KeepUP™ Blog

Unclaimed property compliance is a challenge in many ways during each reporting cycle. Additional issues arise when faced with entering into a VDA program or engaged in an audit. Delaware recently sent notices to a Holders advising them of their option to enter into a VDA program or expedited audit.

If you haven’t taken action yet, or are unsure about what to do, let the MarketSphere Unclaimed Property Specialists go to work on your behalf to guide you through your options and manage the process allowing you and your teams to keep focus in the New Year on your organizations business goals. 

If you’re having difficulty explaining the complexities of determining the best path to take in Delaware, or explain other unclaimed property issues and concerns to colleagues, we can help you open the conversation with this whitepaper:6 Ways Unclaimed Property Takes A Toll.

As we have previously posted, Delaware has been sending letters to Holders advising of the deadlines to elect to enter either a Voluntary Disclosure Agreement (VDA) or Expedited Audit. If you haven’t taken action yet – time is of the essence.

1. Existing Delaware Audits – Although the December 11^th deadline to convert existing audits into the expedited audit or VDA program has passed, companies that missed the deadline or elected to stay the course in the audit may still be able to realize some benefits. These include but are not limited to: 1. retaining your right to challenge the Delaware process and methodologies and 2. reach a favorable settlement agreement with the state.
2. VDA Program - As we previously reported, during the 2^nd and 3^rd weeks of October, Delaware began issuing VDA invitation letters with a 60-day response window to companies not already subject to a Delaware audit. The deadline for companies to respond to these letters and voluntarily enter the VDA program is now occurring.  Companies that fail to respond to Delaware and enter the VDA program will be referred back to the state for audit, which may subject them to all the statutory interest and penalties of the Delaware audit program.

As we indicated in our previous Blog postings - Delaware Issues Final Reporting and Examination Manual and Delaware Unclaimed Property Notice Letter - Which Did You Recieve? Delaware has been busy filling the mailboxes of companies recently.  If you are a recipient of a letter from Delaware regarding your audit conversion and VDA election options, the dates by which you need to act is fast approaching: 

Notice to Convert to an Expedited Audit or VDA 

For companies already under audit by Delaware, the state has recently issued letters notifying them on their options to convert to either the expedited audit option or the VDA program.

This an excerpt which will help in identifying the conversion option letter:

Delaware's goal is to provide companies reasonable, fair, and efficient options to come into compliance with their unclaimed property reporting obligations. I previously shared with you various oopportunities available to Holders under examitation under the revised statute, which was enacted earlier this year. This new legislation offers most companies, including your company, a unique opportunity under 12 Del. C § 1172(c) ti convert the Audit into a review under the Delaware Secretary of State's Voluntary Disclosure Agreement (VDA) program. Holders should consider the benefits of voluntary compliance and the advantages of electing into the Secretary of State's VDA program.

On June 29, 2017, Delaware Governor John Carney signed into law DE Senate Substitution No.1 for Senate Bill 79 (“DE SS1/SB79”), which makes certain technical corrections to the May 5, 2017 original SB 79.  (see previous blog from 6/21/17). These technical corrections mark yet another adjustment to Delaware’s ongoing efforts to overhaul their escheat laws, which began in February 2017 with the passage of Delaware SB13 (see previous blog: Delaware Governor Signs Legislation to Overhaul Their Unclaimed Property Laws), and includes Delaware’s proposed draft estimation regulations from early April (see previous blog: Delaware Releases Draft Estimation Regulations).       

Key Updates of DE SS1/SB79

• Adoption of Regulations - The date by which the Delaware Department of Finance (“DOF”) must adopt regulations (including those pertaining to estimation) has been pushed back to December 1, 2017 from the original July 1, 2017 date. Holders will still have a 60 day window starting with the date the regulations are finalized to elect whether they would like to convert their existing audit to a VDA or expedited audit.
• Due Diligence - The requirement for due diligence letters to be sent to owners commences on July 1, 2017. These notices must be sent not more than 120 days nor less than 60 days before filing the report.
• Interest and Penalties
  • Under the VDA program, the Secretary of State continues to have the authority to waive interest and penalties.
  • For expedited audit conversions, the State Escheator must waive interest, and may waive penalties for good cause. It remains to be seen how interest and penalties will be treated for holders subject to an expedited audit, who are deemed not to have acted in good faith to complete the expedited audit process.
  • For holders who do not elect a VDA or expedited audit conversion and remain in the audit process, up to 50% of interest and 100% of penalties continue to be waivable for good cause.

