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Wednesday 29 March 2017
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Escrow Accounts: Uses and Abuses

Escrow accounts are a holding service managed by a regulated third party to provide additional security in a financial transaction. They are most commonly used to hold cash funds pending the completion of contractual obligations but can also hold other assets and financial instruments.

When Is an Escrow Service Appropriate and Common Uses?

Often in a financial transaction, one side has to provide a service or product and the other payment. An Escrow is used to provide peace of mind to both sides. The party which is paying does not want to transfer funds upfront in case there is a subsequent dispute in terms of the quality of the good or service being paid for or its ultimate provision. The seller does not want to invest resources upfront and carry the risk that the buyer will not meet their payment commitment. An Escrow avoids this problem as the buyer commits the funds which are held by the Escrow provider until such time as the contractual obligations of both parties are met. The seller knows that the buyer is able to meet their financial obligations and the buyer is protected against the case that the good or service is not provided or does not meet the promised quality standards.

Escrow accounts are commonly used in large financial transaction such as for real estate but are also commonly used for company shares. Executives are often awarded share options with conditions attached to them in the company they work for as part of their remuneration package. For example, all or part of the shares must be returned if they leave the company within a certain time frame or under certain conditions, such as being dismissed. Or they can often only be sold only after a pre-agreed period of time has elapsed. These shares will be held in an Escrow on behalf of the employee and released to them as the pre-agreed contractual requirements are met.

The growth of online services where professionals can be hired for a particular one-off job as freelancers is another industry that Escrow services are increasingly being used to facilitate. The client will deposit all or a part of the fee agreed upfront, to be released when the professional has delivered the service agreed upon.

Escrow Agreements

The two parties to a transaction using an Escrow account sign an Escrow Agreement. This is a legal document that functions like any other contract and outlines the terms and conditions that must be met before the assets held in the Escrow are released to the eventual recipient.

Escrow Trustee or Agent

The Escrow Trustee or Agent is the neutral third-party provider of the Escrow account service. In the UK, Escrow Trustees and Agents must be a company registered with and regulated by the Financial Conduct Authority. The technical difference between a Trustee and Agent is that whereas a Trustee’s obligation is towards the eventual recipient(s) of the assets held in Escrow, and has a duty to act in their best interests, an Escrow Agent has an equal obligation to both parties. An Escrow Agent will act in strict accordance with the terms set out in the Escrow agreement and will never take sides in any dispute. Most Escrow providers can and do act as both Trustees and Agents.

Escrow Scams

As with any financial transaction in the internet age, though it is also important to be wary even if you have met the other party in a transaction in person, there are unscrupulous individuals and organisations who attempt to exploit the perceived safety of Escrow transactions for fraudulent purposes. Escrow fraud involves the fraudster providing details of what they claim to be an Escrow account, to encourage the victim to transfer assets, when the account provided is not in fact an Escrow account at all.

Before transferring assets to an Escrow account, always make sure that the Trustee or Agent is in fact a regulated Escrow provider. You can do this via the FCA’s website: https://register.fca.org.uk. Secondly, get in touch with the Escrow provider to verify that they do indeed have an arrangement to provide an Escrow service to the counter-party to the transaction and that the account details provided are accurate. It is not unknown for fraudsters to provide the name of a genuine Escrow Trustee or Agent, or a very similar name, but different account details.

If the Escrow Trustee or Agent is not based in the UK take additional care as they will not be regulated by the FCA and your rights and security will be different. Where possible only use a UK-based and regulated Escrow provider you can verify and if the Escrow agent is based-abroad there should be a clear reason why this would be the case, such as the transaction involving foreign-based assets or businesses. Research the local regulatory body for the Escrow provider and verify their authenticity and account details in the same way as you would for a UK-based Escrow provider.

Do you need an escrow agent, cosec services or the help of experienced process agents? Elemental Cosec offer a full range of corporate services including book keeping, accounting and tax advice to both small and large companies in the UK and abroad.