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Draft Issued: Delaware Unclaimed Property Reporting & Examination Manual

In accordance with Section 1132 of Delaware’s new unclaimed property law, the Department of Finance and State Escheator have rolled out their proposed regulations, in the form of an “Unclaimed Property Reporting and Examination Manual.” According to the preface, these standards are not discretionary and auditors are prohibited from developing or using their own versions, absent the permission of the State Escheator.

The comment period to address any issues with the proposed regulations will expire on Wednesday, May 3, 2017 at 4:30 pm (EST). Comments, suggestions, briefs and other written materials should be submitted in writing to David M. Gregor at the address below or via email to david.gregor@state.de.us.

David M. Gregor
State Escheator
Department of Finance
820 N. French St.
Wilmington, DE 19801

Below are key points within the draft version of the Delaware Unclaimed Property Reporting & Examination Manual:

Guiding Principles:

  • The State Escheator shall not use collection goals or quotas during the audit to assess Holder compliance
  • The State Escheator shall make available, on request, copies of contracts between the State Escheator and third party auditors
  • The VDA agreement releases Holders from all claims, demands, interest, penalties, actions and causes of actions related to all property reported properly under the terms of the VDA

Authority to Conduct Unclaimed Property Audits

  • The State Escheator has the authority to examine the books and records in possession of an agent, representative, subsidiary or affiliate of the Holder to determine whether the Holder was in compliance
  • Section 132 of the Epilogue to the State’s Budget for Fiscal Year 2017 (ending 6/30/17) authorizes the Secretary of Finance or his/her designee to enter into agreements with organizations to identify abandoned property to be escheated by means of audit, examination or otherwise.  “Similar, if not identical, language has existed in the budget for decades.”

Unclaimed Property Examination Procedures

  • The examination will be assigned to an auditor or third party auditing firm retained by the State.  At the request of the Holder, the auditor will enter into a confidentiality agreement with the Holder in a form approved by the State Escheator prior to the production of any records
  • The State Escheator has the authority to resolve an examination via negotiation and settlement with a Holder or duly authorized representative.  The authorization provides flexibility to both parties to resolve issues that could require appeal or litigation.  A mutually agreed upon settlement resolves an examination and does not create any precedent on specific legal issues.

Notice of Examination

  • The Holder shall receive an official examination letter from the State’s Audit Manager notifying the Holder that its books and records are subject to examination and the letter shall include the auditor’s contact information.  The issuance of this letter terminates the Holder’s ability to enter into a VDA.
  • Third party auditors may NOT engage in any examination or audit without the prior consent of the Department of Finance
  • Effective 7/1/15, the State may not initiate new examinations of records or investigation unless the Holder is first notified in writing that the Holder may enter into a VDA or the Holder fails to otherwise comply with Section 1172
  • The State may examine the Holder for any reason.  However, the following factors may be considered, including:
    • A review of the Holder’s past reports for inconsistencies, omissions or lack of detail
    • A comparison of past reports of similar Holders within the same industry and approximately the same size
    • Any information available from the State, including reporting and compliance history
    • Available public data, including annual company reports and press materials

Examination Contact Letter

A sample Examination Contact Letter is included in the proposed regulations and includes:

  • Notification that the State will contact the Holder within 3 weeks to arrange a mutually agreed upon date to commence the examination
  • An expectation set by the State that the opening conference will be held within 90 days of the notice
  • Prior to the conference, the State shall send a document request
  • The scope of the examination, which is 10 years prior to when the property is presumed abandoned through the present
  • Request that the Holder issue a hold notice to retain all records until the examination is complete
  • Request that the Holder make available all prior reports and supporting documentation for all states

Scope of the Examination

  • The scope of the examination is dependent on a number of factors, including, but not limited to:
    • When the entity was created, when the entity began to engage a particular line of business that may result in unclaimed property
    • Activity/materiality
    • Whether an entity was subject to a prior examination and whether it completed, and the state accepted, a VDA
  • Examinations may include all subsidiaries and related entities of the Holder
  • Once entity scoping has been determined by the State, no additional entities may be scoped into the examination without the Holder’s consent
  • At the Holder’s discretion and with the consent of the State, legal entities acquired after scoping was concluded may be added to the examination

The Examination

  • The auditor may conduct the examination on site and/or remotely if records are available electronically or can be shipped
  • The auditor may make additional requests for books and records, which must be in writing and provide a reasonable time frame for the Holder to respond
  • The State may, at the Holder’s request, bifurcate or divide the examination by property type and year
  • The Holder shall be kept informed of the progress of the examination and may contact the State directly to address issue or concerns

