What is an escrow account?
Escrow is used when funds are held by an impartial, respectable and jointly-appointed third party. The escrow agent will transfer the funds only once the counterparts agree on the satisfactory quality of the product.
The set-up of an escrow agreement solves many trust issues between counterparts with limited information about each other.
Escrow: Parties Involved
There are 3 parties involved in an escrow account service agreement:
- The buyer (purchasing company or individual)
- The seller (a supplier, factory or a trading company)
- The escrow agent (the escrow service provider)
Escrow account legal requirements
The parties involved must sign the following documents to pledge to an escrow service.
The buyer agrees to make the purchase within a specific timeline, and the seller agrees to provide the goods (or services) on or by that day.
The sales agreement contains transactional information such as:
- Identification of the parties
- Description of the Service and/or Goods
- Delivery terms: timeline, incoterms and location
- Price, currency and payment terms
- Liability for defected products
A non-disclosure agreement, also known as a confidentiality agreement, is a legally binding contract in which the parties agree not to divulge proprietary information or trade secrets.
Each counterpart signs a Non-Disclosure Agreement (NDA) to build a confidential and mutual relationship.
Required elements of an NDA include:
- Identification of the participants
- Definition of what is considered confidential
- Duration of the agreement
- Exclusion from confidentiality protection
All the parties involved enter a 3-way legal agreement with the escrow agent.
The escrow agreement contains the instructions, obligations and conditions that must be met for the funds to be released.
Also, this document contains the account details and banking information of all the counterparts involved.
Components of Escrow Agreements:
- Identification of the participants
- Details of the promise to be fulfilled
- Deposit amount in escrow
- Conditions to the release of the escrow funds
- Obligations and liabilities of the escrow agent
- Fees and expenses
- Legal jurisdiction
Practical use of escrow account:
- Real Estate
- Stock market
- Mergers & Acquisitions
- Commercial activities
- Second-hand markets
How Does The Escrow Account Work?
An example using EXW InCoTerms:
After settling the commercial terms (sale agreement), all the parties agree to use the escrow account provided by Velotrade.
The parties involved are onboarded after the due diligence procedure, Know Your Client – KYC. This standard practice assures customers’ legitimacy and helps identify risk factors, such as:
- anti-money laundering
- embargo & international sanctions
- financial frauds, terrorism financing, and other financial crimes.
Subsequently, all the parties involved in the escrow service must sign a Non-Disclosure Agreement (NDA).
Once the KYC and the NDA are accepted, the buyer, seller and the escrow agent sign the Escrow Agreement.
The buyer transfers the funds into escrow.
The escrow agent informs the seller of funds receipts, and the production process can begin according to the terms in the sale agreement.
The funds are held in trust in a segregated client account at a well-known financial institution (a large commercial bank).
After the goods are produced, the buyer can verify the quality and the conformity of the items to the purchase order (Quality Assurance). If the articles conform with the sale agreement, the buyer will instruct the escrow agent to release the funds.
The funds are transferred to the seller’s bank account.
The forwarder collects the goods, and the buyer gains ownership of the goods, which are then sent to the loading port to clear customs.
Are You Looking For an Escrow Agent?
If you are looking for an escrow account service, Velotrade is the agent that you are looking for!
Our KYC is fast, simple and fully digital.
We do not ask you to fill out endless paper forms and send the documents to our office; we use electronic signature verification.