On June 2, 2017, the Delaware general assembly introduced a substitute version of S.B. 79, entitled “DE Senate Substitution No.1 for Senate Bill 79” (“DE SS1 SB79”), to make certain technical corrections to the May 5, 2017 original bill.  These technical corrections mark yet another adjustment to Delaware’s ongoing efforts to overhaul their escheat laws, which began in February 2017 with the passage of Delaware SB13 (see previous blog: Delaware Governor Signs Legislation to Overhaul Their Unclaimed Property Laws), and includes Delaware’s proposed draft estimation regulations from early April (see previous blog: Delaware Releases Draft Estimation Regulations).

DE SS1 SB79 - KEY UPDATES

Following are the current key provisions to DE SB 79 as updated, which are subject to any further revisions by the Delaware legislature and ultimately subject to them being passed in order for them to become law. 

• The Delaware Department of Finance (“DOF”) has pushed back the date by which they must adopt regulations (including those pertaining to estimation) to December 1, 2017, which is a departure from the original July 1, 2017 date. Holders will still have a 60 day window starting with the date the regulations are finalized to elect whether they would like to convert their existing audit to a VDA or expedited audit. 

• Interest & Penalties
  • Under the VDA program, the Secretary of State continues to have the authority to waive interest and penalties.
  • For expedited audit conversions, the State Escheator must waive interest, and may waive, for good cause penalties. It remains to be seen how interest and penalties will be treated for holders subject to an expedited audit, who are deemed not to have acted in good faith to complete the expedited audit process.
  • For holders who do not elect a VDA or expedited audit conversion and remain in the audit process, up to 50% of interest and 100% of penalties continue to be waivable for good cause. 

Unclaimed property holders in the oil and gas industry have been hit hard by third-party audits in recent years. Unfortunately, we have reason to believe this focus will continue and perhaps even intensify over the next year. The key to addressing this situation is understanding what auditors are looking for from oil and gas unclaimed property holders and then establishing proactive policies and procedures that can both remediate old issues and help oil and gas holders avoid future complications.

The current situation: unclaimed property auditors are beginning to focus on holders operating unconventional fields

In the past, audits targeted on oil and gas holders have focused primarily on operations in conventional oil and gas fields located in states such as Texas and Oklahoma. We are beginning to see a new focus toward companies operating unconventional fields in states such as North Dakota and Montana.

In part, this may reflect the fact that many companies with conventional fields have already been audited. In addition, the increased focus on unconventional fields is likely a natural transition for third-party audit firms as unclaimed royalty payments from the last decade’s boom are now becoming dormant or even past due.

Why are oil and gas companies being targeted for unclaimed property audit?

Generally, third-party unclaimed property auditors who are paid on a contingent-fee basis look for pockets of commerce where they believe they may find more unclaimed property. State auditors also look for pockets of unclaimed property to help them return property to owners in their state, as well as to increase assessments for the benefit of the state.

Pursuant to Delaware’s recently enacted SB13, any holder currently under examination that received a Notice of Examination from the State Escheator on or before July 22, 2015, except any securities examinations in which estimation is not required, may convert the pending examination into a review under the Secretary of State’s voluntary disclosure program (See 12 Del. C. § 1173.).

As part of a recent communication, the Secretary of State (SOS) provided details explaining the administrative requirements that a holder must use to convert an existing audit to a voluntary disclosure agreement (VDA).  In addition, the SOS provided details regarding (i) the VDA process for holders that convert their examinations, (ii) look-back period for examinations converted to a VDA (ten reporting years), and (iii) the use of estimation as part of a VDA.

Regarding estimation, the SOS has proposed estimation regulations that can be found at: "Delaware Proposed VDA Conversion Guidelines".

The public comment period for these proposed regulations end on May 3^rd . It is anticipated that Delaware will issue final regulations shortly thereafter.

These proposed estimation regulations include sections dealing with their effective date, the scope of the VDA, permissible base periods, items to be excluded from the estimation calculation, aging criteria for outstanding and voided checks, and accounts receivable.  In addition, there are sections dealing with projection and complete and researchable records.