Opening Conference

  • Prior to the conference, a list of documents to be produced will be provided to the Holder and may include, but is not limited to, tax returns, organization charts, charts of account, unclaimed property filing history (for all States), prior completed and accepted VDAs and examinations, policies and procedures relating to record retention, accounting, unclaimed property and any other practices the State deems relevant to the examination
  • The auditor shall advise the Holder of the reporting requirements, provide an overview of the examination process, including State approved methodologies, record availability, sampling and the potential for projection and estimation, if available
  • The auditor shall provide the Holder with an examination work plan, identify the maximum time period to be covered, discuss potential scoping issues and request additional information necessary to proceed
  • The State shall have access to the Holder’s original books and records and expects a typical examination not to exceed 24 months
    • If the examination lasts longer than 24 months, the Audit Manager will meet with the Holder to “facilitate completion of the examination”
    • Interest and penalties may be assessed on abandoned property due for all reporting years under review but can be abated at the discretion of the State Escheator

Third Party Advocates

  • Holders may retain third party advocates to assist them in the process but shall not be the basis for a delay in the start of the examination.  Record requests will still be made directly to the Holder.
  • The examination is not limited to a review of what is prepared by the Holder/Advocate, but includes access to the Holder’s original books and records deemed by the State to be necessary to ascertain compliance

Confidentiality and Nondisclosure Agreements (NDAs)

  • The State has an approved form that auditors are prohibited from editing.  If the Holder opts not to use an NDA and the Holder and auditor cannot agree on terms, the parties shall rely on the confidentiality provisions set forth in Section 1189.
  • The State and its agents are prohibited from disclosing the amount of unclaimed property that has been reported and from disclosing the terms or supporting documentation related to any annual filing, VDA or settlement agreement.
    • A sample Confidentiality and Nondisclosure Agreement is including in the proposed regulations.  Written consent is needed from the Holder to add additional states to the NDA

Remediation

  • Holders will be given the opportunity to review, reconcile and remediate any items identified as potentially unclaimed.  The form of the outreach letter must be approved by the State and all letters submitted to the auditor for prior review and approval.
  • The Holder must provide confirmation of the date of the outreach mailing to the auditor. A sample Remediation Outreach Letter is included within the manual.

Statement of Findings and Request for Payment

  • The State will issue a statement of findings and make a formal demand for payment by letter.  The Holder has 90 days to remit any abandoned property identified during the examination.  Appeal rights to contest any or all of the findings are triggered by the statement of findings and request for payment
  • An examination is deemed complete on the date the Audit Manager mails the statement of findings and request for payment to the Holder

Delaware Unclaimed Property Reports

  • Electronic reports will be accepted until 2/28/18.  Beginning 2/28/18, reports shall be submitted in a web-based record
  • Negative reports, though not required, are accepted
  • Beginning 2/1/18, a Holder’s request to extend shall be made at least 15 days prior to the reporting deadline
    • The State may grant an extension for good cause, which includes, but is not limited to: a natural disaster, criminal activity related to the Holder’s books and records, and recent changes in the form of ownership of the Holder (merger, acquisition, reorganization, and for Holders with 3 or less employees, a change in management)
      • Beginning 2/1/18, good cause shall NOT include a failure to perform a requirement (such as due diligence)
    • Delaware no longer requires that Holders retain sufficient information for the delivery of mail.  A description or code suffices if it evidences the state of the last known address.  A code/description shall include 2 of the following:  city, state or foreign code, or zip code.  The location of the transaction is not evidence of the last known address.

Indication of Owner Interest

  • Indication of owner interest does NOT include:
    • Automatic posting
    • Automatic reinvestments
    • Computer system conversion dates
    • Non return of mail (other than a non-return of  1099 for ACH or DRP accounts)
  • An indication of interest in one account is an indication of interest in all accounts with the same Holder if the records indicate the same name on the account, signature card or contract

Record Retention

  • Records shall include sufficient records of items which were NOT reported to determine whether the Holder was in compliance

 Bankruptcy

  • If the Holder files for bankruptcy before or during the examination, the  Holder shall give notice of the filing to the auditor who will,  within 7 days of the Holder’s notice or discovery of the event, notify the State and assist the State Escheator to ensure a proper proof of claim is filed in the bankruptcy action

Effective Date

  • The effective date is the date that the regulations are adopted.  The regulations shall not apply retroactively.  They do apply to ongoing audits, but the State’s failure to comply with the manual will not invalidate an audit.

Keane will continue to track and monitor the activities pertaining to the Delaware unclaimed property reporting and audit manual, including the estimation practices, here on our unclaimed property blog. Check back for regular updates.

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