On Feb. 2, 2017, Delaware Governor John C. Carney Jr. made sweeping changes to Delaware’s escheats law by signing into law Delaware Senate Bill 13 (SB 13). These changes include those regarding:
- the statute of limitations and record retention periods,
- compliance obligations of holders of unclaimed property,
- the unclaimed property audit process, voluntary disclosure agreement program rules and the related look-back periods, and
- applicable interest and penalty rates.
Longer Statute of Limitation Period
SB 13 establishes a statute of limitation period which prohibits Delaware from initiating an unclaimed property audit more than 10 years after the duty to report, pay, or deliver property arose, unless the holder was already under audit or filed a fraudulent report.
While the new statute of limitations period is longer than the previously existing period (that is, three years from the date a report was filed and six years for under-reporting of 25 percent or more), the new 10-year period better protects holders that have not filed unclaimed property reports. A new 10-year record retention period is also established under SB 13, consistent with the new statute of limitations period.
Under SB 13, holders of unclaimed property must now send to the owner notice, including the required statutory language, by first-class U.S. mail, not more than 120 days nor less than 60 days before filing a required annual report if (1) the holder’s records provide a valid address for the owner and (2) the value of the property is $50 or more, unless the property is a security, in which case the holder must send notice to the owner regardless of value.
Commencing March 1, 2018, all required annual reports must be submitted electronically in a web-based record. If the State Escheator believes the holder may have filed an inaccurate, incomplete, or false report, it may request the holder to file a verified report and conduct a compliance review of the submitted report. If a compliance review results in a determination that the holder is obligated to pay a deficiency in unclaimed property due and payable to the State of Delaware, the State Escheator shall notify the holder in writing of the amount of such deficiency within one year from the authorization of the compliance review.
Modifications of the Audit Process
SB 13 further modifies the audit process by providing holders with the ability to expedite audits in existence prior to Feb. 2, 2017, by providing a written request to the State Escheator within 60 days of the promulgation of certain audit estimation methodology regulations (Estimation Regulations) that are required to be promulgated no later than July 1, 2017. Provided the holder timely provides sufficient copies of requested records and other information in connection with an expedited audit, then the State Escheator is required to issue an audit examination report within two years from receipt of the holder’s written request to expedite the audit.
Moreover, holders under audit as of July 22, 2015, may convert such audit into a voluntary disclosure agreement (VDA) program review upon notice to the State of Delaware by July 1, 2017; provided, however, holders may not convert an audit if the conversion notice is not received by the State Escheator and Secretary of Statewithin 60 days of the promulgation of the Estimation Regulations. Notably, SB 13 reduces the look-back examination period for both audits and VDA program reviews to 10 years.
Noncompliance Penalties and Interest
Noncompliance under the Delaware escheats law may result in the incurrence of interest and penalties. In the event a holder fails to timely pay over property, interest accrues at the rate of 0.5 percent per month on outstanding unpaid amounts until all required amounts are paid. SB 13 provides that interest may not exceed 50 percent of the amount required to be paid, which is an increase from the previous 25 percent maximum interest accumulation cap.
SB 13 also provides that civil penalties, in addition to other statutory penalties, may be assessed against a holder that enters into a contract or arrangement for the purpose of evading an obligation under the escheats law or otherwise willfully fails to perform a duty thereunder. The civil penalty is $1,000 per day up to a cumulative maximum amount of $25,000, plus 25 percent of the amount or value of any property that should have been but was not reported, paid, or delivered as a result of the evasion or failure to perform.
Penalties and interest are required to be waived by the State Escheator for holders that cooperate in connection with and complete the expedited audit process or VDA program review in good faith. In addition, the State Escheator may in connection with other audits waive up to 50 percent of accrued interest and/or assessed penalties, in whole or in part, for good cause.
Because certain statutory deadlines and the estimation methodology applicable to both audits and VDA program reviews will be set by the Estimation Regulations to be promulgated on or before July 1, 2017, it is important for holders to stay abreast of regulatory developments regarding Delaware’s escheats law in the coming months.