The set-up of an escrow agreement solves many of the trust issues existing between counterparts who have limited information about each other. An escrow account is set up by a reputable financial institution: the buyer will be more comfortable to send funds to such an account, knowing that the funds will be released only once the satisfactory production of goods has been confirmed.
The seller will be able to start production of goods knowing that the buyer has wired funds to the escrow account and if the goods are produced to specification, the buyer cannot recall payment and the seller will receive the agreed funds. A buyer is likely to be unwilling to transfer funds directly into the seller’s account before an order is completed.
Imagine a small sized European company is asked to transfer monies into a Chinese supplier’s bank account before production has started. Likewise, a seller may not accept an order because he does not recognise the buyer as a genuinely interested client.
Who Are The Parties Involved in an Escrow account?
There are 3 parties involved in an escrow account service agreement:
- The buyer (the purchasing company)
- The seller (the supplier, the factory or the trading company)
- The escrow service provider (also known as the escrow agent)
What are The Legal Agreements Required To Use The Escrow Account Service?
Sales Agreement: The parties involved sign a sales agreement which defines the details of the transaction such as the specification of the goods to be produced, payment terms, InCoTerms, deposit amount, reference currency, place and delivery time, etc…
Mutual Non-Disclosure Agreement: Each counterpart signs a Mutual Non-Disclosure Agreement (NDA). The parties agree not to disclose information covered by the agreement. An NDA creates a confidential relationship between the parties involved preventing them from divulging any type of confidential and proprietary information or trade secrets.
Escrow Agreement: The buyer, the seller and the escrow agent enter a 3-way agreement. This document contains the instructions that must be fulfilled to release the funds from the escrow account.
How Does The Escrow Account Work?
An example using EXW InCoTerms:
Firstly, all the parties involved in the commercial transaction agree to use the escrow account provided by a digital platform company such as Velotrade.
A due diligence procedure (Know Your Client – KYC) will be performed on the counter-parties by the escrow account service provider. This is a standard practice that assures certain and specific parameters are met (such as anti-money laundering, companies on the sanction list & more…). For traditional institutions such as banks, the onboarding process usually takes a few months to be completed. On the other hand, platforms such as Velotrade, with the help of technology coupled with the lack of paper documents, can execute such processes much faster.
Subsequently, all the parties involved in the escrow service are required to sign a Mutual Non-Disclosure Agreement (NDA). This practice is used to prevent the divulgation of private & confidential information by the counterparts.
Once the KYC checks and the NDA are performed and accepted, the buyer and the seller enter into a purchasing agreement defining all the terms and conditions of the commercial transaction. The funds are then transferred into the escrow account provided by the escrow agent. The escrow agent is a reputable financial institution able to hold and manage client monies.
The funds are held on trust into a segregated client account at a renowned large traditional financial institution (a large commercial bank).
Immediately after the funds are transferred in the escrow account, the escrow agent informs the supplier of safe receipts of funds and the production process can begin according to the terms in the purchasing agreement.
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 purchasing agreement, the buyer will instruct the escrow agent to release the funds.
Once the buyer, or the appointed QA company authorises the escrow agent, the funds are transferred to the seller’s bank account. The goods are collected by the forwarder 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 Account Service?
If you are looking for an escrow account service, Velotrade is the company that you are looking for! Our KYC is fast, simple and fully digital. We do not ask you to fill endless paper forms and send the documents to our office. We use electronic signature verification.