It should be noted that as a requirement of SB13, Delaware’s Department of Finance (DOF) recently proposed regulations regarding its’ abandoned or unclaimed property reporting and examination manual.  Click here to see our recent blog post for more information. 

On February 2, 2017, Delaware Governor John Carney signed into law Delaware Senate Bill 13 (“S.B. 13”), which represents Delaware’s effort to overhaul the state’s unclaimed property laws.  Although S.B. 13 addresses many of the areas on which corporations and unclaimed property practitioners have been seeking guidance (see previous blog: DE Approves Legislation to Overhaul Their UP Laws) a few key issues in the current Delaware act have yet to be addressed.

Among these is how Delaware will ultimately address its current extrapolation practices.  As included in S.B 13, the Delaware State Escheator must promulgate regulations regarding the method of estimation to create consistency in any examination or Voluntary Disclosure Agreement.  These regulations are due to be finalized by July 1, 2017. 

For holders currently under audit, these regulations will be a critical piece of information as they consider whether to either continue with the current audit process, elect to convert to an expedited audit or join the Secretary of State’s VDA program.  As per the requirements of the bill, this election must be made within 60 days of the adoption of the estimation regulations.  Accordingly, it is critical that holders perform the necessary modeling and analysis of their unclaimed property situation ahead of time so that they are armed with all the necessary information to make an informed decision.

Organizations need to be mindful of changing legislation and the impact it can have on their escheat compliance program. If you have any questions about the legislation or assessing your current position, we encourage you to contact us for expert guidance. 

Jon D'Amato                                             David Poehler                                                                     T. 404.264.8554                                         T. 404.857.1894               jon.damato@marketsphere.com               david.poehler@marketsphere.com

Clive Cohen                                                                                                                                            T. 917.538.8900                                                                                                                                       clive.cohen@marketsphere.com

On January 27, 2017, the Delaware House of Representatives passed Delaware Senate Bill 13 (“S.B. 13”), finalizing Delaware’s legislative body’s fast-track effort to overhaul the state’s unclaimed property laws.  The bill will now be sent to Governor John Carney, who has indicated he will sign it. The legislature’s approval of S.B. 13 is a much anticipated development in the unclaimed property world, as Delaware attempts to address the scrutiny it has endured over the last few years, which culminated in July 2016 with the critical decision in the Temple-Inland case.  Although S.B. 13 addresses many of the areas on which corporations and unclaimed property practitioners have been seeking guidance, a few key issues in the current Delaware act have yet to be addressed.  Following are some of the key changes for those areas the Senate Bill has definitively addressed.

Look-Back Periods, Statute of Limitations, and Record Retention

One of the main areas of contention with Delaware’s escheat act has been its audit look-book period and statute of limitation provisions.  As Delaware’s act is currently written, a holder may be subject to a reach-back period of 20+ years, which is especially problematic because such a lengthy audit reach-back period typically far exceeds generally accepted corporate document and data retention policies.  In recognition of this clear misalignment, S.B. 13 stipulates a 10 year look-back period for ongoing and future audits.  The look-back period is based on the calendar year in which the Delaware audit notice was mailed to the holder.  Accordingly, the look-book period for holders already subject to a Delaware audit will vary depending on the age of the specific audit.  To ensure consistency, the look-back for the Voluntary Disclosure Agreement (“VDA”) program will also be amended to 10 years.  We note that this change for VDA’s merely represents a codification of what occurred administratively this past summer following the Temple-Inland decision.

Under S.B. 13, the statute of limitations increases to 10 years from 3 years (or 6 years in cases where a report contained an omission of unclaimed property that was more than 25% of the value disclosed in the report).  This 10-year statute is tolled if a holder is placed under audit or if the Delaware State Escheator determines that the report contained a fraudulent or willful misrepresentation.

In addition to the massive numbers of transactions that end up in the unclaimed property bucket for large healthcare providers, the nature of provider transactions also causes unique issues in this industry. Escheatment for healthcare providers and insurers can be very complex, especially if an organization has not yet come into compliance. However, MarketSphere has identified several high-level unclaimed property focus areas providers can target to get well on their way to proper escheatment.