The escrow service is a secure and simple international financial instrument, protecting the seller against non-payment by the buyer and the buyer against non-performance by the seller.

If you wish to sell a business, to import or export goods, or to finance collaborative projects without incurring a financial risk, the escrow service is a particularly rapid and effective tool.

A conversation with Lout H. M. Lapidaire, managing director, Fortis Escrow Services.

What is escrow precisely?

Escrow, which was originally a US term, means 'security held by a third party'. It is a deed recording an agreement between two parties. This deed is then held by an independent third party – the escrow agent or the trusted third party - until both parties have fulfilled their obligations.

The purpose of an escrow is to safeguard the obligations that the parties have entered into. For example, an escrow account can be opened with the escrow agent and the agent will only make payment if it has made sure that the obligations laid down in the agreement have been fulfilled.

If the supplier has not delivered the product or service in accordance with the agreement, the escrow agent will ensure that the money previously paid by the buyer is repaid. This will be done once the agent has established that the supplier has had the goods returned to it or still has them in its possession.

What are the benefits of escrow?

There are many benefits. Escrow offers financial protection for the seller and the buyer and maximum security at low cost. It enables international payments to be made efficiently, is consistent with special trade practices, can be put in place rapidly, the documentation is simple and it is applicable worldwide.

Why choose an escrow arrangement instead of an advance payment or a letter of credit (L/C) ?

The buyer knows that its money is held securely by the escrow agent and that it will not need to reclaim the money from the seller if the goods are not delivered or are not delivered properly. If the seller becomes insolvent, the amount paid in advance will also be ringfenced, i.e. it will not be affected by the seller’s insolvency.

The escrow service can be arranged more quickly and more efficiently than letters of credit (L/Cs). The parties do not need to go to their bank to request changes to the original terms and conditions of the L/C, such as the delivery date or the place of delivery.

How does Fortis Escrow Services distinguish itself from other escrow service providers in the market?

Fortis Escrow Services has built up wide expertise in three areas: future obligations (including takeovers), international trade transactions and special projects. Fortis is the first financial group in Europe to offer a professional escrow service.

Fortis Escrow Services aims to assist companies with rapid and results-oriented solutions for takeovers, trade transactions and the sale of businesses.

Practical example 1: How can escrow be used when a family business is sold?

A medium-sized Spanish company purchases the shares in a Italian family business. The family consists of the father and four children, all of whom are key to the business’s success in the next three years. The Spanish buyer requires a security deposit from the Italian family of 30% of the total purchase price in case the company’s profits are lower than expected, a family member leaves the business before the end of the three years, or a large customer of the Italian company moves its business to a competitor within a year.

Escrow is regarded as a suitable instrument by the lawyers acting for the Italian family because the purchase price for the shares is paid simultaneously to each family member by an independent third party.

Fortis Escrow Services are the only escrow agents who are able to open the account, draw up the escrow deeds and assume responsibility for performing the agreement, and to do all of this in 48 hours. The costs of setting up this escrow are less than 0.25%.

Practical example 2: Is escrow a suitable instrument for making advance payments in cross-border transactions?

A Belgian dealer purchases goods from a German supplier and sells them on to a Spanish buyer. The buyer is willing to pay for the transaction in advance, provided that the payment is made into an escrow account. Through this advance payment, the German supplier and the Belgian dealer are to be paid simultaneously, without the Spanish buyer finding out the identity of the German supplier.

The escrow agent pays out the escrow as soon as it receives confirmation from the Spanish buyer that the goods are in its possession. The costs of this escrow are 0.85%.

Practical example 3: How does escrow play a role in collaborative projects?

A newly incorporated property company in Spain wishes to refurbish an entire village in the olive region near Barcelona. The total investment is EUR 5 million. The project can only start when sufficient funds have been received from investors in the Netherlands and Germany.

The investors are invited to pay their investment into an escrow account. The escrow agent only pays the property company when the EUR 5 million has been paid in full and ownership has been transferred to the investment fund. If the full amount of the investment is not paid into the account within 12 months, or ownership is not transferred, all of the investors will receive their contributions back, following deduction of 1% for the costs of the escrow service.