The recent reforms have not impacted the power and authority of the Office of the State Bank Commissioner to examine Delaware financial institutions for compliance with the escheat laws, but the shortened look-back period will apply to all of the office’s examinations of financial institutions.

During 2015, Delaware Governor Jack Markell signed into law two pieces of unclaimed property legislation as part of a comprehensive reform of Delaware’s unclaimed property program.

Part I of the unclaimed property reform legislation was signed into law in January 2015 and included reforms regarding the state’s use of outside auditors, restrictions on the hiring of senior state employees by outside auditors, changes to the administrative appeals process, and increased transparency in the examination process.1 Part II was signed into law in July 2015 and included reforms that shorten the “look-back” period, reinstated interest on late-filed unclaimed property, changed the process for voluntary disclosure agreements (VDAs), restricted in certain circumstances the secretary of state’s authority to enter into an agreement, and revised the reports by holders of abandoned property.2

The shortened “look-back” period for Delaware unclaimed property exams is applicable to all audits and reviews and should apply to escheat law examinations conducted by the Office of the State Bank Commissioner (OSBC) on federally chartered and state-chartered banking organizations and federal credit unions in Delaware.

Background

Escheat laws require companies, including banks, that hold unclaimed or abandoned property, whether tangible or intangible, to turn that property over to the state of incorporation of the company holding the property after a period of dormancy and attempts to contact the owners of the property at their last known address.3 The Delaware state legislature defined “abandoned property” as “property against which a full period of dormancy has run,” where the “period of dormancy” is “the full and continuous period of 5 years . . . during which an owner has ceased, failed or neglected to exercise dominion or control over property or to make presentment and demand for payment and satisfaction or to do any other act in relation to or concerning such property.”4

Unclaimed property was the third-largest revenue source for Delaware in 2014. On May 21, 2014, Temple-Inland Inc. filed a lawsuit in federal court against the Delaware secretary of finance, challenging the use of economic modeling by the Delaware Department of Finance to estimate the company’s obligations under Delaware’s Abandoned and Unclaimed Property Law.[v] Soon thereafter, in an attempt to address the concerns discussed in the Temple-Inland, Inc. case, the Delaware State Assembly established a legislative task force to study and make findings and recommendations to improve fairness and compliance in Delaware’s unclaimed property program.6 The changes made in the two pieces of unclaimed property legislation in 2015 were made in accordance with recommendations made by the Unclaimed Property Task Force’s June 2014 report.7

Part I of the Unclaimed Property Reform Legislation (January 29, 2015)

On January 29, 2015, Governor Markell signed the first of two pieces of legislation as part of a comprehensive reform of the Delaware unclaimed property laws and practices. Part I of the unclaimed property reform legislation included the following reforms and changes:

Outside Auditor Reforms

  • The legislation limits the total number of audits that a single state-hired outside contractor can be assigned to no more than 50 percent of the annual examinations undertaken after January 1, 2015.
  • The legislation prohibits outside contractors that are hired to conduct examinations from having a contract with the state of Delaware lasting more than five years.Senior State

Employee Revolving Door

  • The legislation prohibits any contractors that conduct examinations and provide unclaimed property consulting services from hiring state employees who have previously served in a senior government supervisory role, such as the state escheator or audit manager, for a period of two years from the date the employee leaves state employment.

    Administrative Appeals Process

  • The legislation amends the administrative appeals process for assessments of unclaimed property. The administrative appeals process allowed for examined parties to appeal a finding of the abandoned property audit manager (Audit Manager), first to the Audit Manager and then, if still unsatisfied, to an independent reviewer appointed by the secretary of finance. The previous law allowed for the secretary of finance to overturn recommendations made by the independent reviewer, but the new legislation has eliminated this authority.
  • The legislation also provides for the direct appeal of the independent reviewer’s determination to the Delaware Court of Chancery.

Examination Reform

  • The legislation directs the secretary of finance, with input from stakeholders, to develop a detailed manual containing procedural guidelines for conducting unclaimed property examinations by December 31, 2015.
  • The legislation updates Delaware’s regulations to ensure greater transparency and predictability in the audit process.

Part II of the Unclaimed Property Reform Legislation (July 22, 2015)

On July 22, 2015, Governor Markell signed the second of two pieces of legislation from the 2015 Delaware Legislative Session as part of comprehensive unclaimed property reform. Part II included the following changes and reforms:

The “Look-Back” Period

Previously, the “look-back” period or review period for Delaware unclaimed property audits was 34 years. This legislation shortened the “look-back” period to 22 years.

  • For amounts owed from any pending unclaimed property examinations, Delaware may seek payments from amounts owed only as far back as January 1, 1986.
  • Through December 31, 2016, the state escheator is barred from initiating any new examinations of records or investigations for any amounts owed from transactions prior to January 1, 1991.
  • Starting January 1, 2017, the state escheator may not initiate any new examinations of records or investigations for any amounts owed related to any transactions more than 22 years prior to the report years for which the state escheator provides written notice of such examinations.
  • Starting January 1, 2017, the state escheator may not seek payment of any amounts arising from an examination with respect to any transaction that is more than 22 years prior to the calendar year in which the state escheator provides written notice of such examination.

Interest on Late-Filed Unclaimed Property

  • This legislation reinstates the requirement of interest accruing on late-filed unclaimed property, which was formally a requirement but which was removed in 2013.
  • For late-filed unclaimed property that is reported or remitted on or after March 1, 2016, interest accrues at 0.5 percent per month on outstanding unpaid amounts from the date the amounts or property were due until paid, unless failure is shown to be due to reasonable cause and not willful neglect as determined by the state escheator.
  • The interest due may not exceed 25 percent of the amount required to be paid, but penalties are not considered interest for this purpose.

Voluntary Disclosure Agreements

  • The secretary of state is authorized to resolve and compromise claims for abandoned property owed to the state escheator through the abandoned property reporting outreach program.
  • The secretary of state may request that any person or organization enter into an unclaimed property VDA to determine whether the person or organization has complied with Delaware escheat laws.
  • If the form indicating intent to enter into a VDA is not received by the secretary of state within 60 days after the request is mailed, the person or organization will be referred to the state escheator for examination.
  • The “look-back” period for persons or organizations that enter into a VDA after January 1, 2017 is 19 years vs. 22 years for persons or organizations that are subject to examination. The “look-back” is 3 years shorter for those persons or organizations that choose to enter into a VDA rather than through an examination.
  • Specifically, if a VDA is entered into, the person or organization must complete a review of its books and records and file reports of abandoned property for the following transaction years:
    • Back through January 1, 1996 if the VDA is accepted by the secretary of state on or before September 30, 2014, and the person or organization makes payment in full or enters into a payment plan no later than June 30, 2016.
    • Back through January 1, 1996 if the VDA is accepted by the secretary of state after September 30, 2014 but on or before December 31, 2016, and the person or organization makes payment in full or enters into a payment plan within two years from the date the secretary of state accepted the VDA.
    • The previous 19 years if the VDA is accepted by the secretary of state on or after January 1, 2017, and the person or organization makes payment in full or enters into a payment plan within two years from the date the secretary of state accepted the VDA. The two-year window for making a payment in full or entering into a payment plan may be amended by and at the discretion of the secretary of state.
  • Any person or organization that does not enter into a VDA, make payments, or enter into a payment plan within 30 days of the two-year period is deemed to be referred to the state escheator for examination.

    The Secretary of State’s Authority to Enter into an Agreement

  • The new law restricts the secretary of state from entering into a VDA or seeking payment of any amounts of abandoned property from persons or organizations that had previously enrolled in the VDA program and that either formally withdrew or were removed from the VDA program for failure to work in good faith to complete the program as soon as practicable.

    Report by Holders of Abandoned Property

  • No less than 120 days before March 1 each year, the state escheator must send an annual notice to holders that have filed reports in the last five report years, notifying them that they have an apparent obligation to file a report.
  • The report must now include a designated individual employee who will serve as the contact for all correspondence with the state relating to the reporting and remittance of unclaimed property.

Pepper Points

  • The state escheator examines persons and businesses for compliance with state unclaimed property laws. However, the OSBC acts on behalf of the state escheator with regard to examinations of federally chartered and state-chartered banking organizations and federal credit unions in Delaware. Based on our review, the recent reform changes to the Delaware escheat statute has not impacted the power and authority of the OSBC to examine Delaware financial institutions for compliance with the escheat laws, but the shortened “look-back” period, which is applicable to all audits and reviews, should apply to the examinations done by the OSBC on financial institutions.
  • These legislative changes — in response to the claims in Temple-Inland, Inc. — send a strong message to state agencies to administer the enforcement of abandoned property controversies in an evenhanded manner, especially with respect to any issues with weak recordkeeping and estimates/methodologies of the level of abandoned property.
  • The changes to the VDA process have skewed the process to incentivize companies to enter into a VDA. Although it is still voluntary, the new laws and procedures require that those who do not enter into a VDA will be deemed to be referred to the state escheator for examination. This produces a system where entering into a VDA is voluntary, yet unavoidable.

It remains to be seen how the new framework for VDAs might apply to banking organizations that are examined for escheat law compliance by the OSBC. We believe that, if a banking organization approached the secretary of state to enter into a VDA because of some escheat law liability that the banking organization independently identified and uncovered, the secretary of state would likely work with the banking organization to enter into a VDA. However, there is ambiguity in the revised VDA framework as to how or whether the secretary of state ever would approach a banking organization to request that it enter into a VDA, given that banking organizations are routinely examined on a rolling five-to-seven-years basis by the OSBC on behalf of the state escheator.