On October 11, 2017, Delaware’s new regulations regarding reporting of unclaimed property took effect. With the adoption of these regulations, holders of unclaimed property currently being audited by Delaware have two one-time options that must be exercised by December 11, 2017. Holders with ongoing audits that began before February 2, 2017 can expedite completion of the audit, requiring that the audit be completed within two years. Holders with ongoing audits that began on or before July 22, 2015 may convert their audit to a review under the Delaware Secretary of State’s voluntary disclosure program (holders whose audits began after that date have already been offered this opportunity). Both of these options entitle the holder to a waiver of interest and penalties. Holders also have the option of remaining in the current, non-expedited audit process, but the waiver of interest and penalties means that most eligible holders will find at least one of these options attractive. Holders should thoughtfully consider not only the benefit of the interest/penalty waiver but also the other effects of these options.
The expedited audit allows holders, many of whom have been under audit for years, to fix an end to the audit process. Because the option to expedite audits is a one-time option, open only for this two-month period between October 11 and December 11, 2017, Delaware’s contract auditors will likely be forced to complete a large number of audits on this expedited schedule. The auditors must also make requests for documents within the first 18 months of the two-year period, further compressing their time to demand information from holders. To retain the benefits of the expedited audit, the holder must cooperate by responding within the time given by the auditor to requests for documents, testimony, and other information. Although holders cannot challenge the requests and retain the benefits of this option, holders do retain the ability to challenge the assessment and methodology at the end of the audit, just as they would if the audit was not expedited.
Among other considerations, a holder reviewing this option should (1) evaluate possible exposure to determine the benefits of the interest/penalty waiver, (2) assess the stage of the current audit to determine whether the compressed time frame would materially change the likely length of the audit, (3) determine whether the holder is likely to object to the auditor’s document requests, which would take the holder out of the expedited process, and (4) whether the holder has the internal capacity to respond to the auditor’s document requests in a timely manner.
The holder can also opt to convert its audit to a review under the Voluntary Disclosure Agreement program (“VDA”), which is run by the Secretary of State rather than the Department of Finance. The VDA program requires the holder to conduct a self-audit in a process overseen by Delaware and its contract administrator, the law firm of Drinker Biddle & Reath. For holders converting an audit to the VDA program, the Secretary of State does encourage holders to make use of the work already done by contract auditors, which can reduce the workload depending on the stage of the audit at the time of conversion.
Unlike some states’ voluntary disclosure programs, the VDA program requires the holder to follow specific processes set out by the Secretary of State, and the State remains heavily involved in managing and monitoring the process using standards similar to those applied in the audits. The Secretary of State can conduct due diligence checks on the holder’s work, including requesting records to verify the holder’s conclusions. If the holder does not have complete records for the entire lookback period of the audit, the holder must estimate its liability for those missing-records years using methodology approved by the Secretary of State. At the conclusion of the holder’s review, the holder and the Secretary of State attempt to reach a settlement on the assessment amount. If an agreement cannot be reached, the matter can be referred back to the State Escheator and the audit process. Accordingly, holders do not have a way to challenge any of the VDA procedures or outcomes in court; if the parties do not settle, the holder must start over with an audit rather than taking the matter to the Court of Chancery or another court.
Among other considerations, a holder reviewing this option should (1) determine whether the holder has complete records for the entire lookback period used for the VDA program (15 years); if the holder does not have complete records, the holder will have to accept the Secretary of State’s use of and methodology for estimation, no matter how unfavorable; (2) determine whether the holder has the internal resources to commit to a thorough self-audit; (3) review the holder’s interactions with its contract auditor and whether replacing the contract auditor with the Secretary of State and its administrator would be beneficial; and (4) evaluate possible exposure to determine the benefits of the interest/penalty waiver.
The two one-time options offer eligible holders an excellent opportunity to avoid penalties and interest — which can add up quickly — but this benefit must be considered along with all other aspects of these options.