Background
Recently, the Delaware State Escheator’s office published an “administrative policy” concerning the reporting and delivery of “illicit” property (e.g., property with false owner names or other indicia of fraud).1 The policy covers a number of topics, but each instruction should be considered carefully. Some aspects of the guidance are within State Escheator’s discretion and should be adopted into the company’s ordinary processes. Other aspects of the policy, however (particularly Delaware’s suggestion that property should be reported in the name of the false identity as the rightful “owner” and delivered to other states), are ill-advised and likely not enforceable.
The crux of the policy is that Delaware does not want holders to “alter or delete” fraudulent owner information in order to report illicit property to Delaware as “owner unknown”. To be sure, Delaware has an interest in preventing fraud in the unclaimed property program. Its solution, however, is to demand that holders report that property to other states using knowingly false information. Unfortunately, what the guidance lacks in clarity, it attempts to make up for in stridency. The policy inaccurately implies that its conclusions are mandated by federal common law, warns that holders who do not comply with the policy may not be entitled to statutory indemnification, and threatens holders with “heightened scrutiny” and “enforcement review” if they attempt to assist owners with claiming these items in the future. Aside from its questionable substance, the policy was adopted pursuant to a flawed procedural process. It was simply published on the State Escheator’s website without prior notice, public comment, or any of the mandatory rulemaking procedures set forth in the Delaware Administrative Procedure Act (“APA”). As a result, the policy, standing alone, is likely not enforceable.
Below is a summary of the new policy and our concerns with respect to it.
Scope of the Policy
The policy applies to the reporting of property where “a holder has a reasonable belief that fraud or illegal activity has occurred.”2 The policy is particularly concerned with property where the holder has a reasonable belief that “an owner is using a false identity” (“Illicit Property”).3
Pre-reporting Considerations
The policy begins with an instruction that holders should first attempt to “contact the appropriate law enforcement agency” or, if appropriate, “attempt to return the Illicit Property to the source” before considering escheatment.4 The Delaware State Escheator is the Delaware official responsible for the “administration and enforcement” of the state’s unclaimed property act.5 She does not, however, have authority to direct a holder as to whether and how to engage with law enforcement in cases of suspected fraud nor to direct holders how they must handle fraudulent property outside the context of escheatment. This is not merely an issue of state authority; while the policy’s recommendations sound sensible on the surface, they raise more questions than they answer. For example, identification of the “appropriate law enforcement agency” may not be clear in a number of scenarios. In addition, even if the appropriate law enforcement agency were identified, such agencies tend not to provide guidance and have little time to devote to such matters given their focus on perceived larger threats, such as violent crime. Thus, Delaware’s initial instruction is not particularly helpful as a practical matter.
More questionable is the State Escheator’s instruction that holders should “if appropriate, attempt to return the illicit property to the source.” Doing so could create substantial risk to a holder and may not be advisable. For example, if a holder comes into possession of property reasonably believed to be the consequence of a “specified unlawful activity” (or predicate offense) under federal law, such as identity theft or wire fraud, then returning the property to the suspected wrongdoer could create exposure under federal money laundering statutes. Indeed, following Delaware’s instruction in this context could violate three separate money laundering proscriptions: (1) undertaking a monetary transaction that could be deemed to “conceal” the source of funds; (2) engaging in a transaction that could be seen as “promoting” illicit conduct; and (3) depositing proceeds (if more than $10,000) from a predicate offense. Separately, if there is reason to believe that the source of the funds is engaged in criminal behavior, which is arguably a given under the scenario contemplated by Delaware’s guidance, then returning Illicit Property to the source could be deemed aiding and abetting were the source to use the property in furtherance of a criminal scheme. Similarly, in situations where property is the subject of an Office of Foreign Assets Control (OFAC) hold, the property may not be transferred at all, lest one risk civil and even criminal liability.
In sum, the policy leaves a wide swath of questions unanswered, but Delaware has already disclaimed any obligation to clarify. The State Escheator expressly advises that it “will not provide any additional guidance or any legal advice” regarding the policy. Accordingly, with regard to these instructions, the company should follow the guidance of its own policies and advisors.
