KeepUP™ Blog

Delaware continues to focus on unclaimed property compliance, with its’ Voluntary Disclosure Agreement (VDA) program at the forefront of this push.  Since the latter part of 2018, Delaware’s Secretary of State has been consistently mailing VDA invitations and continues this practice on an on-going basis. 

Based on correspondence that MarketSphere received from the office of Delaware’s Secretary of State, the latest round of VDA invitations will be mailed on February 20, 2020 to a number of Delaware incorporated companies.   

The correspondence states: 

On February 20, 2020, the Delaware Secretary of State’s Office will be mailing over 100 letters to various companies (individually referred to as “Holder”) that have been identified as likely being out of compliance with Delaware law, 12 Del. C. ch. 11, as it relates to reporting dormant, abandoned, or unclaimed property.  Pursuant to our state laws, Delaware cannot initiate new abandoned or unclaimed property examinations (audits) unless a company has first been notified in writing by the Secretary of State that it may enter into the SOS VDA Program.  The letter serves as such a notice to the Holder and strongly encourages participation in the SOS VDA Program, as an audit notice will be issued by the Delaware Department of Finance 60 days after the date of the mailing

As the correspondence notes, recipient companies must respond to these notices within 60 days or they will be referred to the Delaware Department of Finance, which would then have the option to commence an unclaimed property audit.

In any given year, it is not uncommon for a holder to have no unclaimed property to report to one or more states.  Does this mean you have no reporting obligation?  Not necessarily.  Some states still require that you file a “negative” report.  This negative report indicates to the state that the holder has no property to report for the given report year, while demonstrating ongoing compliance with the state’s unclaimed property requirements.

The states are split on the matter of negative reports, so it is important to check with the state(s) in question before filing.  Approximately half the states require negative reports to be submitted.  In these states, failing to submit even a negative report will cause the holder to be considered out of compliance.  Other states do not require negative reports but will accept them if they are filed., and a handful of states do not accept negative reports at all. 

A few examples can illustrate the variation in negative reporting requirements across the states:

• Nevada requires negative reporting for three years after the submission of a positive report. After that, negative reports are not accepted.
• In California, if a notice report is negative, a negative remittance report should not be filed. However, if the notice report is positive, a negative remittance report should be filed.
• Connecticut requires a negative report only if the holder is domiciled in Connecticut.

In December of 2019, four companies (AT&T Capital Services, Inc., Eaton Corporation, Fruit of the Loom, Inc. and Siemens USA Holdings, Inc.) filed suit in federal district court challenging Delaware’s unclaimed property program. As part of their suits, each company submitted complaints alleging that the use of contingent-fee auditors violates procedural due process because companies are required to submit disputes to a self-interested party.[1]

In a recent communication from Drinker Biddle & Reath (“DBR”), one of the state agents for the Delaware Secretary of State’s Unclaimed Property Voluntary Disclosure Agreement Program, we were informed that the states of Missouri and North Dakota have now engaged DBR to serve in a similar capacity as they currently serve for Delaware.

Agreements for the Missouri Voluntary Examination and North Dakota Contractor Assisted Self-Audit were provided by DBR for holder consideration. Similar to the Delaware Voluntary Disclosure Program, these agreements include the following holder requirements:

• File a final report within two years of agreement execution
• Disclose the entities reviewed
• Perform due diligence prior to reporting
• Assert as to the completeness of records
• Report past due property for the last 10 report years
• File annual reports prospectively

As a holder advocate, one of the most frequent questions we receive is whether a company with multiple subsidiaries and entities under its corporate umbrella can file consolidated unclaimed property reports.  The unclaimed property compliance environment is complex, frustrating, and demanding for corporate America, and complex organizational structures don’t make it any easier to navigate.  Conducting unclaimed property filings on a consolidated basis can create efficiencies for many holders.  However, a number of factors should be considered when determining the right approach for your particular organization. 

Consolidated unclaimed property filings are similar to other consolidated financial filings such as income tax filings and financial statements.  Consolidated unclaimed property filings consist of one report sent to each state or filing jurisdiction, usually by a parent company, on behalf of multiple subsidiaries.  This single report contains all property that would have been reported if separate reports had been prepared for each individual entity.

Consolidated reporting simplifies and streamlines the reporting process and tends to be more cost effective regardless of whether the filing process is managed internally or outsourced.   It is particularly beneficial for companies with a substantial number of subsidiaries that would otherwise consistently file zero or negative reports due to limited or no unclaimed property activity.  It may also be the simplest approach for companies who already consolidate financials or are running a common paymaster across its various entities. 

While there are  benefits of a simplified process, there are several factors to consider before deciding to file consolidated unclaimed property reports.

This blog was originally created at the request of the Association for Financial Professionals (AFP) organization and posted to their website in August 2019 in a series dedicated to the education of its’ members and attendees of the 2019 AFP Annual Conference in Boston, Oct, 20-23.

