the SOS’s parallel VDA program after the Department of Finance initiates the verified report and/or compliance review process. However, “where the State Escheator determines that the person has not completed or responded to a verified report or compliance review as required,” the State Escheator may initiate an audit without providing the holder with the opportunity to participate in the VDA program.1 Therefore, to retain the ability to opt in to the VDA program, holders must, at the least, respond to the initial Notice within 30 days. Further, while the statute provides one year for completion of the verified report process, the Department of Finance has notified holders that it expects them to satisfy the requests within 180 days.
Failure to meet the Department’s expectations can trigger a compliance review or an audit. At the conclusion of a compliance review, if the holder has failed to pay the deficiency demanded within 90 days, the Department can also initiate an audit. The Department of Finance retains judicial action and referral to the VDA program as other options for enforcement of unpaid deficiencies. In short, to the extent that a holder is concerned that it may not meet the expectations of the Department of Finance under the verified report and/or the compliance review process, it should consider opting in to the VDA program instead.
2022 change in law
The verified report process is not new, but it gained new importance in June 2022, when Governor John Carney signed Senate Bill 281.2 When Delaware revised its unclaimed property laws in 2017, it vested the State Escheator with the authority to conduct a “compliance review” of holders that had not filed a report or had filed a report that the Escheator believed to be inaccurate, incomplete, or false.3 Senate Bill 281 expanded the State Escheator’s authority to initiate a compliance review for any reason, and to then initiate an examination in the event that: (a) the compliance review is not completed within one year, (b) the holder fails to respond to a request for a verified report or compliance review, or (c) the holder receives a notice of deficiency arising from the compliance review and fails to pay the deficiency within 90 days.
Since 2017, Delaware’s Department of Finance conducted the verified report process directly, using state employees. Earlier this year, the Delaware Department of Finance, Office of Unclaimed Property sought bids from vendors to act as the state’s agent in administering the verified report and compliance review processes. Contracts were awarded in and around May 2023. Notably, in many instances, the vendors that awarded the contracts also conduct multistate unclaimed property audit examinations.
Implications for holders
The verified report process applies to holders regardless of whether they filed a report or believe they are in compliance with Delaware’s unclaimed property law. Accordingly, holders will need to develop a plan for responding if and when they receive a notice. Given the expanded audit authority now granted to the Department of Finance under section 1170, holders should be aware of the complicated sequence of events under this law so that they can consider their options.
Further, holders need to consider long-term strategy. There is no one-size-fits-all path for holders in deciding how to respond to the Notice. For some holders, it may be most advantageous to complete the verified report (and the potential compliance review) process. For others, entering into a VDA with the Secretary of State might be a better option. This analysis will depend on each holder’s facts and circumstances and may be guided by the holder’s risk tolerance as well as legal considerations (including recent developments in Delaware and federal case law).
Holders that receive notice letters from the Department of Finance should respond to that letter within 30 days to avoid being subject to immediate audit while determining their next steps.
- Del. Code Ann. tit. 12, sec. 1172(d)(4).
- The amendments in Bill 281 were codified in Del. Code Ann. tit. 12, sec. 1170.
- Del. Code Ann. tit. 12, sec. 1170.
Client Alert 2023-276