Determining Where to Report the Property
The central issue the policy attempts to address is how holders should report property for an owner with a “false identity.”6 The policy unambiguously instructs that where the fraudulent owner gives an address in another state, “the Illicit Property should be reported to that state, notwithstanding questions concerning the legitimacy of the owner’s last known address,” and without “alter[ing] or delet[ing] owner name and address information.”7 We do not endorse this guidance. First, as noted above, Delaware’s authority in this area is limited to property reportable to Delaware and/or Delaware’s refusal to take delivery of property to which it might otherwise be entitled; Delaware does not have the authority to instruct a holder how to report property to another state. More to the point, however, the holder should not purposely make a false statement to a government agency or participate in a potentially fraudulent transaction; nor should the holder facilitate the transfer of property to someone using a false identity.
Delaware’s specific guardrails and instructions for extra steps to take when transferring Delaware-addressable “Illicit Property” to Delaware underscore the many risks and problems inherent in adopting Delaware’s guidance elsewhere. Delaware’s policy expressly specifies that all Illicit Property must be on its own stand-alone report, that the holder obtain preapproval from the State Escheator’s office before reporting, and that the State will not post Illicit Property on the State’s Escheator’s website. Presumably these safeguards are being enacted to prevent the wrongdoer from easily obtaining the property from Delaware. But these policies have not been adopted by other states. Accordingly, reporting Illicit Property to another state in the manner suggested by the State Escheator (using the wrongdoer’s false identity and address) will not prevent – and, in fact, is likely to facilitate – the fraudulent owner’s ability to obtain the funds.
It seems that the impetus behind the new policy is that Delaware does not want to take possession of Illicit Property. The policy warns that holders should not transfer property among subsidiaries to “induce” Delaware to take Illicit Property, nor should owners disregard a fraudulent address to report the property as owner unknown. Insofar as Delaware wants to disclaim the Illicit Property, it may do so.8 However, Delaware has no authority to instruct holders to report property using the name and address of a false identity “notwithstanding questions concerning [its] legitimacy,” nor do the cases cited in the policy support such an instruction.
Delaware attempts to justify its instructions as required by the U.S. Supreme Court’s decision in Texas v. New Jersey, 379 U.S. 674 (1965) and the Delaware Court of Chancery’s decision in Nellius v. Tampax, 394 A.2d 233 (Del. Ch. 1978). Unsurprisingly, neither of these precedents stand for the proposition that a holder is required to treat a fraudulent actor as the “owner” of property and thereby help facilitate a fraudulent transaction. The Supreme Court’s Texas v. New Jersey decision was the first case establishing the common law escheat priority rules: first priority to the state of the owner’s last-known address and, in the absence of address information, second priority to the holder’s state of incorporation.9 In Texas and the Supreme Court’s other escheat priority cases10 the Court repeatedly rejected arguments for the use of “place of purchase” or other placeholders for an actual address of record for the owner. These cases thus stand for the proposition that holders should not use “proxy” addresses for the first priority rule, not that a fraudulent record must be deemed determinative.
Similarly, the policy relies on the Delaware Chancery Court’s decision in Nellius v. Tampax, but here again the policy stretches the precedent too far. In Nellius, Delaware attempted to escheat unclaimed dividends issued by a Delaware corporation to a Massachusetts shareholder.11 The shareholder refused to cash the dividends, alleging that he previously sold the shares. Id. While the issuer’s stock records still reflected the Massachusetts resident as the owner, in Delaware’s view, the former shareholder’s disclaimer of ownership rendered the shares “owner unknown” and thus escheatable to Delaware as the holder’s state of incorporation.12
The Chancery Court disagreed, holding that the Texas v. New Jersey rules give first priority to the state of the “creditor of record” over the state of incorporation even where that record may be incorrect.13 But the Nellius court did not hold (as the policy insinuates) that the issuer’s records were determinative of ownership. To the contrary, the court expressly warned that the decision “should in no way be construed as either a decision or insinuation that Massachusetts has a present right to escheat the property.”14 Instead, the court explained that there would be further litigation among the stock issuer, the former shareholder/seller and the estate of the alleged purchaser to determine who was entitled to the property and that Delaware had “no present standing” to claim the property.15 Thus, Nellius may be read as supporting Delaware’s decision to disclaim custody of Illicit Property, but it decidedly does not require a holder to escheat the property in the name of the fraudulent actor.
Guidelines for Reporting Illicit Property
To the extent that a holder has Delaware-addressable Illicit Property, the new policy contains procedural guidelines to facilitate reporting. In particular, the policy requires that:
- The Holder shall include Illicit Property in a stand-alone “Report of Illicit Property”
- The Holder shall provide email notice to the State Escheator before reporting and remitting such property;
- The Holder shall provide detailed information concerning the property, including “the basis on which the holder reasonably believes a false identity and/or fraud or illegal activity was utilized.”16
The policy also provides that Delaware will not list Illicit Property on its website and warns holders that attempting to reclaim or assist an owner with claiming such property “will be subject to heightened scrutiny and may be referred for further enforcement review.”17
Is the Policy Enforceable?
