Effective Aug. 1, 2021, Senate Bills 103 and 104, recently signed into law by Delaware Gov. John Carney, significantly amend Delaware’s unclaimed property law. Highlighted provisions of the legislation and its impact to unclaimed property holders is summarized below.
Senate Bill 103
With the adoption of Senate Bill 103, Delaware joins a growing list of states that require the escheatment of virtual currency. Senate Bill 103 expands Delaware’s definition of ‘property’ to include virtual currency and imposes an express reporting requirement for this property type. Modeled after the definition of virtual currency in the 2016 Revised Uniform Unclaimed Property Act (RUUPA) promulgated by the Uniform Law Commission, Delaware defines the term as “a digital representation of value, including cryptocurrency, used as a medium of exchange, a unit of account, or a store of value that does not have legal tender status recognized by the United States.” The term excludes “software or protocols governing the transfer of the digital representation of value, game-related digital content, and a loyalty card.” Virtual currency is subject to a five-year dormancy period which is triggered by the owner’s last indication of interest in the property. The holder is required to liquidate the property within 90 days of the filing the report. Holders are precluded from claiming any gain in value that occurs after the liquidation due to the volatility of virtual currency.
Senate Bill 104
Senate Bill 104 aims to address numerous issues stemming from recent unclaimed property litigation and disputes arising between Delaware and the holder community on audits and voluntary disclosure agreements (VDA). The adoption of Senate Bill 104 increases the state’s leverage to resolve future conflicts and attempts to eliminate some controversial issues in its examination process.
Perhaps the most significant development enacted is the state’s adoption of a permanent expedited audit program following the success of a recently sunset program. Since Delaware unclaimed property examinations are known to last upwards of three to seven years, the two-year expedited audit program can save holders significant time and resources. In addition to those savings, businesses that complete the expedited audit program benefit from a waiver of penalties and interest, except for a mandatory 1% interest assessment. Note, companies who do not complete the expedited audit program will be subject to a minimum 20% interest assessment based on the total past due liability.
For audits initiated after Feb. 2, 2017 and before Aug. 1, 2021, holders electing to convert their existing audit to an expedited audit have until Sept. 30, 2021 to provide the following:
- A written notification via the ‘Request to Expedite’ form provided by the state
- Respond to all pending or outstanding requests for records, testimony and information, and
- A detailed work plan and schedule for completion. The template for the work plan will be provided by the state
Within 60 days of submitting these documents, the State Escheator must issue a written determination to accept or deny the person’s request to expedite completion of the examination. Holders are then required to complete their expedited examination within two years of their date of acceptance into the program. Delaware has already commenced issuing letters to holders undergoing qualifying examinations notifying them of their eligibility to enter into the expedited audit program.
The expedited audit program is also available to holders with audits initiated after Aug. 1, 2021. Such holders may submit the written request and documents outlined above to the State Escheator. The State Escheator has 60 days from the date of the received request to accept or decline admittance into the program.
The holder community has historically raised concerns regarding the compensation structure that third-party audit firms have in place with a number of states. This is because most states pay contract auditors on a contingent-fee basis determined by the amount of unclaimed property uncovered by the audit firm. The new law has changed Delaware’s fee structure to pay contract auditors on an hourly basis, except for the examination of customer accounts, securities, and life insurance which will continue to be paid on a contingent-fee basis.
Another holder concern addressed by the legislation is the prohibition of third-party auditors using records obtained in a Delaware audit or VDA from being used in a joint examination with another state unless the holder provides written consent. In the past, some contract third-party auditors may have solicited additional states to join an existing examination after Delaware’s or another state’s examination had commenced. This prohibition adds a layer of protection for holders from multistate audits conducted by contract auditors.
Voluntary disclosure agreements
Holders in receipt of a VDA invitation letter are provided additional time to request participation in the VDA program. The period of time is extended from 60 days to 90 days from the date of the invitation letter. This extension allows holders more time to evaluate their facts and circumstances and determine the proper approach to responding to the notice. Further, the new law permits an audit to be authorized without first providing a voluntary disclosure invitation, such as if the holder previously enrolled in the VDA program but withdrew or was dismissed from the program and in situations where the holder had entered into the historical VDA program administered by the State Escheator (prior to June 30, 2012). In these circumstances, companies may be issued an audit letter without first receiving a VDA invitation letter.
The state also clarified the audit lookback period to 10 report years after the state delivers written notice of examination or the VDA invitation letter. The new law also provides a 10-report year lookback period on the withdrawal or removal from the VDA program based on the date of the notice of intent to enter into the VDA program.
Senate Bill 104 provides that the statutory indemnity for holders does not include penalties and interest imposed by another state. Previously, Delaware indemnified holders against liabilities when the holder paid or delivered property to the state in good faith, if another person or state asserted a claim to the same property.
The changes highlighted above are just some examples of the sweeping updates to Delaware’s unclaimed property law.
Holders who receive an audit invitation letter or who are currently under audit should consider the cost and benefit of the expedited audit program. It is recommend that businesses re-examine their policies, procedures, and controls in place surrounding unclaimed property, determine if the business is compliant with state unclaimed property laws and ensure that the organization has a process in place to properly and timely report dormant property to the applicable jurisdictions.
Delaware remains the largest enforcer of unclaimed property laws and regulations. It is very important that businesses understand the risks and the benefits of a VDA versus an audit. While the landscape of Delaware unclaimed property law is always evolving, some ambiguity in the law remains and holders should carefully review new laws and procedures as they are developed. It is anticipated that Delaware VDA invitation letters and notices of examinations will be issued more regularly in the future. Businesses that receive such notice should speak to an unclaimed property specialist before the response deadline window.