The likelihood of an unclaimed property audit has increased in recent years due to several factors, including the proliferation of third-party auditors, realization by states that significant amounts are involved, and the escalation of unclaimed property litigation. Escheat compliance is no longer optional and being audited is not a matter of if, but when.

Situations and events that may bring an auditor to your door include:

• Failure to file or filing late
• Filing negative reports year after year
• Filing incomplete reports or reports that don’t match remittance
• Not filing in the state’s required format
• Not reporting property types that are standard for your industry
• Reporting much less than similar organizations
• Filing to the incorrect state
• Mergers and acquisitions
• Claiming property without being compliant

Delaware continues to focus on unclaimed property compliance, with its’ Voluntary Disclosure Agreement (VDA) program at the forefront of this push.  Since the latter part of 2018, Delaware’s Secretary of State has been consistently mailing VDA invitations and continues this practice on an on-going basis. 

Based on correspondence that MarketSphere received on September 24, 2019 from the office of Delaware’s Secretary of State, the latest round of VDA invitations have recently been mailed to a number of Delaware incorporated companies.  Targeted companies now include middle market companies with annual revenues of $50M and above. Click here to see a sample correspondence from September 2019.   

The correspondence notes: 

Pursuant to 12 Del. C. §1173(b), the Delaware Secretary of State (SOS) recently sent out letters inviting companies to enter the Voluntary Disclosure Agreement (VDA) Program. Any company that receives a letter is encouraged to enroll in the SOS VDA Program to facilitate compliance with Delaware’s Abandoned or Unclaimed Property Law.

Invitees have 60 days from the date of the invitation to enroll in the SOS VDA Program by completing, executing and submitting Form VDA-1 Disclosure and Notice of Intent to Voluntarily Comply to the Secretary of State.  If an invitee does not enroll in the SOS VDA Program within 60 days of the invitation mailing, the company will be referred to the State Escheator for examination.

In today’s business world, companies are using more and more electronic payments to pay what they owe instead of using paper checks.  The widespread use of direct deposits, wires and ACH’s came about because they are quicker, easier, and have a much lower chance of becoming an unresolved liability (than an uncashed check), because the amounts are being deposited directly into accounts provided by the payees.

Using electronic payments lessens the possibility for the creation of unclaimed property as these payments types rarely fail.  However, when they do fail, it is important that the payor identify and research the reason for the failure and correct any errors to ensure the obligation is paid and does not go unresolved.

As electronic payments rarely fail, they are not high on the list of potential unclaimed property types that companies might focus on.  Unfortunately, unclaimed property auditors are beginning to highlight these payment types focusing on rejections and bounce backs to see how the related obligations are satisfied.

Over the last several years the use of block-chain technologies and their associated cryptocurrencies have grown tremendously. As with many new areas of commerce, growth is usually followed by an onslaught of challenges brought on as governments and regulatory agencies try to decide how to adapt to or fit this new square peg into the round hole of already established laws and regulations.

In the world of unclaimed property, cryptocurrency is just now being recognized in various new statutes and proposed legislation.  Many states, including IL, KY, NV, TN and UT, have adopted some form of the 2016 Revised Uniform Unclaimed Property Act, which includes “virtual currency” in the legislative definition of “property”.  In addition, NY has recently introduced legislation calling for unclaimed cryptocurrency to be escheated to the state upon abandonment.

Whether you are a company that has emerged as a part of the support system to the cryptocurrency world (e.g., coin exchanges) or simply a company that has begun to accept Bitcoin or other similar cryptocurrencies as payment, it will be important that you are prepared for these challenges and are proactively addressing potential issues that can emerge. One often overlooked area for consideration, is the impact of the various states’ unclaimed property laws and regulations.

State enforcement of unclaimed property compliance continues to rise.  States are auditing more companies than ever in order to validate that unclaimed property is being reported accurately and completely.  To prevent an audit, many holders over-report property, escheating items that are not actually unclaimed property, or may not be reportable to the states. However, this practice could cause red flags.

The two most common transaction types that are not considered to be unclaimed property are accounting errors and exclusions/exemptions.

Accounting Errors

Accounting errors are not unclaimed property.  Unfortunately, errors in accounting systems do occur that cause items to appear to be outstanding or unresolved, when in fact they are not. This leads to the potential for over-reporting.  Examples of accounting errors include:

• duplicate payments
• voids that were never processed
• misapplied payments.

Prior to reporting, research should be performed to identify and correct accounting errors and avoid over-reporting.   

Exclusions/Exemptions

Many state statutes include provisions that exclude certain transactions from the definition of unclaimed property, or specifically exempt the property from reporting.  An example of a state exclusion appears in the Kansas unclaimed property law, whereby: