Insight

Why the demand for escrow services has increased during Covid-19

May 2020


The Coronavirus outbreak is forcing businesses and individuals around the world to make significant changes to how they interact and trade.

Just a few weeks ago, deals could be agreed with a firm-grip handshake and trades and transactions processed simply by putting pen to paper. 

But with countries in lockdown and in-person meetings prohibited due to social distancing, organisations and individuals are having to seek alternative ways to do business.

This also applies to governments looking to acquire ventilators and personal protective equipment “PPE” deemed vital in the fight against Covid-19.

But with the current situation forcing governments and businesses to trade with manufacturers and organisations they are not familiar with, concerns are being raised over trust and integrity.

This is evident in the news story published last week regarding a shipment of PPE from Turkey to the UK, which was continually delayed. Other stories have emerged about the wrong items being sent.

With trade deals running into the hundreds of thousands and sometimes millions of pounds, there is a lot at stake especially when you consider these items are critical to defeating Coronavirus.

This is where escrow comes in, and in recent weeks we have seen a rise in the number of organisations requiring us to act as an escrow agent.

Below, I explain what escrow is, how it applies to a wide range of businesses and sectors, plus what to consider when appointing an escrow agent.

Escrow explained:

Escrow is simply a financial agreement where a trusted third-party agent holds and regulates the payment of funds required for the transaction to complete.

The agent carries out due diligence on both parties before agreeing to act as the escrow agent and will also help with mediation should any issues arise.

For example, the UK government may wish to buy PPE equipment from a Chinese manufacturer in a trade deal worth £750,000.

Both parties – the government and the manufacturer – agree to use an escrow agent.

The UK government would transfer the £750,000 to the escrow agent who would hold the funds securely in a segregated account until the product has been sent, received and verified.

The escrow agent would then transfer the £750,000 to the manufacturer and the trade deal would be complete.

Escrow works for a wide range of businesses and individuals:

Escrow has historically been used for real estate sales but is increasingly common in the acquisition and sale of companies as well as luxury items such as yachts, super cars, aircraft and fine art.

In the current climate, escrow can also be used to build trust and security into deals and trades for critical PPE and healthcare equipment, protecting both the buyer and the seller.

It is also possible for an escrow transaction to be undertaken back to back, allowing other parties or intermediaries to become involved in the transaction, e.g. brokers or procurers etc

Again, using the PPE example. The UK government may purchase products via a company based in Germany, who may purchase products direct from the manufacturer in China.

What to consider when choosing an escrow agent:

The purpose of using an escrow agent is to build an additional layer of trust and security into a transaction, providing assurances for both parties.

This is why it is important for organisations and individuals wanting the comfort of an escrow agent they opt for a a trusted escrow agent with a proven track record.

Preferably, the escrow agent should be based in a jurisdiction that is considered a leader in international finance and with a strong and robust regulatory framework in place.

This is imperative to ensure that the necessary due diligence checks are carried out on both parties and that the funds being held are protected to the highest possible standards.

It also means that in the event of a dispute, there are clear legal processes in place to ensure a resolution is reached as quickly and effectively as possible.

The cost of escrow:

Escrow agents do charge a fee for their services, and this fee differs from agent to agent and the size of the trade deal being placed in escrow.

As a ball-park figure, escrow fees range from 1% to 3% of the transaction value and it is often the case that the higher the value of the trade, the lower the fee charged.

Escrow is for the now and for the future:

While escrow may prove key in ensuring trade deals for ventilators, PPE and other products required to fight Covid-19 run smoothly, they really are the foundation for all future transactions.

On the 1st of July the International Chamber of Commerce issued the long awaited revised eRules and guidelines for online trade finance finally arrived for banks, importers, exporters, freight forwarders, chambers of commerce, custom brokers, logistic companies and carriers to prepare and present electronic records in lieu of paper documents.

While this is undoubtedly good for businesses, it has the same effect as Covid-19 in terms of ending the handshake agreements and pen-to-paper deals of times gone by.

In this regard, escrow provides the trust and assurance that can be lost when sales and trade are carried out via the click of a button.

And when it comes to working with a reputable escrow agent based out of a highly regulated international finance hub, look no further than SMP, Russell Bedford's Isle of Man member firm.

To find out more about escrow services at SMP, please contact Ben Lees: Ben.Lees@smppartners.com

Author: Ben Lees, SMP Partners, Isle of Man