Delaware's Unclaimed Property Racket: John Gotti would be proud

Who would have guessed that the State of Delaware's third largest revenue source would essentially be a mafia-like combination of extortion and theft?

That's certainly how it sounds when you read Douglas Lindholm's article in Forbes magazine entitled "Once A Friendly Locale To Business, The Modern State Of Delaware Is A Bully."

I commend the entire article to you, but the short version is this:

Under the guise of "unclaimed property" laws, the state forces companies to prove that they are not holding unclaimed property, even from 20 or 30 years ago, then fine the companies if they can't prove it.

We're talking big money here, the sort of thing that would make John Gotti proud: "Last year alone, Delaware seized $319.5 million from liquidated property, while returning only $18.9 million of unclaimed property to its rightful owners. The State’s estimated General Fund revenue from unclaimed property for FY 2013 is over a half billion dollars."

As if this isn't bad enough, the state pays an auditor on contingency, meaning the auditor has self-serving financial motives to go after the state's business particularly aggressively. And as Lindholm notes, it's working out well for the auditor, Kelmar Associates, which earned $30 million in the second half of 2012: "It is astounding to think that the payout to this one auditor for six months of its 'auditing' was almost twice the unclaimed property returned to all owners all of last year."

This is not entirely a new story: In 2009, Delaware assessed McKesson Corporation $4.5 million dollars when a Kelmar audit -- which took six years to perform -- came up with four vendors (out of 116 questions) who claimed that McKesson owed them a total of $19,337.

McKesson settled out of court; I do not believe the amount of the settlement was ever made public. To add insult to McKesson's injury, roughly at the same time as the settlement, Delaware amended their unclaimed property statute so that the type of "property" which McKesson was fined for is no longer subject to that law.

According to attorney Scott Smith at the law firm of Baker Donelson, while Delaware is probably the most aggressive state in this area, they are far from alone, and it's becoming a bigger revenue source for many states: "They see it as easy money -- even if it's not theirs."

Smith also believes that third party auditor firms like Kelmar are as much the driving force behind the extortion of companies as the states are: "These outfits are really targeting the companies and then marketing themselves to the states." Sounds a lot like a mafia boss offering a lower-level thug protection for a cut of the money.

We can only hope that with a Forbes article and perhaps some help from these pages and elsewhere, Delaware, and other states which are behaving similarly or even thinking about it, will be shamed -- or competed, such as by Nevada, Texas, or other states which are making major efforts to attract business -- into ceasing their mafia-like tactics.

In the meantime, i encourage any state which uses Kelmar Associates for any services to switch to another provider until such time as Kelmar agrees not to be a co-conspirator in Delaware's extortion. Given that they made $30 million stealing from Delaware corporations in just six months, it's easy to guess their response: Like a mafioso, once you get it, you never get out.

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