Changing dynamics open new smart ways to use escrow
Article 4 minute read

Changing dynamics open new smart ways to use escrow

13 July 2018

Changing regulatory environment and market dynamics are driving more new and smart escrow alternatives globally today. Companies can benefit substantially by using the right escrow service that serves their specific needs.

Traditionally, banks and law firms provide escrow services to enable prospective purchasers to show their commitment to potential acquisitions and to provide evidence that they have the funds available, for example. Regulatory rulings and market dynamics are now driving change. There are new, flexible escrow options that can reduce risk, increase transaction speed and better serve the needs of investors and businesses. It’s well worth exploring options to find the right escrow services for your specific needs.

In the UK, the Solicitors Regulator Authority (SRA), which oversees legal services, is encouraging law firms to stop providing escrow services. Separating legal counsel from escrow services can benefit both the firms and clients. Firms can remain independent of clients, limit their potential exposure to money laundering, and minimise their risk in holding client assets. By ensuring that they focus on legal advisory rather than cash services, law firms spend less time administering banking administration processes and they avoid co-mingling client funds and client expenses.

Law firms will increasingly be looking for new ways to serve their clients’ escrow needs now that they are moving away from providing these services.

Banks remain an escrow option for law firms and their clients. However, they are not always the right choice for every situation. Timelines can be slow and complex because their Know Your Client (KYC) processes, and counterparty checks are detailed and burdensome. The regulator puts restrictions on holding short-term funds, so escrow cash held for short periods, particularly under 30 days, is not attractive to bank providers. Also in the unlikely event that banks default, the escrow money is co-mingled with the bank’s operating cash and potentially lost, or a minimum not returned within the timeframe stipulated under the escrow agreement.

Banks also sometimes use the escrow opportunity to offer clients additional banking products. That can be distracting if you are specifically looking for escrow, but if you need investment services or active cash management, bank escrow services can be the right solution. If the escrow is for a large amount and there is an appetite to take investment risk, banking services should be considered (though it should be noted that there is no guaranteed investment uplift and the principal may be put at risk).

To fill the increasing need in the market, TMF Group provides neutral independent cash escrow services as an alternative to bank-based escrow services. TMF Group is flexible in terms of tenor and amount, and our services are simple and quick to implement to meet our clients’ frequently short time scales.

As a global business, our robust internal KYC processes are centralised across services and geographies to ensure a consistent approach no matter where the counterparties are. Our local offices compile KYC documentation which is then reviewed centrally. The timelines are driven by the local office where the service is being delivered – rather than by a centralised committee  -- and the key timing variable is the speed at which clients can provide their supporting documentation on ownership and ultimate beneficiary owners (UBOs).

We deliver tailored solutions that allow you to operate smoothly from day one. To find out exactly how we can help you, make an enquiry with us today.

Use of escrow services

The amount held in escrow for M&A may be the full purchase price or a percentage, often driven by how the acquisition funds are being sourced. Escrow can be used for any purpose where a neutral third party is used for holding funds (or other assets).

Other examples of how escrow services can be beneficial include:

  • project finance: full funds are deposited with an escrow agent at the outset, with funds released to the counterparty on successful completion of project milestones
  • asset purchasing of significant materials or assets: purchase cash is held in escrow until the assets are delivered to the purchaser – either physically or through evidenced transfer of legal ownership
  • litigation settlement funds: holding cash from the outset of litigation, releasing funds as and when judicial decisions are made
  • capital raising: holding capital in escrow from the day of raising the capital until mutually agreed release. Or building up the full capital amount through stepped receipt as and when borrowers release funds (if the full fund requirement is not met, funds are released back to the providers)
  • high yield bonds – holding in escrow a number of interest coupon payments on behalf of investors subscribing as a precondition to the issue of high yield bonds

Having the assets held in escrow means that they can be released on receipt of confirmation by both parties given the required triggers or conditions precedent have been met.

Note: cash escrow cannot be used as an alternative to Cash Fund collection or as an alternative to operating or expense accounts.

Talk to TMF Group

As an escrow agent, TMF Group services and administers clients’ escrowed assets such as cash, securities, property (including intellectual property), contracts, or other collateral. Performing within the terms and conditions set out in its escrow agreement, we can support escrow requirements for a wide variety of transactions and services.

Want to know more about our services? Talk to us

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