Can a holder be sanctioned or penalized solely for the act of not following the policy? Probably not. To be sure, Delaware law unquestionably gives the State Escheator statutory authority to “make such rules and regulations as the State Escheator may deem necessary to administer and enforce”18 the Unclaimed Property Act. However, the State Escheator’s exercise of that authority is subject to the requirements of the APA.19 The State Escheator has made no attempt to comply with the APA in issuing the policy.
The APA governs the procedures for a state agency’s adoption of a “regulation,” defined as “any statement of law, procedure, policy, right, requirement or prohibition formulated and promulgated by an agency as a rule or standard, or as a guide for the decision of cases thereafter by it or by any other agency, authority or court.”20 The APA establishes a formal administrative rulemaking process, whose procedures constitute the “minimum requirements for regulation filing and publication.”21 Those procedures include, among other things, publication of proposed regulations in the state Register, public notification requirements, and a public comment period.22 That the State Escheator characterizes the rules as a “policy” rather than a “regulation” is not determinative.23 Regulations adopted without following the APA’s procedures are void and unenforceable.24
Conclusion
Holders should consider Delaware’s policy on reporting Illicit Property critically rather than blindly follow it. Following the policy could raise significant risks, including potential criminal exposure. The State Escheator’s protocols for reporting Illicit Property to Delaware may make sense and help to facilitate clarity in reporting such property. Delaware also likely has authority to refuse to accept particular property. However, it cannot enforce a policy for which it has not complied with the requirements of the APA. Further, the State Escheator has no authority to direct holders with respect to reporting property to other states, and its guidance in this respect misapplies the relevant law.
- Guidelines for the Reporting of “Illicit Property”, Delaware Escheator (published June 2025) (“Guidelines”).
- Guidelines at 1.
- Id.
- Id.
- Del. Code tit. 12, § 1102.
- Guidelines at 1.
- Id.
- See Marathon Petroleum Corp. v. Sec’y of Fin. for Del., 876 F.3d 481, 492 (3d Cir. 2017) (“Since a state's power to escheat is derived from the principle of sovereignty, a state is also entitled to choose not to escheat property”) (internal quotations and citation omitted).
- Texas, 379 U.S. at 681.
- See, e.g., Pennsylvania v. New York, 407 U.S. 206, 214-15 (address unknown money orders escheat to holder’s state of incorporation under second priority rule), superseded by statute, 12 U.S.C. § 2501, et seq.; Delaware v. New York, 507 U.S. 490, 494 (1993) (property owed to unknown beneficial owners escheatable to state of incorporation under second priority rule).
- Nellius, 394 A.2d at 234.
- Id. at 235.
- Id. at 238.
- Id.
- Id.
- Guidelines at 2.
- Guidelines at 3.
- Del. Code tit. 12, § 1132.
- Del. Code Ann. tit. 29, § 10101 et seq.
- Id § 10102 (emphasis added).
- 29 Del. Admin. Code § 101-1.0; see also Del. Code Ann. tit. 29, § 10113(a).
- 29 Del. Admin. Code §§ 101-3.0–101-4.0.
- See, e.g., Dematteis v. RiseDelaware Inc., 315 A.3d 499, 514 (Del. 2024) (“[W]hether an agency action is a regulation does not depend on the label given to it by the agency.”); Baker v. Del. Dep’t of Natural Res. & Envtl. Control, 2015 Del. Super. LEXIS 522, at *35 (Del. Super. July 15, 2015) (“Specifications, standards and criteria are subject to the APA because they fall within the definition of ‘regulations.’ Standards, specifications and criteria must be subject to the rigors of the APA whether they are located in documents captioned Regulations or whether they are contained in some other document”).
- See, e.g., Christina Educ. Ass’n v. State Bd. of Educ., 1994 Del. Super. LEXIS 395, at *13 (Del. Super. May 25, 1994) (invalidating Board of Education regulation for failure to follow APA); Baker, 2015 Del. Super. LEXIS 522, at *42 (Department of Natural Resources “Technical Documents” unenforceable because of failure to follow APA).
In-depth 2025-236
